snda-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-13445

Sonida Senior Living, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware						75-2678809
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)


14755 Preston Road, Suite 810, Dallas, Texas						75254
(Address of principal executive offices)						(Zip code)

(972) 770-5600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of exchange on which registered

Common Stock, $0.01 par value per share

SNDA

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of May 9, 2023, the Registrant had 7,075,346 shares of common stock outstanding.

Sonida Senior Living, Inc.

Form 10-Q Table of Contents

For the Period Ended March 31, 2023


			Page Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets — March 3 1 , 202 3 (Unaudited) and December 31, 202 2			4
Condensed Consolidated Statements of Operations — Three Months Ended March 3 1 , 202 3 and 202 2 (Unaudited)			5
Condensed Consolidated Statements of Shareholders’ Equity (Deficit)— Three Months Ended March 3 1 , 202 3 and 202 2 (Unaudited)			6
Condensed Consolidated Statements of Cash Flows — Th ree Months Ended March 3 1 , 202 3 and 202 2 (Unaudited)			7
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			27
Part II. Other Information			29
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3. Defaults Upon Senior Securities			29
Item 4. Mine Safety Disclosures			29
Item 5. Other Information			29
Item 6. Exhibits			30
Signature			31

Cautionary Note Regarding Forward-Looking Statements

Certain information contained in this Quarterly Report on Form 10-Q of Sonida Senior Living, Inc. (together with its consolidated subsidiaries, “Sonida,” “we,” “our,” “us,” or the “Company”) constitutes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts included in this Quarterly Report on Form 10-Q, including, without limitation, those relating to the Company’s future business prospects and strategies, financial results, working capital, liquidity, capital needs and expenditures, interest costs, insurance availability and contingent liabilities, are forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “would,” “intend,” “could,” “believe,” “expect,” “anticipate,” “project,” “plans,” “estimate” or “continue” or the negatives thereof or other variations thereon or comparable terminology.

Forward-looking statements are subject to certain risks and uncertainties that could cause the Company’s actual results and financial condition to differ materially from those indicated in the forward-looking statements, including, among others, the risks, uncertainties and factors set forth under “Item. 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2023, and also include the following:

•the impact of COVID-19, including the actions taken to prevent or contain the spread of COVID-19, the transmission of its highly contagious variants and sub-lineages and the development and availability of vaccinations and other related treatments, or another epidemic, pandemic or other health crisis;

•the Company’s ability to generate sufficient cash flows from operations, additional proceeds from debt financings or refinancings, and proceeds from the sale of assets to satisfy its short and long-term debt obligations and to fund the Company’s capital improvement projects to expand, redevelop, and/or reposition its senior living communities;

•increases in market interest rates that increase the cost of certain of our debt obligations;

•increased competition for, or a shortage of, skilled workers, including due to the COVID-19 pandemic or general labor market conditions, along with wage pressures resulting from such increased competition, low unemployment levels, use of contract labor, minimum wage increases and/or changes in overtime laws;

•the Company’s ability to obtain additional capital on terms acceptable to it;

•the Company’s ability to extend or refinance its existing debt as such debt matures;

•the Company’s compliance with its debt agreements, including certain financial covenants, and the risk of cross-default in the event such non-compliance occurs;

•the Company’s ability to complete acquisitions and dispositions upon favorable terms or at all;

•the risk of oversupply and increased competition in the markets which the Company operates;

•the Company’s ability to improve and maintain controls over financial reporting and remediate the identified material weakness discussed in Item 4 of Part I of this Quarterly Report on Form 10-Q;

•the departure of certain of the Company’s key officers and personnel;

•the cost and difficulty of complying with applicable licensure, legislative oversight, or regulatory changes;

•risks associated with current global economic conditions and general economic factors such as inflation, the consumer price index, commodity costs, fuel and other energy costs, competition in the labor market, costs of salaries, wages, benefits, and insurance, interest rates, and tax rates; and

•changes in accounting principles and interpretations.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or outcomes that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this Quarterly Report on Form 10-Q apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Sonida Senior Living, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)


	March 31, 2023		December 31, 2022
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	12,972	$	16,913
Restricted cash	12,174		13,829
Accounts receivable, net	5,924		6,114

Prepaid expenses and other	2,940		4,099
Derivative assets	2,131		2,611
Total current assets	36,141		43,566
Property and equipment, net	610,945		615,754

