CDIX 10-Q
Cardiff Lexington Corp (CDIX)
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
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 complying 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 ☐
No
As of November 5, 2024, 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, 2024
TABLE OF CONTENTS
| PART I | ||
| FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 3 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 47 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 57 |
| Item 4. | Controls and Procedures | 57 |
| PART II | ||
| OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 59 |
| Item 1A. | Risk Factors | 59 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 59 |
| Item 3. | Defaults Upon Senior Securities | 59 |
| Item 4. | Mine Safety Disclosures | 59 |
| Item 5. | Other Information | 59 |
| Item 6. | Exhibits | 61 |
| 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, 2024 (UNAUDITED) AND DECEMBER 31, 2023
| September 30, 2024 | December 31, 2023 (Restated) | |||||||
| 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, net | ||||||||
| Due from related party | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expense | $ | $ | ||||||
| Accrued expenses - related parties | ||||||||
| Accrued interest | ||||||||
| Right of use – lease liabilities | ||||||||
| Due to director and officer | ||||||||
| Notes payable – current portion | ||||||||
| Line of credit | ||||||||
| Convertible notes payable, net of debt discounts of $ | ||||||||
| Net liabilities of discontinued operations | ||||||||
| Total current 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, 2024 and December 31, 2023, respectively | ||||||||
| Redeemable Series R Senior Convertible Preferred Stock - shares authorized, $0.001 par value, stated value of $, and , shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Redeemable Series X Senior Convertible Preferred Stock - shares authorized, $0.001 par value, stated value of $ par value; shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Total Mezzanine Equity | ||||||||
| Stockholders' equity | ||||||||
| Series B Preferred Stock - shares authorized, $0.001 par value, stated value of $, and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Series C Preferred Stock - shares authorized, $0.001 par value, stated value of $, and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Series E Preferred Stock - shares authorized, $0.001 par value, stated value $, and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Series F-1 Preferred Stock - shares authorized, $0.001 par value, stated value $, and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Series I Preferred Stock - shares authorized, $0.001 par value, stated value $, and issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Series J Preferred Stock - shares authorized, $0.001 par value, stated value $, and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Series L Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at September 30, 2024 and December 31, 2023 | ||||||||
| Series Y Senior Convertible Preferred Stock - shares authorized, $0.001 par value, stated value of $, and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Common Stock; shares authorized, $ par value; and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| 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, 2024 AND 2023
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 (Restated) | 2024 | 2023 (Restated) | |||||||||||||
| REVENUE | $ | $ | $ | $ | ||||||||||||
| COST OF SALES | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Depreciation expense | ||||||||||||||||
| Share based compensation | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS | ( | ) | ( | ) | ||||||||||||
| OTHER (EXPENSE) INCOME | ||||||||||||||||
| Other (expense) income | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain on debt refinance and forgiveness | ||||||||||||||||
| Penalties and fees | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of debt discounts | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other (expense) income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET (LOSS) INCOME BEFORE DISCONTINUED OPERATIONS | ( | ) | ( | ) | ||||||||||||
| LOSS FROM DISCONTINUED OPERATIONS | ( | ) | ( | ) | ( | ) | ||||||||||
| NET (LOSS) INCOME FOR THE PERIOD | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| PREFERRED STOCK DIVIDENDS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| BASIC (LOSS) INCOME PER SHARE | ||||||||||||||||
| CONTINUING OPERATIONS | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| DISCONTINUED OPERATIONS | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| DILUTED (LOSS) INCOME PER SHARE | ||||||||||||||||
| CONTINUING OPERATIONS | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| DISCONTINUED OPERATIONS | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING – BASIC | ||||||||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING – DILUTED | ||||||||||||||||
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 (DEFICIT)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(UNAUDITED)
Three Months Ended September 30, 2024:
Preferred Stock Series A, I and Y | Preferred Stock Series B, E, F-1, J and L | Preferred Stock Series C | Common Stock | Additional Paid-In | Accumulated | Total
Stockholders’ | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2024 (Restated) | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||
| Conversion of series B preferred stock | – | ( | ) | ( | ) | – | ||||||||||||||||||||||||||||||||||||||
| Conversion of series C preferred stock | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Conversion of series F-1 preferred stock | – | ( | ) | ( | ) | – | ||||||||||||||||||||||||||||||||||||||
| Conversion of series I preferred stock | ( | ) | ( | ) | – | – | ||||||||||||||||||||||||||||||||||||||
