SONIDA SENIOR LIVING, INC. (SNDA)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the risks, uncertainties and other factors described under “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” in this Annual Report on Form 10-K. Actual results may differ materially from those projected in such statements as a result of such risks, uncertainties and other factors.

Overview

The following discussion and analysis addresses (i) the Company’s results of operations on a historical consolidated basis for the years ended December 31, 2024 and 2023, and (ii) liquidity and capital resources of the Company, and should be read in conjunction with the Company’s historical consolidated financial statements and the selected financial data contained elsewhere in this Annual Report on Form 10-K.

The Company is a leading owner, operator and investor in independent living, assisted living and memory care communities and services for senior adults in the United States in terms of resident capacity. The Company’s operating strategy is to provide value to its senior living residents by providing quality senior living services at reasonable prices, while achieving and sustaining a strong, competitive position within its geographically concentrated regions, as well as continuing to enhance the performance of its operations. The Company primarily provides senior living services to the 75+ population, including independent living, assisted living, and memory care services at reasonable prices. Many of the Company’s communities offer a continuum of care to meet each of their resident’s needs as they change over time. This continuum of care, which integrates independent living, assisted living, and memory care that may be bridged by home care through independent home care agencies, sustains our residents’ autonomy and independence based on their physical and mental abilities.

As of December 31, 2024, the Company owned, managed, or invested in 94 senior housing communities in 20 states with an aggregate capacity of approximately 10,000 residents, including 81 owned senior housing communities (including four owned through joint venture investments in consolidated entities, four owned through a joint venture investment in an unconsolidated entity, and one unoccupied) and 13 communities that the Company managed on behalf of a third party.

Recent Acquisitions

Cincinnati Acquisition

In December 2024, the Company closed on the acquisition of an unoccupied single senior living community located in Cincinnati, Ohio for a purchase price of $16.3 million. Sonida funded the transaction with $18.3 million of senior mortgage debt, including $2.0 million for capital expenditure investment into the facility, which is expected to be utilized to furnish and update the community prior to opening. The non-recourse mortgage has an 84-month term and 24-month interest waiver to support lease-up and stabilization, with a 3% fixed-interest-only rate thereafter.

The asset acquisition was recorded at relative fair value. The Company recorded $16.4 million in “Property and equipment, net” for tangible assets purchased in the Company’s consolidated balance sheets.

Atlanta Acquisition

In October 2024, the Company entered into a purchase and sale agreement (“Atlanta PSA”) to acquire 2 senior living communities in the Atlanta, Georgia market for $29.0 million. On November 1, 2024, the Company closed on the acquisition of these 2 senior living communities. The asset acquisition was recorded at relative fair value. The Company recorded

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$24.7 million in “Property and equipment, net” for tangible assets purchased; $4.8 million in “Intangible assets, net” for in-place leases; and $0.1 million in “Other long-term liabilities” for below-market leases in the Company’s consolidated balance sheets.

Palm Acquisition

In August 2024, the Company entered into eight asset purchase agreements (the “Palm PSAs”) with various affiliates of Principal Senior Living Group, pursuant to which the Company acquired eight senior living communities (collectively, the “Palm Communities”) for an aggregate cash purchase price of $102.9 million (such acquisition, the “Palm Acquisition”). The Company closed on the Palm Acquisition on October 1, 2024. Five of the Palm Communities are located in Florida and the other three Palm Communities are located in South Carolina.

The asset acquisition was recorded at relative fair value. The Company recorded $89.2 million in “Property and equipment, net” for tangible assets purchased; $15.6 million in “Intangible assets, net” for in-place leases; and $0.4 million in “Other long-term liabilities” for below-market leases in the Company’s consolidated balance sheets.

Macedonia Acquisition

In April 2024, the Company entered into an asset purchase agreement to acquire a community located in Macedonia, Ohio for a purchase price of $10.7 million plus transaction costs of $0.4 million. In May 2024, the Company closed on the acquisition and entered into a mortgage loan totaling $9.4 million. The Company purchased a Secured Overnight Financing Rate (“SOFR”) based interest rate cap (“IRC”) to reduce exposure to the variable interest rate fluctuations associated with the new mortgage. The total cost of the IRC was $0.2 million and has an aggregate notional amount of $9.4 million. The IRC has a 24-month term and caps SOFR at 6.00%. See “Note 8–Debt” and “Note 14–Fair Value.”

The asset acquisition was recorded at relative fair value. We recorded $10.0 million in “Property and equipment, net” for tangible assets purchased; $1.2 million in “Intangible assets, net” for in-place leases; and $0.1 million in “Other liabilities” for below-market leases for this acquisition in our consolidated balance sheet.

Recent Investments

Investment in Consolidated VIE

On July 1, 2024, the Company entered into two joint ventures (collectively, the “Palatine JVs”) with affiliates of Palatine Capital Partners, which acquired four senior living communities located in Texas (3) and Georgia (1). The Palatine JVs acquired these communities for a purchase price of $32.8 million plus transaction costs of $0.1 million for net cash of $11.2 million and financing of $21.7 million of senior mortgage debt. The Company is a 51% owner in the Palatine JVs.

The Company has evaluated its investment in the Palatine JVs under ASC 810. The Company has determined that it has the power to direct the activities of the VIE that most significantly impact its economic performance and is the primary beneficiary of the VIE in accordance with ASC 810. Accordingly, the Company has consolidated the activity of the Palatine JVs into its condensed consolidated financial statements for the period ended December 31, 2024. The Company manages the 4 Palatine JV communities in exchange for a management fee calculated as a percentage of gross revenue and an additional incentive management fee based on earnings before interest, taxes, depreciation, amortization, rent, and management fees, and on other customary terms and conditions.

The asset acquisition was recorded at fair value. The Company recorded $27.5 million in “Property and equipment, net” for tangible assets purchased; $5.6 million in “Intangible assets, net” for in-place leases; and $0.2 million in “Other liabilities” for below market leases in the Company’s condensed consolidated balance sheets.

Investment in Stone Unconsolidated Entity

In April 2024, the Company and KZ Stone Investor LLC (“KZ Investor”) formed a new joint venture, Stone JV LLC (the “Stone JV”) for the purpose of acquiring, owning, and operating four senior housing communities located in the Midwest. In May 2024, the Stone JV purchased the four communities for a purchase price of $64.0 million. KZ Investor is the controlling managing member of the Stone JV and owns 67.29% of the entity as of December 31, 2024. Sonida owns a 32.71% noncontrolling interest in the Stone JV as of December 31, 2024, which was acquired through cash contributions in connection with the closing. Sonida operates the four communities for a management fee based on gross revenues of the applicable communities, as well as, in some cases, an incentive management fee based on earnings before interest, taxes, depreciation, amortization, rent, and management fees, and on other customary terms and conditions.

The Company has evaluated its investment in the Stone JV under ASC 810. The Company has determined that it does not have the power to direct the activities of the VIE that most significantly impact its economic performance and is not the

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primary beneficiary of the VIE in accordance with ASC 810. The Company's interests in the VIE are, therefore, accounted for under the equity method of accounting. The carrying amount of the Company's investment in the Stone JV and maximum exposure to loss as a result of the Company's ownership interest in the Stone JV was $10.9 million, which is included in investment in unconsolidated entity on the accompanying condensed consolidated balance sheet as of December 31, 2024.

The Company evaluates the realization of its investment in unconsolidated entities accounted for using the equity method if circumstances indicate the Company's investment is other than temporarily impaired. During the year ended December 31, 2024, there were no impairments.

New Management Agreements

The Company has property management agreements with a third-party owner pursuant to which the Company manages certain communities on their behalf for a management fee based on gross revenues of the applicable communities, as well as an incentive management fee, and other customary terms and conditions. During June 2024 the Company executed management agreements to assume the management of two communities owned by a third party. During August 2024 the Company executed management agreements to assume the management of one community owned by a third party.

Recent Financing and Corporate Transactions

2024 and 2023 Fannie Mae Loan Modifications

In December 2024, the Company and certain of its subsidiaries entered into an Omnibus Amendment to Multifamily Loan and Security Agreements (the “Omnibus Amendment”) with Federal National Mortgage Association (“Fannie Mae”). The Omnibus Amendment amends the terms of each of the loan agreements (each, a “2024 Loan Agreement” and collectively, the “2024 Loan Agreements”) relating to 18 of the Company’s 37 senior living communities encumbered by mortgage agreements with Fannie Mae to, among other things, extend the maturity dates of each 2024 Loan Agreements from December 1, 2026 to January 1, 2029 in exchange for $10 million of scheduled principal paydowns on the 2024 Loan Agreements, which included a $2 million paydown made at closing and a series of $2 million, $3 million and $3 million due in November 2025, 2026 and 2027, respectively.

In June 2023, we entered into a forbearance agreement (“Fannie Forbearance” and “Fannie Forbearance Agreement”) with the Federal National Mortgage Association (“Fannie Mae”) for all 37 of its encumbered communities. Under the Fannie Forbearance, Fannie Mae agreed to forbear on its remedies otherwise available under the community mortgages and Master Credit Facility (“MCF”) in connection with reduced debt service payments made by us during the forbearance period. In connection with the Fannie Forbearance, we made a $5.0 million principal payment in July 2023. The Fannie Forbearance was the first of a two-step process to modify all existing mortgage loan agreements with Fannie Mae by October 2023 under proposed loan modification agreements, as defined in the Fannie Forbearance (“Loan Modification Agreements”).

We entered into Loan Modification Agreements with Fannie Mae in October 2023. Some of the material terms of the Loan Modification Agreements are as follows:

• Maturities on 18 community mortgages, ranging from July 2024 to December 2026, were extended to December 2026 (and were subsequently extended to January 2029, as described below). The remaining 19 communities under the MCF have existing maturities in January 2029.

• We were not required to make scheduled principal payments due under the 18 community mortgages and 19 communities under the MCF through the initially revised maturity date of December 2026 or 36 months from the Fannie Forbearance Effective Date, respectively.

• The monthly interest rate was reduced by a 1.5% weighted average on all 37 communities for 12 months from the Fannie Forbearance Effective Date and deferred until it was contractually waived in June 2024, when the “Fannie Interest Abatement Period” expired because of the Company’s compliance with certain required default covenants.

• We were required to make a second principal payment of $5.0 million with respect to the Fannie Mae debt, which was paid in June 2024 on the one-year anniversary of the Fannie Forbearance Effective Date.

2024 Community Mortgage Loans

On December 31, 2024, as part of the Cincinnati Acquisition, the Company entered into a non-recourse mortgage loan of $18.3 million for a term of 84-months and 24-month interest waiver with a 3% fixed-interest-only rate thereafter.

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In May 2024, as part of the Macedonia Acquisition, the Company entered into a $9.4 million mortgage loan with a 60-month term and a variable interest rate equal to 1-month SOFR plus 2.00% margin. The Company is not required to make scheduled principal payments for the first 36 months. The Company also entered into a SOFR-based IRC to reduce exposure to the variable interest rate fluctuations associated with the new mortgage. The total cost of the IRC was $0.2 million and has an aggregate notional amount of $9.4 million. The IRC has a 24-month term and caps SOFR at 6.00% from May 9, 2024 through May 1, 2026 with respect to such variable rate indebtedness.

Texas Loan Modification

In August 2024, the Company entered into loan modification agreements (“Texas Loan Modification”) with one of its lenders on two owned communities in Texas, pursuant to which, among other things, the Company received an option to make a discounted payoff (“Texas DPO”) of the outstanding loan principal. On November 1, 2024, the Company paid $18.3 million for the Texas DPO which was financed with funds received from our Credit Facility. The Texas DPO represents a discount of 36% on the total principal outstanding for which the Company recognized a gain on debt extinguishment of $10.4 million for the year ended December 31, 2024.

Notes Payable - Consolidated VIE

In connection with the purchase of the Palatine JVs in July 2024, the Palatine JV assumed $21.7 million of mortgage debt with several lenders. The mortgages have a weighted average interest rate of 7.2% and have terms ranging from 2025 through 2029. As of December 31, 2024, $21.7 million relating to this debt assumed through acquisitions, remained outstanding. These purchases are non-cash financing activities and therefore are not reflected within Capital expenditures in our consolidated statements of cash flows.

In addition, one of the affiliates in the Palatine JVs entered into a SOFR-based IRC to reduce exposure to the variable interest rate fluctuations associated with one of the mortgages at a cost of $0.1 million.

Senior Secured Revolving Credit Facility

In July 2024, the Company entered into a credit agreement for a senior secured revolving credit facility (the “Credit Facility”). The Credit Facility has a borrowing capacity of $150.0 million, a term of three years, a leverage-based pricing matrix between SOFR plus 2.10% margin and SOFR plus 2.60% margin and is fully recourse to Sonida Senior Living, Inc. and its applicable subsidiaries. The borrowing base by which borrowing availability under the Credit Facility is determined is generally based upon the value of the senior living communities that secure the Company’s obligations under the Credit Facility. During the year ended December 31, 2024, the Company borrowed $68.7 million under the Credit Facility, at a weighted average interest rate of 7.3%, which was secured by two of the Company’s previously unencumbered senior living communities and ten newly acquired communities. The Company repaid $8.7 million of the borrowing during the year ended December 31, 2024 and $60.0 million borrowings were outstanding as of December 31, 2024.

2024 Loan Purchase and Ally Term Loan Expansion

We entered into an agreement with one of our previous lenders whereby the Company agreed to purchase the outstanding indebtedness it owed to such lender for a purchase price of $40.2 million (plus the reimbursement of certain amounts advanced to the Company by such lender). In February 2024, the Company completed the purchase of the total outstanding principal balance of $74.4 million from the lender which loans were secured by seven of the Company’s senior living communities (such transaction, the “2024 Loan Purchase”). The 2024 Loan Purchase was funded by the concurrent expansion of the Company’s existing loan facility with Ally Bank (“Ally”) by $24.8 million (as described below) and the remainder was funded by proceeds from the 2024 Private Placement, as described below. The 2024 Loan Purchase and Ally Term Loan expansion reduced notes payable by $49.6 million and resulted in a gain on debt extinguishment totaling $38.1 million.

2024 and 2023 Ally Loan Amendments

In May 2024, the Company executed an amendment (“Ally Fourth Amendment”) to the Ally term loan agreement (“Ally Term Loan”). Ally Bank successfully syndicated a portion of its total term loan commitment to Cross River Bank. Following the syndication, Ally Bank and Cross River Bank owned 67.5% and 32.5% of the outstanding principal balance, respectively.

In February 2024, the Company expanded the existing loan facility with Ally by $24.8 million (“Ally Third Amendment”) to partially fund the 2024 Loan Purchase. The Ally Third Amendment required expanded monthly payments into both the Waiver Principal Reserve Account and the IRC Reserve by approximately $36,000 and amount to match the

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notional amount required under the increased Ally Term Loan. Additionally, the Company made a one-time payment to the debt service reserve (“Ally Debt Service Reserve”) of $0.4 million. The expanded Ally Term Loan was secured by six of the Company’s senior living communities involved in the 2024 Loan Purchase.

In June 2023 and concurrent with the Fannie Forbearance, we executed an amendment (“2023 Ally Amendment”) to the Ally term loan agreement (“Ally Term Loan” or “Ally Term Loan Agreement”) and an amended guaranty (“Second Amended Ally Guaranty”) with Ally Bank. Under the terms of the Second Amended Ally Guaranty, Ally granted the Company, as Guarantor, a waiver (“Limited Payment Guaranty Waiver” or “Waiver”) of the liquid assets minimum requirement of $13.0 million for a 12-month period, which expired on December 31, 2024. Additionally, the Company was required to make monthly payments of approximately $117,000 through an Ally controlled escrow (“Waiver Principal Reserve”), as well as a $2.3 million payment to an interest rate cap reserve account (“IRC Reserve”) held by Ally, which represented the quoted cost of a one-year interest rate cap on the full notional value of the Ally Term Loan. With the expiration of Limited Payment Guaranty Waiver on December 31, 2024, the Company ceased its monthly payments into both the Waiver Principal Reserve Account and the IRC Reserve.

For additional information regarding the Company’s recent financing transactions described above, see “Note 8—Debt.”

Public Offering

In August 2024, the Company entered into an underwriting agreement providing for the offer and sale (the “Offering”) by the Company, and the purchase by the underwriters, of 4,300,000 shares of the Company’s common stock, at a price to the public of $27.00 per share. The Company also granted a 30-day option to the underwriters to purchase up to an additional 645,000 shares of common stock on the same terms as above. During August 2024, the Company raised $124.1 million in total net proceeds from the Offering: an initial $110.4 million of proceeds on the sale of 4,300,000 shares and an additional $13.7 million on 530,317 shares, pursuant to the partial exercise of the underwriters’ 30-day option.

At-the-Market Equity Offerings

In April 2024, the Company entered into an At-the-Market Issuance Sales Agreement (the “ATM Sales Agreement”) with Mizuho Securities USA LLC, as sole sales agent. Pursuant to the ATM Sales Agreement in which the Company may sell, at its option, shares of its common stock up to an aggregate offering price of $75.0 million (the “Shares”) through its Agent. The ATM Sales Agreement provides that the Mizuho will be entitled to receive a commission of up to 3% of the gross proceeds from the sale of the shares in a transaction.

During 2024, the Company sold an aggregate of 667,502 shares pursuant to the ATM Sales Agreement for net proceeds of $18.7 million, after applicable commissions.

2024 Private Placement Transaction

On February 1, 2024, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with affiliates of Conversant Capital, LLC and several other shareholders (together, the “Investors”), pursuant to which the Investors agreed to purchase from the Company, and the Company agreed to sell to the Investors, in a private placement transaction (the “2024 Private Placement”), an aggregate of 5,026,318 shares of the Company’s common stock at a price of $9.50 per share. The 2024 Private Placement occurred in two tranches. The first tranche occurred on February 1, 2024, at which time 3,350,878 shares of common stock were issued and sold to the Investors for $31.8 million. The second tranche occurred on March 22, 2024, at which time 1,675,440 shares of common stock were issued and sold to the Investors for $15.9 million. The Company used a portion of the proceeds from the first closing of the 2024 Private Placement to fund a portion of the cash purchase price for the 2024 Loan Purchase.