Other assets, net	1,611		1,948
Total assets	$	648,697	$	661,268
Liabilities and Equity
Current liabilities:
Accounts payable	$	9,246	$	7,272
Accrued expenses	31,857		36,944
Current portion of notes payable, net of deferred loan costs	81,151		46,029
Current portion of deferred income	3,857		3,419
Federal and state income taxes payable	260		—
Other current liabilities	640		653



Total current liabilities	127,011		94,317
Notes payable, net of deferred loan costs and current portion	554,723		625,002
Other liabilities	95		113
Total liabilities	681,829		719,432
Commitments and contingencies
Redeemable preferred stock:
Series A convertible preferred stock, $0.01 par value; 41 shares authorized, 41 shares issued and outstanding as of March 31, 2023 and December 31, 2022	44,748		43,550
Shareholders’ deficit:
Preferred stock, $0.01 par value:
Authorized shares - 15,000 as of March 31, 2023 and December 31, 2022; none issued or outstanding, except Series A convertible preferred stock as noted above	—		—
Common stock, $0.01 par value:
Authorized shares - 15,000 as of March 31, 2023 and December 31, 2022; 6,942 and 6,670 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	69		67
Additional paid-in capital	294,964		295,277
Retained deficit	(372,913)		(397,058)
Total shareholders’ deficit	(77,880)		(101,714)
Total liabilities, redeemable preferred stock and shareholders’ deficit	$	648,697	$	661,268

See Notes to Condensed Consolidated Financial Statements.

Sonida Senior Living, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)


	Three Months Ended March 31,
	2023		2022
Revenues:
Resident revenue	$	56,606	$	50,834
Management fees	505		628
Managed community reimbursement revenue	4,962		7,022
Total revenues	62,073		58,484
Expenses:
Operating expense	43,808		41,929
General and administrative expense	7,063		8,273

Depreciation and amortization expense	9,881		9,578
Managed community reimbursement expense	4,962		7,022
Total expenses	65,714		66,802
Other income (expense):
Interest income	194		1
Interest expense	(8,867)		(7,603)


Gain (loss) on extinguishment of debt, net	36,339		(641)
Gain on sale of assets, net	251		—
Other income (expense), net	(62)		137
Income (loss) before provision for income taxes	24,214		(16,424)
Provision for income taxes	(69)		(254)
Net income (loss)	24,145		(16,678)
Dividends on Series A convertible preferred stock	(1,198)		(1,133)
Undistributed net income allocated to participating securities	(3,182)		—
Net income (loss) attributable to common stockholders	$	19,765	$	(17,811)

Weighted average common shares outstanding — basic	6,855		6,341
Weighted average common shares outstanding — diluted	7,168		6,341

Basic net income (loss) per common share	$	2.88	$	(2.81)
Diluted net income (loss) per common share	$	2.76	$	(2.81)

See Notes to Condensed Consolidated Financial Statements.

Sonida Senior Living, Inc.

Condensed Consolidated Statements of Shareholders’ Equity (Deficit) (Unaudited)

(in thousands)


	Common Stock			Additional Paid-In Capital		Retained Deficit
	Shares	Amount						Total
Balance as of December 31, 2021	6,634	$	66	$	295,781	$	(342,657)	$	(46,810)
Series A convertible preferred stock dividends	—	—		(1,133)		—		(1,133)
Stock-based plan activity	31	1		—		—		1
Non-cash stock-based compensation	—	—		1,827		—		1,827
Net loss	—	—		—		(16,678)		(16,678)
Balance as of March 31, 2022	6,665	$	67	$	296,475	$	(359,335)	$	(62,793)










	Common Stock			Additional Paid-In Capital		Retained Deficit
	Shares	Amount						Total
Balance as of December 31, 2022	6,670	$	67	$	295,277	$	(397,058)	$	(101,714)
Series A convertible preferred stock dividends	—	—		(1,198)		—		(1,198)
Stock-based plan activity	272	2		(17)		—		(15)
Non-cash stock-based compensation	—	—		902		—		902

Net income	—	—		—		24,145		24,145
Balance as of March 31, 2023	6,942	$	69	$	294,964	$	(372,913)	$	(77,880)

See Notes to Condensed Consolidated Financial Statements.

