UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended:
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _____________
Commission File Number:
| (Exact name of registrant as specified in its charter) |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
| (Registrant’s telephone number, including area code) |
N/A
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for comply with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 14, 2023, there were shares of common stock of the registrant issued and outstanding.
CARDIFF LEXINGTON CORPORATION
Quarterly Report on Form 10-Q
Period Ended September 30, 2023
TABLE OF CONTENTS
| Item 1. | Legal Proceedings | 53 |
| Item 1A. | Risk Factors | 53 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 53 |
| Item 3. | Defaults Upon Senior Securities | 53 |
| Item 4. | Mine Safety Disclosures | 53 |
| Item 5. | Other Information | 53 |
| Item 6. | Exhibits | 54 |
| 2 |
PART I
FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS. |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 3 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2023 AND DECEMBER 31, 2022
(UNAUDITED)
September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable-net | ||||||||
| Prepaid and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Land | ||||||||
| Goodwill | ||||||||
| Right of use - assets | ||||||||
| Due from related party | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND DEFICIENCY IN STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expense | $ | $ | ||||||
| Accrued expenses - related parties | ||||||||
| Accrued interest | ||||||||
| Right of use - liability | ||||||||
| Due to director & officer | ||||||||
| Notes payable | ||||||||
| Notes payable - related party | ||||||||
| Convertible notes payable, net of debt discounts of $ | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| Notes payable | ||||||||
| Operating lease liability – long term | ||||||||
| Total liabilities | ||||||||
| Mezzanine equity | ||||||||
| Redeemable Series N Senior Convertible Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Redeemable Series X Senior Convertible Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Total Mezzanine Equity | ||||||||
| Stockholders' equity (deficit) | ||||||||
| Series B Preferred Stock - shares authorized, $0.001 par value, stated value $, and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Series C Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Series E Preferred Stock - shares authorized, $0.001 par value, stated value $, and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Series F-1 Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Series I Preferred Stock - shares authorized, $ par value, shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Series J Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Series L Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Series R Preferred Stock - shares authorized, $0.001 par value, stated value of $, shares issued and outstanding at September 30, 2023 and December 31, 2022 | ||||||||
| Common Stock - shares authorized, $ par value; and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity (deficit) | ( | ) | ||||||
| Total liabilities, mezzanine equity and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 4 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | |||||||||||||||
| 2023 | 2022 (Restated) | 2023 | 2022 (Restated) | |||||||||||||
| REVENUE | ||||||||||||||||
| Financial Services | $ | $ | $ | $ | ||||||||||||
| Healthcare | ||||||||||||||||
| Total revenue | ||||||||||||||||
| COST OF SALES | ||||||||||||||||
| Financial Services | ||||||||||||||||
| Healthcare | ||||||||||||||||
| Total cost of sales | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Depreciation expense | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| INCOME FROM OPERATIONS | ||||||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Other income | ( | ) | ||||||||||||||
| Gain on forgiveness of debt | ||||||||||||||||
| Interest expense and finance charge | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Conversion cost | ( | ) | ( | ) | ||||||||||||
| Penalties and fees | ( | ) | ( | ) | ||||||||||||
| Amortization of debt discounts | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS | ( | ) | ( | ) | ||||||||||||
| GAIN FROM DISCONTINUED OPERATIONS | ||||||||||||||||
| NET INCOME (LOSS) FOR THE PERIOD | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| DEEMED DIVIDENDS ON PREFERRED STOCK | ( | ) | ( | ) | ||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| BASIC INCOME (LOSS) PER SHARE | ||||||||||||||||
| Continuing operations | $ | ( | ) | |||||||||||||
| Discontinued operations | $ | ( | ) | |||||||||||||
| DILUTED INCOME (LOSS) PER SHARE | ||||||||||||||||
| Continuing operations | $ | |||||||||||||||
| Discontinued operations | $ | |||||||||||||||
| BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES – CONTINUED AND DISCONTINUED OPERATIONS | ||||||||||||||||
| DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES – CONTINUED AND DISCONTINUED OPERATIONS | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 5 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
Preferred Stock Series A, K and I | Preferred Stock Series B, D, E, F, F-1, G, H, L | Preferred Stock Series C and R | Treasury Stock | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||
| Balance December 31, 2021 (Restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Issuance of series B preferred stock in exchange of series D preferred stock and series H preferred stock | – | – | – | |||||||||||||||||||||||||
| Cancellation of common stock | – | – | – | – | ||||||||||||||||||||||||
| Cancellation of series D preferred stock | – | ( | ) | ( | ) | – | – | |||||||||||||||||||||
| Cancellation of series H preferred stock | – | ( | ) | ( | ) | – | – | |||||||||||||||||||||
| Issuance of series J preferred stock | – | – | – | |||||||||||||||||||||||||
| Issuance of common stock for settlement of Red Rock Travel | – | – | – | – | ||||||||||||||||||||||||
| Distribution of dividend | – | – | – | – | ||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||
| Balance, September 30, 2022 (Restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Balance December 31, 2022 | $ | $ | $ | – | $ | |||||||||||||||||||||||
| Conversion of convertible notes payable | – | – | – | – | ||||||||||||||||||||||||
| Distribution of dividend | – | – | – | – | ||||||||||||||||||||||||
| Issuance of series B preferred stock | – | – | – | |||||||||||||||||||||||||
| Issuance of series E preferred stock | – | – | – | |||||||||||||||||||||||||
| Net income | – | – | – | – | ||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | – | $ | |||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | |||||||||||||||
| Balance December 31, 2021 (Restated) | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Issuance of series B preferred stock in exchange of series D preferred stock and series H preferred stock | – | ||||||||||||||||||
| Cancellation of common stock | ( | ) | ( | ) | ( | ) | |||||||||||||
| Cancellation of series D preferred stock | – | ( | ) | ||||||||||||||||
| Cancellation of series H preferred stock | – | ( | ) | ||||||||||||||||
| Issuance of series J preferred stock | – | ||||||||||||||||||
| Issuance of common stock for settlement of Red Rock Travel | ( | ) | |||||||||||||||||
| Distribution of dividend | – | ( | ) | ( | ) | ||||||||||||||
| Net loss | – | ( | ) | ( | ) | ||||||||||||||
| Balance, September 30, 2022 (Restated) | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Balance December 31, 2022 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||
| Conversion of convertible notes payable | ( | ) | |||||||||||||||||
| Accrued dividend | – | ( | ) | ( | ) | ||||||||||||||
| Issuance of series B preferred stock | – | ||||||||||||||||||
| Issuance of series E preferred stock | – | ( | ) | ||||||||||||||||
| Net income | – | ||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 6 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 (Restated) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) for the period | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of loan discount | ||||||||
| Gain on forgiveness of debt | ( | ) | ||||||
| Gain on refinance of debt | ( | ) | ||||||
| Loss on finance penalties and fees | ||||||||
| Other noncash items, net | ||||||||
| Bad debt | ||||||||
| Fair value settled upon conversion | ||||||||
| Conversion and note issuance cost | ||||||||
| Share issuance for service rendered | ||||||||
| Increase (decrease) in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Right of use – assets | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Increase (decrease) in: | ||||||||
| Accounts payable and accrued expense | ||||||||
| Accrued officer’s compensation | ||||||||
| Due from related parties | ( | ) | ||||||
| Accrued interest | ( | ) | ||||||
| Capital stock to be issued | ||||||||
| Right of use – liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities - continuing operations | ( | ) | ( | ) | ||||
| Net cash used in operating activities - discontinued operations | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from convertible notes payable | ||||||||
| Repayment of convertible notes payable | ( | ) | ||||||
| Payment of SBA loan | ( | ) | ( | ) | ||||
| Dividend on preferred stock | ( | ) | ||||||
| Proceeds from line of credit | ||||||||
| Repayment of line of credit | ( | ) | ||||||
| Payment of notes payable related party | ( | ) | ( | ) | ||||
| Proceeds from notes payable related party | ||||||||
| Net cash provided by financing activities | ||||||||
| NET (DECREASE) IN CASH | ( | ) | ( | ) | ||||
| CASH, BEGINNING OF PERIOD | ||||||||
| CASH, END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Common stock issued upon conversion of notes payable and accrued interest | $ | $ | ||||||
| Preferred stock issued for business acquisition | ||||||||
| Preferred stock issued for debt refinance | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 7 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(UNAUDITED)
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization and Nature of Operations
Cardiff Lexington Corporation (“Cardiff”) was originally incorporated on September 3, 1986 in Colorado as Cardiff International Inc. On November 10, 2005, Cardiff merged with Legacy Card Company, LLC and changed its name to Cardiff Lexington Corporation. On August 27, 2014, Cardiff redomiciled and became a corporation under the laws of Florida. On April 13, 2021, Cardiff redomiciled and became a corporation under the laws of Nevada.
Cardiff is an acquisition holding company focused on locating undervalued and undercapitalized companies, primarily in the healthcare industry, and providing them capitalization and leadership to maximize the value and potential of their private enterprises while also providing diversification and risk mitigation for stockholders. All of Cardiff’s operations are conducted through, and its income derived from, its various subsidiaries, which includes:
| · | We Three, LLC dba Affordable Housing Initiative (“AHI”), which was acquired on May 15, 2014 and sold on October 31, 2022; | |
| · | Edge View Properties, Inc. (“Edge View”), which was acquired on July 16, 2014; | |
| · | Platinum Tax Defenders (“Platinum Tax”), which was acquired on July 31, 2018; and | |
| · | Nova Ortho and Spine, PLLC (“Nova”), which was acquired on May 31, 2021. |
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Cardiff and its wholly owned subsidiaries AHI, Edge View, Platinum Tax and Nova (collectively, the “Company”). AHI is included in discontinued operations. All significant intercompany accounts and transactions are eliminated in consolidation. Certain prior period amounts may have been reclassified for consistency with the current period presentation. These reclassifications would have no material effect on the reported condensed consolidated financial results.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management uses its historical records and knowledge of its business in making estimates. Accordingly, actual results could differ from those estimates.
| 8 |
Accounts Receivable and Credit Losses
The Company adopted ASU 2016-13, Financial Instruments
– Credit Losses. In accordance with this standard, the Company recognizes an allowance for credit losses for its trade receivables
to present the net amount expected to be collected as of the balance sheet date. This allowance is based on the credit losses expected
to arise over the life of the asset and are based on Current Expected Credit Losses (CECL). Accounts receivable is reported on the balance
sheet at the net amounts expected to be collected by the Company. Management closely monitors outstanding accounts receivable and charges
off to expense any balances that are determined to be uncollectible, which was $
Property and Equipment
Property and equipment are carried at cost. Expenditures for renewals and betterments that extend the useful lives of property, equipment or leasehold improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is calculated using the straight-line method for financial reporting purposes based on the following estimated useful lives:
| Classification | Useful Life |
| Equipment, furniture, and fixtures | |
| Medical equipment | |
| Leasehold improvements |
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived brands are not amortized
but are evaluated for impairment annually or when indicators of a potential impairment are present. The Company’s impairment testing
of goodwill is performed separately from its impairment testing of indefinite-lived intangibles. The annual evaluation for impairment
of goodwill and indefinite-lived intangibles is based on valuation models that incorporate assumptions and internal projections of expected
future cash flows and operating plans. The Company believes such assumptions are also comparable to those that would be used by other
marketplace participants. During the nine months ended September 30, 2023 and 2022, the Company did
Valuation of Long-lived Assets
In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as plant and equipment and construction in progress held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets.
| 9 |
Revenue Recognition
The Company applies the following five-step model to determine revenue recognition:
| · | Identification of a contract with a customer | |
| · | Identification of the performance obligations in the contact | |
| · | Determination of the transaction price | |
| · | Allocation of the transaction price to the separate performance allocation | |
| · | Recognition of revenue when performance obligations are satisfied. |
The Company only applies the five-step model when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, the Company assesses services promised within each contract and determines those that are performance obligations and assesses whether each promised service is distinct.
The Company’s financial services sector reports revenues as services are performed and its healthcare sector reports revenues at the time control of the services transfer to the customer and from providing licensed and/or certified orthopedic procedures. The Company’s healthcare subsidiary does not have contract liabilities or deferred revenue as there are no amounts prepaid for services.
Healthcare Income
Established billing rates are not the same as actual amounts recovered for the Company’s healthcare subsidiary. They generally do not reflect what the Company is ultimately paid and therefore are not reported in the condensed consolidated financial statements. The Company is typically paid amounts based on established charges per procedure with guidance from the annually updated Current Procedural Terminology (“CPT”) guidelines (a code set maintained by the American Medical Association through the CPT Editorial Panel), that designates relative value units (“RVU's”) and a suggested range of charges for each procedure which is then assigned a CPT code.
This fee is discounted to reflect the percentage paid to the Company “using a modifier” recognized by each insurance carrier for services, less deductible, co-pay, and contractual adjustments which are deducted from the calculated fee. The net revenue is recorded at the time the services are rendered.
Contract Fees (Non-PIP)
The Company has contract fees for amounts earned from its Non-Personal Injury Protection (“PIP”) related procedures, typically car accidents, and are collected on a contingency basis. These cases are sold to a factor, who bears the risk of economic benefit or loss. After selling patient cases to the factor, any additional funds collected by the Company are remitted to the factor.
Service Fees – Net (PIP)
The Company generates services fees from performing various procedures on the date the services are performed. These services primarily include slip and falls as well as smaller nominal Non-PIP services. Fees are collected primarily from third party insurance providers. These revenues are based on established insurance billing rates less allowances for contractual adjustments and uncollectible amounts. These contractual adjustments vary by insurance company and self-pay patients. The Company computes these contractual adjustments and collection allowances based on its historical collection experience.
| 10 |
Completing the paperwork for each case and preparing it for billing takes approximately ten business days after a procedure is performed. The majority of claims are then filed electronically except for those remaining insurance carriers requiring paper filing. An initial response is usually received within four weeks from electronic filing and up to six weeks from paper filing. Responses may be a payment, a denial, or a request for additional information.
The Company’s healthcare revenues are generated from professional medical billings including facility and anesthesia services. With respect to facility and anesthesia services, the Company is the primary obligor as the facility and anesthesia services are considered part of one integrated performance obligation. Historically the Company receives 49.9% of collections from total gross billed. Accordingly, the Company recognized net healthcare service revenue as 49.9% of gross billed amounts. Historical collection rates are estimated using the most current prior 12-month historical payment and collection percentages.