Significant Financial and Operational Highlights

Operations

The Company derives its revenue primarily by providing senior living and healthcare services to seniors. During the year ended December 31, 2024, the Company generated resident revenue of approximately $267.8 million compared to resident revenue of approximately $232.0 million in the prior year, representing an increase of approximately $35.8 million. The increase in revenue was primarily due to increased occupancy, increased average rent rates, and additional communities acquired in 2024.

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Weighted average occupancy for the year ended December 31, 2024 for the communities owned by the Company excluding 2024 acquisitions was 86.4% as compared to a weighted average occupancy for the year ended December 31, 2023 of 84.6%, reflecting continued occupancy growth. The average monthly rental rate for these owned communities for the year ended December 31, 2024 was 5.9% higher when compared to the year ended December 31, 2023.

Management Services

The Company has property management agreements with third parties and its joint ventures pursuant to which the Company manages certain communities on their behalf for a management fee based on gross revenues of the applicable communities, as well as, in some cases, an incentive management fee and on other customary terms and conditions. The Company managed 13 and ten communities on behalf of a third party during the years ended December 31, 2024 and 2023, respectively. The Company managed four communities on behalf of an unconsolidated joint venture and four communities of consolidated joint ventures during the year ending December 31, 2024 and none during the prior year period.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and related notes. Management bases its estimates and assumptions on historical experience, observance of industry trends and various other sources of information and factors, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions. The Company believes the following are our most critical accounting policies and/or typically require management’s most difficult, subjective, and complex judgments.

Acquisitions of Senior Living Communities

Upon the acquisition of new senior living communities, we recognize the assets acquired and the liabilities assumed as of the acquisition date, measured at their fair values using Level 3 inputs at the date of acquisition. There is judgement involved when determining the fair value of land and building values, including the selection of key assumptions in the valuation models based on estimated replacement costs, market rental rates, and capitalization rates, which are primarily unobservable inputs. We have estimated the value and economic lives of certain tangible assets based on historical information, industry estimates and averages, which are used to calculate depreciation and amortization expense. If the subsequent actual results and updated projections of the underlying business activity change, compared with the assumptions and projections used to develop these values, we could experience impairment charges. If our estimates of the economic lives change, depreciation or amortization expense could be accelerated or extended. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Long-Lived Assets and Impairment

The Company continuously 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.

To estimate fair value management makes several estimates and assumptions, including, but not limited to, the projected date of disposition, estimated sales price, future cash flows of each property during our estimated holding period, and estimated capitalization rates. We corroborate the estimated capitalization rates we use in these calculations with capitalization rates observable from recent market transactions. 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. The Company recognized a non-cash impairment charge of $6.0 million to its “Property and equipment, net” during the year ended December 31, 2023, which related to one owned community. There were no impairments on long-lived assets during the year ended December 31, 2024.

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New Accounting Pronouncements

See “Note 2–Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a discussion of new accounting pronouncements.

Results of Operations

The following table includes our Consolidated Statements of Operations data in thousands of dollars and expressed as a percentage of total revenues for the years ended December 31, 2024 and 2023.

* Represents a percentage in excess of 100%.

Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

Revenues

Resident revenue for the year ended December 31, 2024 was $267.8 million as compared to $232.0 million for the year ended December 31, 2023, an increase of $35.8 million, or 15.4%. The increase in revenue was primarily due to increased occupancy, increased average rent rates, and 16 additional consolidated communities acquired during 2024 (including one unoccupied community). Weighted average occupancy for the year ended December 31, 2024 for the communities owned by the Company excluding 2024 acquisitions was 86.4% as compared to a weighted average occupancy for the year ended December 31, 2023 of 84.6%, reflecting continued occupancy growth. The average monthly rental rate for these owned communities for the year ended December 31, 2024 was 5.9% higher when compared to the year ended December 31, 2023.

Management fee revenue for the year ended December 31, 2024 increased by $1.2 million as compared to the year ended December 31, 2023, primarily as a result of managing more communities in 2024.

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Managed community reimbursement revenue for the year ended December 31, 2024 was $33.1 million as compared to $21.1 million for the year ended December 31, 2023, representing an increase of $12.0 million, or 56.9%. The increase was primarily a result of managing three more third-party and four unconsolidated joint venture communities during the year ended December 31, 2024.

Expenses

Operating expenses for the year ended December 31, 2024 were $202.0 million as compared to $177.3 million for the year ended December 31, 2023, an increase of $24.7 million. The increase is primarily attributable to the increase in labor costs of $15.7 million and an increase in other variable operating expenses of $5.3 million as a result of increased occupancy in the Company's same store communities and 16 new consolidated communities (including one unoccupied community acquired on December 31, 2024) as compared to the prior year.

General and administrative expenses for the year ended December 31, 2024 were $40.0 million as compared to $32.2 million for year ended December 31, 2023, an increase of $7.8 million, or 24.2%. The increase is due to a $6.6 million increase in labor costs to support the Company's 2024 acquisitions and a $1.6 million increase in stock-based compensation expense, partially offset by a $0.4 million decrease in other costs.

During the year ended December 31, 2024, there were no impairments on long-lived assets. During the year ended December 31, 2023, the Company recorded a non-cash impairment charge of $6.0 million related to one owned community with decreased cash flow estimates as a result of recurring net operating losses.

Managed community reimbursement expense for the year ended December 31, 2024 was $33.1 million as compared to $21.1 million for the year ended December 31, 2023, an increase of $12.0 million, or 56.9%. The increase was primarily a result of managing more communities during the year ended December 31, 2024 as compared to the prior year period.

Other income and expense

Interest income generally reflects interest earned on the investment of cash balances and escrow funds or interest associated with certain income tax refunds or property tax settlements. Interest income increased by $1.1 million compared to the prior year primarily due to an average increased investment balance in money market accounts.

Interest expense for the year ended December 31, 2024 was $37.0 million as compared to $36.1 million for the year ended December 31, 2023, an increase of $0.9 million, or 2.4%, due to the incremental borrowings associated with the Company's 2024 community acquisitions, partially offset by a decrease in the Company's SOFR-based variable rate debt.

Gain on extinguishment of debt for the year ended December 31, 2024 was $48.5 million related to the derecognition of notes payable and liabilities as a result of the 2024 Loan Purchase and the Texas DPO from two of our lenders. Gain on extinguishment of debt for the year ended December 31, 2023 was $36.3 million related to the derecognition of notes payable and liabilities as a result of the transition of legal ownership of two communities to Fannie Mae, the holder of the related non-recourse debt.

Net loss

As a result of the foregoing factors, the Company reported net loss of $3.3 million for the year ended December 31, 2024, compared to net loss of $21.1 million for the year ended December 31, 2023.

Liquidity and Capital Resources

In addition to approximately $17.0 million of unrestricted cash balance as of December 31, 2024, our future liquidity will depend in part upon our operating performance, which will be affected by prevailing economic conditions, and financial, business and other factors, some of which are beyond our control. Principal sources of liquidity are expected to be cash flows from operations, proceeds from our secured Credit Facility, proceeds from equity offerings, including sales of common stock under our ATM Sales Agreement, and proceeds from debt refinancings or loan modifications. During 2023, we entered into loan modifications with Fannie Mae, an amendment with Ally Bank, including a revised Limited Payment Guaranty, and an equity commitment with Conversant. During 2024, we completed the 2024 Private Placement pursuant to which we issued and sold an aggregate of approximately 5.0 million shares of our common stock to several of our shareholders for gross cash proceeds of $47.8 million, which enabled us to purchase all the Company's debt then outstanding with a certain lender at a substantial discount, as well as fund future working capital and growth initiatives. Additional financing of $24.8 million for the debt purchase was provided by an expansion of the Company’s existing Ally Bank term loan. In addition, during April 2024, the Company entered into the At-the-Market Issuance Sales Agreement (the “ATM Sales Agreement”), whereby the Company

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may sell, at its option, shares of its common stock up to an aggregate offering price of $75,000,000. As of December 31, 2024, the Company has received $18.7 million in net proceeds from the ATM sales. During August 2024, the Company completed a public offering and issued 4.8 million shares of common stock for net proceeds of $124.1 million, after deducting underwriting discounts and commissions and the Company’s offering expenses. During August 2024, the Company entered into a Credit Facility in which borrowing availability is determined based upon the value of the senior living communities. As of December 31, 2024, the Company had outstanding borrowings under its Credit Facility of $60.0 million. These transactions are expected to provide additional financial flexibility to us and increase our liquidity position. See “Note 8–Debt” and “Note 9–Securities Financing” in the Notes to Consolidated Financial Statements.

The Company, from time to time, considers and evaluates financial and capital raising transactions related to its portfolio, including debt refinancings, purchases and sales of assets, equity offerings and other transactions. There can be no assurance that the Company will continue to generate cash flows at or above current levels, or that the Company will be able to obtain the capital necessary to meet the Company’s short- and long-term capital requirements.

Recent changes in the current economic environment, and other future changes, could result in decreases in the fair value of assets, slowing of transactions, and the tightening of liquidity and credit markets. These impacts could make securing debt or refinancings for the Company or buyers of the Company’s properties more difficult or on terms not acceptable to the Company. The Company’s actual liquidity and capital funding requirements depend on numerous factors, including its operating results, its capital expenditures for community investment, and general economic conditions, as well as other factors described in “Item 1A. Risk Factors.”

In summary, the Company’s cash flows were as follows (in thousands):

Operating activities

Net cash used in operating activities for the year ended December 31, 2024 was $1.8 million as compared to net cash provided by operating activities of $10.7 million for the year ended December 31, 2023. The change of $12.5 million is primarily due to the settlement of accounts payable and accrued expenses during the year ended December 31, 2024 compared to the prior year. Additionally, we received grants of $2.9 million in the year ended December 31, 2023 from state departments due to financial distress impacts of the coronavirus. No such grants were received during 2024.

Investing activities

The net cash used in investing activities for the year ended December 31, 2024 was $208.9 million primarily due to $172.5 million for acquisitions of new communities, $25.2 million due to ongoing capital improvements and refurbishments, and $22.4 million in investments in unconsolidated entities, partially offset by a return on investment of $10.6 million in our unconsolidated entities in connection with its subsequent financing. The net cash used in investing activities for the year ended December 31, 2023 was primarily due to ongoing capital improvements and refurbishments at the Company’s senior housing communities of $17.9 million, partially offset by the proceeds from sale of assets of $1.4 million.

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Financing activities

The net cash provided by financing activities for the year ended December 31, 2024 of $232.0 million was primarily due to net proceeds from the issuance of common stock of $190.5 million, proceeds from our Credit Facility of $68.7 million, proceeds of $56.0 million from notes payable, and proceeds from noncontrolling investors of $7.8 million, partially offset by repayments of notes payable of $72.0 million, repayments of our Credit Facility of $8.7 million, deferred loan costs paid of $3.7 million, purchase of derivative assets of $3.3 million, and dividends paid of $2.8 million. The net cash used in financing activities for the year ended December 31, 2023 of $7.1 million was primarily due to repayments of notes payable of $13.8 million, purchase of derivative assets of $2.4 million, and deferred financing costs paid of $0.8 million, partially offset by proceeds of $10.0 million from equity draws under the equity commitment. See “Note 8–Debt” and “Note 9–Securities Financing” in the Notes to Consolidated Financial Statements.

Debt Covenants

Certain of our debt agreements contain restrictions and financial covenants, such as those requiring us to maintain prescribed minimum debt service coverage ratios, in each case on a multi-community basis. The debt service coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee, divided by the debt (principal and interest). Furthermore, our debt is secured by our communities and if an event of default has occurred under any of our debt, subject to cure provisions in certain instances, the respective lender would have the right to declare all of the related outstanding amounts of indebtedness immediately due and payable, to foreclose on our mortgaged communities and/or pursue other remedies available to such lender. We cannot provide assurance that we would be able to pay the debts if they became due upon acceleration following an event of default.

The Company was in compliance with all financial covenants of its outstanding indebtedness as of December 31, 2024.

Other Liquidity Factors

The continuation of the currently elevated inflationary environment could affect the Company’s future revenues and results of operations because of, among other things, the Company’s dependence on senior residents, many of whom rely primarily on fixed incomes to pay for the Company’s services. As a result, during inflationary periods, the Company may not be able to increase resident service fees to account fully for increased operating expenses. In structuring its fees, the Company attempts to anticipate inflation levels, but there can be no assurances that the Company will be able to anticipate fully or otherwise respond to any future inflationary pressures.

Our non-labor operating expenses have historically comprised of approximately one-third of our total operating expenses and are subject to inflationary pressures. The United States consumer price index increased 2.9% during 2024, as compared to an increase of 3.4% in 2023, with food and energy prices increasing approximately 200 basis points. We mitigated a portion of the increase in food costs with the scale benefit of a higher number of residents, along with appropriate product substitution. For 2024 our non-labor operating expense on the same-store communities increased 2.4% as compared to the prior year. For 2025, we expect to continue to experience increases tied in to overall inflationary pacing.

Historically, labor costs have comprised of approximately two-thirds of our total operating expenses. We began to experience pressures associated with the intensely competitive labor environment during 2022, which continued throughout 2023 and 2024. Labor pressures have resulted in higher-than-typical associate turnover and wage growth, and we have experienced difficulty in filling open positions timely. To cover existing open positions, during 2023 and continuing into 2024, we needed to rely on more expensive premium labor, primarily shift bonuses and overtime. The increase primarily resulted from merit and market wage rate adjustments, more hours worked with higher occupancy during 2024, and an increase in the use of premium labor, primarily shift bonuses and overtime. For 2025, we expect to continue to experience labor cost pressures as a result of the continuing labor conditions previously described and an anticipated increase in hours worked as our occupancy levels grow. Continued increased competition for, or a shortage of, nurses and other employees and general inflationary pressures have required and may require that we enhance our pay and benefits package to compete effectively for such employees.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the risks, uncertainties and other factors described under “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” in this Annual Report on Form 10-K. Actual results may differ materially from those projected in such statements as a result of such risks, uncertainties and other factors.

Overview

The following discussion and analysis addresses (i) the Company’s results of operations on a historical consolidated basis for the years ended December 31, 2023 and 2022, and (ii) liquidity and capital resources of the Company, and should be read in conjunction with the Company’s historical consolidated financial statements and the selected financial data contained elsewhere in this Annual Report on Form 10-K.

The Company is one of the leading owner-operators of senior housing communities in the United States.  The Company’s operating strategy is to provide value to its senior living residents by providing quality senior living services at reasonable prices, while achieving and sustaining a strong, competitive position within its geographically concentrated regions, as well as continuing to enhance the performance of its operations. The Company generally provides senior living services to the 75+ population, including independent living, assisted living, and memory care services at reasonable prices. Many of the Company’s communities offer a continuum of care to meet each of their resident’s needs as they change over time. This continuum of care, which integrates independent living, assisted living, and memory care that may be bridged by home care through independent home care agencies, sustains our residents’ autonomy and independence based on their physical and mental abilities.

As of December 31, 2023, the Company operated 71 senior housing communities in 18 states with an aggregate capacity of approximately 8,000 residents, including 61 senior housing communities that the Company owned and 10 communities that the Company managed on behalf of third parties.

Corporate Transactions

Fannie Mae Loan Modification

On June 29, 2023, the Company entered into a forbearance agreement (“Fannie Forbearance” and “Fannie Forbearance Agreement”) with Fannie Mae for all 37 of its encumbered communities, effective as of June 1, 2023 (“Fannie Forbearance Effective Date”). Under the Fannie Forbearance, Fannie Mae agreed to forbear on its remedies otherwise available under the community mortgages and Master Credit Facility (“MCF”) in connection with reduced debt service payments made by the Company during the forbearance period. In connection with the Fannie Forbearance, the Company made a $5.0 million principal payment in July 2023. The Fannie Forbearance was the first of a two-step process to modify all existing mortgage loan agreements with Fannie Mae by October 2023 under proposed loan modification agreement, as defined in the Fannie Forbearance (“Loan Modification Agreements.”) Terms outlined in an agreed upon term sheet accompanying the Fannie Forbearance were included in the Loan Modification Agreements as the final step to modify the various 37 Fannie Mae community mortgages and MCF prior to the expiration of the Fannie Forbearance, which was subsequently extended to October 6, 2023.

The Company entered into Loan Modification Agreements with Fannie Mae on October 2, 2023. The material terms of the Loan Modification Agreements are as follows:

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•Maturities on 18 community mortgages, ranging from July 2024 to December 2026, have been extended to December 2026. The remaining 19 communities under the MCF have existing maturities in January 2029.

•The Company is not required to make scheduled principal payments due under the 18 community mortgages and 19 communities under the MCF through the revised maturity date of December 2026 or 36 months from the Fannie Forbearance Effective Date, respectively.

•The monthly interest rate will be reduced by a 1.5% weighted average on all 37 communities for 12 months from the Fannie Forbearance Effective Date and deferred until it is contractually waived in June 2024 so long as there is no event of default (the “Fannie Interest Abatement Period”).

•The Company is required to make a second principal payment of $5.0 million with respect to the Fannie Mae debt which is due on June 1, 2024, the one-year anniversary of the Fannie Forbearance Effective Date.

•The Company provided a full corporate guaranty in the amount of $5.0 million related to the second principal payment of $5.0 million (the “Second Payment Guaranty”). This guaranty will fully expire upon payment of the second $5.0 million principal payment.

•In addition to the Second Payment Guaranty above, the Company also provided a $10.0 million guaranty (the “Supplemental Fannie Guaranty”). After the expiration of 24 months from the Fannie Forbearance Effective Date, Sonida may discharge the full amount of the Supplemental Fannie Guaranty by making a $5.0 million principal payment to Fannie Mae on its community mortgages and/or its MCF.

•In the first twelve months following the effective date of the Loan Modification Agreements, the Company is required to escrow 50% of Net Cash Flow less Debt Service (as defined in the Fannie mortgages and MCF) on an aggregate basis over all 37 Fannie Mae communities. The excess cash flow will be deposited into a lender-controlled capital expenditure reserve on a monthly basis to support the re-investment into certain communities, as mutually determined by the Company and Fannie Mae. The Company will be able to draw down such amounts on qualifying projects as the capital expenditures are incurred. As of December 31, 2023, the Company has funded $0.2 million into such escrow account.