Sonida Senior Living, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	24,145	$	(16,678)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	9,881		9,578
Amortization of deferred loan costs	366		244


Gain on sale of assets, net	(251)		—

Unrealized loss on interest rate cap, net	572		—
(Gain) loss on extinguishment of debt	(36,339)		641
Provision for bad debt	237		106
Non-cash stock-based compensation expense	902		1,828
Other non-cash items	(1)		(55)
Changes in operating assets and liabilities:
Accounts receivable, net	(48)		(625)

Prepaid expenses and other	1,159		1,633
Other assets, net	62		296
Accounts payable and accrued expense	1,828		1,700

Federal and state income taxes payable	260		251
Deferred income	438		365

Other current liabilities	38		26
Net cash provided by (used in) operating activities	3,249		(690)
Cash flows from investing activities:
Acquisition of new communities	—		(12,342)
Capital expenditures	(5,429)		(5,582)
Proceeds from sale of assets	343		—
Net cash used in investing activities	(5,086)		(17,924)
Cash flows from financing activities:
Proceeds from notes payable	—		80,000
Repayments of notes payable	(3,714)		(90,579)


Dividends paid to Series A preferred stockholders	—		(718)

Deferred loan costs paid	—		(2,137)
Other financing costs	(45)		—
Net cash used in financing activities	(3,759)		(13,434)
Decrease in cash and cash equivalents and restricted cash	(5,596)		(32,048)
Cash, cash equivalents, and restricted cash at beginning of period	30,742		92,876
Cash, cash equivalents, and restricted cash at end of period	$	25,146	$	60,828

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	7,639	$	7,076
Income taxes paid (refunds received), net	$	(193)	$	3
Non-cash investing and financing activities:
Accrued dividends on Series A convertible preferred stock	$	1,198	$	1,133
Non-cash additions of property, plant and equipment	$	1,150	$	40

See Notes to Condensed Consolidated Financial Statements.

Sonida Senior Living, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

Organization and Business

Sonida Senior Living, Inc. (formerly known as Capital Senior Living Corporation), a Delaware corporation (together with its subsidiaries, the “Company”), is one of the leading owner-operators of senior housing communities in the United States in terms of resident capacity. The Company owns, operates, develops, and manages senior housing communities throughout the United States. As of March 31, 2023, the Company operated 72 senior housing communities in 18 states with an aggregate capacity of approximately 8,000 residents, including 62 senior housing communities that the Company owned and 10 communities that the Company managed on behalf of third parties. As of December 31, 2022, the Company had two properties that the Company no longer operated that were in the process of transitioning legal ownership back to the Federal National Mortgage Association ("Fannie Mae"). The transfer of ownership was completed during January 2023. The accompanying condensed consolidated financial statements include the financial statements of Sonida Senior Living, Inc. and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

Interim Unaudited Financial Information

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and should be read in conjunction with the condensed consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated financial statements have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, including normal recurring items, necessary to present fairly our condensed consolidated financial position as of March 31, 2023 and December 31, 2022, and our condensed consolidated results of operations and cash flows for the periods ended March 31, 2023 and 2022.

Reclassifications

Certain amounts previously reflected in the prior year condensed consolidated balance sheet have been reclassified to conform to our March 31, 2023 presentation. The condensed consolidated statements of operations include the consolidation of “stock-based compensation expense” within “general and administrative expenses.” The condensed consolidated statements of cash flows include reclassifying “property tax and insurance deposits” to restricted cash and lender reserves from “other assets, net” to restricted cash. Additionally, “lease expense adjustment” was reclassified to “other non-cash items.”

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. These estimates include such items related to the accounting for: income taxes, including assessments of probabilities of realization of income tax benefits; impairment of long-lived assets, including applicable cash flow projections, holding periods and fair value evaluations; self-insurance liabilities and expense; stock-based compensation; and depreciation and amortization including determination of estimated useful lives. Actual results could differ from those estimates.