The Company’s healthcare subsidiary has contractual medical receivable sales and purchase agreements with third party factors which result in approximately 30% to 56% reduction from the accounts receivables amounts when a receivable is sold to the factors. The Company evaluated the factored adjustments considering the actual factored amounts per patient quarterly, and the reductions from accounts receivable that are factored were recorded in finance charges as other expenses on the consolidated statement of operations.
The Company’s contracts for both its contract and service fees each contain a single performance obligation (providing orthopedic services), as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct, as a result, the entire transaction price is allocated to this single performance obligation.
Accordingly, the Company recognizes revenues (net) when the patient receives orthopedic care services. The Company’s patient service contracts generally have performance obligations which are satisfied at a point in time. The performance obligation is for onsite or off-site care provided. Patient service contracts are generally fixed-price, and the transaction price is in the contract. Revenue is recognized when obligations under the terms of the contract with our patients are satisfied; generally, at the time of patient care.
Financial Services Income
The Company generates revenue from providing tax resolution services to individuals and business owners that have federal and state tax liabilities by assisting its clients to settle outstanding tax debts. Additionally, services include back taxes, offer in compromise, audit representation, amending tax returns, tax preparation, wage garnishment relief, removal of bank levies and liens, and other financial challenges. The Company recognizes revenues for these services as services are performed.
Advertising Costs
Advertising costs are expensed as incurred. Advertising
costs are included as a component of cost of sales in the condensed consolidated statements of operations and changes in stockholders’
equity. The Company recognized advertising and marketing expenses of $
| 11 |
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value in the condensed consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
| Level 1 | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. | |
| Level 2 | Inputs, other than quoted prices included in Level 1, which are observable for the asset or liability through corroboration with market data at the measurement date. | |
| Level 3 | Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
Distinguishing Liabilities from Equity
The Company accounts for its series N senior convertible preferred stock and series X senior convertible preferred stock subject to possible redemption in accordance with ASC 480, “Distinguishing Liabilities from Equity”. Conditionally redeemable preferred shares are classified as temporary equity within the Company’s condensed consolidated balance sheet.
The Company accounts for its stock-based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB ASC. Pursuant to paragraph 718-10-30-6 of the FASB ASC, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.
Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.
The expense resulting from share-based payments is recorded in general and administrative expense in the condensed consolidated statements of operations.
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
FASB ASU No 2018-07 prescribes equity instruments issued to parties other than employees.
| 12 |
Income Taxes
Income taxes are determined in accordance with ASC Topic 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
As of September 30, 2023 and December 31, 2022,
the Company did not have any interest and penalties associated with tax positions and did
FASB ASC Subtopic 260, Earnings Per Share, provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, warrants, and debts convertible into common stock. The dilutive effect of stock options and warrants are reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. The diluted effect of debt convertibles is reflected utilizing the if converted method.
Going Concern
The accompanying condensed consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The accompanying condensed consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company is unable to continue as a going concern.
The ability of the Company to continue as a going concern and the appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusions. Management has prospective investors and believes the raising of capital will allow the Company to fund its cash flow shortfalls and pursue new acquisitions. There can be no assurance that the Company will be able to obtain sufficient capital from debt or equity transactions or from operations in the necessary time frame or on terms acceptable to it. Should the Company be unable to raise sufficient funds, it may be required to curtail its operating plans. In addition, increases in expenses may require cost reductions. No assurance can be given that the Company will be able to operate profitably on a consistent basis, or at all, in the future. Should the Company not be able to raise sufficient funds, it may cause cessation of operations.
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Recent Accounting Standards
Changes to accounting principles are established by the FASB in the form of Accounting Standards Update (“ASU”) to the FASB's Codification. The Company considers the applicability and impact of all ASU’s on its financial position, results of operations, stockholders’ deficit, cash flows, or presentation thereof.
In June 2016, the FASB issued ASU No.
2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of
credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for
estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will
result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash.
In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments -- Credit Losses (Topic 326), Derivatives and hedging
(Topic 815) and Leases (Topic 842), which extends the effective date of Topic 326 for certain companies until fiscal years
beginning after December 15, 2022. The Company has adopted this standard effective January 1, 2023, and it resulted in the Company
recognizing an allowance for doubtful accounts of $
Management does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
| 2. | RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS |
Subsequent to the initial issuance of the Company's balance sheet as of December 31, 2021, management reconsidered the methodology previously applied in its valuation of goodwill and redeemable preferred stock.
The Company agreed to issue 818,750 additional shares of series J preferred stock with an aggregate stated value equal to $3,275,000 if, as of May 31, 2022, Nova’s trailing twelve months minimum pre-tax net income exceeded $1,979,320 (the “Milestone”). The Company finalized its purchase price accounting and allocation in 2022 and recorded purchase consideration of $6,100,000 associated with the cash consideration, the fair value of the series J preferred stock and the fair value of the contingent consideration. The impact of the correction is reflected in a $3,275,000 increase to goodwill and contingent consideration liability on the consolidated balance sheet.
In December 2022, the Company identified an error in its classification for its series N senior convertible preferred stock for the acquisition of Nova as presented in its audited balance sheet as of December 31, 2021. Pursuant to ASC 250, “Accounting changes and error corrections” issued by FASB and SAB 99 “Materiality” issued by SEC, the Company determined the impact of the error was immaterial. The impact of the error correction is reflected in a $3,125,002 increase to the mezzanine equity and offsetting decrease to the series N senior convertible preferred stock subject to possible redemption mezzanine equity line item.
The Company and the managers of AHI entered into a resignation, release and buyback agreement and addendum, effective October 31, 2022. The Company presented in prior periods operating loss as loss from discontinued operations in the amount of $365 on the consolidated statement of operations for the nine months ended September 30, 2022.
The Company identified that Nova’s accounts receivable as presented in its balance sheet as of December 31, 2021 was understated due to an error in the collection utilized to estimate Nova’s accounts receivable. The impact of this correction on the accounting estimates is reflected in a $1,076,000 decrease to accounts receivable as of September 30, 2022 and a $1,076,000 increase in finance charges for the nine months ended September 30, 2022.
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The following table summarizes the impacts of the error corrections on the Company's financial statements for each of the periods presented below:
i. Balance sheet
| Impact of correction of error | ||||||||||||
| September 30, 2022 (Unaudited) | As previously reported | Adjustments | As restated | |||||||||
| Total assets | $ | $ | $ | |||||||||
| Total liabilities | ||||||||||||
| Mezzanine equity | ||||||||||||
| Total stockholders' equity | $ | $ | ( | ) | $ | |||||||
ii. Statement of operations
| Impact of correction of error | ||||||||||||
| Three months ended September 30, 2022 (Unaudited) | As previously reported | Adjustments | As restated | |||||||||
| Revenue | $ | $ | ( | ) | $ | |||||||
| Cost of sales | ( | ) | ||||||||||
| Gross profit | ( | ) | ||||||||||
| Operating expense | ( | ) | ||||||||||
| Income from operations | $ | $ | ( | ) | $ | |||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||
| Net loss before discontinued operations | ( | ) | ( | ) | ( | ) | ||||||
| Loss from discontinued operations | ||||||||||||
| Net loss | $ | ( | ) | $ | $ | ( | ) | |||||
| Basic Loss per Share | ||||||||||||
| Continued Operations | ) | ) | ||||||||||
| Discontinued Operations | ) | ) | ||||||||||
| Weighted Average Shares Outstanding - Basic Earnings Loss per Share | ||||||||||||
| Continued Operations | ||||||||||||
| Discontinued Operations | ||||||||||||
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| Impact of correction of error | ||||||||||||
| Nine months ended September 30, 2022 (Unaudited) | As previously reported | Adjustments | As restated | |||||||||
| Revenue | $ | $ | ( | ) | $ | |||||||
| Cost of sales | ( | ) | ||||||||||
| Gross profit | ( | ) | ||||||||||
| Operating expense | ( | ) | ||||||||||
| Income from operations | $ | $ | ( | ) | $ | |||||||
| Other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||
| Net loss before discontinued operations | ( | ) | ( | ) | ( | ) | ||||||
| Loss from discontinued operations | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Basic Loss per Share | ||||||||||||
| Continued Operations | $ | ) | $ | ) | ||||||||
| Discontinued Operations | $ | ) | $ | ) | ||||||||
| Weighted Average Shares Outstanding - Basic Earnings Loss per Share | ||||||||||||
| Continued Operations | ||||||||||||
| Discontinued Operations | ||||||||||||
| 3. | REVISION OF FINANCIAL STATEMENTS |
During the preparation of the financial statements for the nine months ended September 30, 2023, the Company found that the results of the settlement agreement with Red Rock Travel Group (“Red Rock”) were incorrectly reflected on the consolidated statement of stockholders’ equity (deficiency) as of December 31, 2022. The Company determined that these errors were immaterial to the previously issued consolidated financial statements, and as such no restatement was necessary. The revisions discussed below were made to the December 31, 2022 balance sheet and statement of stockholders’ equity (deficiency).
As a result of the settlement agreement with Red Rock on July 29, 2022, the Company reduced 35,000,000 shares of common shares on the consolidated financial statements as of December 31, 2022. The certificate of the common stock for 35,000,000 shares which were originally issued on February 24, 2020 was returned as part of the 2022 agreement with Red Rock and 3,500 common shares were cancelled, which were equivalent to 35,000,000 shares before the 10,000:1 reverse split on May 12, 2020. Consequently, the December 31, 2022 financial statements as originally reported were understated by 34,996,500 common shares. The impact of the correction is reflected in the $35,097 increase to common stock and decrease the same amount to additional paid-in-capital on the consolidated statement of stockholders’ equity. The adjustment had no impact on earnings per share for any 2022 period.
On July 31, 2018, the Company issued 8,200,562 shares of series K preferred stock to the prior owners of Red Rock for the consideration of the acquisition of Red Rock. The acquisition was not completed, and Red Rock returned the 8,200,562 shares of series K preferred stock during the year ended December 31, 2018. A total of 8,200,562 shares of series K preferred stock were cancelled. The impact of the correction is reflected in the $8,201 decrease to series K preferred stock and increase the same amount to additional paid-in-capital on the consolidated statement of stockholders’ equity (deficiency).
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| 4. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
September 30, 2023 | December 31, 2022 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued credit cards | ||||||||
| Accrued expense – previously factored liability | ||||||||
| Accrued income taxes, and other taxes | ||||||||
| Accrued professional fees | ||||||||
| Accrued advertising | ||||||||
| Accrued payroll | ||||||||
| Accrue expense - other | ||||||||
| Accrued expense - dividend payable | ||||||||
| Total | $ | $ | ||||||
The Company is delinquent paying certain income
and property taxes. As of September 30, 2023 and December 31, 2022, the balance for these taxes, penalties and interest is $
| 5. | PLANT AND EQUIPMENT, NET |
Property and equipment as of September 30, 2023 and December 31, 2022 is as follows:
September 30, 2023 | December 31, 2022 | |||||||
| Medical equipment | $ | $ | ||||||
| Computer Equipment | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Leasehold Improvement | ||||||||
| Total | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
For the three and nine months ended September
30, 2023, total depreciation expense was $
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| 6. | LAND |
As of September 30, 2023 and December 31, 2022,
the Company had 27 acres of land valued at approximately $
| 7. | LINES OF CREDIT |
At September 30, 2023 and December 31, 2022, the
Company had a revolving line of credit with a financial institution for $
On September 29, 2023, the Company and Nova entered
into a two-year revolving purchase and security agreement with DML HC Series, LLC to sell Nova’s accounts receivables for a revolving
financing up to a maximum advance amount of $
| 8. | RELATED PARTY TRANSACTIONS |
From time to time, the previous owner who is currently
the manager of Platinum Tax loaned funds to Platinum Tax to cover short term operating needs. Amounts owed as of September 30, 2023 and
December 31, 2022 were $
In connection with the acquisition of Edge View
on July 16, 2014, the Company assumed amounts due to previous owners who are current managers Edge View. These amounts are due on demand
and do not bear interest. The balance of these amounts are $
The Company obtained short-term advances from
the Chairman of the Board that are non-interest bearing and due on demand. As of September 30, 2023 and December 31, 2022, the Company
owed the Chairman $
See also Note 15 for compensation paid to employees of the Company.
| 9. | NOTES AND LOANS PAYABLE |
Notes payable at September 30, 2023 and December 31, 2022, respectively, are summarized as follows:
September 30, 2023 | December 31, 2022 | |||||||
| Notes and loans payable | $ | $ | ||||||
| Less current portion | ( | ) | ( | ) | ||||
| Long-term portion | $ | $ | ||||||
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Long-term debt matures as follows:
| Amount | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
Loans and Notes Payable – Unrelated Party
On March 12, 2009, the Company issued a debenture
in the principal amount of $20,000. The debenture bears interest at 12% per annum and matured on September 12, 2009. The balance of the
debenture was $
Small Business Administration (“SBA”) Loans
On June 2, 2020, the Company obtained an SBA loan
in the principal amount of $
| 10. | CONVERTIBLE NOTES PAYABLE |
As of September 30, 2023 and December 31,
2022, the Company had convertible debt outstanding net of amortized debt discount of $
On September 22, 2022, the Company entered into
a security exchange and purchase agreement with its largest lender to consolidate all promissory notes held by it and related accrued
interest in exchange for (1) one consolidated senior secured convertible promissory note in the amount of $
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Convertible notes as of September 30, 2023 and December 31, 2022 are summarized as follows:
September 30, 2023 | December 31, 2022 | |||||||
| Convertible notes payable | $ | $ | ||||||
| Discounts on convertible notes payable | ( | ) | ( | ) | ||||
| Total convertible debt less debt discount | ||||||||
| Current portion | ||||||||
| Long-term portion | $ | $ | ||||||
The following is a schedule of convertible notes payable as of and for the nine months ended September 30, 2023.
| Note # | Issuance | Maturity | Principal Balance 12/31/22 | New Loan | Principal Conversions | Shares Issued Upon Conversion | Principal Balance 9/30/23 | Accrued Interest on Convertible Debt at 12/31/22 | Interest Expense On Convertible Debt For the Period Ended 9/30/23 | Accrued Interest on Convertible Debt at 9/30/23 | Unamortized Debt Discount At 9/30/23 | ||||||||||||||||||
| 7-1 | $ | $ | ( | ) | $ | $ | $ | $ | $ | ||||||||||||||||||||
| 9 | |||||||||||||||||||||||||||||
| 10 | |||||||||||||||||||||||||||||
| 10-1 | |||||||||||||||||||||||||||||
| 10-2 | |||||||||||||||||||||||||||||
| 10-3 | |||||||||||||||||||||||||||||
| 29-2 | |||||||||||||||||||||||||||||
| 31 | |||||||||||||||||||||||||||||
| 37-1 | |||||||||||||||||||||||||||||
| 37-2 | |||||||||||||||||||||||||||||
| 37-3 | |||||||||||||||||||||||||||||
| 38 | ( | ) | |||||||||||||||||||||||||||
| 39 | |||||||||||||||||||||||||||||
| 40-1 | |||||||||||||||||||||||||||||
| 40-2 | |||||||||||||||||||||||||||||
| 40-3 | |||||||||||||||||||||||||||||
| 40-4 | |||||||||||||||||||||||||||||
| 40-5 | |||||||||||||||||||||||||||||
| 40-6 | |||||||||||||||||||||||||||||
| 40-7 | |||||||||||||||||||||||||||||
| 40-8 | |||||||||||||||||||||||||||||
| 40-9 | |||||||||||||||||||||||||||||
| 40-10 | |||||||||||||||||||||||||||||
| 41 | |||||||||||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||
| 20 |
Note 7-1
On October 28, 2016, the Company issued a convertible promissory note in the principal amount of $50,000, which matured on October 28, 2017. Note 7-1 is currently in default and accrues interest at a default interest rate of 20% per annum.