As of December 31, 2023, the Company had drawn down $10.0 million of the Equity Commitment as more fully described in the “Conversant Equity Commitment” below. As of December 31, 2023, $3.5 million remains in the Equity Commitment.

The Company has determined that the Fannie loan modification is a troubled debt restructuring where the total cash outflows exceed the current carrying value of the debt. The Company incurred restructuring costs of $0.7 million in the year ended December 31, 2023. These costs are included in deferred loan costs as of December 31, 2023 and will be amortized over the new lives of the Fannie Mae loans. In addition, the Company paid $3.1 million in transaction costs related to the loan modifications that was expensed as general and administrative expenses in the year ended December 31, 2023.

2023 Ally Loan Amendment

On June 29, 2023, and concurrent with the Fannie Forbearance, we executed a second amendment (“2023 Ally Amendment”) to our Refinance Facility (“Ally Term Loan” or “Ally Term Loan Agreement”) and an amended guaranty (“Second Amended Ally Guaranty”) with Ally Bank with terms as follows:

•With respect to the Second Amended Ally Guaranty, Ally will grant the Company, as guarantor, a waiver (“Limited Payment Guaranty Waiver” or “Waiver”) of the Liquid Assets minimum requirement of $13.0 million for a 12-month period. On July 1, 2024, a new Liquid Assets Threshold of $7.0 million will be effective, with such threshold increasing $1.0 million per month through the earlier of the release of the Waiver period or December 31, 2024.

•During the Waiver period, a new and temporary Liquid Assets minimum threshold (“Limited Payment Guaranty Waiver Minimum Threshold”) will be established. The Limited Payment Guaranty Waiver Minimum Threshold is $6.0 million and is measured weekly. If breached, the “Excess Cash Flow Sweep” is triggered and all excess cash from the communities collateralizing the Ally Term Loan will be swept into an “Equity Cure Fund”, as defined in the Ally Term Loan Agreement. As provided for in the Ally Amendment, the Excess Cash Flow Sweep, if triggered, will cease upon the achievement of meeting or exceeding the Limited Payment Guaranty Waiver Minimum Threshold for four

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consecutive weeks. Consistent with the Ally Term Loan, all amounts held in escrow (i.e., Debt Service Escrow and IRC Reserve (defined below)) will be included and combined with the Company’s unrestricted cash for purposes of measurement against the Limited Payment Guaranty Waiver Minimum Threshold.

•During the Waiver period, Ally will collect the equivalent of the monthly Ally Term Loan principal payment (as provided for in the Ally Term Loan Agreement) of approximately $117,000 through an Ally controlled escrow (“Waiver Principal Reserve Account”).

•Upon meeting the Ally Term Loan’s Liquid Assets Threshold of $13.0 million, the Company may elect to remove the Waiver, with initial terms in the Ally Term Loan applicable again, except as described further below.

•In July 2023, we were required to fund $2.3 million to an interest rate cap reserve (“IRC Reserve”) held by Ally, which represented the quoted cost of a one-year interest rate cap on the full $88.1 million notional value of the Ally Term Loan at a 2.25% SOFR strike rate. On December 1, 2023, the Company entered into a new SOFR-based interest rate cap transaction for an aggregate notional amount of $88.1 million at a cost of $2.4 million. The interest rate cap agreement has a 12-month term and caps the floating interest rate portion of our indebtedness with Ally Bank at 2.25%. Until the terms of the Limited Payment Guaranty Waiver have expired or have been met and elected at the Company’s discretion, the IRC Reserve is required to be replenished to its replacement cost.

•To the extent either the Second Payment Guaranty or Supplemental Fannie Guaranty have not been discharged, any uncured monetary event of default under the Fannie Forbearance will constitute a cross default under the Ally Amendment, resulting in the immediate trigger of a full excess cash flow sweep for the communities collateralizing the Ally Term Loan as well as additional performance and liquidity reporting requirements.

•Subsequent to the Waiver period, all funds in the Waiver Principal Reserve Account as well as any funds swept into the Equity Cure Fund will be released to the Company.

The foregoing description of the Fannie Forbearance, the 2023 Ally Amendment, Second Amended Ally Guaranty, and the Loan Modification Agreements and the transactions contemplated thereby do not purport to be complete and are subject to, and qualified in their entirety by, the full text of the Fannie Forbearance, the Ally Amendment and Second Amended Ally Guaranty which are filed as Exhibits 10.21, 10.22 and 10.23, respectively, and the Loan Modification Agreements, which are filed as Exhibits 10.24 and 10.25 to this Annual Report on Form 10-K. See “Item 15. Exhibits.”

2022 Ally Loan Mortgage Refinance

In March 2022, the Company completed the refinancing of certain existing mortgage debt with Ally Bank (the “Refinance Facility”) for ten of its communities. The Refinance Facility includes an initial term loan of $80.0 million. On December 13, 2022, the Company entered into an agreement with Ally Bank to amend the Refinance Facility by adding two additional subsidiaries of the Company (which own the two Indiana properties acquired during the first quarter of 2022) as borrowers. The amendment increased the principal by $8.1 million to $88.1 million. See “Note 7–Notes Payable” in Notes to Consolidated Financial Statements.

Conversant Equity Commitment

In connection with the Fannie Forbearance and Ally Amendment signed on June 29, 2023, the Company entered into a $13.5 million equity commitment agreement (“Equity Commitment”) with Conversant Investors for a term of 18 months. The Equity Commitment had a commitment fee of $675,000, which was paid through the issuance of 67,500 shares of common stock of the Company. The commitment fee shares were issued to Conversant on June 29, 2023. Subject to certain conditions, the Company has the right, but not the obligation, to utilize Conversant’s equity commitment and may draw on the commitment in whole or in part. The Company made an equity draw in July 2023 of $6.0 million and issued 600,000 shares of common stock to Conversant. We used $5.0 million of the proceeds to make unscheduled principal payments on two of our Fannie Mae loan balances. On November 1, 2023, the Company made an equity draw of $4.0 million and issued 400,000 shares of common stock to the Conversant Investors.

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COVID-19 Pandemic

The United States broadly continues to recover from the pandemic caused by COVID-19, which significantly disrupted the nation’s economy, the senior living industry, and the Company’s business. The COVID-19 pandemic caused a decline in the occupancy levels at the Company’s communities, which negatively impacted the Company’s revenues and operating results, that depend significantly on such occupancy levels. In an effort to protect its residents and employees and slow the spread of COVID-19 and in response to quarantines, shelter-in-place orders and other limitations imposed by federal, state and local governments, the Company had previously restricted or limited access to its communities, including limitations on in-person prospective resident tours and, in certain cases, new resident admissions. As of December 31, 2023, all of the Company's senior living communities were open for new resident move-ins.

The COVID-19 pandemic required the Company to incur significant additional operating costs and expenses in order to implement enhanced infection control protocols and otherwise care for its residents, including increased costs and expenses relating to supplies and personal protective equipment, testing of the Company’s residents and employees, labor and specialized disinfecting and cleaning services, which has increased the costs of caring for the residents and resulted in reduced occupancy at such communities. During the years ended December 31, 2023 and 2022, the Company incurred approximately $0.1 million and $0.4 million, respectively, in direct costs related to the COVID-19 pandemic.

The Company received approximately $9.1 million in the year ended December 31, 2022 through grants from the Public Health and Social Services Emergency Fund’s (the “Provider Relief Fund”) Phase 4 General Distribution which was expanded by the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) to provide grants or other funding mechanisms to eligible healthcare providers for healthcare-related expenses or lost revenues attributable to COVID-19. The Phase 4 Provider Relief Funds were recorded as other income in the year ended December 31, 2022. The CARES Act Provider Relief Funds are grants that do not have to be repaid provided we satisfy the terms and conditions of the CARES Act. For the years ended December 31, 2023 and 2022, the Company received approximately $2.9 million and $1.2 million, respectively, in various relief funds received from state departments due to financial distress impacts of COVID-19 (“State Relief Funds”). While we intend to pursue additional funding that may become available, there can be no assurances that we will qualify for, or receive, any additional relief funds in the future.

CARES Act Provider Relief Funds are subject to the terms and conditions of the program, including stringent restrictions that funds may only be used to reimburse COVID-19-related expenses or lost revenue that are attributable to COVID-19 and have not been reimbursed from other sources or that other sources are not obligated to reimburse. While we intend to pursue additional funding that may become available, there can be no assurances that we will qualify for, or receive, any additional relief funds in the future.

The Company elected to utilize the CARES Act payroll tax deferral program to delay payment of a portion of its payroll taxes incurred during 2020. The Company repaid one-half of the deferral amount in December 2021 and the other half became due on December 31, 2022. The Company has submitted applications to enter into payment plans for the remaining amounts due. As of December 31, 2023 and December 31, 2022, the Company had $5.1 million and $4.8 million, respectively, in deferred payroll taxes, which is included in accrued expenses in the Company’s Consolidated Balance Sheets.

On September 14, 2023, amid concerns about aggressive employee retention credit (“ERC”) marketing, the IRS announced a moratorium on processing new claims. A specific resumption date hasn't been determined but, at this point, the IRS anticipates it will be sometime in the late spring of 2024. The Company filed for an ERC with the Internal Revenue Service during November 2023, which was before the moratorium. The ERC is a federal payroll tax credit for businesses that had employees and were affected during the COVID-19 pandemic.

We cannot, at this time, predict with reasonable certainty the continued impact that the COVID-19 pandemic will ultimately have on our business, results of operations, cash flow and liquidity, and our response efforts may delay or negatively impact our strategic initiatives, including plans for future growth.

Significant Financial and Operational Highlights

Operations

The Company derives its revenue primarily by providing senior living and healthcare services to seniors. During the year ended December 31, 2023, the Company generated resident revenue of approximately $232.0 million compared to resident revenue of approximately $208.7 million in the prior year, representing an increase of approximately $23.3 million. The increase in revenue was primarily due to increased occupancy, increased average rent rates, and the acquisition of two new communities in Q1 2022.

Weighted average occupancy for the years ended December 31, 2023 and 2022 for the communities owned by the Company during both periods was 84.6% and 83.0%, respectively, reflecting continued occupancy recovery following the onset

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of the COVID-19 pandemic. The average monthly rental rate for these owned communities for the year ended December 31, 2023 was 9.6% higher when compared to the year ended December 31, 2022.

During the year ended December 31, 2023 the Company continued to be impacted by the senior living industry's workforce challenges related to limited staff availability, which required the use of overtime, shift bonuses and contract labor to properly support our senior living communities and residents.

Management Services

The Company has property management agreements with affiliates of Ventas, Inc. (collectively, “Ventas”) in which the Company manages certain communities for Ventas, and Ventas pays the Company a management fee based on gross revenues of the applicable communities, and other customary terms and conditions. The Company managed ten communities on behalf of Ventas during the years ended December 31, 2023 and 2022.

Previously, the Company managed four properties on behalf of Welltower. During October 2022, these properties transitioned to a new operator.

Shaker Heights Disposition

In August 2023, the Company completed the sale of Shaker Heights, for $1.0 million. The Company recognized a $0.2 million loss on the sale. The Shaker Heights property was unencumbered.

Indiana Acquisition

On February 1, 2022, the Company completed the acquisition of two senior living communities located in Indiana for a combined purchase price of $12.3 million. The communities consist of a total of 157 independent living units. The purchase price for these communities was funded at the time of acquisition with cash on hand and subsequently financed in December 2022.

Other Significant Transactions

Transactions Involving Certain Fannie Mae Loans

The Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”), among other things, permitted borrowers with mortgages from Government Sponsored Enterprises who experienced a financial hardship related to the COVID-19 pandemic to obtain forbearance of their loans for up to 90 days. During 2020, the Company entered into several loan forbearance agreements with Fannie Mae. In July 2020, the Company elected not to pay $3.8 million on the loans for 18 properties as of that date as it initiated a process intended to transfer the operations and ownership of such properties to Fannie Mae. Therefore, the Company was in default on such loans, which were non-recourse loans.

As a result of the default, Fannie Mae filed a motion with the United States District Court (the “District Court”) requesting that a receiver be appointed over the 18 properties, which was approved by the District Court. The Company agreed to continue to manage the 18 communities, subject to earning a management fee, until management of the communities was transitioned to a successor operator or legal ownership of the properties was transferred to Fannie Mae or its designee. Management fees earned from the properties were recognized as revenue when earned. In conjunction with the receivership order, the Company was required to obtain approval from the receiver for all payments and received reimbursements from Fannie Mae for reasonable operating expenses incurred on behalf of any of the 18 communities under the receivership order. As a result of the events of default and receivership order, the Company discontinued recognizing revenues and expenses related to the 18 properties effective August 1, 2020, which was the date of default. In addition, the Company concluded that it was no longer entitled to receive any existing accounts receivable or revenue related to the properties, all amounts held in escrow by Fannie Mae were forfeited and the Company no longer had control of the properties in accordance with ASC 610-20.

During the year ended December 31, 2021, Fannie Mae completed the transition of legal ownership of 16 of the Company's properties. As of December 31, 2022, two properties remained for which the legal ownership had not been transferred back to Fannie Mae. As of December 31, 2022, the Company included $31.8 million of outstanding debt in current portion of notes payable, net of deferred loan costs of $0.2 million. As of December 31, 2022, the accrued interest related to the remaining two properties was $4.1 million and was included in accrued expenses. As of December 31, 2022, the Company did not manage any properties on behalf of Fannie Mae.

In January 2023, the Company received notice that the foreclosure sales conducted by Fannie Mae had successfully transitioned the remaining two properties to new owners which relieved the Company of the existing Fannie Mae debt. Accordingly, the Company recognized a total of $36.3 million for the gain on debt extinguishments for the year ended December 31, 2023.

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Protective Life Insurance Company Non-recourse Mortgages

At December 31, 2023, the Company had loan agreements with Protective Life Insurance Company (“Protective Life”), secured by seven of the Company's properties, which allowed the Company to defer principal and interest payments on some of the properties. During 2023, the Company elected not to make principal and interest payments related to certain non-recourse mortgage loan agreements with Protective Life covering four of the Company's properties. During August 2023, the Company paid all past due amounts on one of the properties to bring the mortgage current. As of December 31, 2023, the Company remained in default on three of the Company's properties with Protective Life with an aggregate principal amount of $55.8 million. On February 2, 2024, the Company completed the purchase of the total outstanding principal balance of $74.4 million from Protective Life that was secured by seven of the Company’s senior living communities for a purchase price of $40.2 million (such transaction, the “Protective Life Loan Purchase”). Additional financing of $24.8 million for the debt purchase was provided by Ally Bank through an expansion of the Company’s existing Ally Bank term loan. See “Note 16–Subsequent Events” in the Notes to Consolidated Financial Statements.

Other Debt Related Transactions

The Company had deferred notes payable related to rent payments due to Healthpeak Properties, Inc. (“Healthpeak”) for the years ended December 31, 2023 and 2022. As of December 31, 2023, the Company had $1.6 million due to Healthpeak, which is included in notes payable. During November 2023, the Company modified its payment terms on the Healthpeak note payable to include four quarterly installments beginning in January 2024.

2024 Private Placement Transaction

On February 1, 2024, we entered into a securities purchase agreement with certain of our largest shareholders, including the Conversant Investors, pursuant to which the Investors agreed to purchase from us, and we agreed to sell to the Investors, in a private placement transaction (the “2024 Private Placement”) an aggregate of 5,026,318 shares (the “Shares”) of our common stock at a price of $9.50 per share.

The 2024 Private Placement occurred in two tranches. The first tranche occurred on February 1, 2024, in which 3,350,878 Shares were issued and sold to the Investors for a total of approximately $31.8 million. The second tranche occurred on March 22, 2024, in which 1,675,440 Shares were issued and sold to the Investors for a total of approximately $15.9 million.

In addition to its aggregate deposits of $1.5 million made in December 2023 and January 2024, we funded the remaining cash portion of the purchase price (including one-time closing costs) for the Protective Life Loan Purchase (as defined above) with approximately $15.4 million of net proceeds from the sale of the Shares at the first closing of the 2024 Private Placement. We obtained additional debt proceeds through our existing finance facility with Ally Bank for the remaining portion of the purchase price for the Protective Life Loan Purchase. We expect to use the remaining proceeds from the sale of the Shares at the first tranche and the proceeds from the sale of the Shares at the second tranche for capital expenditure projects at our senior living communities, working capital, potential acquisition opportunities and other general corporate purposes.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and related notes. Management bases its estimates and assumptions on historical experience, observance of industry trends and various other sources of information and factors, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions. The Company believes the following are our most critical accounting policies and/or typically require management’s most difficult, subjective, and complex judgments.

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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 Company’s corporate office and its 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, as well as 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. Management believes that the liability for outstanding losses and expenses is adequate to cover the ultimate cost of losses and expenses incurred as of December 31, 2023; however, actual claims and expenses may differ. 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 potential settlements for pending claims, known incidents that result in claims, estimates of incurred but not yet reported claims, changes in insurance premiums, estimated litigation costs and other factors. The Company regularly adjusts these estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, 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.

Long-Lived Assets and Impairment

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. The Company recognized a non-cash impairment charge of $6.0 million to its “Property and equipment, net” during the year ended December 31, 2023, which related to one owned community. In addition, the Company recognized a non-cash impairment charge of $1.6 million to its “Property and equipment, net” during the year ended December 31, 2022, which related to one owned community.

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. See “Note 4–Impairment of Long-Lived Assets.”

Upon the acquisition of new communities accounted for as an acquisition of assets, 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 5–Property and Equipment, net.”

New Accounting Pronouncements

See “Note 3–Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a discussion of new accounting pronouncements.

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Results of Operations

The following table includes our Consolidated Statements of Operations data in thousands of dollars and expressed as a percentage of total revenues for the years ended December 31, 2023 and 2022.

* Represents positive or negative change in excess of 100%

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Revenues

Resident revenue for the year ended December 31, 2023 was $232.0 million as compared to $208.7 million for the year ended December 31, 2022, an increase of $23.3 million, or 11.2%. The increase in revenue was primarily due to increased occupancy and increased average rent rates.

Managed community reimbursement revenue for the year ended December 31, 2023 was $21.1 million as compared to $27.4 million for the year ended December 31, 2022, representing a decrease of $6.3 million, or 22.9%. The decrease was primarily a result of managing fewer communities in 2023.