2. Going Concern Uncertainty and Related Strategic Cash Preservation Initiatives

Accounting Standards Codification (“ASC”) 205-40, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” requires an evaluation of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within 12 months after the date the financial statements are issued. Initially, this evaluation does not consider the potential mitigating effect of management’s plans that have not been fully implemented. When substantial doubt exists, management evaluates the mitigating effect of its plans to determine

if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

In complying with the requirements under ASC 205-40 to complete an evaluation without considering mitigating factors, the Company considered several conditions or events including: (1) the continued impact of the COVID-19 pandemic, the current inflationary environment and the impact of elevated interest rates on the Company’s operations and financial results; (2) $81.2 million of principal payments and $38.5 million of scheduled interest payments due in the next 12 months; (3) recurring operating losses and projected operating losses for fiscal periods through June 30, 2024; (4) the Company’s working capital deficit; and (5) events of non-compliance with certain of our mortgage agreements, as noted in "Note 6–Notes Payable". The above conditions raise substantial doubt about the Company’s ability to continue as a going concern for the 12-month period following the date the March 31, 2023 financial statements are issued.

As discussed below, the Company has implemented plans which encompass short-term cash preservation initiatives to provide the Company with adequate liquidity to meet its obligations for at least the 12-month period following the date its March 31, 2023 financial statements are issued, in addition to creating sustained cash flow generation thereafter. The Company’s primary sources of near- and medium-term liquidity are expected to be (1) net cash generated from operations; (2) COVID-19 or related relief grants from various state agencies; and (3) debt modifications, refinancings and extensions to the extent available on acceptable terms.

Strategic and Cash Preservation Initiatives

The Company has either taken, or intends to take, the following actions, among others, to improve its liquidity position and to address uncertainty about its ability to continue as a going concern:

•Upon its management team transition in September 2022, the Company promptly implemented new strategic and operational plans to accelerate margin recovery, including the following:

◦Design and execution of a comprehensive resident rate review program to align revenues with the significant increase in the operating cost environment.

◦Implementation of a global purchasing organization function to leverage scaled purchasing to lower unit operating costs.

◦Use of several internally developed and external programs to provide alternative mitigants to a challenging labor environment.

•We have adopted a comprehensive cash optimization strategy aimed at improving working capital management.

•The Company is engaged in discussions with certain of its lenders in regard to potential modifications of certain mortgage debt on more favorable terms, which does not preclude a potential ownership transfer on select communities based on various financial metrics.

•Through recently integrated systems and revised process workflows, the Company has implemented additional proactive spending reductions, including reduced discretionary spending and more stringent, return-based capital spending.

•The Company received approximately $2.0 million in various state grants during the quarter ended March 31, 2023, and has outstanding applications for additional grants not yet received.

•Under the terms of the A&R Investment Agreement, the Company may request additional investments from the Conversant Investors in shares of Series A Preferred Stock (up to an aggregate amount equal to $25.0 million) that can be used for future investment in accretive capital expenditures and acquisitions, subject to certain conditions.

While the Company’s plans are designed to provide it with adequate liquidity to meet its obligations for at least the 12-month period following the date its financial statements are issued, the remediation plan is dependent on conditions and matters that may be outside of the Company’s control, and no assurances can be given that certain options will be available on terms acceptable to the Company, or at all. Accordingly, management could not conclude that it was probable that the plans will mitigate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going

concern. In addition, it is probable that the Company will not be able to comply with some of the financial covenants and other restrictions contained in our debt instruments, which would in turn trigger an event of default under our loan agreements. An event of default, subject to cure provisions in certain instances, would give the respective lenders the right to accelerate the related debt and to declare all amounts outstanding to be immediately due and payable, or foreclose on collateral securing the outstanding indebtedness. We cannot assure that we could pay these debt obligations if they became due prior to their stated dates.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date the financial statements are issued. As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should the Company be unable to continue as a going concern.

3. Summary of Significant Accounting Policies

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with original maturities of three months or less at the date of acquisition to be cash equivalents. The Company has deposits in banks that exceed Federal Deposit Insurance Corporation insurance limits. Management believes that credit risk related to these deposits is minimal. Restricted cash consists of reserve accounts for property insurance, real estate taxes, capital expenditures, and debt service required by certain loan agreements. In addition, restricted cash includes deposits required by certain counterparties as collateral pursuant to letters of credit which must remain so long as the letters of credit are outstanding, which are subject to renewal annually.

In March 2022, the Company completed the refinancing of certain existing mortgage debt with Ally Bank. Ally Bank required a debt service reserve of $1.5 million as part of this transaction, which is included in the restricted cash balances as of March 31, 2023 and December 31, 2022. See "Note 6–Notes Payable."