Note 9
On September 12, 2016, the Company issued a convertible promissory note in the principal amount of $80,000 for services rendered, which matured on September 12, 2017. Note 9 is currently in default and accrues interest at a default interest rate of 20% per annum.
Notes 10, 10-1, 10-2 and 10-3
On January 24, 2017, the Company issued a convertible promissory note in the principal amount of $80,000 for services rendered, which matured on January 24, 2018. Note 10 is currently in default and accrues interest at a default interest rate of 20% per annum. On February 10, 2023, the Company executed a second tranche under this note in the principal amount of $50,000 (Note 10-1). On March 30, 2023, the Company executed a third tranche under this note in the principal amount of $25,000 (Note 10-2). On August 11, 2023, the Company executed a fourth tranche under this note in the principal amount of $25,000 (Note 10-3). Notes 10-1, 10-2 and 10-3 accrue interest at a rate of 15% per annum.
Notes 29, 29-1 and 29-2
On May 10, 2019, the Company issued a convertible promissory note in the principal amount of $150,000. On November 8, 2019, this note (Note 29) was purchased by and assigned to an unrelated party. The amount assigned was the existing principal amount of $150,000 and accrued interest of $5,918 which was issued as Note 29-1, plus a new convertible promissory note in the principal amount of $62,367 which was issued as Note 29-2. Note 29-2 is currently in default and accrues interest at a default interest rate of 24% per annum.
Note 31
On August 28, 2019, the Company issued a convertible promissory note in the principal amount of $120,000, which matured on August 28, 2020. Note 31 is currently in default and accrues interest at a default interest rate of 24% per annum.
Notes 37-1, 37-2 and 37-3
On September 3, 2020, the Company issued a convertible promissory note in the principal amount of $200,000, with an original issue discount of $50,000, which could be drawn in several tranches. On September 3, 2020, the Company executed the first tranche in the principal amount of $67,000, less an original issue discount of $17,000, which matured on June 30, 2021 (Note 37-1). On November 2, 2020, the Company executed the second tranche in the principal amount of $66,500, less an original issue discount of $16,500, which matured on August 31, 2021 (Note 37-2). On December 29, 2020, the Company executed the third tranche in the principal amount of $66,500, less an original issue discount of $16,500, which matured on September 30, 2021 (Note 37-3). Notes 37-1, 37-2 and 27-3 are currently in default and accrue interest at a default interest rate of 18% per annum.
Note 38
On February 9, 2021, the Company issued a convertible promissory note in the principal amount $103,500, which matured on February 9, 2022. Note 38 is currently in default and accrues interest at a default interest rate of 22% per annum.
| 21 |
Note 39
On April 26, 2021, the Company issued a convertible promissory note in the principal amount $153,500, which matured on May 10, 2022. Note 39 is currently in default and accrues interest at a default interest rate of 22% per annum.
Notes 40-1, 40-2, 40-3, 40-4, 40-5, 40-6, 40-7, 40-8, 40-9 and 40-10
On September 22, 2022, the Company issued a convertible
promissory note in the principal amount of $2,600,000 in exchange for total of $4,791,099 of defaulted promissory notes balances (Note
40-1). On November 4, 2022, the Company executed a second tranche under this note in the principal amount of $68,667, less an original
issue discount and fee of $18,667 (Note 40-2). On November 28, 2022, the Company executed the third tranche under this note in the principal
amount of $68,667, less an original issue discount and fee of $18,667 (Note 40-3). On November 28, 2022, the Company executed a fourth
tranche under this note in the principal amount of $68,667, less an original issue discount and fee of $18,667 (Note 40-4). On January
24, 2023, the Company executed a fifth tranche under this note in the principal amount of $90,166, less an original issue discount and
fee of $25,166 (Note 40-5). On March 21, 2023, the Company executed a sixth tranche under this note in the principal amount of $136,666,
less an original issue discount and fee of $39,166 (Note 40-6). On June 5, 2023, the Company executed a seventh tranche under this note
in the principal amount of $
Note 41
On August 25, 2023, the Company issued a twelve-month convertible promissory note in the principal amount of $5,000 to the Company’s CEO for the Company’s operating expenses. The rate of interest is 10% per annum.
| 11. | CAPITAL STOCK |
Preferred Stock
The Company has designated multiple series of preferred stock, including shares of series A preferred stock, shares of series B preferred stock, shares of series C preferred stock, shares of series E preferred stock, shares of series F-1 preferred stock, shares of series I preferred stock, shares of series J preferred stock, shares of series L preferred stock, shares of series N senior convertible preferred stock, shares of series R preferred stock and shares of series X senior convertible preferred stock.
The following is a description of the rights and preferences of each series of preferred stock.
Redeemable Preferred Stock
The Company recognized the series N senior convertible preferred stock and series X senior convertible preferred stock as mezzanine equity since the redeemable preferred stock may be redeemed at the option of the holder, but is not mandatorily redeemable.
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Series N Senior Convertible Preferred Stock
Ranking. The series N senior convertible preferred stock ranks, with respect to the payment of dividends and the distribution of assets upon liquidation, (i) senior to all common stock and each other class or series that is not expressly made senior to or on parity with the series N senior convertible preferred stock; (ii) on parity with each class or series that is not expressly subordinated or made senior to the series N senior convertible preferred stock; and (iii) junior to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company and each class or series that is expressly made senior to the series N senior convertible preferred stock.
Dividend Rights. Holders of series N senior
convertible preferred stock are entitled to dividends at a rate per annum of 12.0% of the stated value ($4.00 per share); provided that
upon an event of default (as defined in the certificate of designation for the series N senior convertible preferred stock), such rate
shall increase by 8% per annum. Dividends shall accrue from day to day, whether or not declared, and shall be cumulative. Dividends shall
be payable quarterly in arrears on each dividend payment date in cash or common stock at the Company’s discretion. Dividends payable
in common stock shall be calculated based on a price equal to eighty percent (80%) of the volume weighted average price for the common
stock on the Company’s principal trading market (the “VWAP”) during the five (5) trading days immediately prior to the
applicable dividend payment date. At September 30, 2023, cumulative dividends on Series N Preferred Stock were $
Liquidation Rights. Subject to the rights of creditors and the holders of any senior securities or parity securities (in each case, as defined in the certificate of designation), upon any liquidation of the Company or its subsidiaries, before any payment or distribution of the assets of the Company (whether capital or surplus) shall be made to or set apart for the holders of junior securities (as defined in the certificate of designation), including the common stock, each holder of outstanding series N senior convertible preferred stock shall be entitled to receive an amount of cash equal to 115% of the stated value of $4.00 per share, plus an amount of cash equal to all accumulated accrued and unpaid dividends thereon (whether or not declared) to, but not including the date of final distribution to such holders.
Voting Rights. Holders of series N senior convertible preferred stock do not have any voting rights; provided that, so long as any shares of series N senior convertible preferred stock are outstanding, the affirmative vote of holders of a majority of the series N senior convertible preferred stock, which majority must include SILAC Insurance Company so long as it holds any shares of series N senior convertible preferred stock, voting as a separate class, shall be necessary for approving, effecting or validating any amendment, alteration or repeal of any of the provisions of the certificate of designation or prior to the Company’s (or Nova’s) creation or issuance of any parity securities or new indebtedness (as defined in the certificate of designation); provided that the foregoing shall not apply to any financing transaction the use of proceeds of which will be used to redeem the series N senior convertible preferred stock and the warrants issued in connection therewith. In addition, the affirmative vote of holders of 66% of the series N senior convertible preferred stock, voting as a separate class, is required prior to the Company’s (or Nova’s) creation or issuance of any senior securities.
Conversion Rights. Each shares of series N senior convertible preferred stock, plus all accrued and unpaid dividends thereon, shall be convertible, at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of common stock determined by dividing the stated value ($4.00 per share), plus the value of the accrued, but unpaid, dividends thereon, by a conversion price of $0.012 per share (subject to standard adjustments in the event of any stock splits, stock combinations, stock reclassifications, dividends paid in common stock, sales of substantially all assets, mergers, consolidations or similar transactions); provided that in no event shall the holder of any series N senior convertible preferred stock be entitled to convert any number of shares that upon conversion the sum of (i) the number of shares of common stock beneficially owned by the holder and its affiliates and (ii) the number of shares of common stock issuable upon the conversion of the series N senior convertible preferred stock with respect to which the determination of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.99% of the then outstanding common stock. This limitation may be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, upon not less than sixty-one (61) days’ prior notice to the Company.
Redemption Rights. The Company may redeem the series N senior convertible preferred stock at any time by paying in cash therefore a sum equal to 115% of the stated value of $4.00 per share, plus the amount of accrued and unpaid dividends and any other amounts due pursuant to the terms of the certificate of designation. In addition, any holder may require the Company to redeem some or all of its shares of series N senior convertible preferred stock on the same terms after a period of twelve months from the date of issuance; provided, however, that such redemption right shall only be exercisable if the Company raises at least $5,000,000 or the common stock is trading on the Nasdaq Stock Market or the New York Stock Exchange.
| 23 |
Series X Senior Convertible Preferred Stock
Ranking. The series X senior convertible preferred stock ranks, with respect to the payment of dividends and the distribution of assets upon liquidation, (i) senior to all common stock and each other class or series that is not expressly made senior to or on parity with the series X senior convertible preferred stock; (ii) on parity with each class or series that is not expressly subordinated or made senior to the series X senior convertible preferred stock; and (iii) junior to the series N senior convertible preferred stock, all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company and each class or series that is expressly made senior to the series X senior convertible preferred stock.
Dividend Rights. Holders of series X senior
convertible preferred stock are entitled to dividends at a rate per annum of 10.0% of the stated value ($4.00 per share); provided that
upon an event of default (as defined in the certificate of designation for the series X senior convertible preferred stock), such rate
shall increase by 5% per annum. Dividends shall accrue from day to day, whether or not declared, and shall be cumulative. Dividends shall
be payable quarterly in arrears on each dividend payment date. At September 30, 2023, cumulative dividends on Series X Preferred Stock
were $
Liquidation Rights. Subject to the rights of creditors and the holders of any senior securities, including the series N senior convertible preferred stock, or parity securities (in each case, as defined in the certificate of designation), upon any liquidation of the Company or its subsidiaries, before any payment or distribution of the assets of the Company (whether capital or surplus) shall be made to or set apart for the holders of junior securities (as defined in the certificate of designation), including the common stock, each holder of outstanding series N senior convertible preferred stock shall be entitled to receive an amount of cash equal to 100% of the stated value of $4.00 per share, plus an amount of cash equal to all accumulated accrued and unpaid dividends thereon (whether or not declared) to, but not including the date of final distribution to such holders.
Voting Rights. Holders of series X senior convertible preferred stock do not have any voting rights; provided that, so long as any shares of series X senior convertible preferred stock are outstanding, the affirmative vote of holders of a majority of the series X senior convertible preferred stock, which majority must include Leonite Capital LLC so long as it holds any shares of series X senior convertible preferred stock, voting as a separate class, shall be necessary for approving, effecting or validating any amendment, alteration or repeal of any of the provisions of the certificate of designation or prior to the creation or issuance of any parity securities or new indebtedness (as defined in the certificate of designation); provided that the foregoing shall not apply to any financing transaction the use of proceeds of which will be used to redeem the series X senior convertible preferred stock and the warrants issued in connection therewith. In addition, the affirmative vote of holders of 66% of the series X senior convertible preferred stock, voting as a separate class, is required prior to the creation or issuance of any senior securities.
Conversion Rights. Each shares of series X senior convertible preferred stock, plus all accrued and unpaid dividends thereon, shall be convertible, at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of common stock determined by dividing the stated value ($4.00 per share), plus the value of the accrued, but unpaid, dividends thereon, by a conversion price equal to the lower of (i) the lowest VWAP during the five (5) trading days immediately prior to the applicable conversion date and (ii) the price per share paid in any subsequent financing (the “Fixed Price”). The Fixed Price is subject to standard adjustments in the event of any stock splits, stock combinations, stock reclassifications, dividends paid in common stock, sales of substantially all assets, mergers, consolidations or similar transactions, as well as a price based antidilution adjustment, pursuant to which, subject to certain exceptions, if the Company issues common stock at a price lower than the Fixed Price, the Fixed Price shall decrease to such lower price. Notwithstanding the foregoing, in no event shall the holder of any series X senior convertible preferred stock be entitled to convert any number of shares that upon conversion the sum of (i) the number of shares of common stock beneficially owned by the holder and its affiliates and (ii) the number of shares of common stock issuable upon the conversion of the series X senior convertible preferred stock with respect to which the determination of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.99% of the then outstanding common stock. This limitation may be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, upon not less than sixty-one (61) days’ prior notice to the Company.