Expenses

Operating expenses for the year ended December 31, 2023 were $177.3 million as compared to $171.6 million for the year ended December 31, 2022, an increase of $5.7 million. In our consolidated community portfolio, the labor component of our operating expense increased approximately $7.2 million during 2023 compared to 2022. Other increases in operating expenses were $1.0 million in information technology related expenses, partially offset by decreases in real estate taxes of $1.2 million, $0.9 million of savings in programming expenses, and $0.4 million of other expenses.

General and administrative expenses for the year ended December 31, 2023 were $32.2 million as compared to $30.3 million for year ended December 31, 2022, an increase of $1.9 million, or 6.3%. The increase is due to $4.0 million year-over-year change in transaction costs related to our 2023 loan modifications and other transaction related expenses, partially offset by a $1.6 million decrease in stock-based compensation expense as a result of prior year forfeiture credits in connection with executive personnel changes and $1.0 million decrease in insurance costs in connection with the Company's transition to a new

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broker. The remaining variance of $0.5 million represents the inflationary impact from the remaining recurring general and administrative expenses.

During the year ended December 31, 2023, the Company recorded a non-cash impairment charge of $6.0 million related to one owned community with decreased cash flow estimates as a result of recurring net operating losses. During the year ended December 31, 2022, the Company recorded a non-cash impairment charge of $1.6 million due to the management's commitment to sell the community at a selling price below the community's carrying amount.

Managed community reimbursement expense for the year ended December 31, 2023 was $21.1 million as compared to $27.4 million for the year ended December 31, 2022, a decrease of $6.3 million, or 22.9%. The decrease was primarily a result of managing fewer communities in 2023.

Other income and expense

Interest income generally reflects interest earned on the investment of cash balances and escrow funds or interest associated with certain income tax refunds or property tax settlements. Interest income increased by $0.4 million compared to the prior year primarily due to more active cash management and increased investment in money market accounts.

Interest expense for the year ended December 31, 2023 was $36.1 million as compared to $33.0 million for the year ended December 31, 2022, an increase of $3.1 million, or 9.4%, due to increased interest rates associated with the Company’s variable rate mortgages and the additional interest expense on the two Indiana communities financed during December 2022. The year ended December 31, 2023 interest expense includes $4.3 million of accrued expense related to the deferred portion of interest on our Fannie Mae loans and $2.4 million of interest accrued for our Protective Life loans currently in default.

Gain on extinguishment of debt for the year ended December 31, 2023 was $36.3 million related to the derecognition of notes payable and liabilities as a result of the transition of legal ownership of two communities to Fannie Mae, the holder of the related non-recourse debt. Loss on extinguishment of debt for the year ended December 31, 2022 was $0.6 million related to the 2022 debt refinancing.

Other income (expense), net for the year ended December 31, 2022 was $10.0 million, which included $9.1 million for Provider Relief Funds.

Net loss

As a result of the foregoing factors, the Company reported net loss of $21.1 million for the year ended December 31, 2023, compared to $54.4 million for the year ended December 31, 2022.

Liquidity and Capital Resources

In addition to approximately $4.1 million of unrestricted cash balances on hand as of December 31, 2023, our future liquidity will depend in part upon our operating performance, which will be affected by prevailing economic conditions, and financial, business and other factors, some of which are beyond our control. Principal sources of liquidity are expected to be cash flows from operations, proceeds from equity financings, proceeds from debt refinancings or loan modifications, and proceeds from the sale of owned assets. During 2023, we entered into loan modifications with Fannie Mae, an amendment with Ally Bank, including a revised Limited Payment Guaranty, and an Equity Commitment with Conversant. During the first quarter of 2024, we completed the Private Placement Transaction pursuant to which we issued and sold an aggregate of 5,026,318 Shares of our common stock with several shareholders for gross cash proceeds of approximately $47.8 million, which enabled us to purchase all debt outstanding with Protective Life at a substantial discount, as well as fund future working capital and growth initiatives. Additional financing of $24.8 million for the debt purchase was provided by Ally Bank through an expansion of the Company’s existing Ally Bank term loan. These transactions are expected to provide additional financial flexibility to us and increase our liquidity position. See “Note 7–Notes Payable” and “Note 16–Subsequent Events” in the Notes to Consolidated Financial Statements.

In February 2024, in order to comply with the lender’s requirements, the Company expanded its SOFR-based interest rate cap for an aggregate notional amount of $24.8 million at a cost of $0.6 million. The interest rate cap agreement has a 12-month term and caps the floating interest rate portion of our indebtedness with Ally Bank at 2.25%. As of December 31, 2023, the entire balance of our outstanding variable-rate debt obligations were covered by our interest rate caps to better manage our exposure to market risks associated with the fluctuations in interest rates.

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During 2023, the Company's liquidity conditions, including operating losses and net working capital deficits, raised substantial doubt about the Company's ability to continue as a going concern. As a result of increases in occupancy occurring throughout 2023 and into the first quarter of 2024, rental rate increases in March 2024 and in connection with the 2024 private placement transaction and Protective Life loan purchase, the Company has substantially improved its liquidity position. See details throughout of the transactions which have increased cash on hand significantly. Based on these events, the Company concluded it has adequate cash to meet its obligations as they become due for the 12-month period following the date the December 31, 2023 financial statements are issued.

The Company, from time to time, considers and evaluates financial and capital raising transactions related to its portfolio, including debt refinancings, purchases and sales of assets, equity financings and other transactions. There can be no assurance that the Company will continue to generate cash flows at or above current levels, or that the Company will be able to obtain the capital necessary to meet the Company’s short- and long-term capital requirements.

Recent changes in the current economic environment, and other future changes, could result in decreases in the fair value of assets, slowing of transactions, and the tightening of liquidity and credit markets. These impacts could make securing debt or refinancings for the Company or buyers of the Company’s properties more difficult or on terms not acceptable to the Company. The Company’s actual liquidity and capital funding requirements depend on numerous factors, including its operating results, its capital expenditures for community investment, and general economic conditions, as well as other factors described in “Item 1A. Risk Factors.”

In summary, the Company’s cash flows were as follows (in thousands):

Operating activities

The net cash provided by operating activities for the year ended December 31, 2023 primarily results from increases in operating assets and liabilities of $13.8 million. The net cash used in operating activities for the year ended December 31, 2022 primarily results from net loss of $54.4 million, partially offset by increases in operating assets and liabilities of $3.2 million and net positive non-cash activity of $48.6 million.

Investing activities

The net cash used in investing activities for the year ended December 31, 2023 primarily results from ongoing capital improvements and refurbishments at the Company’s senior housing communities of $17.9 million, offset by $1.4 million from the proceeds from sale of assets. The net cash used in investing activities for the year ended December 31, 2022 primarily results from ongoing capital improvements and refurbishments at the Company’s senior housing communities of $24.6 million and the acquisition of two communities in Indiana for $12.3 million.

Financing activities

The net cash used in financing activities for the year ended December 31, 2023 primarily results from repayments of notes payable of $13.8 million, deferred financing costs paid of $0.8 million, and purchase of derivative assets of $2.4 million, partially offset by proceeds of $10.0 million from equity draws under the Equity Commitment. The net cash used in financing activities for the year ended December 31, 2022 primarily results from the refinancing of certain of our mortgage debt, preferred stock dividends of $3.0 million, and purchase of derivative assets of $2.7 million. See “Note 7–Notes Payable” and “Note 8–Securities Financing” in the Notes to Consolidated Financial Statements.

Debt Covenants

Certain of our debt agreements contain restrictions and financial covenants, such as those requiring us to maintain prescribed minimum debt service coverage ratios, in each case on a multi-community basis. The debt service coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee, divided by the debt (principal and interest). Furthermore, our debt is secured by our communities and if an event of default has occurred under any of our debt, subject to cure provisions in certain instances. The respective lender would have the right to declare all of the

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related outstanding amounts of indebtedness immediately due and payable, to foreclose on our mortgaged communities and/or pursue other remedies available to such lender. We cannot provide assurance that we would be able to pay the debts if they became due upon acceleration following an event of default.

Except for the non-compliance with certain mortgage loan agreements with Protective Life, the Company was in compliance with all other aspects of its outstanding indebtedness as of December 31, 2023. See “Note 16–Subsequent Events” in the Notes to Consolidated Financial Statements.

Impact of Inflation

The continuation of the current inflationary environment could affect the Company’s future revenues and results of operations because of, among other things, the Company’s dependence on senior residents, many of whom rely primarily on fixed incomes to pay for the Company’s services. As a result, during inflationary periods, the Company may not be able to increase resident service fees to account fully for increased operating expenses. In structuring its fees, the Company attempts to anticipate inflation levels, but there can be no assurances that the Company will be able to anticipate fully or otherwise respond to any future inflationary pressures.

Our non-labor operating expenses have historically comprised of approximately one-third of our total operating expenses and are subject to inflationary pressures. The United States consumer price index increased 3.4% during 2023, as compared to an increase of 6.5% in 2022, with food and energy prices increasing approximately 70 basis points. We mitigated a portion of the increase in food costs with the scale benefit of a higher number of residents, along with appropriate product substitution. As a result of our mitigation efforts, for 2023 our non-labor operating expense in our community portfolio decreased approximately $0.8 million, compared to the prior year. For 2024, we expect to continue to experience inflationary pressures.

Historically, labor costs have comprised of approximately two-thirds of our total operating expenses. We began to experience pressures associated with the intensely competitive labor environment during 2022, which continued throughout 2023. The United States’ unemployment rate remained at or below 4.0% each month during 2023 and 2022, and many of states experienced record low unemployment rates. Labor pressures have resulted in higher-than-typical associate turnover and wage growth, and we have experienced difficulty in filling open positions timely. To cover existing open positions, during 2022 and continuing into 2023, we needed to rely on more expensive premium labor, primarily contract labor and overtime. In our community portfolio, the labor component of our operating expense increased approximately $7.2 million, or 6.9% during 2023 compared to 2022. The increase primarily resulted from merit and market wage rate adjustments, more hours worked with higher occupancy during 2023, and an increase in the use of premium labor, primarily contract labor and overtime. For 2024, we expect to continue to experience labor cost pressures as a result of the continuing labor conditions previously described and an anticipated increase in hours worked as our occupancy levels grow. Continued increased competition for, or a shortage of, nurses and other employees and general inflationary pressures have required and may require that we enhance our pay and benefits package to compete effectively for such employees.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the risks, uncertainties and other factors described under “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors” in this Annual Report on Form 10-K. Actual results may differ materially from those projected in such statements as a result of such risks, uncertainties and other factors.

Overview

The following discussion and analysis addresses (i) the Company’s results of operations on a historical consolidated basis for the years ended December 31, 2022 and 2021, and (ii) liquidity and capital resources of the Company, and should be read in conjunction with the Company’s historical consolidated financial statements and the selected financial data contained elsewhere in this Annual Report on Form 10-K.

The Company is one of the leading owner-operators of senior housing communities in the United States.  The Company’s operating strategy is to provide value to its senior living residents by providing quality senior living services at reasonable prices, while achieving and sustaining a strong, competitive position within its geographically concentrated regions, as well as continuing to enhance the performance of its operations. The Company generally provides senior living services to the 75+ population, including independent living, assisted living, and memory care services at reasonable prices. Many of the Company’s communities offer a continuum of care to meet each of their resident’s needs as they change over time. This continuum of care, which integrates independent living, assisted living, and memory care that may be bridged by home care through independent home care agencies, sustains our residents’ autonomy and independence based on their physical and mental abilities.

As of December 31, 2022, 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 third-party managed.

Corporate Events and Transactions

Corporate Name Change

On November 9, 2021, the Company filed a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, with the Delaware Secretary of State to effect the change of the Company’s name from "Capital Senior Living Corporation" to “Sonida Senior Living, Inc.” effective as of November 15, 2021. In addition, the Company’s board of directors adopted an amendment to the Company’s Second Amended and Restated Bylaws to reflect the Company’s new legal name, effective as of November 15, 2021.

In conjunction with the Name Change, the ticker symbol of the Company’s common stock on the New York Stock Exchange changed from "CSU" to “SNDA.” The CUSIP number for the Company’s common stock following the effectiveness of the Name Change remained unchanged.

Investment Agreement

On October 1, 2021, the Company entered into an Amended and Restated Investment Agreement (the "A&R Investment Agreement") with Conversant Dallas Parkway (A) LP (“Conversant Fund A”) and Conversant Dallas Parkway (B) LP ("Conversant Fund B" and, together with Conversant Fund A, the “Conversant Investors”), affiliates of Conversant Capital LLC, which amended and restated in its entirety the Investment Agreement that the Company entered into with the Conversant Investors on July 22, 2021 (the “Original Investment Agreement”). Pursuant to the A&R Investment Agreement, (i) the Conversant Investors purchased from the Company, and the Company sold to the Conversant Investors, in a private placement (the “Private Placement”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), 41,250 shares of newly designated Series A convertible preferred stock, par value $0.01 per share (the “Series A Preferred Stock”), at a price per share equal to $1,000; and 1,650,000 shares of common stock, par value $0.01 per share, at a price per share equal to $25; (ii) the Conversant Investors received 1,031,250 warrants, each evidencing the right to purchase one share of common

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stock at a price per share of $40 and with an exercise expiration date of five years after the Closing Date; (iii) the Company amended the terms of its previously announced rights offering under the Original Investment Agreement to allow the holders of record of its outstanding shares of common stock at the close of business on September 10, 2021 the right to purchase at $30 per share, 1.1 shares of common stock for each share of common stock held (the “Rights Offering”), in each case as more fully described in the A&R Investment Agreement.

In addition, pursuant to the A&R Investment Agreement, the Conversant Investors agreed to partially backstop the Amended Rights Offering up to $50.5 million through the purchase of additional shares of the Company's common stock at $30 per share. In consideration for the backstop commitments of the Conversant Investors, the Company paid to the Conversant Investors, as a premium, 174,675 shares of common stock. On or after the closing date under the A&R Investment Agreement, the Company may from time to time request additional investments from the Conversant Investors in shares of Series A Preferred Stock for investment in accretive capital expenditures and acquisitions post-closing up to an aggregate amount equal to $25.0 million, subject to certain conditions.

Simultaneously with the entry into the Original Investment Agreement, the Company and the Conversant Investors entered into a $17.3 million secured promissory note (the “Promissory Note”) to provide interim debt financing which was scheduled to mature in July 2022 and was subsequently amended. The Promissory Note was amended to reduce the aggregate indebtedness outstanding by $1.3 million, resulting in an amended secured promissory note in the amount of $16.0 million. The Promissory Note was fully repaid upon closing of the transactions contemplated by the A&R Investment Agreement and the Company recognized a $1.0 million loss on extinguishment of the Promissory Note. See "Note 8–Notes Payable" in the Notes to Consolidated Financial Statements.

The transactions contemplated by the A&R Investment Agreement were subject to stockholder approval, which was received on October 22, 2021. The Rights Offering expired on October 27, 2021 with subscription rights to purchase 1,133,941 shares exercised. The transactions contemplated by the A&R Investment Agreement closed (the “Closing”) on November 3, 2021 and resulted in net proceeds to the Company of $141.4 million after paying customary transaction and closing costs of approximately $13.4 million. The Conversant Investors and Arbiter Partners QP, LP (“Arbiter”) backstopped the Rights Offering, pursuant to which they purchased an additional 1,160,806 shares of common stock and 114,911 shares of common stock, respectively, and received a backstop fee of 174,675 shares of common stock and 17,292 shares of common stock, respectively.

At the Closing, the Company, the Conversant Investors and Silk Partners LP (“Silk”) entered into an Investor Rights Agreement (the "Investor Rights Agreement"), pursuant to which, among other things, the Company's board of directors was reconstituted to consist of four new directors designated by the Conversant Investors, two new directors designated by Silk and three continuing directors.

At the Closing, all outstanding performance-based stock-based compensation held by the Company's officers and other key employees, including restricted shares were converted at target award levels to time-based restricted stock awards that are scheduled to vest on the applicable scheduled vesting dates or the relevant award termination date applicable to such performance shares. See “Note 10–Stock-Based Compensation" in the Notes to Consolidated Financial Statements.

COVID-19 Pandemic

The United States broadly continues to recover from the pandemic caused by COVID-19, which significantly disrupted the nation’s economy, the senior living industry, and the Company’s business. The COVID-19 pandemic caused a decline in the occupancy levels at the Company’s communities, which negatively impacted the Company’s revenues and operating results, that depend significantly on such occupancy levels. In an effort to protect its residents and employees and slow the spread of COVID-19 and in response to quarantines, shelter-in-place orders and other limitations imposed by federal, state and local governments, the Company had previously restricted or limited access to its communities, including limitations on in-person prospective resident tours and, in certain cases, new resident admissions. As of December 31, 2022, all of the Company's senior living communities were open for new resident move-ins. Although vaccines are now widely available, we cannot predict the duration of the ongoing impact of the pandemic on our business. If the COVID-19 pandemic worsens, including the transmission of highly contagious variants of the COVID-19 virus, the Company may have to impose or revert to restricted or limited access to its communities.

The COVID-19 pandemic has required the Company to incur significant additional operating costs and expenses in order to implement enhanced infection control protocols and otherwise care for its residents, including increased costs and expenses relating to supplies and personal protective equipment, testing of the Company’s residents and employees, labor and specialized disinfecting and cleaning services, which has increased the costs of caring for the residents and resulted in reduced occupancy at such communities. During the years ended December 31, 2022 and 2021, the Company incurred $0.4 million and $1.9 million, respectively, in direct costs related to the COVID-19 pandemic.

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In April 2022 and January 2021, the Company accepted $9.1 million and $8.7 million of cash, respectively, through grants from the Public Health and Social Services Emergency Fund’s (the “Provider Relief Fund”) Phases 4 and 3 General Distribution, respectively, which was expanded by the Coronavirus Aid, Relief and Economic Security Act of 2020 (the "CARES Act") to provide grants or other funding mechanisms to eligible healthcare providers for healthcare-related expenses or lost revenues attributable to COVID-19. Both the Phase 4 and Phase 3 Provider Relief Funds were recorded as other income in the years ended December 31, 2022 and 2021, respectively. The CARES Act Provider Relief Funds are grants that do not have to be repaid provided we satisfy the terms and conditions of the CARES Act. In addition, during the years ended December 31, 2022 and 2021 the Company received approximately $1.2 million and $0.6 million, respectively, in relief from various state agencies.