The following table sets forth our cash and cash equivalents and restricted cash (in thousands):


	March 31, 2023		December 31, 2022
Cash and cash equivalents	$	12,972	$	16,913
Restricted cash:
Property tax and insurance reserves	4,361		6,184
Lender reserve	1,500		1,500
Capital expenditures reserves	2,202		2,034
Deposits pursuant to outstanding letters of credit	4,111		4,111
Total restricted cash	12,174		13,829
Total cash, cash equivalents, and restricted cash	$	25,146	$	30,742

Long-Lived Assets

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. At each balance sheet date, the Company reviews the carrying value of its property and equipment to determine if facts and circumstances suggest that they may be impaired or that the depreciation period may need to be changed. The Company considers internal factors such as net operating losses along with external factors relating to each asset, including contract changes, local market developments, and other publicly available information to determine whether impairment indicators exist.

If an indicator of impairment is identified, recoverability of an asset group is assessed by comparing its carrying amount to the estimated future undiscounted net cash flows expected to be generated by the asset group through operation or disposition, calculated utilizing the lowest level of identifiable cash flows. If this comparison indicates that the carrying amount of an asset group is not recoverable, we estimate fair value of the asset group and record an impairment loss when the carrying amount exceeds fair value. There were no impairments on long-lived assets during the three months ended March 31, 2023 and March 31, 2022.

In evaluating our long-lived assets for impairment, we undergo continuous evaluations of property level performance and real estate trends, and management makes several estimates and assumptions, including, but not limited to, the projected date of disposition, estimated sales price and future cash flows of each property during our estimated holding period. If our analysis or

assumptions regarding the projected cash flows expected to result from the use and eventual disposition of our properties change, we incur additional costs and expenses during the holding period, or our expected hold periods change, we may incur future impairment losses.

Upon the acquisition of new communities accounted for as an acquisition of an asset, we recognize the assets acquired and the liabilities assumed as of the acquisition date, measured at their relative fair values once we have determined the fair value of each of these assets and liabilities. The acquisition date is the date on which we obtain control of the real estate property. The assets acquired and liabilities assumed consist of land, inclusive of associated rights, buildings, assumed debt, and identified intangible assets and liabilities. See “Note 4– Property and Equipment, net.”

Revenue Recognition

Resident revenue consists of fees for basic housing and certain support services and fees associated with additional housing and expanded support requirements such as assisted living care, memory care, and ancillary services. Basic housing and certain support services revenue is recorded when services are rendered, and amounts billed are due from residents in the period in which the rental and other services are provided. Residency agreements are generally short term in nature with durations of one year or less and are typically terminable by either party, under certain circumstances, upon providing 30 days’ notice, unless state law provides otherwise, with resident fees billed monthly in advance. Revenue for certain ancillary services is recognized as services are provided, and includes fees for services such as medication management, daily living activities, beautician/barber, laundry, television, guest meals, pets, and parking which are generally billed monthly in arrears. Other operating revenue consists of “Provider Relief Funds” received from various states due to the financial distress impacts of COVID-19.

The Company's senior housing communities have residency agreements that generally require the resident to pay a community fee and other amounts prior to moving into the community which are initially recorded by the Company as deferred revenue. The Company had contract liabilities for deferred fees paid by our residents prior to the month housing and support services were to be provided totaling approximately $3.9 million and $3.4 million, respectively, which are included as a component of deferred income within current liabilities of the Company’s condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022.

Revenues from the Medicaid program accounted for approximately 9.3% and 9.6% of the Company’s revenue in the three months ended March 31, 2023 and March 31, 2022, respectively. During the three months ended March 31, 2023 and 2022, 24 and 28, respectively, of the Company’s communities were providers of services under the Medicaid program. Accordingly, these communities were entitled to reimbursement under the Medicaid program at established rates that were lower than private pay rates. Resident revenues for Medicaid residents were recorded at the reimbursement rates as the rates were set prospectively by the applicable state upon the filing of an annual cost report. None of the Company’s communities were providers of services under the Medicare program during fiscal quarters ended March 31, 2023 and 2022.

Laws and regulations governing the Medicaid program are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on its Condensed Consolidated Financial Statements. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicaid program.