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Redemption Rights. Commencing on September 22, 2023, any holder may require the Company to redeem its shares by the payment in cash therefore of a sum equal to 100% of the stated value of $4.00 per share, plus the amount of accrued and unpaid dividends and any other amounts due pursuant to the terms of the certificate of designation; provided however, that in the event that the Company completes a public offering prior to the redemption date, then any holder may only cause the Company to redeem any outstanding series X senior convertible preferred stock by paying such redemption price in twelve (12) equal monthly installments with the first such payment due on the date that is six (6) months following the date that the Company completes such public offering.
Non-redeemable Preferred Stock
Series A Preferred Stock
Ranking. The series A preferred stock ranks, with respect to the distribution of assets upon liquidation, (i) senior to all common stock and each other class or series that is not expressly made senior to or on parity with the series A preferred stock; (ii) on parity with each class or series that is not expressly subordinated or made senior to the series A preferred stock; and (iii) junior to the series B preferred stock, series C preferred stock, series E preferred stock, series F-1 preferred stock, series I preferred stock, series J preferred stock, series L preferred stock, series N senior convertible preferred stock, series R preferred stock, series X senior convertible preferred stock and each other series of preferred stock and each class or series that is expressly made senior to the series A preferred stock, as well as to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company.
Dividend Rights. The series A preferred stock is not entitled to participate in any distributions or payments to the holders of common stock or any other class of stock and shall have no economic interest in the Company.
Liquidation Rights. In the event of any liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, a merger or consolidation of our company wherein the Company is not the surviving entity, or a sale of all or substantially all of the assets of the Company, the holders of each share of series A preferred stock shall be entitled to receive from any distribution of any of the assets or surplus funds of the Company, before and in preference of any holder of shares of common stock, an amount equal to the stated value of $250. Once the holders receive the foregoing from any such liquidation, dissolution or winding up, the holders shall not participate with the common stock or any other class of stock.
Voting Rights. Each share of series A preferred stock shall have a number of votes at any time equal to (i) 25% of the number of votes then held or entitled to be made by all other equity securities of the Company, including, without limitation, the common stock, plus (ii) one (1). The series A preferred stock shall vote on any matter submitted to the holders of the common stock, or any other class of voting securities, for a vote, and shall vote together with the common stock, or any class of voting securities, as applicable, on such matter for as long as the shares of series A preferred stock are issued and outstanding. Notwithstanding the foregoing, the series A preferred stock shall not have the right to vote on any matter as to which solely another series of preferred stock is entitled to vote pursuant to the Company’s amended and restated articles of incorporation or a certificate of designation of such other series of preferred stock.
Transfer. Upon transfer of any share of series A preferred stock, except for a transfer by the holder to an affiliate, whether such transfer is voluntary or involuntary, such share of series A preferred stock shall automatically, and without any action being required by the Company or the holder, be converted into one (1) share of common stock.
Other Rights. Holders of series A preferred stock do not have any conversion (except as set forth above) or redemption rights.
Series B Preferred Stock
Ranking. The series B preferred stock ranks, with respect to the distribution of assets upon liquidation, (i) senior to all common stock, series A preferred stock and to each other class or series that is not expressly made senior to or on parity with the series B preferred stock; (ii) on parity with the series C preferred stock, series E preferred stock, series F-1 preferred stock, series J preferred stock, series L preferred stock and each other class or series that is not expressly subordinated or made senior to the series B preferred stock; and (iii) junior to the series I preferred stock, series N senior convertible preferred stock, series R preferred stock, series X senior convertible preferred stock and to each other series of preferred stock and each class or series that is expressly made senior to the series B preferred stock, as well as to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company.
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Dividend Rights. The holders of series B preferred stock are entitled to receive dividends equal (on an as converted to common stock basis) to and in the same form as dividends actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends shall be paid on shares of series B preferred stock.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of series B preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the shares of series B preferred stock were fully converted to common stock immediately prior to such liquidation, which amount shall be paid to the holders of series B preferred stock pari passu with all holders of parity securities and in preference to the holders of junior securities.
Voting Rights. On any matter presented to stockholders for their action or consideration, each holder of series B preferred stock shall be entitled to cast one (1) vote per share of series B preferred stock held. Except as provided by law, the holders of series B preferred stock shall vote together with the holders of shares of common stock as a single class. However, as long as any shares of series B preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of outstanding series B preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series B preferred stock or alter or amend the certificate of designation for the series B preferred stock, or (b) amend the Company’s amended and restated articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series B preferred stock.
Conversion Rights. Each share of series B preferred stock is convertible, at any time and from time to time at the option of the holder thereof, into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. In addition, upon the earlier to occur of: (a) the closing of the sale of shares of common stock to the public at a price of at least $3.00 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the common stock) in a public offering pursuant to an effective registration statement or offering statement under the Securities Act resulting in at least $3,000,000 of gross proceeds to the Company, (b) the date on which the shares of common stock of the Company are listed on a national stock exchange, including without limitation the New York Stock Exchange, NYSE American or the Nasdaq Stock Market (any tier), or (c) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least 67% of the then outstanding shares of series B preferred stock, voting together as a single class, each share of series B preferred stock shall be automatically converted into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock splits, stock reclassifications and similar events.
Redemption Rights. Holders of series B preferred stock do not have any redemption rights.
Series C Preferred Stock
Ranking. The series C preferred stock ranks, with respect to the distribution of assets upon liquidation, (i) senior to all common stock, series A preferred stock and to each other class or series that is not expressly made senior to or on parity with the series C preferred stock; (ii) on parity with the series B preferred stock, series E preferred stock, series F-1 preferred stock, series J preferred stock, series L preferred stock and each other class or series that is not expressly subordinated or made senior to the series C preferred stock; and (iii) junior to the series I preferred stock, series N senior convertible preferred stock, series R preferred stock, series X senior convertible preferred stock and to each other series of preferred stock and each class or series that is expressly made senior to the series C preferred stock, as well as to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company.
Dividend Rights. The holders of series C preferred stock are entitled to receive dividends equal (on an as converted to common stock basis) to and in the same form as dividends actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends shall be paid on shares of series C preferred stock.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of series C preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the shares of series C preferred stock were fully converted to common stock immediately prior to such liquidation, which amount shall be paid to the holders of series C preferred stock pari passu with all holders of parity securities and in preference to the holders of junior securities.
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Voting Rights. On any matter presented to stockholders for their action or consideration, each holder of series C preferred stock shall be entitled to cast one (1) vote per share of series C preferred stock held. Except as provided by law, the holders of series C preferred stock shall vote together with the holders of shares of common stock as a single class. However, as long as any shares of series C preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of outstanding series C preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series C preferred stock or alter or amend the certificate of designation for the series C preferred stock, or (b) amend the Company’s amended and restated articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series C preferred stock.
Conversion Rights. Each share of series C preferred stock is convertible, at any time and from time to time at the option of the holder thereof, into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $0.00004. In addition, on the date on which the shares of common stock are listed on a national stock exchange, including without limitation the New York Stock Exchange, NYSE American or the Nasdaq Stock Market (any tier) (a “Listing Event”), all outstanding shares of series C preferred stock shall be automatically converted into such number of shares of common stock as is determined by dividing $50,000 by the highest traded or closing price on such date, which such shares of common stock shall be issued pro rata among the holders of the outstanding series C preferred stock. Finally, upon the earlier to occur of: (a) the closing of the sale of shares of common stock to the public at a price of at least $3.00 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the common stock) in a public offering pursuant to an effective registration statement or offering statement under the Securities Act resulting in at least $3,000,000 of gross proceeds to the Company or (b) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least 67% of the then outstanding shares of series C preferred stock, voting together as a single class, each share of series C preferred stock shall be automatically converted into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $0.00004. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock splits, stock reclassifications and similar events.
Redemption Rights. If there is a Listing Event, the Company shall have the right (but not the obligation) to redeem shares of series C preferred stock at a price per share of $50,000.
Series E Preferred Stock
Ranking. The series E preferred stock ranks, with respect to the distribution of assets upon liquidation, (i) senior to all common stock, series A preferred stock and to each other class or series that is not expressly made senior to or on parity with the series E preferred stock; (ii) on parity with the series B preferred stock, series C preferred stock, series F-1 preferred stock, series J preferred stock, series L preferred stock and each other class or series that is not expressly subordinated or made senior to the series E preferred stock; and (iii) junior to the series I preferred stock, series N senior convertible preferred stock, series R preferred stock, series X senior convertible preferred stock and to each other series of preferred stock and each class or series that is expressly made senior to the series E preferred stock, as well as to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company.
Dividend Rights. The holders of series E preferred stock are entitled to receive dividends equal (on an as converted to common stock basis) to and in the same form as dividends actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends shall be paid on shares of series E preferred stock.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of series E preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the shares of series E preferred stock were fully converted to common stock immediately prior to such liquidation, which amount shall be paid to the holders of series E preferred stock pari passu with all holders of parity securities and in preference to the holders of junior securities.
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Voting Rights. On any matter presented to stockholders for their action or consideration, each holder of series E preferred stock shall be entitled to cast one (1) vote per share of series E preferred stock held. Except as provided by law, the holders of series E preferred stock shall vote together with the holders of shares of common stock as a single class. However, as long as any shares of series E preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of outstanding series E preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series E preferred stock or alter or amend the certificate of designation for the series E preferred stock, or (b) amend the Company’s amended and restated articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series E preferred stock.
Conversion Rights. Each share of series E preferred stock is convertible, at any time and from time to time at the option of the holder thereof, into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. In addition, upon the earlier to occur of: (a) the closing of the sale of shares of common stock to the public at a price of at least $3.00 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the common stock) in a public offering pursuant to an effective registration statement or offering statement under the Securities Act resulting in at least $3,000,000 of gross proceeds to the Company, (b) the date on which the shares of common stock of the Company are listed on a national stock exchange, including without limitation the New York Stock Exchange, NYSE American or the Nasdaq Stock Market (any tier), or (c) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least 67% of the then outstanding shares of series E preferred stock, voting together as a single class, each share of series E preferred stock shall be automatically converted into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock splits, stock reclassifications and similar events.
Redemption Rights. If the Company’s common stock is listed on a national stock exchange, including without limitation the New York Stock Exchange, NYSE American or the Nasdaq Stock Market (any tier), the Company shall have the right (but not the obligation) to redeem shares of series E preferred stock at a price per share of $50,000.
Series F-1 Preferred Stock
Ranking. The series F-1 preferred stock ranks, with respect to the distribution of assets upon liquidation, (i) senior to all common stock, series A preferred stock and to each other class or series that is not expressly made senior to or on parity with the series F-1 preferred stock; (ii) on parity with the series B preferred stock, series C preferred stock, series E preferred stock, series J preferred stock, series L preferred stock and each other class or series that is not expressly subordinated or made senior to the series F-1 preferred stock; and (iii) junior to the series I preferred stock, series N senior convertible preferred stock, series R preferred stock, series X senior convertible preferred stock and to each other series of preferred stock and each class or series that is expressly made senior to the series F-1 preferred stock, as well as to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company.
Dividend Rights. The holders of series F-1 preferred stock are entitled to receive dividends equal (on an as converted to common stock basis) to and in the same form as dividends actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends shall be paid on shares of series F-1 preferred stock.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of series F-1 preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the shares of series F-1 preferred stock were fully converted to common stock immediately prior to such liquidation, which amount shall be paid to the holders of series F-1 preferred stock pari passu with all holders of parity securities and in preference to the holders of junior securities.
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Voting Rights. Except as provided by law, the holders of series F-1 preferred stock shall have no voting rights. However, as long as any shares of series F-1 preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of outstanding series F-1 preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series F-1 preferred stock or alter or amend the certificate of designation for the series F-1 preferred stock, or (b) amend the Company’s amended and restated articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series F-1 preferred stock.
Conversion Rights. Each share of series F-1 preferred stock is convertible, at any time and from time to time at the option of the holder thereof, into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. In addition, upon the earlier to occur of: (a) the closing of the sale of shares of common stock to the public at a price of at least $3.00 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the common stock) in a public offering pursuant to an effective registration statement or offering statement under the Securities Act resulting in at least $3,000,000 of gross proceeds to the Company, (b) the date on which the shares of common stock of the Company are listed on a national stock exchange, including without limitation the New York Stock Exchange, NYSE American or the Nasdaq Stock Market (any tier), or (c) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least 67% of the then outstanding shares of series F-1 preferred stock, voting together as a single class, each share of series F-1 preferred stock shall be automatically converted into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock splits, stock reclassifications and similar events.
Redemption Rights. Holders of series F-1 preferred stock do not have any redemption rights.
Series I Preferred Stock
Ranking. The series I preferred stock ranks, with respect to the distribution of assets upon liquidation, (i) senior to all common stock, series A preferred stock, series B preferred stock, series C preferred stock, series E preferred stock, series F-1 preferred stock, series J preferred stock, series L preferred stock and to each other class or series that is not expressly made senior to or on parity with the series I preferred stock; (ii) on parity with each class or series that is not expressly subordinated or made senior to the series I preferred stock; and (iii) junior to the series N senior convertible preferred stock, series R preferred stock, series X senior convertible preferred stock and to each other series of preferred stock and each class or series that is expressly made senior to the series I preferred stock, as well as to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company.
Dividend Rights. The holders of series I preferred stock are entitled to receive dividends equal (on an as converted to common stock basis) to and in the same form as dividends actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends shall be paid on shares of series I preferred stock.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of series I preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the shares of series I preferred stock were fully converted to common stock immediately prior to such liquidation, which amount shall be paid to the holders of series I preferred stock pari passu with all holders of parity securities and in preference to the holders of junior securities.
Voting Rights. On any matter presented to stockholders for their action or consideration, each holder of series I preferred stock shall be entitled to cast five (5) votes per share of series I preferred stock held. Except as provided by law, the holders of series I preferred stock shall vote together with the holders of shares of common stock as a single class. However, as long as any shares of series I preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of outstanding series I preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series I preferred stock or alter or amend the certificate of designation for the series I preferred stock, or (b) amend the Company’s amended and restated articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series I preferred stock.