CARES Act Provider Relief Funds are subject to the terms and conditions of the program, including stringent restrictions that funds may only be used to reimburse COVID-19-related expenses or lost revenue that are attributable to COVID-19 and have not been reimbursed from other sources or that other sources are not obligated to reimburse. While we intend to pursue additional funding that may become available, there can be no assurances that we will qualify for, or receive, any additional relief funds in the future.

The Company elected to utilize the CARES Act payroll tax deferral program to delay payment of a portion of its payroll taxes incurred from April 2020 through December 2020. The Company repaid one-half of the deferral amount in December 2021 and the other half became due on December 31, 2022. The Company has submitted applications to enter into payment plans for the remaining amounts due. In conjunction with the deferral and payment plan applications, the Company accrued penalties and interest of $0.7 million and $0.4 million, respectively, which were included in accrued expenses on the Company’s Consolidated Balance Sheets. As of December 31, 2022 and December 31, 2021, the Company had $4.8 million and $3.7 million, respectively, in deferred payroll taxes, which is included in accrued expenses in the Company’s Consolidated Balance Sheets.

We cannot, at this time, predict with reasonable certainty the continued impact that the COVID-19 pandemic will ultimately have on our business, results of operations, cash flow and liquidity, and our response efforts may delay or negatively impact our strategic initiatives, including plans for future growth. The ultimate impact of the COVID-19 pandemic will depend on many factors, many of which cannot be foreseen, including: (i) the duration, severity and geographic concentrations of the COVID-19 pandemic and any resurgence, additional waves and highly contagious variants and strains of the disease; (ii) the impact of COVID-19 on the nation’s economy and debt and equity markets at large and the local economies in our markets; (iii) the development and availability of COVID-19 infection and antibody testing, therapeutic agents and vaccines and the prioritization of such resources among businesses and demographic groups, including within the geographic areas in which the Company operates and derives material revenue; (iv) governmental financial and regulatory relief efforts that may become available to businesses and individuals; (v) concerns over, and the perceptions of, the safety of senior living communities during and after the pandemic; (vi) changes in demand for senior living communities and our ability to adapt our sales and marketing efforts to meet that demand; (vii) the impact of the COVID-19 pandemic on our residents’ and their families’ ability to afford our resident fees, including those related to changes in unemployment rates, consumer confidence and equity markets; (viii) changes in the acuity levels of our new residents; (ix) the disproportionate impact of the COVID-19 pandemic on seniors generally and those residing in our communities; (x) the duration and costs of our preparation and response efforts, including increased supplies, labor, litigation and other expenses; (xi) the impact of the COVID-19 pandemic on our ability to (1) complete equity and debt financings, refinancings or other transactions (including dispositions) and (2) generate sufficient cash flow to cover required debt service payments and to satisfy financial and other covenants in our debt documents; (xii) increased regulatory requirements and enforcement actions resulting from the COVID-19 pandemic, including those that may limit our collection efforts for delinquent accounts; and (xiii) the frequency and magnitude of legal actions and liability claims that may arise due to the COVID-19 pandemic and our associated response efforts.

Going Concern Uncertainty and Related Strategic Cash-Preservation Initiatives

We have taken, and continue to take, actions to improve our liquidity position and to address the uncertainty about our ability to continue as a going concern, but these actions are subject to a number of assumptions, projections, and analyses. If these assumptions prove to be incorrect, we may be unsuccessful in executing our business plans or achieving the projected results, which could adversely impact our financial results and liquidity. Those plans include various cost-cutting, efficiency and profitability initiatives. There are no assurances such initiatives will prove to be successful or the cost savings, profitability or other results we achieve through those plans will be consistent with our expectations. As a result, our results of operations, financial position and liquidity could be negatively impacted. In particular, if we are unable to extend or refinance our indebtedness prior to scheduled maturity dates, our liquidity and financial condition could be adversely impacted. Even if we are able to extend or refinance such indebtedness, the terms of the new financing may not be as favorable to us as the terms of the existing financing. If we become insolvent or fail to continue as a going concern, our common stock may become worthless.

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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) approximately $15.7 million of principal payments and $30.1 million of scheduled interest payments due in the next 12 months (excluding $32.0 million of Fannie Mae debt - see "Note 8–Notes Payable" in the Notes to Consolidated Financial Statements); (3) recurring operating losses and projected operating losses for fiscal periods through March 31, 2024; (4) the Company’s available working capital balance; and (5) events of non-compliance with certain of our mortgage agreements, as noted in "Note 16–Subsequent Events". 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 fiscal year 2022 financial statements are issued.

As discussed below, the Company has implemented plans that encompass short-term cash preservation measures, initiatives to provide the Company with adequate liquidity to meet its obligations for at least the 12-month period following the date its fiscal year 2022 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 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 active discussions with certain of its lenders in regards 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 January and February of 2023. See "Note 16–Subsequent Events" in the Notes to Consolidated Financial Statements.

•Under the terms of the A&R Investment Agreement, the Company may request that the Conversant Investors make additional investments 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.

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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. If the Company is unable to successfully execute all of these initiatives or if the plan does not fully mitigate the Company’s liquidity challenges, the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the 12-month period following the date the financial statements are issued. 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 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.

Significant Financial and Operational Highlights

Operations

The Company derives its revenue primarily by providing senior living and healthcare services to seniors. During the year ended December 31, 2022, the Company generated resident revenue of approximately $208.7 million compared to resident revenue of approximately $190.2 million in the prior year representing an increase of approximately $18.5 million. The increase in revenue was primarily due to increased occupancy, increased average rent rates, and the acquisition of two new communities in early 2022.

Weighted average occupancy for the years ended December 31, 2022 and 2021 for the 60 communities owned by the Company during both periods was 83.3% and 79.0%, respectively, reflecting continued occupancy recovery following the onset of the COVID-19 pandemic. The average monthly rental rate for these owned communities for the year ended December 31, 2022 was higher by 270 basis points when compared to the year ended December 31, 2021.

During the year ended December 31, 2022, the Company continued to be impacted by the senior living industry's workforce challenges related to limited staff availability, which resulted in the use of overtime, shift bonuses, and contract labor to properly support our senior living communities and residents.

2022 Mortgage Refinance

In March 2022, the Company completed the refinancing of certain existing mortgage debt with Ally Bank (the “Refinance Facility”) for ten of its communities. The Refinance Facility includes an initial term loan of $80 million. In addition, $10 million is available as delayed loans that can be borrowed upon achieving and maintaining certain financial covenant requirements and up to an additional uncommitted $40 million may be available in the lender's discretion to fund future growth initiatives. On December 13, 2022, the Company entered into an agreement with Ally Bank to amend the Refinance Facility by adding two additional subsidiaries of the Company (which own the two Indiana properties acquired during the first quarter of 2022) as borrowers. The amendment increased the principal by $8.1 million to $88.1 million, with an additional $10 million still available as delayed loans that can be borrowed upon achieving and maintaining certain financial covenant requirements. See "Note 8–Notes Payable" in Notes to Consolidated Financial Statements.

Indiana Acquisition

On February 1, 2022, the Company completed the acquisition of two senior living communities located in Indiana for a combined purchase price of $12.3 million. The communities consist of a total of 157 independent living units. The purchase price for these communities was funded at the time of acquisition with cash on hand and subsequently financed in December 2022, as described in the "2022 Mortgage Refinance" paragraph above.

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Management Services

On December 31, 2020, the Company entered into property management agreements with affiliates of Ventas, Inc. (collectively, "Ventas") pursuant to which the Company agreed to manage certain communities for Ventas, and Ventas agreed to pay the Company a management fee based on gross revenues of the applicable communities, and other customary terms and conditions. The Company managed seven communities on behalf of Ventas as of December 31, 2020, and in November 2021 the Company announced the expansion of the Ventas relationship with three additional managed communities in Arkansas effective December 1, 2021. As of December 31, 2022, the Company managed ten communities on behalf of Ventas.

On August 9, 2022, the Company received a notice of intent from Welltower to transition the management of four properties to a new operator. The transition was completed on October 20, 2022. As of December 31, 2022, the Company did not manage any communities on behalf of Welltower.

Other Significant Transactions

Transactions Involving Certain Fannie Mae Loans

The CARES Act, among other things, permitted borrowers with mortgages from Government Sponsored Enterprises who experienced a financial hardship related to the COVID-19 pandemic to obtain forbearance of their loans for up to 90 days. On May 7, 2020, the Company entered into forbearance agreements with Berkadia Commercial Mortgage LLC, as servicer of 23 of its Fannie Mae loans covering 20 of the Company's properties. On May 9, 2020, the Company entered into a forbearance agreement with Wells Fargo Bank (“Wells Fargo”), as servicer of one Fannie Mae loan covering one of the Company's properties. On May 20, 2020, the Company entered into forbearance agreements with KeyBank National Association ("KeyBank"), as servicer of three Fannie Mae loans covering two of the Company's properties. The forbearance agreements allowed the Company to withhold the loan payments due under the loan agreements for the months of April, May, and June 2020 and Fannie Mae agreed to forbear in exercising its rights and remedies during such three-month period. During this three-month loan payment forbearance, the Company agreed to pay to Fannie Mae monthly net operating income, if any, as defined in the forbearance agreement, for the properties receiving forbearance.

On July 8, 2020, the Company entered into forbearance extension agreements with Fannie Mae, which provided for a one-month extension of the forbearance agreements between the Company and Fannie Mae covering 23 of the Company's properties. The forbearance extension agreements extended the forbearance period until July 31, 2020, and Fannie Mae agreed to forbear in exercising its rights and remedies during such period. By July 31, 2020, the Company was required to repay to Fannie Mae the deferred payments, less any payments made during the forbearance period.

On July 31, 2020, the Company made required payments to Fannie Mae totaling $0.6 million, which included the deferred payments, less any payments made during the forbearance period, for five of the Company's properties with forbearance agreements. The Company elected not to pay $3.8 million on the loans for the remaining 18 properties as of that date as it initiated a process intended to transfer the operations and ownership of such properties to Fannie Mae. Therefore, the Company was in default on such loans, which were non-recourse loans.

As a result of the default, Fannie Mae filed a motion with the United States District Court (the "District Court") requesting that a receiver be appointed over the 18 properties, which was approved by the District Court. The Company agreed to continue to manage the 18 communities, subject to earning a management fee, until management of the communities was transitioned to a successor operator or legal ownership of the properties was transferred to Fannie Mae or its designee. Management fees earned from the properties were recognized as revenue when earned. In conjunction with the receivership order, the Company was required to obtain approval from the receiver for all payments and received reimbursements from Fannie Mae for reasonable operating expenses incurred on behalf of any of the 18 communities under the receivership order. As a result of the events of default and receivership order, the Company discontinued recognizing revenues and expenses related to the 18 properties effective August 1, 2020, which was the date of default. In addition, the Company concluded that it was no longer entitled to receive any existing accounts receivable or revenue related to the properties, all amounts held in escrow by Fannie Mae were forfeited and the Company no longer had control of the properties in accordance with ASC 610-20.

During the year ended December 31, 2021, Fannie Mae completed the transition of legal ownership of 16 of the Company's properties and the Company recorded a gain on extinguishment of debt of $200.9 million, which is included in gain on extinguishment of debt in the Company's Consolidated Statement of Operations and Comprehensive Income (Loss). As of December 31, 2022, two properties remained for which the legal ownership had not been transferred back to Fannie Mae. As of December 31, 2022, the Company included $31.8 million of outstanding debt in current portion of notes payable, net of deferred loan costs of $0.2 million. As of December 31, 2022 and December 31, 2021, the accrued interest related to the remaining two properties was $4.1 million and $2.7 million, respectively, and was included in accrued expenses on the Company’s Consolidated Balance Sheets. As of December 31, 2022, the Company did not manage any properties on behalf of Fannie Mae.

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On January 11, 2023, Fannie Mae completed the transfer of ownership of the two remaining properties. See "Note 16–Subsequent Events" in the Notes to Consolidated Financial Statements.

Protective Life Amendments to Loan Agreements and Loan Modification and Temporary Deferral Agreements

On May 21, 2020, the Company entered into amendments to its loan agreements with one of its lenders, Protective Life Insurance Company (“Protective Life”), related to loans (the "Protective Life Loans") covering ten of the Company's properties. These amendments allowed the Company to defer principal and interest payments for April, May, and June 2020 and to defer principal payments for July 2020 through March 2021. The Company made all required debt service payments in July, August, and September 2020. On October 1, 2020, the Company entered into further amendments to its loan agreements with Protective Life. These amendments allowed the Company to defer interest payments for October, November, and December 2020, and to extend the deferral period of principal payments through September 1, 2021, with such deferral amounts being added to principal due at maturity in either 2025, 2026, or 2031, depending upon the loan. As of December 31, 2022, the Company had deferred payments of $7.2 million related to the Protective Life Loans, of which $2.6 million was included in accrued expenses in the Company’s Consolidated Balance Sheets. The remaining $4.6 million is included in notes payable, net of deferred loan costs and current portion on the Company’s Consolidated Balance Sheets.

Other Debt Related Transactions

On May 20, 2020, the Company entered into an agreement with Healthpeak (the “Healthpeak Forbearance”), effective from April 1, 2020, to defer a percentage of rent payments that would otherwise have been payable during the remainder of the lease term ending on October 31, 2020. As of December 31, 2022, the Company had deferred $1.6 million in rent payments pursuant to the Healthpeak Forbearance, which is included in notes payable, net of deferred loan costs and current portion on the Company’s Consolidated Balance Sheets. The interest accrued on the deferred rent payments was $0.1 million as of December 31, 2022 and was included in accrued expenses in the Company’s Consolidated Balance Sheets.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and related notes. Management bases its estimates and assumptions on historical experience, observance of industry trends and various other sources of information and factors, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions. The Company believes the following are our most critical accounting policies and/or typically require management’s most difficult, subjective, and complex judgments.

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 Company’s corporate office and its 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, as well as 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. Management believes that the liability for outstanding losses and expenses is adequate to cover the ultimate cost of losses and expenses incurred as of December 31, 2022; however, actual claims and expenses may differ. 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 potential settlements for pending claims, known incidents that result in claims, estimates of incurred but not yet reported claims, changes in insurance premiums, estimated litigation costs and other factors. The Company regularly adjusts these estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, 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.

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Long-Lived Assets and Impairment

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 indicate the carrying amount of an asset group may not be recoverable, 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. Projecting future cash flows involves predicting unknown future circumstances and events and requires significant management judgments and estimates, which include historic operating results, approved budgets, future demographic factors, expected growth rates, estimated asset holding periods, and other factors. 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.

During 2022 and 2021, the Company evaluated the carrying value of its long-lived depreciable assets and operating lease right-of-use assets and determined that the carrying amount of these assets exceeded the undiscounted cash flows for certain of its communities. Estimated fair values were determined for these properties and impairment charges were recorded for all communities for which carrying values exceeded fair values. The following is a summary of asset impairment expense for these assets.

During the fourth quarter of 2022, the Company recorded a non-cash impairment charge of $1.6 million to its "Property and equipment, net", which related to one owned community. The impairment charge resulted from: a) the management's commitment to a plan to sell the community shortly after the balance sheet date, but before the issuance of this Annual Report on Form 10-K; and b) the agreed-upon selling price being below the community's carrying amount. In complying with the requirements under ASC 360, Property, Plant, and Equipment, management evaluated the significance of the asset in relation to the overall asset group, as well as the facts and circumstances surrounding the sale of this particular asset, and determined that no additional testing of the asset group under the held-and-used impairment approach was necessary at the balance sheet date.

During the fourth quarter of 2021, the Company recorded non-cash impairment charges of $6.5 million to property and equipment, net for one owned community. Due to recurring net operating losses, the Company concluded the assets related to this community had indicators of impairment and the carrying value was not recoverable. The fair value of the property and equipment, net of this community was determined using an income capitalization approach considering stabilized facility operating income and market capitalization rates of 8.25%. This impairment charge is primarily due to the COVID-19 pandemic and lower than expected operating performance at the community and reflects the amount by which the carrying amount of these assets exceeded their fair value.

New Accounting Pronouncements

See “Note 3–Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a discussion of new accounting pronouncements.

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Results of Operations

The following table includes our Consolidated Statements of Operations and Comprehensive Income (Loss) data in thousands of dollars and expressed as a percentage of total revenues for the years ended December 31, 2022 and 2021.

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

Revenues

Resident revenue for the year ended December 31, 2022 was $208.7 million as compared to $190.2 million for the year ended December 31, 2021, an increase of $18.5 million, or 9.7%. The increase in revenue was primarily due to increased occupancy, increased average rent rates, and the acquisition of two new communities in early 2022.

Management fee revenue for the year ended December 31, 2022 decreased by $1.2 million as compared to the year ended December 31, 2021, primarily as a result of managing fewer communities in 2022.

Managed community reimbursement revenue for the year ended December 31, 2022 was $27.4 million as compared to $40.9 million for the year ended December 31, 2021, representing a decrease of $13.5 million, or 33.1%. The decrease was primarily a result of transitioning sixteen Fannie Mae communities to other operators during the year ended December 31, 2021.

Expenses

Total expenses were $269.3 million during fiscal year 2022 compared to $274.9 million during fiscal year 2021, representing a decrease of $5.6 million. This decrease was primarily the result of a decrease in long-lived asset impairment of $4.9 million, a decrease of $2.0 million in general and administrative expenses, and a decrease of $13.5 million in managed community reimbursement expense in 2022 as compared to 2021. These decreases were partially offset by $14.4 million increase in operating expenses.

Operating expenses for the year ended December 31, 2022 were $171.6 million as compared to $157.3 million for the year ended December 31, 2021, an increase of $14.4 million or 9.1%. The increase is primarily due to increases of $9.9 million

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in labor and employee-related expenses including premium labor and contract labor, $1.3 million in utilities, $1.2 million in food costs, $0.6 million in supplies, and $0.6 million in promotion and marketing expenses.