The Company has management agreements whereby it manages certain communities on behalf of third-party owners under contracts that provide for periodic management fee payments to the Company. The Company has determined that all community management activities are a single performance obligation, which is satisfied over time as the services are rendered. The Company’s estimate of the transaction price for management services also includes the amount of reimbursement due from the owners of the communities for services provided and related costs incurred. Such revenue is included in “managed community reimbursement revenue” on the Company’s condensed consolidated statements of operations. The related costs are included in “managed community reimbursement expense” on the Company’s condensed consolidated statements of operations. See “Note 8– Revenue.”

In January and February 2023, the Company received approximately $2.0 million in various Provider Relief Funds received from state departments due to financial distress impacts of COVID-19. For the three months ended March 31, 2022, the Company received approximately $0.7 million in various Provider Relief Funds from state departments due to financial distress impacts of COVID-19.

Credit Risk and Allowance for Doubtful Accounts

The Company’s resident accounts receivable are generally due within 30 days after the date billed. Accounts receivable are reported net of an allowance for doubtful accounts of $6.2 million and $5.9 million as of March 31, 2023 and December 31, 2022, respectively, and represent the Company’s estimate of the amount that ultimately will be collected. The adequacy of the Company’s allowance for doubtful accounts is reviewed on an ongoing basis, using historical payment trends, write-off experience, analyses of receivable portfolios by payor source and aging of receivables, as well as a review of specific accounts, and adjustments are made to the allowance, as necessary. Credit losses on resident receivables have historically been within management’s estimates, and management believes that the allowance for doubtful accounts adequately provides for expected losses.

Concentration of Credit Risk and Business Risk

Substantially all of our revenues are derived from senior living communities we own and senior living communities that we manage. Senior living operations are particularly sensitive to adverse economic, social and competitive conditions and trends, including the effects of the COVID-19 pandemic, which has adversely affected, and may continue to adversely affect, our business, financial condition, and results of operations.

We have a concentration of owned properties operating in Texas (16), Indiana (12), Ohio (11) and Wisconsin (8), which we estimate represented approximately 25%, 18%, 19% and 10%, respectively, of our resident revenues for the three months ended March 31, 2023.

Self-Insurance Liability Accruals

The Company offers full-time employees an option to participate in its health and dental plans. The Company is self-insured up to certain limits and is insured if claims in excess of these limits are incurred. The cost of employee health and dental benefits, net of employee contributions, is shared between the corporate office and the senior housing communities based on the respective number of plan participants. Funds collected are used to pay the actual program costs, including estimated annual claims, third-party administrative fees, network provider fees, communication costs, and other related administrative costs incurred by the plans. Claims are paid as they are submitted to the Company’s third-party administrator. The Company records a liability for outstanding claims and claims that have been incurred but not yet reported. This liability is based on the historical claim reporting lag and payment trends of health insurance claims. Additionally, the Company may be liable for an Employee Shared Responsibility Payment (“ESRP”) pursuant to the Patient Protection and Affordable Care Act. The ESRP is applicable to employers that (i) had 50 or more full-time equivalent employees, (ii) did not offer minimum essential coverage (“MEC”) to at least 70% of full-time employees and their dependents, or (iii) did offer MEC to at least 70% of full-time employees and their dependents that did not meet the affordable or minimum value criteria and had one or more full-time employees certified as being allowed the premium tax credit. The Internal Revenue Service ("IRS") determines the amount of the proposed ESRP from information returns completed by employers and from income tax returns completed by such employers' employees. Management believes that the recorded liabilities and reserves established for outstanding losses and expenses are adequate to cover the ultimate cost of losses and expenses incurred as of March 31, 2023. It is possible that actual claims and expenses may differ from established reserves. Any subsequent changes in estimates are recorded in the period in which they are determined.

The Company uses a combination of insurance and self-insurance for workers’ compensation. Determining the reserve for workers’ compensation losses and costs that the Company has incurred as of the end of a reporting period involves significant judgments based on projected future events, including among other factors, potential settlements for pending claims, known incidents which may result in claims, estimates of incurred but not yet reported claims, changes in insurance premiums and estimated litigation costs. The Company regularly adjusts these estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, it is possible the actual expenses incurred may differ from the amounts reserved. Any subsequent changes in estimates are recorded in the period in which they are determined.

Income Taxes

Income taxes are computed using the asset and liability method and current income taxes are recorded based on amounts refundable or payable in the current year. The effective tax rates for the three months ended March 31, 2023 and 2022 differ from the statutory tax rates due to state income taxes, permanent tax differences, and changes in the deferred tax asset valuation allowance.