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Conversion Rights. Each share of series I preferred stock is convertible, at any time and from time to time at the option of the holder thereof, into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. In addition, upon the earlier to occur of: (a) the closing of the sale of shares of common stock to the public at a price of at least $3.00 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the common stock) in a public offering pursuant to an effective registration statement or offering statement under the Securities Act resulting in at least $10,000,000 of gross proceeds to the Company, (b) the date on which the shares of common stock of the Company are listed on a national stock exchange, including without limitation the New York Stock Exchange, NYSE American or the Nasdaq Stock Market (any tier), or (c) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least 67% of the then outstanding shares of series I preferred stock, voting together as a single class, each share of series I preferred stock shall be automatically converted into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock splits, stock reclassifications and similar events.
Redemption Rights. Holders of series I preferred stock do not have any redemption rights.
Series J Preferred Stock
Ranking. The series J preferred stock ranks, with respect to the distribution of assets upon liquidation, (i) senior to all common stock, series A preferred stock and to each other class or series that is not expressly made senior to or on parity with the series J preferred stock; (ii) on parity with the series B preferred stock, series C preferred stock, series E preferred stock, series F-1 preferred stock, series L preferred stock and each other class or series that is not expressly subordinated or made senior to the series J preferred stock; and (iii) junior to the series I preferred stock, series N senior convertible preferred stock, series R preferred stock, series X senior convertible preferred stock and to each other series of preferred stock and each class or series that is expressly made senior to the series J preferred stock, as well as to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company.
Dividend Rights. The holders of series J preferred stock are entitled to receive dividends equal (on an as converted to common stock basis) to and in the same form as dividends actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends shall be paid on shares of series J preferred stock.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of series J preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the shares of series J preferred stock were fully converted to common stock immediately prior to such liquidation, which amount shall be paid to the holders of series J preferred stock pari passu with all holders of parity securities and in preference to the holders of junior securities.
Voting Rights. On any matter presented to stockholders for their action or consideration, each holder of series J preferred stock shall be entitled to cast one (1) vote per share of series J preferred stock held. Except as provided by law, the holders of series J preferred stock shall vote together with the holders of shares of common stock as a single class. However, as long as any shares of series J preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of outstanding series J preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series J preferred stock or alter or amend the certificate of designation for the series J preferred stock, or (b) amend the Company’s amended and restated articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series J preferred stock.
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Conversion Rights. Each share of series J preferred stock is convertible, at any time and from time to time at the option of the holder thereof, into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. In addition, upon the earlier to occur of: (a) the closing of the sale of shares of common stock to the public at a price of at least $3.00 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the common stock) in a public offering pursuant to an effective registration statement or offering statement under the Securities Act resulting in at least $3,000,000 of gross proceeds to the Company, (b) the date on which the shares of common stock of the Company are listed on a national stock exchange, including without limitation the New York Stock Exchange, NYSE American or the Nasdaq Stock Market (any tier), or (c) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least 67% of the then outstanding shares of series J preferred stock, voting together as a single class, each share of series J preferred stock shall be automatically converted into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock splits, stock reclassifications and similar events.
Redemption Rights. Holders of series J preferred stock do not have any redemption rights.
Series L Preferred Stock
Ranking. The series L preferred stock ranks, with respect to the distribution of assets upon liquidation, (i) senior to all common stock, series A preferred stock and to each other class or series that is not expressly made senior to or on parity with the series L preferred stock; (ii) on parity with the series B preferred stock, series C preferred stock, series E preferred stock, series F-1 preferred stock, series J preferred stock and each other class or series that is not expressly subordinated or made senior to the series L preferred stock; and (iii) junior to the series I preferred stock, series N senior convertible preferred stock, series R preferred stock, series X senior convertible preferred stock and to each other series of preferred stock and each class or series that is expressly made senior to the series L preferred stock, as well as to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company.
Dividend Rights. The holders of series L preferred stock are entitled to receive dividends equal (on an as converted to common stock basis) to and in the same form as dividends actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends shall be paid on shares of series L preferred stock.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of series L preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the shares of series L preferred stock were fully converted to common stock immediately prior to such liquidation, which amount shall be paid to the holders of series L preferred stock pari passu with all holders of parity securities and in preference to the holders of junior securities.
Voting Rights. On any matter presented to stockholders for their action or consideration, each holder of series L preferred stock shall be entitled to cast one (1) vote per share of series L preferred stock held. Except as provided by law, the holders of series L preferred stock shall vote together with the holders of shares of common stock as a single class. However, as long as any shares of series L preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of outstanding series L preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series J preferred stock or alter or amend the certificate of designation for the series L preferred stock, or (b) amend the Company’s amended and restated articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series L preferred stock.
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Conversion Rights. Each share of series L preferred stock is convertible, at any time and from time to time at the option of the holder thereof, into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. In addition, upon the earlier to occur of: (a) the closing of the sale of shares of common stock to the public at a price of at least $3.00 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the common stock) in a public offering pursuant to an effective registration statement or offering statement under the Securities Act resulting in at least $3,000,000 of gross proceeds to the Company, (b) the date on which the shares of common stock of the Company are listed on a national stock exchange, including without limitation the New York Stock Exchange, NYSE American or the Nasdaq Stock Market (any tier), or (c) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least 67% of the then outstanding shares of series L preferred stock, voting together as a single class, each share of series L preferred stock shall be automatically converted into such number of shares of common stock as is determined by dividing the stated value ($4.00 per share) by a conversion price of $2.00. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock splits, stock reclassifications and similar events.
Redemption Rights. Holders of series L preferred stock do not have any redemption rights.
Series R Preferred Stock
Ranking. The series R preferred stock ranks, with respect to the distribution of assets upon liquidation, (i) senior to all common stock, series A preferred stock, series B preferred stock, series C preferred stock, series E preferred stock, series F-1 preferred stock, series I preferred stock, series J preferred stock, series L preferred stock and to each other class or series that is not expressly made senior to or on parity with the series R preferred stock; (ii) on parity with each class or series that is not expressly subordinated or made senior to the series R preferred stock; and (iii) junior to the series N senior convertible preferred stock, series X senior convertible preferred stock and to each other series of preferred stock and each class or series that is expressly made senior to the series R preferred stock, as well as to all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company.
Dividend Rights. The holders of series R preferred stock are entitled to receive dividends equal (on an as converted to common stock basis) to and in the same form as dividends actually paid on shares of common stock when, as and if such dividends are paid on shares of common stock. No other dividends shall be paid on shares of series R preferred stock.
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of series R preferred stock shall be entitled to receive out of the assets of the Company the same amount that a holder of common stock would receive if the shares of series R preferred stock were fully converted to common stock immediately prior to such liquidation, which amount shall be paid to the holders of series R preferred stock pari passu with all holders of parity securities and in preference to the holders of junior securities.
Voting Rights. On any matter presented to stockholders for their action or consideration, each holder of series R preferred stock shall be entitled to cast one (1) vote per share of series R preferred stock held. Except as provided by law, the holders of series R preferred stock shall vote together with the holders of shares of common stock as a single class. However, as long as any shares of series R preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of outstanding series R preferred stock, (a) alter or change adversely the powers, preferences or rights given to the series R preferred stock or alter or amend the certificate of designation for the series R preferred stock, or (b) amend the Company’s amended and restated articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of series R preferred stock.
Conversion Rights. Each share of series R preferred stock is convertible, at any time and from time to time at the option of the holder thereof, into such number of shares of common stock as is determined by dividing the stated value of $1,200 by a conversion price of $1,200 (subject to standard adjustments in the event of any stock dividends, stock splits, stock reclassifications and similar events).
Redemption Rights. Holders of series R preferred stock do not have any redemption rights.
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Preferred Stock Transactions
During the nine months ended September 30, 2023, the Company executed the following transactions:
| · | On May 25, 2023, the Company issued shares of series B preferred stock to Zia Choe, Interim Chief Financial Officer, for $ |
| · | On July 24, 2023, the Company issued shares of series E preferred stock as compensation for the property manager of Edge View in exchange for a bonus of $ |
During the nine months ended September 30, 2022, the Company executed the following transactions:
| · | In the second quarter of
2022,
shares of series D preferred stock were cancelled and exchanged for |
| · | On September 7, 2022, the
Company issued
shares of series J preferred stock for $ |
| · | On September 12, 2022, the
Company issued
shares of series X senior convertible preferred stock for $ |
Common Stock
During the nine months ended September 30, 2023, the Company executed the following transactions:
| · | The Company issued shares of common stock upon the conversion of certain convertible notes. |
During the nine months ended September 30, 2022, the Company executed the following transactions:
| · | As part of the Red Rock settlement, the Company issued shares of common stock. | |
| · | The settlement also required the previous owners to relinquish shares of common stock resulting in a gain to the Company of $ |
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| 12. | WARRANTS |
The table below sets forth warrant activity for the nine months ended September 30, 2023:
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Balance at January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ( | ) | ||||||
| Balance at September 30, 2023 | ||||||||
| Warrants Exercisable at September 30, 2023 | $ | |||||||
As a result of the settlement agreement with Red Rock on July 29, 2022, the Company required the previous owners to relinquish warrants for 25,000 shares of common stock. The warrants were returned and cancelled during the second quarter of 2023. There was no impact on the consolidated financial statements as of December 31, 2022.
| 13. | DISCONTINUED OPERATIONS |
The Company and the managers of AHI entered into
a resignation, release and buyback agreement and addendum, effective October 31, 2022, pursuant to which the managers purchased AHI in
exchange for returning shares of series F preferred stock. There was a loss on disposal in the amount of $
The Company had
| Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Gain (Loss) from discontinued operations | ||||||||
| Revenue of AHI subsidiary | $ | $ | ||||||
| Cost of sales of AHI subsidiary | ( | ) | ||||||
| Selling, general and administrative expenses of AHI subsidiary | ( | ) | ||||||
| Interest expense of Red Rock Investor Note | ( | ) | ||||||
| Gain from disposal of Red Rock subsidiary | ||||||||
| Gain on settlement of debt on Red Rock | ||||||||
| Gain from discontinued operations | $ | $ | ||||||
| 34 |
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Gain (Loss) from discontinued operations | ||||||||
| Revenue AHI subsidiary | $ | $ | ||||||
| Cost of sales AHI subsidiary | ( | ) | ||||||
| Selling, general and administrative expenses AHI subsidiary | ( | ) | ||||||
| Interest expense of Red Rock Investor Note | ( | ) | ||||||
| Gain no change in estimate of AHI subsidiary | ( | ) | ||||||
| Gain on settlement of debt on Red Rock | ||||||||
| Gain from discontinued operations | $ | $ | ||||||
| 14. | GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS, NET |
The following table shows the Company’s
goodwill balances by reportable segment. The Company reviews goodwill for impairment on a reporting unit basis annually and whenever events
or changes in circumstances indicate the carrying value of goodwill may not be recoverable. During the nine months ended September 30,
2023 and 2022, the Company had
The following table shows goodwill balances by reportable segment:
| Healthcare | Total | |||||||
| Carrying value at December 31, 2022 | $ | $ | ||||||
| Accumulated impairment | ||||||||
| Carrying value at September 30, 2023 | $ | $ | ||||||
| 15. | COMMITMENTS AND CONTINGENCIES |
Leases
ASC 842, “Leases”, requires that a lessee recognize the assets and liabilities that arise from operating leases, A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transaction, lessees and lessors are required to recognize and measure leases at either the effective date (the “effective date method”) or the beginning of the earliest period presented (the “comparative method”) using a modified retrospective approach. Under the effective date method, the Company’s comparative period reporting is unchanged. In contrast, under the comparative method, the Company’s date of initial application is the beginning of the earliest comparative period presented, and the Topic 842 transition guidance is then applied to all comparative periods presented. Further, under either transition method, the standard includes certain practical expedients intended to ease the burden of adoption. The Company adopted ASC 842, January 1, 2020, using the effective date method and elected certain practical expedients allowing the Company not to reassess:
| · | whether expired or existing contracts contain leases under the new definition of a lease; | |
| · | lease classification for expired or existing leases; and | |
| · | whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. |
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The Company also made the accounting policy decision not to recognize lease assets and liabilities for leases with a term of 12 months or less.
The Company recorded operating lease expense
of $
The Company has operating leases with future commitments as follows:
| September 30, | Amount | |||
| 2024 | $ | |||
| 2025 | ||||
| Total | $ | |||
Employees
The Company agreed to pay $360,000 per year and
$200,000 of targeted annual incentives to the Chief Executive Officer based on his employment agreement since July 1, 2020, of which currently
50% is paid in cash and 50% is accrued. The total outstanding accrued compensation as of September 30, 2023 and December 31, 2022 were
$
The Company agreed to pay $360,000 per year and
$200,000 of targeted annual incentives to the Chairman of the Board based on his employment agreement since July 1, 2020, of which currently
50% is paid in cash and 50% is accrued. The total outstanding accrued compensation as of September 30, 2023 and December 31, 2022 were
$
The Company agreed to pay $
The Company entered into a Management Agreement
effective May 31, 2021 for compensation to the principals of Nova in the form of an annual base salaries of $
| Year | Minimum Annual Nova EBITDA | Cash Annual Bonus | Series J Preferred Stock |
| 2021 | $ |
$ |
Shares |
| 2022 | $ |
$ |
Shares |
| 2023 | $ |
$ |
Shares |
| 2024 | $ |
$ |
Shares |
| 2025 | $ |
$ |
Shares |
| 36 |
| 16. | LEGAL PROCEEDINGS |
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business. Management is not currently aware of any such legal proceedings or claims that it believes will have a material adverse effect on the Company’s business, financial condition, or operating results.
| 17. | SEGMENT REPORTING |
The Company has three reportable operating segments as determined by management using the “management approach” as defined by the authoritative guidance on Disclosures about Segments of an Enterprise and Related Information:
| (1) | Tax Resolution Services (Platinum Tax) | |
| (2) | Real Estate (Edge View) | |
| (3) | Healthcare (Nova) |
These segments are a result of differences in the nature of the products and services sold. Corporate administration costs, which include, but are not limited to, general accounting, human resources, legal and credit and collections, are partially allocated to the three operating segments. Other revenue consists of nonrecurring items.
The Affordable Housing segment leases and sells mobile homes as an option for a homeowner wishing to avoid large down payments, expensive maintenance costs, large monthly mortgage payments and high property taxes and insurance which is a common trait of brick-and-mortar homes. Additionally, if bad credit is an issue preventing potential homeowners from purchasing a traditional house, the Company will provide a "lease to own" option so people secure their family home.