General and administrative expenses for the year ended December 31, 2022 were $30.3 million as compared to $32.3 million for year ended December 31, 2021, a decrease of $2.0 million, or 6.3%. The decrease is primarily due to a $2.3 million decrease in bonuses and a $1.3 million decrease in employee insurance and workers' compensation, partially offset by $1.5 million increase in non-cash stock-based compensation expense. Non-cash stock-based compensation expense included in general and administrative expenses was $4.3 million and $2.8 million for the years ended December 31, 2022 and 2021, respectively.

The $0.6 million increase in depreciation and amortization expense is primarily due to the acquisition of the two Indiana communities during the first quarter of 2022.

During the year ended December 31, 2022, the Company recorded a non-cash impairment charge of $1.6 million related to the management's commitment to a plan to sell the community shortly after the balance sheet date, and the agreed-upon selling price being below the community's carrying amount, compared to $6.5 million of non-cash impairment charges recorded during the year ended December 31, 2021, in relation to one owned community with decreased cash flow estimates as a result of recurring net operating losses.

Managed community reimbursement expense for the year ended December 31, 2022 was $27.4 million as compared to $40.9 million for the year ended December 31, 2021, a decrease of $13.5 million, or 33.1%. The decrease was primarily a result of transitioning sixteen Fannie Mae communities to other operators during the year ended December 31, 2021.

Other income and expense.

Interest income generally reflects interest earned on the investment of cash balances and escrow funds or interest associated with certain income tax refunds or property tax settlements. Interest income increased by $0.2 million compared to the prior year primarily due to more active cash management and increased investment in money market accounts.

Interest expense for the year ended December 31, 2022 was $33.0 million as compared to $37.2 million for the year ended December 31, 2021, a decrease of $4.2 million, or 11.3%, due to lower overall borrowings in 2022, partially offset by increased interest rates associated with the Company’s variable rate mortgages.

Loss on extinguishment of debt for the year ended December 31, 2022 was $0.6 million as compared to a gain on extinguishment of debt of $199.9 million for the year ended December 31, 2021, a decrease of $200.5 million, or 100.3%. The 2022 loss was incurred in conjunction with the refinancing of debt during the first quarter of 2022. The 2021 gain is related to the derecognition of notes payable and liabilities as a result of transition of legal ownership of sixteen communities to Fannie Mae, the holder of the non-recourse debt related to such properties.

Other income for the year ended December 31, 2022 was $10.0 million as compared to other income of $8.3 million for the year ended December 31, 2021. Both such periods include cash received for CARES Act funding for healthcare-related expenses or lost revenues attributable to COVID-19 of $9.1 million and $8.7 million, respectively.

Provision for income taxes.

Provision for income taxes for the year ended December 31, 2022 was $0.1 million, or 0.16% of net income before income taxes, compared to a provision for income taxes of $0.6 million, or 0.46% of loss before income taxes, for the year ended December 31, 2021. The effective tax rates for the years ended December 31, 2022 and 2021 differ from the statutory tax rates due to state income taxes, permanent tax differences and changes in the deferred tax asset valuation allowance. The Company is impacted by the Texas Margin Tax, which effectively imposes tax on modified gross revenues for communities within the State of Texas. The Company consolidated 16 Texas communities at each of December 31, 2022 and 2021, which contributes to the overall provision for income taxes. 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. At year end, the Company had a three-year cumulative operating loss for its U.S. operations and accordingly, has provided a full valuation allowance on its 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.

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Net income (loss) and comprehensive income (loss).

As a result of the foregoing factors, the Company reported net loss and comprehensive loss of $54.4 million for the year ended December 31, 2022, compared to net income and comprehensive income of $125.6 million for the year ended December 31, 2021.

Liquidity and Capital Resources

In addition to approximately $16.9 million of unrestricted cash balances on hand as of December 31, 2022, the Company’s principal sources of liquidity are expected to be cash flows from operations, COVID-19 or related relief grants from various state agencies, proceeds from debt refinancings, and/or proceeds from the sale of owned assets. During November 2021, the Company raised net proceeds of $141.4 million from the private placement of Series A Preferred Stock and common stock to the Conversant Investors and the sale of common stock pursuant to the Rights Offering, and the A&R Investment Agreement allows, subject to certain conditions, for an additional $25 million equity investment by the Conversant Investors to fund future growth initiatives (as more fully described in the A&R Investment Agreement). In March and December 2022 the Company completed the refinancing of certain existing mortgage debt. See "Note 8–Notes Payable" in the Notes to Consolidated Financial Statements.

The Company has implemented plans, which include strategic and cash-preservation initiatives, designed to provide the Company with adequate liquidity to meet its obligations for at least the 12-month period following the date its fiscal year 2022 financial statements are issued. 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 assurance can be given that certain options will be available on terms acceptable to the Company, or at all. If the Company is unable to successfully execute all of the planned initiatives or if the plan does not fully mitigate the Company’s liquidity challenges, the Company’s operating plans and resulting cash flows along with its cash and cash equivalents and other sources of liquidity may not be sufficient to fund operations for the 12-month period following the date the financial statements are issued. See “Note 2–Going Concern Uncertainty" in the Notes to Consolidated Financial Statements.

The Company, from time to time, considers and evaluates financial and capital raising transactions related to its portfolio, including debt refinancings, purchases and sales of assets and other transactions. There can be no assurance that the Company will continue to generate cash flows at or above current levels, or that the Company will be able to obtain the capital necessary to meet the Company’s short and long-term capital requirements.

Recent changes in the current economic environment, and other future changes, could result in decreases in the fair value of assets, slowing of transactions, and the tightening of liquidity and credit markets. These impacts could make securing debt or refinancings for the Company or buyers of the Company’s properties more difficult or on terms not acceptable to the Company. The Company’s actual liquidity and capital funding requirements depend on numerous factors, including its operating results, its capital expenditures for community investment, and general economic conditions, as well as other factors described in “Item 1A. Risk Factors.”

In summary, the Company’s cash flows were as follows (in thousands):

Operating activities.

The net cash used in operating activities for the year ended December 31, 2022 primarily results from net loss of $54.4 million, partially offset by increases in operating assets and liabilities of $3.2 million and net positive non-cash activity of $48.6 million. The net cash used in operating activities for the year ended December 31, 2021, primarily results from net income of $125.6 million, partially offset by decreases in operating assets and liabilities of $9.4 million and net non-cash charges of $145.0 million.

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Investing activities.

The net cash used in investing activities for the year ended December 31, 2022 primarily results from ongoing capital improvements and refurbishments at the Company’s senior housing communities of $24.6 million and the acquisition of two communities in Indiana for an aggregate purchase price of $12.3 million. The net cash used in investing activities for the year ended December 31, 2021 primarily results from ongoing capital improvements and refurbishments at the Company’s senior housing communities of $10.4 million.

Financing activities.

The net cash used in financing activities for the year ended December 31, 2022 primarily results from repayments of notes payable of $102.4 million, deferred loan costs of $2.4 million, purchase of derivative assets of $2.7 million, and preferred stock dividends of $3.0 million, partially offset by $88.1 million of proceeds from the refinancing of certain of our mortgage debt, See "Note 8–Notes Payable" in the Notes to Consolidated Financial Statements. The net cash provided by financing activities for the year ended December 31, 2021 primarily results from $141.4 million in net proceeds from the transactions contemplated by the A&R Investment Agreement and Rights Offering, and $23.1 million of proceeds from debt which includes the $16.0 million proceeds from the Promissory Note (See "Note 5–Significant Transactions" in the Notes to Consolidated Financial Statements), partially offset by repayments of notes payable of $65.0 million, which includes paying off the amounts owed to Fifth Third Bank and the Promissory Note.

Debt Covenants

Certain of our debt agreements contain restrictions and financial covenants, such as those requiring us to maintain prescribed minimum debt service coverage ratios, in each case on a multi-community basis. The debt service coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee, divided by the debt (principal and interest). Furthermore, our debt is secured by our communities and if an event of default has occurred under any of our debt, subject to cure provisions in certain instances. The respective lender would have the right to declare all of the related outstanding amounts of indebtedness immediately due and payable, to foreclose on our mortgaged communities and/or pursue other remedies available to such lender. We cannot provide assurance that we would be able to pay the debts if they became due upon acceleration following an event of default.

Except for the non-compliance with Fannie Mae mortgages for the two properties in the process of transitioning back to Fannie Mae, and certain mortgage loan agreements with Protective Life (See "Note 16–Subsequent Events" in the Notes to Consolidated Financial Statements), the Company was in compliance with all aspects of its outstanding indebtedness as of December 31, 2022.

Impact of Inflation

The continuation of the current inflationary environment could affect the Company’s future revenues and results of operations because of, among other things, the Company’s dependence on senior residents, many of whom rely primarily on fixed incomes to pay for the Company’s services. As a result, during inflationary periods, the Company may not be able to increase resident service fees to account fully for increased operating expenses. In structuring its fees, the Company attempts to anticipate inflation levels, but there can be no assurances that the Company will be able to anticipate fully or otherwise respond to any future inflationary pressures.

Our non-labor operating expenses have historically comprised of approximately one-third of our total operating expenses and are subject to inflationary pressures. The United States consumer price index increased 6.5% during 2022, with food and energy prices increasing above 10%. We mitigated a portion of the increase in food costs with the scale benefit of a higher number of residents, along with appropriate product substitution. Despite our mitigation efforts and with higher occupancy, for 2022 our non-labor operating expense in our same-store community portfolio increased approximately $4.0 million, or 6.8%, compared to the prior year. For 2023, we expect to continue to experience inflationary pressures.

Historically, labor costs have comprised of approximately two-thirds of our total operating expenses. We began to experience pressures associated with the intensely competitive labor environment during 2021, which continued throughout 2022. The United States’ unemployment rate remained at or below 4.0% each month during 2022, and many of states experienced record low unemployment rates. Labor pressures have resulted in higher-than-typical associate turnover and wage growth, and we have experienced difficulty in filling open positions timely. To cover existing open positions, during 2021 and continuing into 2022, we needed to rely on more expensive premium labor, primarily contract labor and overtime. In our same-store community portfolio, the labor component of our operating expense increased approximately $9.5 million, or 10.2% during 2022 compared to 2021. The increase primarily resulted from merit and market wage rate adjustments, more hours worked with higher occupancy during 2022, and an increase in the use of premium labor, primarily contract labor and overtime.

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For 2023, we expect to continue to experience labor cost pressures as a result of the continuing labor conditions previously described and an anticipated increase in hours worked as our occupancy levels grow. Continued increased competition for, or a shortage of, nurses and other employees and general inflationary pressures have required and may require that we enhance our pay and benefits package to compete effectively for such employees.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Certain information contained in this Annual Report on Form 10-K 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, which can be identified by the use of forward-looking terminology such as “may,” “will,” “would,” “intend,” “could,” “believe,” “expect,” “anticipate,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terminology. Examples of forward-looking statements, include, 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. 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, but not limited to, the Company’s ability to generate sufficient cash flows from operations, additional proceeds from debt financings or refinancings, capital raises from issuance of additional equity securities and proceeds from the sale of assets to satisfy its short- and long-term debt and to fund the Company’s capital improvement projects to expand, redevelop and/or reposition its senior living communities; 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 and leases, including certain financial covenants and the risk of cross-default in the event non-compliance occurs; the Company’s ability to complete acquisitions and dispositions upon favorable terms or at all; the risks related to an epidemic, pandemic or other health crisis (such as the outbreak of the novel coronavirus (COVID-19)) or any resurgence or variants thereof, including impacts on residents' abilities to afford resident fees and costs and expenses incurred in the Company's COVID-19 response efforts, including increased equipment, supplies, labor, litigation, testing, vaccination clinic, health plan and other expenses; the development, availability, utilization and efficacy of COVID-19 testing, therapeutic agents and vaccines and the prioritization of such resources among business and demographic groups; the risk of oversupply and increased competition in the markets where the Company operates; the risk of increased competition for skilled workers due to wage pressure and changes in regulatory requirements; potentially greater use of contract labor and overtime due to COVID-19 and general labor market conditions; the departure of the Company’s key officers and personnel; the cost and difficulty of complying with applicable licensure, legislative oversight or regulatory changes; the risks associated with a general decline in economic conditions; the adequacy and continued availability of the Company’s insurance policies and the Company’s ability to recover any losses it sustains under such policies; changes in accounting principles and interpretations; and the other risks and factors identified from time to time in the Company’s reports filed with the SEC.

Overview

The following discussion and analysis addresses (i) the Company’s results of operations on a historical consolidated basis for the years ended December 31, 2021 and 2020, and (ii) liquidity and capital resources of the Company, and should be read in conjunction with the Company’s historical consolidated financial statements and the selected financial data contained elsewhere in this Annual Report on Form 10-K.

The Company is one of the leading owner-operators of senior housing communities in the United States.  The Company’s operating strategy is to provide value to its senior living residents by providing quality senior living services at reasonable prices, while achieving and sustaining a strong, competitive position within its geographically concentrated regions, as well as continuing to enhance the performance of its operations. The Company provides senior living services to the 75+ population, including independent living, assisted living and memory care services at reasonable prices. Many of the Company’s communities offer a continuum of care to meet each of their resident’s needs as they change over time. This continuum of care, which integrates independent living, assisted living and memory care that may be bridged by home care through independent home care agencies, sustains our residents’ autonomy and independence based on their physical and mental abilities.

As of December 31, 2021, the Company operated 75 senior housing communities in 18 states with an aggregate capacity of approximately 9,500 residents, including 60 senior housing communities that the Company owned and 15 communities that the Company managed on behalf of third parties.

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Recent Events and Transactions

Investment Agreement

On October 1, 2021, the Company entered into an Amended and Restated Investment Agreement (the "A&R Investment Agreement") with the Conversant Dallas Parkway (A) LP (“Conversant Fund A”) and Conversant Dallas Parkway (B) LP ("Conversant Fund B" and, together with Conversant Fund A, the “Conversant Investors”), affiliates of Conversant Capital LLC, which amended and restated in its entirety an Investment Agreement that the Company entered into with the Conversant Investors on July 22, 2021 and was subsequently amended (the “Original Investment Agreement”). Pursuant to the A&R Investment Agreement, (i) the Conversant Investors agreed to purchase from the Company, and the Company agreed to sell to the Conversant Investors, in a private placement (the “Private Placement”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), 41,250 shares of newly designated Series A Convertible Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) at a price per share equal to $1,000; and 1,650,000 shares of common stock, par value $0.01 per share, at a price per share equal to $25; (ii) subject to the consummation of the transactions contemplated by the A&R Investment Agreement, the Conversant Investors would receive 1,031,250 warrants, each evidencing the right to purchase one share of common stock at a price per share of $40 and with an exercise expiration date of five years after the Closing Date; (iii) the Company amended the terms of its previously announced rights offering under the Original Investment Agreement to allow the holders of record of its outstanding shares of common stock at the close of business on September 10, 2021 the right to purchase at $30 per share, 1.1 shares of common stock for each share of common stock held, which would result in gross cash proceeds to the Company of approximately $72.3 million (the “Rights Offering”), in each case as more fully described in the A&R Investment Agreement.

In addition, pursuant to the A&R Investment Agreement, the Conversant Investors agreed to partially backstop the Amended Rights Offering up to $50.5 million through the purchase of additional shares of the Company's common stock at $30 per share. In consideration for the backstop commitments of the Conversant Investors, the Company agreed to pay to the Conversant Investors, as a premium, 174,675 shares of common stock. On or after the closing date under the A&R Investment Agreement, the Company may from time to time request additional investments from the Conversant Investors in shares of Series A Preferred Stock for future investment in accretive capital expenditures and acquisitions post-closing up to an aggregate amount equal to $25.0 million, subject to certain conditions.

Simultaneously with the entry into the Original Investment Agreement, the Company and the Conversant Investors entered into a $17.3 million secured promissory note (the “Promissory Note”) to provide interim debt financing which was scheduled to mature in July 2022 and was subsequently amended. The Promissory Note was amended to reduce the aggregate indebtedness outstanding by $1.3 million, resulting in an amended secured promissory note in the amount of $16.0 million. The Promissory Note was fully repaid upon closing of the transactions contemplated by the A&R Investment Agreement and the Company recognized a $1.0 million loss on extinguishment of the Promissory Note. See "Note 8- Notes Payable."

The transactions contemplated by the A&R Investment Agreement were subject to stockholder approval, which was received on October 22, 2021. The Rights Offering expired on October 27, 2021 with subscription rights to purchase 1,133,941 shares exercised. The transactions contemplated by the A&R Investment Agreement closed (the “Closing”) on November 3, 2021 and resulted in net proceeds to the Company of $141.4 million after paying customary transaction and closing costs of approximately $13.4 million. The Conversant Investors and Arbiter Partners QP, LP (“Arbiter”) backstopped the Rights Offering, pursuant to which they purchased an additional 1,160,806 shares of common stock and 114,911 shares of common stock, respectively, and received a backstop fee of 174,675 shares of common stock and 17,292 shares of common stock, respectively.

At the Closing, the Company, the Conversant Investors and Silk Partners LP (“Silk”) entered into an Investor Rights Agreement, pursuant to which, among other things, the Company's board of directors was reconstituted to consist of six new directors designated by the Conversant Investors and Silk and three continuing directors.

At the Closing, all outstanding performance-based stock based compensation including restricted shares were converted at target award levels to time-based restricted stock awards that will vest on the applicable scheduled vesting dates or the relevant award termination date applicable to such performance shares. See “Note 11- Stock-Based Compensation.”

Corporate Name Change

On November 9, 2021, the Company filed a Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended, with the Delaware Secretary of State to effect the change of the Company’s name from "Capital Senior Living Corporation" to “Sonida Senior Living, Inc.” effective as of November 15, 2021. In addition, the Company’s board of directors adopted an amendment to the Company’s Second Amended and Restated Bylaws to reflect the Company’s new legal name, effective as of November 15, 2021.

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In conjunction with the Name Change, the ticker symbol of the Company’s common stock on the New York Stock Exchange changed from "CSU" to “SNDA.” The CUSIP number for the Company’s common stock following the effectiveness of the Name Change remained unchanged.