Deferred income taxes are recorded based on the estimated future tax effects of loss carryforwards and temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which the Company expects those carryforwards and temporary differences to be recovered or settled. Management regularly evaluates the future realization of deferred tax assets and provides a valuation allowance, if considered necessary, based on such evaluation. As part of the evaluation, management has evaluated taxable income in carryback years, future reversals of taxable temporary differences, feasible tax planning strategies, and future expectations of income. As of December 31, 2022, the Company had a three-year cumulative net operating loss for its U.S. operations and is subject to annual operating loss utilization limits and accordingly, has provided a full valuation allowance on its U.S. and state net deferred tax assets. The valuation allowance reduces the Company’s net deferred tax assets to the amount that is “more likely than not” (i.e., a greater than 50% likelihood) to be realized. However, in the event that the Company were to ultimately determine that it would be more likely than not that the Company would realize the benefit of deferred tax assets in the future in excess of their net recorded amounts, adjustments to deferred tax assets would increase net income in the period such determination was made. The benefits of the net deferred tax assets might not be realized if actual results differ from expectations.

The Company evaluates uncertain tax positions through consideration of accounting and reporting guidance on criteria, measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different companies. The Company is required to recognize a tax benefit in its financial statements for an uncertain tax position only if management’s assessment is that its position is “more likely than not” (i.e., a greater than 50 percent likelihood) to be upheld on audit based only on the technical merits of the tax position. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as income tax expense.

Redeemable Preferred Stock

The Company's Series A Preferred Stock is convertible outside of our control and in accordance with ASC 480-10-S99-3A is classified as mezzanine equity. The Series A Preferred Stock was initially recorded at fair value upon issuance, net of issuance costs and discounts. The holders (“Conversant Investors”) of Series A Preferred Stock are entitled to vote with the holders of common stock on all matters submitted to a vote of stockholders of the Company. As such, the Conversant Investors, in combination with their common stock ownership as of March 31, 2023 and December 31, 2022, have voting rights in excess of 50% of the Company’s total voting stock. It is deemed probable that the Series A Preferred Stock could be redeemed for cash by the Conversant Investors, and as such, the Series A Preferred Stock is required to be remeasured and adjusted to its maximum redemption value at the end of each reporting period. However, to the extent that the maximum redemption value of the Series A Preferred Stock does not exceed the fair value of the shares at the date of issuance, the shares are not adjusted below the fair value at the date of issuance. As of March 31, 2023 and December 31, 2022, the Series A Preferred Stock is carried at the maximum redemption value. The Series A Preferred Stock does not have a maturity date and therefore is considered as perpetual.

Dividends on redeemable preferred stock are recorded to retained earnings or additional paid-in capital if retained earnings is an accumulated deficit. Dividends are cumulative, and any declaration of dividends is at the discretion of the Company’s Board of Directors. If the Board does not declare a dividend in respect of any dividend payment date, the amount of such accrued and unpaid dividend is added to the liquidation preference and compounds quarterly thereafter. During the three months ended March 31, 2023, the Board did not declare a dividend with respect to the Series A Preferred Stock, and accordingly, $1.2 million was added to the liquidation preference of the Series A Preferred Stock, effectively increasing the carrying value of the redeemable preferred stock.

Derivative Instruments

We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with the fluctuations in interest rates. We are also required to enter into interest rate derivative instruments in compliance with certain debt agreements. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not enter into derivative financial instruments for trading or speculative purposes. We record all derivatives at fair value. As of March 31, 2023, our derivative instruments consisted of interest rate caps that were not designated as hedge instruments. Changes in fair value of undesignated hedge instruments are recorded in current period earnings in interest expense. See “Note14–Derivatives and Hedging.”

Net Income (Loss) Per Common Share

The Company uses the two-class method to compute net income (loss) per common share because the Company has issued securities (Series A Preferred Stock) that entitle the holder to participate in dividends and earnings of the Company. Under this method, net income is reduced by the amount of any dividends earned during the period. The remaining earnings (undistributed earnings) are allocated based on the weighted-average shares outstanding of common stock and Series A Preferred Stock (on an if-converted basis) to the extent that each preferred security may share in earnings as if all of the earnings for the period had been distributed. The total earnings allocated to common stock is then divided by the number of outstanding shares to which the earnings are allocated to determine the earnings per share. The two-class method is not applicable during periods with a net loss, as the holders of the Series A Preferred Stock have no obligation to fund losses.