The Tax Resolution Services segment provides tax resolution services to individuals and companies that have federal and state tax liabilities. The Company collects fees based on efforts to negotiate and assist in the settlement of outstanding tax debts.
The Real Estate segment consists of Edge View, a real estate company that owns five (5) acres zoned medium density residential (MDR) with 12 lots already platted, six (6) acres zoned high-density residential (HDR) that can be platted in various configurations to meet current housing needs, and twelve (12) acres zoned in Lemhi County as Agriculture that is available for further annexation into the City of Salmon for development, as well as a common area for landowners to view wildlife, provide access to the Salmon River and fishing in a two (2) acre pond.
The Healthcare segment provides a full range of diagnostic and surgical services for injuries and disorders of the skeletal system and associated bones, joints, tendons, muscles, ligaments, and nerves.
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September 30, 2023 | December 31, 2022 | |||||||
| Assets: | ||||||||
| Financial Services | $ | $ | ||||||
| Healthcare | ||||||||
| Real Estate | ||||||||
| Others | ||||||||
| Consolidated assets | $ | $ | ||||||
| Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues: | ||||||||
| Financial Services | $ | $ | ||||||
| Healthcare | ||||||||
| Consolidated revenues | $ | $ | ||||||
| Cost of Sales: | ||||||||
| Financial Services | $ | $ | ||||||
| Healthcare | ||||||||
| Consolidated cost of sales | $ | $ | ||||||
| Income (Loss) from operations from subsidiaries | ||||||||
| Financial Services | $ | ( | ) | $ | ||||
| Healthcare | ||||||||
| Real Estate | ( | ) | ( | ) | ||||
| Income from operations from subsidiaries | $ | $ | ||||||
| Loss from operations from Cardiff Lexington | $ | ( | ) | $ | ( | ) | ||
| Total income from operations | $ | $ | ||||||
| Income (Loss) before taxes | ||||||||
| Financial Services | $ | ( | ) | $ | ||||
| Healthcare | ||||||||
| Real Estate | ( | ) | ( | ) | ||||
| Corporate, administration and other non-operating expenses | ( | ) | ( | ) | ||||
| Consolidated income (loss) before taxes | $ | $ | ( | ) | ||||
| 38 |
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Revenues: | ||||||||
| Financial Services | $ | $ | ||||||
| Healthcare | ||||||||
| Consolidated revenues | $ | $ | ||||||
| Cost of Sales: | ||||||||
| Financial Services | $ | $ | ||||||
| Healthcare | ||||||||
| Consolidated cost of sales | $ | $ | ||||||
| Income (Loss) from operations from subsidiaries | ||||||||
| Financial Services | $ | ( | ) | $ | ( | ) | ||
| Healthcare | ||||||||
| Real Estate | ( | ) | ( | ) | ||||
| Income from operations from subsidiaries | $ | $ | ||||||
| Loss from operations from Cardiff Lexington | $ | ( | ) | $ | ( | ) | ||
| Total income from operations | $ | $ | ||||||
| Income (Loss) before taxes | ||||||||
| Financial Services | $ | ( | ) | $ | ( | ) | ||
| Healthcare | ||||||||
| Real Estate | ( | ) | ( | ) | ||||
| Corporate, administration and other non-operating expenses | ( | ) | ( | ) | ||||
| Consolidated income (loss) before taxes | $ | $ | ( | ) | ||||
| 18. | SUBSEQUENT EVENTS |
The Company has evaluated its operations subsequent to September 30, 2023 to the date these condensed consolidated financial statements were issued and determined there was subsequent events or transactions the required recognition or disclosure in these consolidated financial statements.
The Company received the first net cash advance in the amount of $861,071 on October 9, 2023 from DML HC Series, LLC for the sale of accounts receivable and future claims in the amount of $1,428,571. (See Note 7)
On October 20, 2023, the Company issued 5,000 shares of series B preferred stock as compensation for the manager of Platinum Tax as bonus compensation.
On November 7, 2023, Platinum Tax was dissolved due to the significant decline in revenues and recurring operating losses.
On various dates in October and November 2023, the Company issued 227,000,000 shares of common stock upon the conversion of accrued interest and conversion cost of $17,400 and $1,000, respectively. (See Note 10, 37-2, and 40-1)
| 39 |
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following management’s discussion and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment and understanding of our plans and financial condition. The following financial information is derived from our financial statements and should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein.
Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” and “our company” are to Cardiff Lexington Corporation, a Nevada corporation, and its consolidated subsidiaries.
Special Note Regarding Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| · | our ability to successfully identify and acquire additional businesses; | |
| · | our ability to effectively integrate and operate the businesses that we acquire; | |
| · | our expectations around the performance of our current businesses; | |
| · | our ability to maintain our business model and improve our capital efficiency; | |
| · | our ability to effectively manage the growth of our business; | |
| · | our lack of operating history and ability to attain profitability; | |
| · | the competitive environment in which our businesses operate; | |
| · | trends in the industries in which our businesses operate; | |
| · | the regulatory environment in which our businesses operate under; | |
| · | changes in general economic or business conditions or economic or demographic trends in the United States, including changes in interest rates and inflation; | |
| · | our ability to service and comply with the terms of indebtedness; | |
| · | our ability to retain or replace qualified employees of our businesses; | |
| · | labor disputes, strikes or other employee disputes or grievances; | |
| · | casualties, condemnation or catastrophic failures with respect to any of our business’ facilities; | |
| · | costs and effects of legal and administrative proceedings, settlements, investigations and claims; and | |
| · | extraordinary or force majeure events affecting the business or operations of our businesses. |
In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
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In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Overview
We are an acquisition holding company focused on locating undervalued and undercapitalized companies, primarily in the healthcare industry, and providing them capitalization and leadership to maximize the value and potential of their private enterprises while also providing diversification and risk mitigation for our stockholders. Specifically, we have and will continue to look at a diverse variety of acquisitions in the healthcare sector in terms of growth stages and capital structures and we intend to focus our portfolio of subsidiaries approximately as follows: 80% will be targeted to established profitable niche small to mid-sized healthcare companies and 20% will be targeted to second stage startups in healthcare and related financial services (emerging businesses with a strong organic growth plan that is materially cash generative).
All of our operations are conducted through, and our income derived from, our various subsidiaries. We operate the following businesses through our wholly owned subsidiaries.
| · | Healthcare Business. Nova Ortho and Spine, PLLC, or Nova, which we acquired May 31, 2021, operates a group of regional primary specialty and ancillary care facilities throughout Florida that provide traumatic injury victims with primary care evaluations, interventional pain management, and specialty consultation services. We focus on plaintiff related care are and a highly efficient provider of emergency medical condition, or EMC, assessments. We provide a full range of diagnostic and surgical services for injuries and disorders of the skeletal system and associated bones, joints, tendons, muscles, ligaments, and nerves. From sports injuries, to sprains, strains, and fractures, our doctors are dedicated to helping patients return to active lifestyles. | |
| · | Financial Services (Tax Resolution) Business. Platinum Tax Defenders, or Platinum Tax, which we acquired on July 31, 2018, is a full-service tax resolution firm located in Los Angeles, California. Since 2011, we have been assisting all types of taxpayers resolve any and all issues with the IRS and applicable state tax agencies. We provide fee-based tax resolution services to individuals and companies that have federal and state tax liabilities by assisting clients to settle outstanding tax debts. | |
| · | Real Estate Business. Edge View Properties, Inc., or Edge View, which we acquired on July 16, 2014, is a real estate company that owns five (5) acres zoned medium density residential (MDR) with 12 lots already platted, six (6) acres zoned high-density residential (HDR) that can be platted in various configurations to meet current housing needs, and twelve (12) acres zoned in Lemhi County as Agriculture that is available for further annexation into the City of Salmon for development, as well as a common area for landowners to view wildlife, provide access to the Salmon River and fishing in a two (2) acre pond. Salmon is known as Idaho’s premier whitewater destination as well as one of the easier accesses to the Frank Church Wilderness Area - the largest wilderness in the lower 48 states. Salmon’s airport has service to Boise, Idaho and serves as a hub to access whitewater rafting start points and wilderness landing strips. Management has invested years working to develop a new and exciting housing development in Salmon, Idaho and plans to enter into a joint venture agreement with a developer for this planned concept development. |
We previously owned We Three, LLC dba Affordable Housing Initiative, or AHI, which was acquired on May 15, 2014 and sold on October 31, 2022. AHI leased and sold mobile homes and also provided a “lease to own” option.
| 41 |
Segments
During the three months ended September 30, 2023 and 2022, we had three reportable operating segments as determined by management using the “management approach” as defined by the authoritative guidance on Disclosures about Segments of an Enterprise and Related Information:
| (1) | Financial Services (Platinum Tax) | |
| (2) | Healthcare (Nova) | |
| (3) | Real Estate (Edge View) |
These segments are a result of differences in the nature of the products and services sold. Corporate administration costs, which include, but are not limited to, general accounting, human resources, legal and credit and collections, are partially allocated to the three operating segments. Other revenue consists of nonrecurring items.
The financial services segment provides tax resolution services to individuals and companies that have federal and state tax liabilities. It collects fees based on efforts to negotiate and assist in the settlement of outstanding tax debts.
The healthcare segment provides a full range of diagnostic and surgical services for injuries and disorders of the skeletal system and associated bones, joints, tendons, muscles, ligaments, and nerves.
The Real Estate segment consists of Edge View, a real estate company that owns five (5) acres zoned medium density residential (MDR) with 12 lots already platted, six (6) acres zoned high-density residential (HDR) that can be platted in various configurations to meet current housing needs, and twelve (12) acres zoned in Lemhi County as Agriculture that is available for further annexation into the City of Salmon for development, as well as a common area for landowners to view wildlife, provide access to the Salmon River and fishing in a two (2) acre pond.
Discontinued Operations
We and the managers of AHI entered into a resignation, release and buyback agreement and addendum, effective October 31, 2022, pursuant to which the managers purchased AHI in exchange for returning 175,045 shares of series F preferred stock. There was a loss on disposal in the amount of $217,769 on October 31, 2022, which represented net assets and liabilities at the time of sale back.
We had no net liabilities of discontinued operations at September 30, 2023 and December 31, 2022. We had $0 and $363,895 of gain from discontinued operations for the three months ended September 30, 2023 and 2022, respectively. We had $0 and $328,353 of gain from discontinued operations for the nine months ended September 30, 2023 and 2022, respectively.
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Results of Operations
Comparison of Three Months Ended September 30, 2023 and 2022
The following table sets forth key components of our results of operations during the three months ended September 30, 2023 and 2022, both in dollars and as a percentage of our revenue.
| September 30, 2023 | September 30, 2022 | |||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | |||||||||||||
| Revenue | ||||||||||||||||
| Financial services | $ | 32,264 | 0.94 % | $ | 219,872 | 6.62 % | ||||||||||
| Healthcare | 3,405,860 | 99.06 % | 3,103,409 | 93.38 % | ||||||||||||
| Total revenue | 3,438,124 | 100.00 % | 3,323,281 | 100.00 % | ||||||||||||
| Cost of sales | ||||||||||||||||
| Financial services | 5,604 | 0.16 % | 39,963 | 1.20 % | ||||||||||||
| Healthcare | 551,424 | 16.04 % | 1,094,794 | 32.94 % | ||||||||||||
| Total cost of sales | 557,028 | 16.20 % | 1,134,757 | 34.15 % | ||||||||||||
| Gross profit | 2,881,096 | 83.80 % | 2,188,524 | 65.85 % | ||||||||||||
| Operating expenses | ||||||||||||||||
| Depreciation expense | 3,365 | 0.11 % | 5,783 | 0.17 % | ||||||||||||
| Selling, general and administrative | 607,745 | 17.68 % | 685,026 | 20.61 % | ||||||||||||
| Total operating expenses | 611,110 | 17.77 % | 690,809 | 20.79 % | ||||||||||||
| Income from operations | 2,269,986 | 66.02 % | 1,497,715 | 45.07 % | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Other income | – | – | (2 | ) | (0.00)% | |||||||||||
| Gain on forgiveness of debt | – | – | 1,397,271 | 42.04 % | ||||||||||||
| Interest expense and finance charge | (226,418 | ) | (6.59)% | (3,430,785 | ) | (103.23)% | ||||||||||
| Conversion cost | (1,000 | ) | (0.03)% | – | – | |||||||||||
| Penalties and fees | (15,000 | ) | (0.44)% | – | – | |||||||||||
| Amortization of debt discounts | (46,048 | ) | (1.34)% | (92,868 | ) | (2.79)% | ||||||||||
| Total other expense, net | (288,466 | ) | (8.39)% | (2,126,384 | ) | (63.98)% | ||||||||||
| Net income (loss) before discontinued operations | 1,981,520 | 57.63 % | (628,669 | ) | (18.92)% | |||||||||||
| Gain from discontinued operations | – | – | 363,895 | 10.95 % | ||||||||||||
| Net income (loss) | $ | 1,981,520 | 57.63 % | $ | (264,774 | ) | (7.97)% | |||||||||
| 43 |
Revenue. Our total revenue increased by $114,843, or 3.46%, to $3,438,124 for the three months ended September 30, 2023 from $3,323,281 for the three months ended September 30, 2022. Such increase was primarily due to an increase in revenue from the healthcare segment.
The financial services segment generates revenue through the provision of tax resolution services to individuals and business owners. Revenue from the financial services segment decreased by $187,608, or 85.33%, to $32,264 for the three months ended September 30, 2023 from $219,872 for the three months ended September 30, 2022. Such decrease was primarily due to the loss of sales leads from the discontinued service with Optima Tax Relief, which affected the significant revenue reduction in the tax resolution business.
The healthcare segment generates revenue through a full range of diagnostic and surgical services. Revenue from the healthcare services segment increased by $302,451, or 9.75%, to $3,405,860 for the three months ended September 30, 2023 from $3,103,409 for the three months ended September 30, 2022. Such increase was primarily due to increased patients and Personal Injury Protection (PIP) services.
Cost of sales. Our total cost of sales decreased by $577,729 or 50.91%, to $557,028 for the three months ended September 30, 2023 from $1,134,757 for the three months ended September 30, 2022. Such a decrease was primarily due to a decrease in contractor services from the healthcare segment and terminated employees in the financial services segment due to the decreased revenue from financial service segment. As a percentage of revenue, our total cost of sales was 16.20% and 34.15% for the three months ended September 30, 2023 and 2022, respectively.