COVID-19 Pandemic

The United States broadly continues to experience the pandemic caused by COVID-19, which significantly disrupted the nation’s economy, the senior living industry and the Company’s business. The COVID-19 pandemic caused a decline in the occupancy levels at the Company’s communities, which negatively impacted the Company’s revenues and operating results, that depend significantly on such occupancy levels. In an effort to protect its residents and employees and slow the spread of COVID-19 and in response to quarantines, shelter-in-place orders and other limitations imposed by federal, state and local governments, the Company had previously restricted or limited access to its communities, including limitations on in-person prospective resident tours and, in certain cases, new resident admissions. As of December 31, 2021, all of the Company's senior living communities were open for new resident move-ins. Although vaccines are now widely available, we cannot predict the duration of the pandemic or its ongoing impact on our business. If the COVID-19 pandemic worsens, including the transmission of highly contagious variants of the COVID-19 virus, the Company may have to impose or revert to restricted or limited access to its communities.

The COVID-19 pandemic has required the Company to incur significant additional operating costs and expenses in order to implement enhanced infection control protocols and otherwise care for its residents, including increased costs and expenses relating to supplies and personal protective equipment, testing of the Company’s residents and employees, labor and specialized disinfecting and cleaning services, which has increased the costs of caring for the residents and resulted in reduced occupancy at such communities. During the years ended December 31, 2021 and 2020, the Company incurred $1.9 million and $9.4 million, respectively, in direct costs related to the COVID-19 pandemic.

In November 2020 and January 2021, the Company accepted $8.1 million and $8.7 million of cash, respectively, through grants from the Public Health and Social Services Emergency Fund’s (the “Provider Relief Fund”) Phases 2 and 3 General Distribution, which was expanded by the CARES Act to provide grants or other funding mechanisms to eligible healthcare providers for healthcare related expenses or lost revenues attributable to COVID-19. The $8.7 million Phase 3 Provider Relief Funds were recorded as other income in the year ended December 31, 2021. On April 13, 2022, subsequent to year end, the Company accepted $9.1 million of cash for grants from the Provider Relief Fund’s Phase 4 General Distribution. The CARES Act Phase 2, Phase 3 and Phase 4 funds are grants that do not have to be repaid provided we satisfy the terms and conditions of the CARES Act. In addition, the Company had received approximately $1.9 million in relief from state agencies in the year ended December 31, 2020.

The Company elected to utilize the CARES Act payroll tax deferral program to delay payment of a portion of its payroll taxes incurred from April 2020 through December 2020. The Company repaid one-half of the deferral amount in December 2021 and the other half will become due on December 31, 2022. At December 31, 2021, the Company had $3.7 million in deferred payroll taxes, which is included in accrued expenses in the Company’s Consolidated Balance Sheets.

CARES Act Provider Relief Funds are subject to the terms and conditions of the program, including stringent restrictions that funds may only be used to reimburse COVID-19 related expenses or lost revenue that are attributable to COVID-19 and have not been reimbursed from other sources or that other sources are not obligated to reimburse. While we intend to pursue additional funding that may become available, there can be no assurances that we will qualify for, or receive, any additional relief funds in the future.

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We cannot, at this time, predict with reasonable certainty the impacts that the COVID-19 pandemic will ultimately have on our business, results of operations, cash flow and liquidity, and our response efforts may delay or negatively impact our strategic initiatives, including plans for future growth. The ultimate impact of the COVID-19 pandemic will depend on many factors, many of which cannot be foreseen, including: (i) the duration, severity and geographic concentrations of the COVID-19 pandemic and any resurgence, additional waves and highly contagious variants and strains of the disease; (ii) the impact of COVID-19 on the nation’s economy and debt and equity markets at large and the local economies in our markets; (iii) the development and availability of COVID-19 infection and antibody testing, therapeutic agents and vaccines and the prioritization of such resources among businesses and demographic groups, including within the geographic areas in which the Company operates and derives material revenue; (iv) governmental financial and regulatory relief efforts that may become available to businesses and individuals; (v) concerns over, and the perceptions of, the safety of senior living communities during and after the pandemic; (vi) changes in demand for senior living communities and our ability to adapt our sales and marketing efforts to meet that demand; (vii) the impact of the COVID-19 pandemic on our residents’ and their families’ ability to afford our resident fees, including those related to changes in unemployment rates, consumer confidence and equity markets; (viii) changes in the acuity levels of our new residents; (ix) the disproportionate impact of the COVID-19 pandemic on seniors generally and those residing in our communities; (x) the duration and costs of our preparation and response efforts, including increased supplies, labor, litigation and other expenses; (xi) the impact of the COVID-19 pandemic on our ability to (1) complete equity and debt financings, refinancings or other transactions (including dispositions) and (2) generate sufficient cash flow to cover required debt service payments and to satisfy financial and other covenants in our debt documents; (xii) increased regulatory requirements and enforcement actions resulting from the COVID-19 pandemic, including those that may limit our collection efforts for delinquent accounts; and (xiii) the frequency and magnitude of legal actions and liability claims that may arise due to the COVID-19 pandemic and our associated response efforts.

Significant Financial and Operational Highlights

The Company derives its revenue primarily by providing senior living and healthcare services to seniors. During the year ended December 31, 2021, the Company generated resident revenue of approximately $190.2 million compared to resident revenue of approximately $357.1 million in the prior year representing a decrease of approximately $166.9 million. The decrease in revenue is generated from significant  property dispositions throughout 2021 and 2020, including (1) the sale of two owned properties, one of which transitioned to a management agreement with the buyer; (2) the transition of 39 leased communities to different operators in conjunction with the Company exiting its master lease agreements; (3) the transition of seven leased communities to management agreements; and (4) the process of transferring legal ownership of 18 communities to the Federal National Mortgage Association ("Fannie Mae") the holder of nonrecourse debt related to such communities begun on August 1, 2020. Together, these actions accounted for a decrease in revenue of approximately $150.0 million. The Company also experienced a decline in resident revenue due to the impact of COVID-19 on its occupancy in early 2021 and 2020. Beginning in March 2021, the Company was able to begin to improve its overall resident occupancy to an average of 81.6% for the month ended December 31, 2021 compared to the low of 75.3% for the month ended February 28, 2021. The decreases in resident revenue were also partially offset by increases in management fees and community reimbursement revenue of $1.8 million and $16.4 million, respectively, which were due to the Company’s management of communities during all of 2021 compared to management of communities for a portion of 2020.

Ventas

As of December 31, 2019, the Company leased seven senior housing communities from Ventas, Inc. ("Ventas"). The term of the Ventas lease agreement was previously scheduled to expire on September 30, 2025.  On March 10, 2020, the Company entered into an agreement with Ventas (as amended, the “Ventas Agreement”), providing for the early termination of its Master Lease Agreement with Ventas covering the seven communities.  Pursuant to the Ventas Agreement, the Company agreed to pay Ventas rent of approximately $1.0 million per month from February 1, 2020 through December 31, 2020 for such communities, as compared to approximately $1.3 million per month that would otherwise have been due and payable under the Master Lease Agreement.  In addition, the Ventas Agreement provided that the Company would not be required to comply with certain financial covenants of the Master Lease Agreement during the forbearance period, which terminated on December 31, 2020.  In conjunction with the Ventas Agreement, the Company released to Ventas $4.1 million in security deposits and $2.5 million in escrow deposits held by Ventas, and Ventas reduced the amounts and term of the Company’s lease payments, and effectively eliminated the Company’s lease termination obligation, which was $11.4 million at December 31, 2019.  Pursuant to the Ventas Agreement, the Master Lease Agreement terminated on December 31, 2020.

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In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to Ventas and the modification of the lease term pursuant to the Ventas Agreement was determined to be a modification of the Master Lease Agreement.  As such, the Company reassessed the classification of the Master Lease Agreement with Ventas based on the modified terms and determined that the lease continued to be classified as an operating lease until the communities transitioned to a different operator or management agreement, at which time the lease would terminate.  The modification resulted in a reduction to the lease termination obligation, lease liability and operating lease right-of-use asset recorded in the Company's Consolidated Balance Sheets by approximately $11.4 million, $51.6 million and $47.8 million, respectively, during the first quarter of 2020.  The Company recognized a net gain of approximately $8.4 million on the transaction, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020 and was primarily due to the impact of the change in lease term on certain of the right-of-use asset balances.  As a result of the lease modification, the Company assessed the operating lease right-of-use assets for impairment during the first quarter of 2020.  See “Note 3- Impairment of Long-Lived Assets.”

Under the terms of the Ventas Agreement, Ventas elected on December 31, 2020 to enter into a property management agreement with the Company as manager that provides for a management fee based on gross revenues of the applicable community payable to the Company and other customary terms and conditions. As a result of these transactions, the Company had no remaining lease transactions with Ventas as of January 1, 2021.

Welltower

As of December 31, 2019, the Company leased 24 senior housing communities from Welltower, Inc ("Welltower"). The initial terms of the Welltower lease agreements were previously scheduled to expire on various dates from April 2025 through April 2026. On March 15, 2020, the Company entered into an agreement with Welltower (the “Welltower Agreement”), providing for the early termination of three Master Lease Agreements between the Company and Welltower covering all 24 communities.  Pursuant to the Welltower Agreement, among other things, from February 1, 2020 through December 31, 2020, the Company agreed to pay Welltower rent of approximately $2.2 million per month for such communities as compared to approximately $2.8 million per month that would otherwise have been due and payable under the Master Lease Agreements.  In addition, the Welltower Agreement provided that the Company was not required to comply with certain financial covenants of the Master Lease Agreements during the forbearance period, which terminated on December 31, 2020.  In conjunction with the Welltower Agreement, the Company agreed to release $6.5 million in letters of credit to Welltower, which were released during the second quarter of 2020.  The Welltower Agreement provided that Welltower could terminate such agreement with respect to any or all communities upon 30 days’ notice, but no later than December 31, 2020. Upon termination, Welltower could elect to enter into a property management agreement with the Company as manager or to transition the properties to a new operator. The Welltower Agreement also provided that the Company was not obligated to fund certain capital expenditures under the Master Lease Agreements during the applicable forbearance period and that Welltower would reimburse the Company for certain specified capital expenditures.

In accordance with ASC Topic 842, the reduction in the monthly minimum rent payable to Welltower under the then existing Master Lease Agreements with Welltower and modification to the lease term pursuant to the Welltower Agreement was determined to be a modification of the Master Lease Agreements.  As such, the Company reassessed the classification of the Master Lease Agreements based on the modified terms and determined that each of the leases continued to be classified as an operating lease until the applicable communities transitioned to a different operator or management agreement, at which time such lease would terminate.  The modification resulted in a reduction to the lease liability and operating lease right-of-use asset recorded in the Company's Consolidated Balance Sheets by approximately $129.9 million, and $121.9 million, respectively, during the first quarter of 2020.  The Company recognized a gain of approximately $8.0 million on the transaction, which is included in gain (loss) on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020.  As a result of the lease modification, the Company assessed the operating lease right-of-use assets for impairment during the first quarter of 2020.  See “Note 3- Impairment of Long-Lived Assets.”

During the third quarter of 2020, Welltower elected to terminate the Welltower Agreement with respect to five communities, all of which transferred to a different operator on September 10, 2020.  During the fourth quarter of 2020, Welltower elected to terminate the Welltower Agreement with respect to 14 communities.  The Company recorded a loss of approximately $0.7 million, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020.

Under the terms of the Welltower Agreement, on December 31, 2020, Welltower elected to enter into a property management agreement with the Company that provided for the Company to serve as manager of the remaining five communities that had not been transitioned to other operators for a management fee based on gross revenues of the applicable community payable to the Company and other customary terms and conditions. At December 31, 2021, the Company managed four communities on behalf of Welltower.

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Healthpeak

On March 1, 2020, the Company entered into an agreement with Healthpeak Properties, Inc. ("Healthpeak") (the “Healthpeak Agreement”), effective February 1, 2020, providing for the early termination of one of its Master Lease Agreements with Healthpeak, that was previously scheduled to mature in April 2026. Such Master Lease Agreement terminated and was converted into a Management Agreement under a Real Estate Investment Trust Investment Diversification and Empowerment Act structure (a “RIDEA structure”) pursuant to which the Company agreed to manage the six communities that were subject to the Master Lease Agreement until such communities are sold by Healthpeak. Pursuant to the Management Agreement, the Company received a management fee based on gross revenues realized at the applicable senior living communities plus reimbursement for its direct costs and expenses related to such communities.  In conjunction with the Healthpeak Agreement, the Company released to Healthpeak approximately $2.6 million of security deposits held by Healthpeak.  The Company remeasured the lease liability and operating lease right-of-use asset recorded in the Company's Consolidated Balance Sheets at December 31, 2019 to zero, resulting in a net loss of $7.0 million on the transaction, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for year ended December 31, 2020.

On May 20, 2020, the Company entered into an additional agreement with Healthpeak (the “Amended Healthpeak Agreement”) effective from April 1, 2020 until the end of the lease term.  Pursuant to the Amended Healthpeak Agreement, the Company began paying Healthpeak rent of approximately $0.7 million per month for eight senior housing communities subject to the Amended Healthpeak Agreement in lieu of approximately $0.9 million of monthly rent due and payable under the Master Lease Agreement before the agreement covering such communities.  The rents paid to Healthpeak represent approximately 75% of their scheduled rates, with the remaining rent being subject to payment by the Company pursuant to a three-year note payable with final payment including accrued interest from November 1, 2021, to be made on or before November 1, 2023.  At December 31, 2020, the Company had deferred $2.1 million in rent payments, which is included in notes payable, net of deferred loan costs and current portion on the Company’s Consolidated Balance Sheets.  Given that the total minimum lease payments and the lease term remain unchanged, the Company has elected not to evaluate the deferral as a rent concession and did not account for the deferral as a modification to the existing lease agreement.  The Company concluded the concessions provided to the Company were not contemplated by the existing lease. The Company accounted for the concession in the form of a deferral as if the lease terms were unchanged.  Accordingly, accrued interest on the deferral amount is recorded in interest expense and accrued interest payable on the portion of the deferral amount that has yet to be paid on a monthly basis until such interest payments become due.

In November 2020, upon the expiration of the other Master Lease Agreement with Healthpeak, the Company entered into a short-term excess cash flow lease amendment pursuant to which the Company agreed to manage the seven communities that were then subject to the such lease amendment until the earlier of such time that the communities are sold by Healthpeak or until April 30, 2021. Pursuant to such agreement, the Company began paying Healthpeak monthly rent equal to any excess cash flow of the communities and earning a management fee for management of the seven communities.

In April 2021, the Company executed an agreement with Healthpeak to amend and extend its existing agreement for the remaining three properties managed by the Company on behalf of Healthpeak. In addition to a management fee based on a percentage of revenue, the Company received a monthly flat fee for three months with such fee increasing thereafter until such properties were sold or December 31, 2021, whichever was earlier. On September 30, 2021, Healthpeak sold the three remaining properties and terminated all agreements with the Company related to those three properties.

Dispositions and Other Significant Transactions

Disposition of Boca Raton, Florida Community

Effective January 15, 2020, the Company’s leased senior living community located in Boca Raton, Florida, transitioned to a new operator.  In conjunction with the transition, the Company paid the lessor, Healthpeak, a one-time $0.3 million termination payment as a prepayment against the remaining lease payments and was relieved of any additional obligation to Healthpeak with regard to such property and the lease was terminated as to the property.  The Company recorded a gain on the transaction of $1.8 million, which is included in gain on facility lease modification and termination, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for year ended December 31, 2020.

Disposition of Merrillville, Indiana Community

Effective March 31, 2020, the Company sold one community located in Merrillville, Indiana for a total purchase price of $7.0 million and received approximately $6.9 million in cash proceeds after paying customary closing costs. The community was unencumbered by any mortgage debt.  The Company recognized a loss of $7.4 million on the disposition, which is included in gain (loss) on disposition of assets, net on the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020.

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Disposition of Canton, Ohio Community

On November 24, 2020, the Company closed on the sale of one senior housing community located in Canton, Ohio, for a total purchase price of $18.0 million and received approximately $6.4 million in net proceeds after retiring outstanding mortgage debt of $10.8 million and paying customary transaction and closing costs. The Company recorded a $2.0 million gain on the sale of the property, which is included in gain (loss) on disposition of assets, net in the year ended December 31, 2020. In November 2020, the Company entered into a management agreement with the successor owner to manage the senior living community, pursuant to which the Company receives a management fee based on the gross revenues of the property.

Transactions Involving Certain Fannie Mae Loans

The CARES Act, among other things, permitted borrowers with mortgages from Government Sponsored Enterprises who experienced a financial hardship related to the COVID-19 pandemic to obtain forbearance of their loans for up to 90 days. On May 7, 2020, the Company entered into forbearance agreements with Berkadia Commercial Mortgage LLC, as servicer of 23 of its Fannie Mae loans covering 20 of the Company's properties. On May 9, 2020, the Company entered into a forbearance agreement with Wells Fargo Bank (“Wells Fargo”), as servicer of one Fannie Mae loan covering one of the Company's properties. On May 20, 2020, the Company entered into forbearance agreements with KeyBank National Association ("KeyBank"), as servicer of three Fannie Mae loans covering two of the Company's properties. The forbearance agreements allowed the Company to withhold the loan payments due under the loan agreements for the months of April, May and June 2020 and Fannie Mae agreed to forbear in exercising its rights and remedies during such period. During this three-month loan payment forbearance, the Company agreed to pay to Fannie Mae monthly net operating income, if any, as defined in the forbearance agreement, for the properties receiving forbearance.

On July 8, 2020, the Company entered into forbearance extension agreements with Fannie Mae, which provided for a one-month extension of the forbearance agreements between it and Fannie Mae covering 23 properties. The forbearance extension agreements extended the forbearance period until July 31, 2020, and Fannie Mae agreed to forbear in exercising its rights and remedies during such period. By July 31, 2020, the Company was required to repay to Fannie Mae the deferred payments, less payments made during the forbearance period.

On July 31, 2020, the Company made required payments to Fannie Mae totaling $0.6 million, which included the deferred payments, less payments made during the forbearance period, for five properties under forbearance agreements. The Company elected not to pay $3.8 million on the loans for the remaining 18 properties as of that date as it initiated a process intended to transfer the operations and ownership of such properties to Fannie Mae. Therefore, the Company was in default on such loans, which were non-recourse loans.