Diluted net income (loss) per common share is computed under the two-class method by using the weighted-average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options, stock-based compensation awards and warrants. In addition, the Company analyzes the potential dilutive effect of the outstanding Series A Preferred Stock under the "if-converted" method when calculating diluted earnings per share, in which it is assumed that the outstanding Series A Preferred Stock converts into common stock at the beginning of the period or when issued, if later. The Company reports the more dilutive of the approaches (two class or "if-converted") as its diluted net income per share during the period. See “Note 9 - Net Income (Loss) Per Share.”

Segment Reporting

The Company evaluates the performance and allocates resources of its senior living communities based on current operations and market assessments on a property-by-property basis. The Company does not have a concentration of operations geographically or by product or service as its management functions are integrated at the property level. The Company has determined that its operating units meet the criteria in ASC Topic 280, Segment Reporting, to be aggregated into one reporting segment. As such, the Company operates in one segment.

Recently Adopted Accounting Pronouncements

Allowance for Doubtful Accounts

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. Current U.S. generally accepted accounting principles (GAAP) require an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. ASU 2016-13 replaces the current incurred loss methodology for credit losses and removes the thresholds that companies apply to measure credit losses on financial statements measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The determination of the allowance for credit losses under the new standard would typically be based on evaluation of a number of factors, including, but not limited to, general economic conditions, payment status, historical collection patterns and loss experience, financial strength of the borrower, and nature, extent and value of the underlying collateral. For smaller reporting companies, ASU 2016-13 is effective for fiscal years and for interim periods within those fiscal years beginning after December 15, 2022. It requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company adopted ASU 2016-13 on January 1, 2023. The effect of the adoption had an immaterial impact on our condensed consolidated financial statements.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on contracts, hedging relationships, and other transactions that reference the London InterBank Offered Rate. The new standard was effective upon issuance and elections can be made through December 31, 2024. The adoption of the optional expedient has not had and is not expected to have a material impact on the Company's condensed consolidated financial statements.

4. Property and Equipment, net

As of March 31, 2023 and December 31, 2022, property and equipment, net and leasehold improvements, which include assets under finance leases, consist of the following (in thousands):


	Asset Lives	March 31, 2023		December 31, 2022
Land		$	47,384	$	47,476
Land improvements	5 to 20 years	20,121		20,053
Buildings and building improvements	10 to 40 years	844,770		842,854
Furniture and equipment	5 to 10 years	54,389		53,236
Automobiles	5 to 7 years	2,707		2,704
Assets under financing leases and leasehold improvements (1)		3,749		1,899
Construction in progress		697		666
Total property and equipment		973,817		968,888
Less accumulated depreciation and amortization		(362,872)		(353,134)
Total property and equipment, net		$	610,945	$	615,754

__________

(1) Leasehold improvements are amortized over the shorter of the useful life of the asset or the remaining lease term. Assets under financing leases and leasehold improvements include $0.2 million and $0.2 million of financing lease right-of-use assets as of March 31, 2023 and December 31, 2022, respectively.

There were no impairments of long-lived assets for the quarters ended March 31, 2023 and March 31, 2022.

5. Accrued expenses

The following is a summary of accrued expenses as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023		December 31, 2022
Accrued payroll and employee benefits	$	14,187	$	13,795
Accrued interest	5,897		9,374
Accrued taxes	5,876		6,939
Accrued professional fees	3,571		3,179
Accrued other expenses	2,326		3,657
Total accrued expenses	$	31,857	$	36,944

6. Notes Payable

Notes payable consists of the following (in thousands):


	Weighted average interest rate	Maturity Date	March 31, 2023		December 31, 2022
Fixed rate mortgage notes payable	4.6%	2024 to 2045	$	500,721	$	503,312
Fannie Mae 18 mortgage notes payable (1)			—		31,991
Variable rate mortgage notes payable (2)	5.9%	2026 to 2029	137,453		137,652
Notes payable - insurance	5.6%	2023	800		1,724
Notes payable - other	7.9%	2023	1,619		1,619
Notes payable, excluding deferred loan costs			$	640,593	$	676,298
Deferred loan costs, net			(4,719)		(5,267)
Total notes payable, net			$	635,874

SEC Form 10-Q filed by Sonida Senior Living Inc.