Cost of sales for the financial services segment consists of advertising, contract labor and merchant fees. Cost of sales for the financial services segment decreased by $34,359, or 85.98%, to $5,604 for the three months ended September 30, 2023 from $39,963 for the three months ended September 30, 2022. As a percentage of financial services revenue, cost of sales was 0.16% and 1.20% for the three months ended September 30, 2023 and 2022, respectively. Such a decrease was generally in line with the decrease in revenue from this segment.
Cost of sales for the healthcare segment consists of surgical center fees, physician and professional fees, salaries and wages and medical supplies. Cost of sales from the healthcare services segment decreased by $543,370, or 49.63%, to $551,424 for the three months ended September 30, 2023 from $1,094,794 for the three months ended September 30, 2022. As a percentage of healthcare revenue, cost of sales was 16.04% and 32.94% for the three months ended September 30, 2023 and 2022, respectively. This decrease was due to decreased surgical and laboratory contracted services.
Gross profit. As a result of the foregoing, our total gross profit increased by $692,572, or 31.65%, to $2,881,096 for the three months ended September 30, 2023 from $2,188,524 for three months ended September 30, 2022. Our total gross profit (percent of revenue) was 83.80% and 65.85% for September 30, 2023 and 2022, respectively.
Gross profit for the financial services segment decreased by $153,249, or 85.18%, to $26,660 for the three months ended September 30, 2023 from $179,909 for the three months ended September 30, 2022. Gross profit (percent of revenue) for the financial services segment was 82.63% and 81.82% for the three months ended September 30, 2023 and 2022, respectively.
Gross profit for the healthcare services segment increased by $845,821, or 42.11%, to $2,854,436 for the three months ended September 30, 2023 from $2,008,615 for the three months ended September 30, 2022. Gross profit (percent of revenue) for the healthcare segment was 83.81% and 64.72% for the three months ended September 30, 2023 and 2022, respectively.
Depreciation expense. Our depreciation expense was $3,365, or 0.10% of revenue, for the three months ended September 30, 2023, as compared to $5,783, or 0.17% of revenue, for the three months ended September 30, 2022.
Selling, general and administrative expenses. Our selling, general and administrative expenses consist primarily of accounting, auditing, legal and public reporting expenses, personnel expenses, including employee salaries and bonuses plus related payroll taxes, advertising expenses, professional advisor fees, bad debts, rent expense, insurance and other expenses incurred in connection with general operations. Our selling, general and administrative expenses decreased by $77,281, or 11.28%, to $607,745 for the three months ended September 30, 2023 from $685,026 for the three months ended September 30, 2022. As a percentage of revenue, our selling, general and administrative expenses were 17.68% and 20.61% for the three months ended September 30, 2023 and 2022, respectively. Such decrease was primarily due to the significant terminated employees in the financial services segment due to the decreased revenue and decreased laboratory fees and travel expense in our healthcare services business.
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Total other income (expense). We had $288,466 in total other expense, net, for the three months ended September 30, 2023, as compared to other expense, net, of $2,126,384 for the three months ended September 30, 2022. Other expenses, net, for the three months ended September 30, 2023 consisted of interest expense and finance charges of $226,418, amortization of debt discounts of $46,048, financing penalties and fees of $15,000 and conversion costs of $1,000. Other expense, net, for the three months ended September 30, 2022, consisted of interest expense and finance charges of $3,430,785 and amortization of debt discounts of $92,868, offset by gain on forgiveness of debt of $1,397,271.
Discontinued operations. For the three months ended September 30, 2023 and 2022, we recorded a gain from discontinued operations of $0 and $363,895, respectively.
Net income (loss). As a result of the cumulative effect of the factors described above, our net income was $1,981,520 for the three months ended September 30, 2023, as compared to net loss of $264,774 for the three months ended September 30, 2022, an increase of $2,246,294, or 848.38%.
Comparison of Nine Months Ended September 30, 2023 and 2022
The following table sets forth key components of our results of operations during the nine months ended September 30, 2023 and 2022, both in dollars and as a percentage of our revenue.
| September 30, 2023 | September 30, 2022 | |||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | |||||||||||||
| Revenue | ||||||||||||||||
| Financial services | $ | 304,967 | 3.12 % | $ | 1,156,729 | 12.42 % | ||||||||||
| Healthcare | 9,476,764 | 96.88 % | 8,154,934 | 87.58 % | ||||||||||||
| Total revenue | 9,781,731 | 100.00 % | 9,311,663 | 100.00 % | ||||||||||||
| Cost of sales | ||||||||||||||||
| Financial services | 53,730 | 0.55 % | 365,185 | 3.92 % | ||||||||||||
| Healthcare | 2,589,407 | 26.47 % | 2,982,418 | 32.03 % | ||||||||||||
| Total cost of sales | 2,643,137 | 27.02 % | 3,347,603 | 35.95 % | ||||||||||||
| Gross profit | 7,138,594 | 72.98 % | 5,964,060 | 64.05 % | ||||||||||||
| Operating expenses | ||||||||||||||||
| Depreciation expense | 11,365 | 0.12 % | 17,349 | 0.19 % | ||||||||||||
| Selling, general and administrative | 2,437,511 | 24.92 % | 2,625,503 | 28.20 % | ||||||||||||
| Total operating expenses | 2,448,876 | 25.04 % | 2,642,852 | 28.38 % | ||||||||||||
| Income from operations | 4,689,718 | 47.94 % | 3,321,208 | 35.67 % | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Other income | 205 | 0.00 % | 6 | 0.00 % | ||||||||||||
| Gain on forgiveness of debt | 390 | 0.00 % | 1,397,271 | 15.01 % | ||||||||||||
| Interest expense and finance charge | (1,766,041 | ) | (18.05)% | (6,686,772 | ) | (71.81)% | ||||||||||
| Conversion cost | (3,000 | ) | (0.03)% | – | – | |||||||||||
| Penalties and fees | (45,000 | ) | (0.46)% | – | – | |||||||||||
| Amortization of debt discounts | (94,664 | ) | (0.97)% | (249,120 | ) | (2.68)% | ||||||||||
| Total other expense, net | (1,908,110 | ) | (19.51)% | (5,538,615 | ) | (47.93)% | ||||||||||
| Net income (loss) before discontinued operations | 2,781,608 | 28.44 % | (2,217,407 | ) | (23.81)% | |||||||||||
| Gain from discontinued operations | – | – | 328,353 | 3.53 % | ||||||||||||
| Net income (loss) | $ | 2,781,608 | 28.44 % | $ | (1,889,054 | ) | (20.29)% | |||||||||
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Revenue. Our total revenue increased by $470,068, or 5.05%, to $9,781,731 for the nine months ended September 30, 2023 from $9,311,663 for the nine months ended September 30, 2022. Such increase was primarily due to an increase in revenue from the healthcare segment.
Revenue from the financial services segment decreased by $851,762, or 73.64%, to $304,967 for the nine months ended September 30, 2023 from $1,156,729 for the nine months ended September 30, 2022. Such decrease was primarily due to the loss of sales leads from the discontinued service with Optima Tax Relief, which affected the significant revenue reduction in the tax resolution business.
Revenue from the healthcare services segment increased by $1,321,830, or 16.21%, to $9,476,764 for the nine months ended September 30, 2023 from $8,154,934 for the nine months ended September 30, 2022. Such an increase was primarily due to increased Personal Injury Protection (PIP) services.
Cost of sales. Our total cost of sales decreased by $704,466 or 21.04%, to $2,643,137 for the nine months ended September 30, 2023 from $3,347,603 for the nine months ended September 30, 2022. Such decrease was primarily due to a decrease from both financial service segment and healthcare segment. As a percentage of revenue, our total cost of sales was 27.02% and 35.95% for the nine months ended September 30, 2023 and 2022, respectively.
Cost of sales for the financial services segment decreased by $311,455, or 85.29%, to $53,730 for the nine months ended September 30, 2023 from $365,185 for the nine months ended September 30, 2022. As a percentage of financial services revenue, cost of sales was 0.55% and 3.92% for the nine months ended September 30, 2023 and 2022, respectively. Such a decrease was generally in line with the decrease in revenue from this segment.
Cost of sales from the healthcare services segment decreased by $393,011, or 13.18%, to $2,589,407 for the nine months ended September 30, 2023 from $2,982,418 for the nine months ended September 30, 2022. As a percentage of healthcare revenue, cost of sales was 26.47% and 32.03% for the nine months ended September 30, 2023 and 2022, respectively. This decrease was due to decreased surgical contracted services and laboratory fees.
Gross profit. As a result of the foregoing, our total gross profit increased by $1,174,534, or 19.69%, to $7,138,594 for the nine months ended September 30, 2023 from $5,964,060 for the nine months ended September 30, 2022. Our total gross profit (percent of revenue) was 72.98% and 64.05% for the nine months ended September 30, 2023 and 2022, respectively.
Gross profit for the financial services segment decreased by $540,307, or 68.26%, to $251,237 for the nine months ended September 30, 2023 from $791,544 for the nine months ended September 30, 2022. Gross profit (percent of revenue) for the financial services segment was 82.38% and 68.43% for the nine months ended September 30, 2023 and 2022, respectively.
Gross profit for the healthcare services segment increased by $1,714,841, or 33.15%, to $6,887,357 for the nine months ended September 30, 2023 from $5,172,516 for the nine months ended September 30, 2022. Gross profit (percent of revenue) for the healthcare segment was 72.68% and 63.43% for the nine months ended September 30, 2023 and 2022, respectively.
Depreciation expense. Our depreciation expense was $11,365, or 0.12% of revenue, for the nine months ended September 30, 2023, as compared to $17,349, or 0.19% of revenue, for the nine months ended September 30, 2022.
Selling, general and administrative expenses. Our selling, general and administrative expenses decreased by $187,992, or 7.16%, to $2,437,511 for the nine months ended September 30, 2023 from $2,625,503 for the nine months ended September 30, 2022. As a percentage of revenue, our selling, general and administrative expenses were 24.92% and 28.20% for the nine months ended September 30, 2023 and 2022, respectively. Such decrease was primarily due to the significant terminated employees in the financial services segment due to the decreased revenue and decreased laboratory fees and travel expense into our healthcare services business.
Total other income (expense). We had $1,908,110 in total other expense, net, for the nine months ended September 30, 2023, as compared to other expense, net, of $5,538,615 for the nine months ended September 30, 2022. Other expense, net, for the nine months ended September 30, 2023 consisted of interest expense and finance charges of $1,766,041, amortization of debt discounts of $94,664, financing penalties and fees of $45,000 and conversion costs related to convertible note of $3,000, offset by gain on forgiveness of debt of $390 and other income of $205. Other expenses, net, for the nine months ended September 30, 2022 consisted of interest expense and finance charges of $6,686,772 and amortization of debt discounts of $249,120, offset by gain on forgiveness of debt of $1,397,271 and other income of $6.
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Discontinued operations. For the nine months ended September 30, 2023 and 2022, we recorded a gain from discontinued operations of $0 and $328,353, respectively.
Net income (loss). As a result of the cumulative effect of the factors described above, our net income was $2,781,608 for the nine months ended September 30, 2023, as compared to net loss of $1,889,054 for the nine months ended September 30, 2022, an increase of $4,670,662, or 247.25%.
Liquidity and Capital Resources
As of September 30, 2023, we had $181,343 in cash. To date, we have financed our operations primarily through revenue generated from operations, sales of securities, advances from stockholders and third-party and related party debt.
We believe, based on our operating plan, that current working capital and current and expected additional financing should be sufficient to fund operations and satisfy our obligations as they come due for at least one year from the financial statement issuance date. However, additional funds from new financing and/or future equity raises are required for continued operations and to execute our business plan and our strategy of acquiring additional businesses. The funds required to sustain operations ranges between $600,000 to $1 million and additional funds execute our business plan will depend on the size, capital structure and purchase price consideration that the seller of a target business deems acceptable in a given transaction. The amount of funds needed to execute our business plan also depends on what portion of the purchase price of a target business the seller of that business is willing to take in the form of seller notes or our equity or equity in one of our subsidiaries. Given these factors, we believe that the amount of outside additional capital necessary to execute our business plan on the low end (assuming target company sellers accept a significant portion of the purchase price in the form of seller notes or our equity or equity in one of our subsidiaries) ranges between $5 million to $7 million. If, and to the extent, that sellers are unwilling to accept a significant portion of the purchase price in seller notes and equity, then the cash required to execute our business plan could be as much as $10 million.
We intend to raise capital for additional acquisitions primarily through equity and debt financing. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. There is no guarantee that we will be able to acquire additional businesses under the terms outlined above.
Summary of Cash Flow
The following table provides detailed information about our net cash flow for the nine months ended September 30, 2023 and 2022.
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities from continuing operations | $ | (603,392 | ) | $ | (414,616 | ) | ||
| Net cash from discontinued operations | – | (328,353 | ) | |||||
| Net cash provided by financing activities | 557,933 | 407,480 | ||||||
| Net change in cash | (45,459 | ) | (335,489 | ) | ||||
| Cash and cash equivalents at beginning of period | 226,802 | 595,987 | ||||||
| Cash and cash equivalents at end of period | $ | 181,343 | $ | 260,498 | ||||
Our net cash used in operating activities from continuing operations was $603,392 for the nine months ended September 30, 2023, as compared to $414,616 for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, our net income of $2,781,608, an increase in accounts payable and accrued expenses of $687,135, an increase in accrued officer’s compensation of $514,000, an increase in accrued interest of $380,020, an increase in bad debt expense of $270,000, an increase in amortization of debt discount of $94,664, and an increase in fair value settled upon conversion of $141,406, offset by a decrease in accounts receivable of $5,509,958, were the primary drivers of our net cash used in operating activities. For the nine months ended September 30, 2022, our net loss of $1,889,054, a decrease in accounts receivable of $782,494, a decrease in gain on refinancing debt of $1,397,271 and a decrease in accrued interest of $219,082, offset by increase in accounts payable and accrued expense of $319,232, an increase in accrued officers’ compensation of $500,000, an increase in capital stock to be issued of $545,333, an increase of the amortization of debt discount of $249,120, an increase of non-cash items of $324,563 and loss on finance penalties and fees of $1,923,916, were the primary drivers of our net cash used in operating activities.
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We had no investing activities for the nine months ended September 30, 2023 and 2022.