As a result of the default, Fannie Mae filed a motion with the United States District Court (the "District Court") requesting that a receiver be appointed over the 18 properties, which was approved by the District Court. The Company agreed to continue to manage the 18 communities, subject to earning a management fee, until management of the communities is transferred to a successor operator or legal ownership of the properties is transferred to Fannie Mae or its designee. Management fees earned from the properties are recognized as revenue when earned. In conjunction with the receivership order, the Company was required to obtain approval from the receiver for all payments and received reimbursements from Fannie Mae for reasonable operating expenses incurred on behalf of any of the 18 communities under the receivership order. As a result of the events of default and receivership order, the Company discontinued recognizing revenues and expenses related to the 18 properties effective August 1, 2020, which was the date of default. In addition, the Company concluded that it was no longer entitled to receive any existing accounts receivable or revenue related to the properties, all amounts held in escrow by Fannie Mae were forfeited, and the Company no longer has control of the properties in accordance with ASC 610-20.

During the year ended December 31, 2021, Fannie Mae completed the transition of legal ownership of 16 of the Company's properties, and the Company recorded a gain on extinguishment of debt of $200.9 million which is included in gain on extinguishment of debt in the Company's Consolidated Statement of Operations and Comprehensive Income (Loss). At December 31, 2021, the Company included $32.0 million in outstanding debt in current portion of notes payable, net of deferred loan costs, and $2.7 million of accrued interest in accrued expenses on the Company’s Consolidated Balance Sheets related to the remaining two properties. At December 31, 2021 the Company did not manage any properties on behalf of Fannie Mae.

Loan Extension and Debt Forbearance Agreement on PNC Bank (successor to BBVA) Loan

The Company also entered into a loan amendment with another lender, PNC Bank National Association (successor to BBVA) ("PNC Bank"), related to a loan covering three of the Company's properties pursuant to which the Company deferred monthly debt service payments for April, May and June 2020, which deferred payments were added to principal. The deferred monthly debt service payments were paid by the Company in June 2021. At December 31, 2021, no deferred payments remained outstanding.

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In August 2021, the Company executed a one-year extension of the Company's $40.5 million loan agreement with PNC Bank, which extended the maturity date to December 10, 2022. The extension also included an additional six-month extension option if certain financial criteria are met. The loan agreement extension includes a waiver for non-compliance with certain financial ratios on December 31, 2020 and eliminated the compliance requirements for minimum financial ratios. The extension required a principal payment of $1.0 million in December 2021 and quarterly principal payments of $0.5 million beginning in March 2022 unless a certain financial ratio is attained. The required $1.0 million principal payment was made in December 2021. PNC Bank required a debt service reserve of $0.9 million as part of this extension, which is included in the restricted cash balances as of December 31, 2021. In March 2022, subsequent to year-end, the Company refinanced this loan with a different lender. See "Note 17- Subsequent Events."

Debt Forbearance Agreement on HUD Loan

The Company also entered into a debt forbearance agreement with ORIX Real Estate Capital, LLC (“ORIX”), related to a U.S. Department of Housing and Urban Development (“HUD”) loan covering one property pursuant to which the Company deferred monthly debt service payments for April, May and June 2020, which deferred payments are added to the regularly scheduled payments in equal installments for one year following the forbearance period and were paid in the year ended December 31, 2021. At December 31, 2021, no deferred payments remained outstanding.

Protective Life Amendments to Loan Agreements and Loan Modification and Temporary Deferral Agreements

On May 21, 2020, the Company entered into amendments to its loan agreements with Protective Life Insurance Company related to loans covering ten properties.  These amendments allowed the Company to defer principal and interest payments for April, May and June 2020 and to defer principal payments for July 2020 through March 2021. The Company made all required debt service payments in July, August and September 2020. On October 1, 2020, the Company entered into further amendments to its loan agreements with Protective Life Insurance Company. These amendments allowed the Company to defer interest payments for October, November and December 2020, and to extend the deferral period of principal payments through September 1, 2021, with such deferral amounts being added to principal due at maturity in either 2025, 2026 or 2031 depending upon the loan. At December 31, 2021, the Company had deferred payments of $7.2 million related to the Protective Life Insurance Company loans, of which $2.6 million was included in accrued expenses in the Company’s Consolidated Balance Sheets. The remaining $4.6 million of deferred payments is included in notes payable, net of deferred loan costs and current portion, on the Company’s Consolidated Balance Sheets.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and related notes. Management bases its estimates and assumptions on historical experience, observance of industry trends and various other sources of information and factors, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially could result in materially different results under different assumptions and conditions. The Company believes the following are our most critical accounting policies and/or typically require management’s most difficult, subjective and complex judgments.

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 Company’s corporate office and its 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. Management believes that the liability for outstanding losses and expenses is adequate to cover the ultimate cost of losses and expenses incurred at December 31, 2021; however, actual claims and expenses may differ. Any subsequent changes in estimates are recorded in the period in which they are determined.

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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 potential settlements for pending claims, known incidents that result in claims, estimates of incurred but not yet reported claims, changes in insurance premiums, estimated litigation costs and other factors. The Company regularly adjusts these estimates to reflect changes in the foregoing factors. However, since this reserve is based on estimates, 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.

Long-Lived Assets and Impairment

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 indicate the carrying amount of an asset group may not be recoverable, 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. Projecting future cash flows involves predicting unknown future circumstances and events and requires significant management judgments and estimates, which include historic operating results, approved budgets, future demographic factors, expected growth rates, estimated asset holding periods and other factors. 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.

During 2021 and 2020, the Company evaluated the carrying value of its long-lived depreciable assets and operating lease right-of-use assets and determined that the carrying amount of these assets exceeded the undiscounted cash flows for certain of its communities. Estimated fair values were determined for these properties and impairment charges were recorded for all communities for which carrying values exceeded fair values. The following is a summary of asset impairment expense for these assets.

During the first quarter of 2020, the Company determined that the modifications of certain of its Master Lease Agreements (see “Significant Financial and Operational Highlights”) and adverse impacts on the Company’s operating results resulting from the COVID-19 pandemic were indicators of potential impairment of its long-lived assets and evaluated certain owned communities and all leased communities for impairment. The recoverability of these assets was evaluated by comparing projected undiscounted cash flows associated with these assets to their respective historical carrying values. For communities in which the historical carrying value was not recoverable, the Company compared the estimated fair value of the assets to their carrying amount and recorded an impairment charge for the excess of carrying amount over fair value. For the operating lease right-of-use assets, fair value was estimated utilizing a discounted cash flow approach based on historical and projected cash flows and market data, including management fees and a market supported lease coverage ratio. The fair values of the property and equipment, net of these communities, were primarily determined utilizing the cost approach, which determines the current replacement cost of the property being appraised and then deducts for the loss in value caused by physical deterioration, functional obsolescence and economic obsolescence the amount required to replace the asset as if new and adjusts to reflect usage. These fair value measurements are considered Level 3 measurements within the valuation hierarchy. During the first quarter of 2020, the Company recorded non-cash impairment charges of $6.2 million and $29.8 million to operating lease right-of-use assets, net and property and equipment, net, respectively.

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During the third quarter of 2020, the Company recorded non-cash impairment charges of $1.3 million and $1.1 million to operating lease right-of-use assets, net and property and equipment, net, respectively, due to a change in the useful life of 15 of its communities, all of which transferred to new operators during the fourth quarter of 2020. Due to the changes in useful lives, the Company concluded the assets related to those properties had indicators of impairment and the carrying values were not fully recoverable. The fair values of the right-of-use assets were estimated, using Level 3 inputs as defined in the accounting standards codification, utilizing a discounted cash flow approach based upon historical and projected cash flows and market data, including management fees and a market supported lease coverage ratio. In addition, during the third quarter of 2020 the Company recorded a non-cash impairment charge of $0.8 million to property and equipment, net of one owned community. The fair value of the property and equipment, net of this community was determined using the sales comparison approach, which utilizes the sales of comparable properties, and the income capitalization approach, which reflects the property’s income-producing capabilities. This impairment charge is primarily due to the COVID-19 pandemic and lower than expected operating performance at the community and reflects the amount by which the carrying amount of these assets exceeded their fair value.

During the fourth quarter of 2021, the Company recorded non-cash impairment charges of $6.5 million to property and equipment, net of one owned community. Due to recurring net operating losses, the Company concluded the assets related to this community had indicators of impairment and the carrying value was not recoverable. The fair value of the property and equipment, net of this community was determined using an income capitalization approach considering stabilized facility operating income and market capitalization rates of 8.25%. This impairment charge is primarily due to the COVID-19 pandemic and lower than expected operating performance at the community and reflects the amount by which the carrying amount of these assets exceeded their fair value.

New Accounting Pronouncements

See “Note 2- Summary of Significant Accounting Policies” for a discussion of new accounting pronouncements.

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Results of Operations

The following table includes our Consolidated Statements of Operations and Comprehensive Income (Loss) data in thousands of dollars and expressed as a percentage of total revenues for the years ended December 31, 2021 and 2020.

Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020

Revenues

The decrease in revenues is primarily due to significant property dispositions in fiscal year 2020, including (1) the sale of two owned properties, one of which transitioned to a management agreement with the buyer; (2) the transition of 39 leased communities to different operators in conjunction with the Company exiting its master lease agreements; (3) the transition of seven leased communities to management agreements; and (4) the process of transferring legal ownership of 18 communities to Fannie Mae, the holder of non-recourse debt related to such communities on August 1, 2020. Together, these actions accounted for a decrease in revenue of approximately $150.0 million. The Company also experienced a decline in resident revenue due to the impact of COVID-19 on its occupancy in early 2021 and 2020. Beginning in March 2021, the Company was able to begin to improve its overall resident occupancy to an average of 81.6% for the month of December 31, 2021 compared to the low of 75.3% for the month ended February 28, 2021.

The decreases in resident revenue were partially offset by increases in management fees and community reimbursement revenue of $1.8 million and $16.0 million, respectively, which were due to the Company’s management of 12 communities during all of 2021 and three communities for a portion of 2021.

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Expenses

Total expenses were $274.9 million during fiscal year 2021 compared to $439.5 million during fiscal year 2020, representing a decrease of $164.6 million. This decrease was primarily the result of the 2020 property dispositions, as described above, which reduced operating expense and facility lease expense by $97.4 million and $28.1 million, respectively, and a decrease in long-lived asset impairment of $35.3 million coupled with a decrease in depreciation and amortization expense of $22.4 million. These decreases were partially offset by increases of $1.6 million in general and administrative expenses, $1.1 million in stock compensation expense and $16.0 million in community reimbursement expense in 2021 as compared to 2020.

During the year ended December 31, 2021, operating expenses were lower than the prior year by $97.4 million. The decrease in operating expenses primarily results from the disposition of communities during the year ended December 31, 2020 as described above which generated reductions of $63.4 million in labor and employee-related expenses, $8.8 million decrease in food expenses, a $2.4 million decrease in promotion expenses, a $7.8 million decrease in property tax expense, a $7.9 million decrease in utilities and a $7.0 million decrease in all other operating expenses, all of which were primarily due to the property disposals described above and reduced occupancy levels at our continuing communities.

The increase in general and administrative expenses of $1.6 million is primarily due to a $4.7 million higher employee benefits and health insurance claims and $0.5 million in insurance and other expenses, which were partially offset by reductions of approximately $2.9 million in transaction costs incurred in the year ended December 31, 2020 related to the lease amendments and terminations in the prior year.

The $28.1 million decrease in facility lease expense is attributable to the termination of the Company's Master Lease Agreements during fiscal 2020.

The $22.4 million decrease in depreciation and amortization expense primarily results from a decrease in depreciable assets at the Company’s communities resulting from the disposition of communities since the first quarter of 2020.

During the year ended December 31, 2021, the Company recorded $6.5 million of non-cash impairment charges related to one owned community with decreased cash flow estimates as a result of recurring net operating losses. During the prior year, the Company recorded $41.8 million of non-cash impairment charges, which included $3.4 million related to property and equipment for two owned communities as a result of lower than expected operating performance at the communities driven by the COVID-19 pandemic, $30.9 million related to property and equipment for certain leased communities as a result of lease transactions and $7.5 million related to operating lease right-of-use assets.

The $16.0 million increase in community reimbursement expense includes reimbursements due from the owners of the communities for which the Company provides management services, which totaled 15 and 12 communities at December 31, 2021 and 2020, respectively.

Other income and expense.

Interest income generally reflects interest earned on the investment of cash balances and escrow funds or interest associated with certain income tax refunds or property tax settlements.

Interest expense decreased in fiscal 2021 when compared to fiscal 2020 primarily due to the (i) early repayment of mortgage debt associated with the sale of one community in the fourth quarter of 2020 and (ii) completion of the transition of the ownership of 16 communities to Fannie Mae during the year ended December 31, 2021.

The gain on extinguishment of debt of $200.9 million relates to the de-recognition of notes payable and liabilities as a result of the completion of the transition of the legal ownership of 16 of the Company's communities back to Fannie Mae, the holder of the non-recourse debt related to such properties, during the year ended December 31, 2021.

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Provision for income taxes.

Provision for income taxes for the year ended December 31, 2021 was $0.6 million, or 0.46% of net income before income taxes, compared to a provision for income taxes of $0.4 million, or 0.13% of loss before income taxes, for the year ended December 31, 2020. The effective tax rates for the years ended December 31, 2021 and 2020 differ from the statutory tax rates due to state income taxes, permanent tax differences and changes in the deferred tax asset valuation allowance. The Company is impacted by the Texas Margin Tax, which effectively imposes tax on modified gross revenues for communities within the State of Texas. The Company consolidated 16 and 38 Texas communities at December 31, 2021 and 2020, respectively, which contributes to the overall provision for income taxes. 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. At year end, the Company had a three-year cumulative operating loss for its U.S. operations and accordingly, has provided a full valuation allowance on its 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.

Net income (loss) and comprehensive income (loss).

As a result of the foregoing factors, the Company reported net income and comprehensive income of $125.6 million for the year ended December 31, 2021, compared to net loss and comprehensive loss of $295.4 million for the year ended December 31, 2020.

Liquidity and Capital Resources

In addition to approximately $78.7 million of unrestricted cash balances on hand at December 31, 2021, the Company’s principal sources of liquidity are expected to be cash flows from operations, proceeds from debt refinancings and/or proceeds from the sale of owned assets. During November 2021, the Company raised $154.8 million from the private placement of Series A Preferred Stock and common stock to the Conversant Investors and the Rights Offering that also provides for an additional $25 million equity investment to fund future growth (as defined in the A&R Investment Agreement). In March 2022, subsequent to year end, the Company completed the refinancing of certain existing mortgage debt. See "Note 17- Subsequent Events." This debt refinancing, together with the enhanced liquidity from the proceeds raised by the A&R Investment Agreement and other liquidity sources addressed the relevant conditions and events that previously raised substantial doubt about the Company's ability to continue as a going concern.

The Company, from time to time, considers and evaluates financial and capital raising transactions related to its portfolio, including debt refinancings, purchases and sales of assets and other transactions. There can be no assurance that the Company will continue to generate cash flows at or above current levels, or that the Company will be able to obtain the capital necessary to meet the Company’s short and long-term capital requirements.

Recent changes in the current economic environment, and other future changes, could result in decreases in the fair value of assets, slowing of transactions, and the tightening of liquidity and credit markets. These impacts could make securing debt or refinancings for the Company or buyers of the Company’s properties more difficult or on terms not acceptable to the Company. The Company’s actual liquidity and capital funding requirements depend on numerous factors, including its operating results, its capital expenditures for community investment, and general economic conditions, as well as other factors described in “Item 1A. Risk Factors.”

In summary, the Company’s cash flows were as follows (in thousands):

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Operating activities.

The net cash used in operating activities for the year ended December 31, 2021 primarily results from net income of $125.6 million and decreases from current liabilities of $3.0 million, offset by decreases and net non-cash charges of $150.0 million. The net cash used in operating activities for the year ended December 31, 2020, primarily results from net loss of $295.4 million, a decrease in cash flows from current assets of $2.9 million, increase from current liabilities of $13.0 million and net non-cash charges of $278.4 million.

Investing activities.

The net cash used in investing activities for the year ended December 31, 2021 primarily results from ongoing capital improvements and refurbishments at the Company’s senior housing communities of $10.4 million. The net cash provided by investing activities for the year ended December 31, 2020 primarily results from the Company's receipt of $24.1 million in proceeds from the disposition of assets, partially offset by ongoing capital improvements and refurbishments at the Company’s senior housing communities of $15.6 million.

Financing activities.

The net cash provided by financing activities for the year ended December 31, 2021 primarily results from $141.4 million in proceeds from the transactions contemplated by the A&R Investment Agreement and $23.1 million of proceeds from debt which includes the $16.0 million proceeds from the Promissory Note, See "Note 4- Significant Transactions," partially offset by repayments of notes payable of $65.0 million, which includes paying off the amounts owed to Fifth Third Bank and the Conversant Promissory Note. The net cash used in financing activities for the year ended December 31, 2020 primarily reflects proceeds from notes payable of $7.6 million, repayments of notes payable of $23.1 million, and payments on financing obligations of $0.4 million.

Debt Covenants

Certain of our debt agreements contain restrictions and financial covenants, such as those requiring us to maintain prescribed minimum debt service coverage ratios, in each case on a multi-community basis. The debt service coverage ratios are generally calculated as revenues less operating expenses, including an implied management fee, divided by the debt (principal and interest). Furthermore, our debt is secured by our communities and if an event of default has occurred under any of our debt, subject to cure provisions in certain instances. The respective lender would have the right to declare all of the related outstanding amounts of indebtedness immediately due and payable, to foreclose on our mortgaged communities and/or pursue other remedies available to such lender. We cannot provide assurance that we would be able to pay the debts if they became due upon acceleration following an event of default.

The Company was in compliance with all aspects of its outstanding indebtedness at December 31, 2021.

Impact of Inflation

To date, inflation has not had a significant impact on the Company. However, continuation of the current inflationary environment could affect the Company’s future revenues and results of operations because of, among other things, the Company’s dependence on senior residents, many of whom rely primarily on fixed incomes to pay for the Company’s services. As a result, during inflationary periods, the Company may not be able to increase resident service fees to account fully for increased operating expenses. In structuring its fees, the Company attempts to anticipate inflation levels, but there can be no assurances that the Company will be able to anticipate fully or otherwise respond to any future inflationary pressures.