Our net cash provided by financing activities was $557,933 for the nine months ended September 30, 2023, as compared to $407,480 for the nine months ended September 30, 2022. Net cash provided by financing activities for the nine months ended September 30, 2023 consisted of proceeds from convertible notes payable of $421,375, proceeds from related party notes payable of $129,220 and proceeds from line of credit of $44,254, offset by repayments of line of credit and SBA loan of $30,584 and payment of related party notes payable of $6,332. Net cash provided by financing activities for the nine months ended September 30, 2022 consisted of proceeds from convertible notes payable of $729,083 and proceeds from related party notes payable of $5,065, offset by preferred stock dividends of $310,522, repayment of convertible notes payable of $5,908, payment of related party notes payable of $7,948 and payment of the SBA loan described below of $2,290.
Convertible Notes
As of September 30, 2023, we had convertible debt outstanding net of amortized debt discount of $3,952,581. During the nine months ended September 30, 2023, we received net proceeds of $421,375 from convertible notes and converted $87,460 of convertible debt, $12,073 in accrued interest and $3,000 in conversion cost into 274,682,378 shares of common stock. The Company recognized $141,406 of interest expense and additional paid-in capital to adjust fair value for the debt settlement during the nine months ended September 30, 2023. For the nine months ended September 30, 2023, we recorded amortization of debt discounts of $94,664.
The following is a schedule of convertible notes payable outstanding as of September 30, 2023:
| Note # | Issuance Date | Maturity Date | Principal Balance | Accrued Interest | Unamortized Debt Discount | |||||||||||
| 9 | 09/12/2016 | 09/12/2017 | $ | 50,080 | $ | 21,648 | $ | – | ||||||||
| 10 | 01/24/2017 | 1/24/2018 | 55,000 | 78,103 | – | |||||||||||
| 10-1 | 02/10/2023 | 02/10/2024 | 50,000 | 4,767 | – | |||||||||||
| 10-2 | 03/30/2023 | 03/30/2024 | 25,000 | 1,890 | – | |||||||||||
| 10-3 | 08/11/2023 | 08/11/2024 | 25,000 | 514 | – | |||||||||||
| 29-2 | 11/08/2019 | 11/08/2020 | 36,604 | 26,731 | – | |||||||||||
| 31 | 08/28/2019 | 08/28/2020 | – | 8,385 | – | |||||||||||
| 37-1 | 09/03/2020 | 06/30/2021 | 113,667 | 59,059 | – | |||||||||||
| 37-2 | 11/02/2020 | 08/31/2021 | 113,167 | 57,746 | – | |||||||||||
| 37-3 | 12/29/2020 | 09/30/2021 | 113,166 | 56,710 | – | |||||||||||
| 38 | 02/09/2021 | 02/09/2022 | 18,540 | 35,181 | – | |||||||||||
| 39 | 04/26/2021 | 04/26/2022 | 168,866 | 67,470 | – | |||||||||||
| 40-1 | 09/22/2022 | 09/22/2023 | 2,600,000 | 255,499 | – | |||||||||||
| 40-2 | 11/04/2022 | 11/04/2023 | 68,666 | 6,208 | 4,327 | |||||||||||
| 40-3 | 11/28/2022 | 11/28/2023 | 68,667 | 5,756 | 4,327 | |||||||||||
| 40-4 | 12/21/2022 | 12/21/2023 | 68,667 | 5,323 | 4,327 | |||||||||||
| 40-5 | 01/24/2023 | 01/24/2024 | 90,166 | 6,151 | 5,965 | |||||||||||
| 40-6 | 03/21/2023 | 03/21/2024 | 139,166 | 7,359 | 9,242 | |||||||||||
| 40-7 | 6/5/2023 | 6/5/2024 | 139,166 | 4,461 | 24,913 | |||||||||||
| 40-8 | 6/13/2023 | 6/13/2024 | 21,167 | 632 | 3,624 | |||||||||||
| 40-9 | 7/19/2023 | 7/19/2024 | 35,500 | 710 | 7,100 | |||||||||||
| 40-10 | 7/24/2023 | 7/24/2024 | 14,000 | 261 | 2,849 | |||||||||||
| 41 | 8/25/2023 | 8/25/2024 | 5,000 | 49 | – | |||||||||||
| $ | 4,019,255 | $ | 710,613 | $ | 66,674 | |||||||||||
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Note 9. On September 12, 2016, we issued a convertible promissory note in the principal amount of $80,000 for services rendered, which matured on September 12, 2017. Note 9 is currently in default and accrues interest at a default interest rate of 20% per annum.
Notes 10, 10-1, and 10-3. On January 24, 2017, we issued a convertible promissory note in the principal amount of $80,000 for services rendered, which matured on January 24, 2018. Note 10 is currently in default and accrues interest at a default interest rate of 20% per annum. On February 10, 2023, we executed a second tranche under this note in the principal amount of $50,000 (Note 10-1). On March 30, 2023, we executed a third tranche under this note in the principal amount of $25,000 (Note 10-2). On August 11, 2023, we executed a fourth tranche under this note in the principal amount of $25,000 (Note 10-3). Notes 10-1, 10-2 and 10-3 accrue interest at a rate of 15% per annum.
Note 29-2. On May 10, 2019, we issued a convertible promissory note in the principal amount of $150,000. On November 8, 2019, this note (Note 29) was purchased by and assigned to an unrelated party. The amount assigned was the existing principal amount of $150,000 and accrued interest of $5,918, which was issued as Note 29-1, plus a new convertible promissory note in the principal amount of $62,367.12, which was issued as Note 29-2. Note 29-2 is currently in default and accrues interest at a default interest rate of 24% per annum.
Note 31. On August 28, 2019, we issued a convertible promissory note in the principal amount of $120,000, which matured on August 28, 2020. Note 31 is currently in default and accrues interest at a default interest rate of 24% per annum.
Notes 37-1, 37-2 and 37-3. On September 3, 2020, we issued a convertible promissory note in the principal amount of $200,000, with an original issue discount of $50,000, which could be drawn in several tranches. On September 3, 2020, we executed the first tranche in the principal amount of $67,000, less an original issue discount of $17,000, which matured on June 30, 2021 (Note 37-1). On November 2, 2020, we executed the second tranche in the principal amount of $66,500, less an original issue discount of $16,500, which matured on August 31, 2021 (Note 37-2). On December 29, 2020, we executed the third tranche in the principal amount of $66,500, less an original issue discount of $16,500, which matured on September 30, 2021 (Note 37-3). Notes 37-1, 37-2 and 27-3 are currently in default and accrue interest at a default interest rate of 18% per annum.
Note 38. On February 9, 2021, we issued a convertible promissory note in the principal amount $103,500, which matured on February 9, 2022. Note 38 is currently in default and accrues interest at a default interest rate of 22% per annum.
Note 39. On April 26, 2021, we issued a convertible promissory note in the principal amount $153,500, which matured on May 10, 2022. Note 39 is currently in default and accrues interest at a default interest rate of 22% per annum.
Note 40-1 through 40-10. On September 22, 2022, we issued a convertible promissory note in the principal amount of $2,600,000 in exchange for total of $4,791,099 of defaulted promissory notes balances (Note 40-1). On November 4, 2022, we executed a second tranche under this note in the principal amount of $68,667, less an original issue discount and fee of $18,667 (Note 40-2). On November 28, 2022, we executed the third tranche under this note in the principal amount of $68,667, less an original issue discount and fee of $18,667 (Note 40-3). On November 28, 2022, we executed a fourth tranche under this note in the principal amount of $68,667, less an original issue discount and fee of $18,667 (Note 40-4). On January 24, 2023, we executed a fifth tranche under this note in the principal amount of $90,166, less an original issue discount and fee of $25,166 (Note 40-5). On March 21, 2023, we executed a sixth tranche under this note in the principal amount of $136,666, less an original issue discount and fee of $39,166 (Note 40-6). On June 5, 2023, we executed a seventh tranche under this note in the principal amount of $136,667, less original issue discount and fee of $39,167 (Note 40-7). On June 13, 2023, we executed an eighth tranche under this note in the principal amount of $21,167, less original issue discount and fee of $5,167 (Note 40-8). On July 19, 2023, we executed a ninth tranche under this note in the principal amount of $35,500, less an original issue discount and fee of $8,875 (Note 40-9). On July 24, 2023, we executed a tenth tranche under this note in the principal amount of $14,000, less an original issue discount and fee of $3,500 (Note 40-10). All of the Note 40 tranches mature in one year from the note issuance date and accrue interest at a rate of 10% per annum.
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Notes 41
On August 25, 2023, we issued a twelve-month convertible promissory note in the principal amount of $5,000 to our CEO for our operation expenses. The rate of interest is 10% per annum.
Lines of Credit
In February 2018, we entered into a revolving line of credit with a financial institution for $92,500 which was personally guaranteed by the manager of Platinum Tax. The loan accrues interest at 11.95% as of September 30, 2023. As of September 30, 2023, the outstanding balance was $8,622.
On September 29, 2023, we entered into a two-year revolving purchase and security agreement with DML HC Series, LLC to sell Nova’s accounts receivables for a revolving financing up to a maximum advance amount of $4.5 million. As of September 30, 2023, we had no outstanding balance against the revolving receivable line of credit.
Small Business Administration Loan
On June 2, 2020, we obtained a loan from the U.S. Small Business Administration, or SBA, in the principal amount of $150,000 with an interest rate of 3.75% and a maturity date of June 2, 2050. We reclassified $5,723 of accrued interest to the principal amount for the nine months ended September 30, 2023. The principal balance and accrued interest at September 30, 2023 was $149,655 and $0, respectively.
Debenture
On March 12, 2009, we issued a debenture in the principal amount of $20,000. The debenture bears interest at 12% per annum and matured on September 12, 2009. The balance of the debenture was $10,989 at September 30, 2023 and the accrued interest was $7,215. We assigned all of our receivables from consumer activations of our rewards program as collateral on this debenture.
Related Party Loans
From time to time, the previous owner and current manager of Platinum Tax loaned funds to Platinum Tax to cover short term operating needs. The amount owed as of September 30, 2023 was $159,662.
In connection with the acquisition of Edge View on July 16, 2014, we assumed amounts due to previous owners who are current managers of Edge View. These amounts are due on demand and do not bear interest. The balance of these amounts are $4,979 as of September 30, 2023.
We have obtained short-term advances from the Chairman of the Board that are non-interest bearing and due on demand. As of September 30, 2023, we owed the Chairman $123,442.
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Critical Accounting Policies
The preparation of our unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission, or the SEC, on September 30, 2023.
Off Balance Sheet Arrangements
As of September 30, 2023, we had no off-balance sheet arrangements.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable.
| ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(e) of the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of September 30, 2023. Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer determined that, because of the material weaknesses described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which we are still in the process of remediating as of September 30, 2023, our disclosure controls and procedures were not effective. Specifically, we did not design and maintain effective controls related to separation of duties as it relates to the preparation and review of financial statements and monitoring, documenting over internal control procedures and environment. Investors are directed to Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for the description of these weaknesses.
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
We have evaluated the material weakness described above and our management and board of directors are committed to the design and successful implementation of internal control over financial reporting as promptly as possible. We currently plan to evaluate our updated internal controls design and determine whether the controls have operated effectively during the year ended of 2023 in order to fully remediate the aforementioned material weakness in our internal control over financial reporting.
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As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, our management has identified the steps necessary to address the material weaknesses, and in the third quarter of 2023, we continued to implement the following remedial procedures:
| · | We plan to make necessary changes by providing training to our financial team and our other relevant personnel on the GAAP accounting guidelines applicable to financial reporting requirements. | |
| · | We plan to implement proper documentation procedures for key functional areas, control objectives and our workflows. | |
| · | We plan to reinforce effective compensating controls can improve the design of the current process with limited human resources. | |
| · | We plan to develop a more comprehensive review process over our accounting policies and procedures to ensure that all required disclosures are included in our consolidated financial statements. | |
| · | We plan to perform a review of key business process controls related to high-risk financial statement accounts, such as revenue, accounts receivables, convertible notes, and significant transactions, which resulted in addition of newly developed documented control activities, in order to mitigate material weakness and strengthen the overall control environments. |
We intend to complete the remediation of the material weaknesses discussed above as soon as practicable, but we can give no assurance that we will be able to do so. Designing and implementing an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weaknesses that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.
Changes in Internal Control Over Financial Reporting
Other than in connection with the implementation of the remedial measures described above, there were no changes in our internal controls over financial reporting during the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS. |
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
| ITEM 1A. | RISK FACTORS. |
Not applicable.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
We have not sold any equity securities during the three months ended September 30, 2023 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.
We did not repurchase any of our common shares during the three months ended September 30, 2023.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
| ITEM 5. | OTHER INFORMATION. |
None.
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| ITEM 6. | EXHIBITS. |
| Exhibit No. | Description of Exhibit | |
| 3.1 | Amended and Restated Articles of Incorporation Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.2 | Certificate of Designation of Series A Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.3 | Certificate of Designation of Series B Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.3 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.4 | Certificate of Designation of Series C Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.4 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.5 | Certificate of Designation of Series E Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.5 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.6 | Certificate of Designation of Series F-1 Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.6 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.7 | Certificate of Designation of Series I Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.7 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.8 | Certificate of Designation of Series J Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.8 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.9 | Certificate of Designation of Series L Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.9 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.10 | Certificate of Designation of Series N Senior Convertible Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K filed on June 6, 2023) | |
| 3.11 | Certificate of Designation of Series R Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.11 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.12 | Certificate of Designation of Series X Senior Convertible Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.12 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.13 | Amended and Restated Bylaws of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed on June 6, 2023) | |
| 4.1 | Common Stock Purchase Warrant issued by Cardiff Lexington Corporation to SILAC Insurance Company on May 21, 2021 (incorporated by reference to Exhibit 4.2 to the Annual Report on Form 10-K filed on June 6, 2023) | |
| 10.1* | Revolving Purchase and Security Agreement | |
| 10.2* | ||
| 31.1* | Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certifications of Principal Financial and Accounting Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1** | Certifications of Principal Executive Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2** | Certifications of Principal Financial and Accounting Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
______________
*Filed herewith
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: November 14, 2023 | CARDIFF LEXINGTON CORPORATION |
| /s/ Alex Cunningham | |
| Name: Alex Cunningham | |
| Title: Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ Zia Choe | |
| Name: Zia Choe | |
| Title: Interim Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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