| Issuance of series Y preferred stock | – | – | – | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Common stock issued in legal settlement | – | – | – | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Preferred stock Dividends | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net income | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||
| 6 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(UNAUDITED)
(continued)
Nine Months Ended September 30, 2024:
Preferred Stock Series A, I and Y | Preferred Stock Series B, E, F-1, J and L | Preferred Stock Series C | Common Stock | Additional Paid-In | Accumulated | Total
Stockholders’ | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 (Restated) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||
| Conversion of convertible notes payable | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Conversion of series B preferred stock | – | ( | ) | ( | ) | – | ||||||||||||||||||||||||||||||||||||||
| Conversion of series C preferred stock | – | – | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Conversion of series E preferred stock | – | ( | ) | ( | ) | – | ||||||||||||||||||||||||||||||||||||||
| Conversion of series F-1 preferred stock | – | ( | ) | ( | ) | – | ||||||||||||||||||||||||||||||||||||||
| Conversion of series I preferred stock | ( | ) | ( | ) | – | – | ||||||||||||||||||||||||||||||||||||||
| Conversion of series J preferred stock | – | ( | ) | ( | ) | – | ||||||||||||||||||||||||||||||||||||||
| Issuance of series I preferred stock to officers | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Issuance of series Y preferred stock | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Cancellation of series C preferred stock | – | – | ( | ) | ( | ) | – | |||||||||||||||||||||||||||||||||||||
| Common stock issued for services | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued to board members | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued in Red Rock settlement | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued in legal settlement | – | – | – | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Preferred stock Dividends | – | – | – | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Net income | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||
| 7 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(UNAUDITED)
(continued)
Three Months Ended September 30, 2023:
Preferred Stock Series A and I | Preferred Stock Series B, E, F-1, J and L | Preferred Stock Series C | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ (Deficit) | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 (Restated) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||
| Issuance of preferred stock series E | – | – | – | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes payable | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Preferred stock Dividends | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net income | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 (Restated) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2023:
Preferred Stock Series A and I | Preferred Stock Series B, E, F-1, J and L | Preferred Stock Series C | Common Stock | Additional Paid-In | Accumulated | Total
Stockholders’ (Deficit) | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 (Restated) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||
| Issuance of preferred stock series B | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock series E | – | – | – | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Conversion of convertible notes payable | – | – | – | |||||||||||||||||||||||||||||||||||||||||
| Preferred stock Dividends | – | – | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net income | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 (Restated) | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 8 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(UNAUDITED)
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 (Restated) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of debt discount | ||||||||
| Bad debt | ||||||||
| Change in estimate for settlement realization rate | ||||||||
| Conversion and note issuance cost | ||||||||
| Share issuance for compensations to directors and officers | ||||||||
| Share issuance for service rendered | ||||||||
| Fair value settled upon conversion | ||||||||
| Gain on settlement or forgiveness of debt | ( | ) | ( | ) | ||||
| (Increase) decrease in: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Right of use - assets | ( | ) | ||||||
| Prepaids and other current assets | ( | ) | ||||||
| Increase (decrease) in: | ||||||||
| Accounts payable and accrued expense | ( | ) | ||||||
| Accrued officers compensation | ( | ) | ||||||
| Accrued interest | ||||||||
| Right of use - liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) Discontinued Operations – Operating | ( | ) | ||||||
| FINANCING ACTIVITIES | ||||||||
| Payments to director | ( | ) | ||||||
| Repayment of SBA loans | ( | ) | ( | ) | ||||
| Proceeds from convertible notes payable | ||||||||
| Payment of convertible notes | ( | ) | ||||||
| Net proceeds from line of credit | ||||||||
| Payment of note payable | ( | ) | ||||||
| Proceeds from note payable – related party | ||||||||
| Payment of dividends on preferred stock | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net cash provided by Discontinued Operations – Financing | ||||||||
| NET INCREASE (DECREASE) IN CASH | ( | ) | ||||||
| CASH, BEGINNING OF PERIOD | ||||||||
| CASH, END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the year for Interest | $ | $ | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Common stock issued upon conversion of notes payable | $ | $ | ||||||
| Common stock issued upon conversion of preferred stock | $ | $ | ||||||
| Series Y preferred stock issued in exchange of convertible notes payable | $ | $ | ||||||
| Promissory note payable issued in settlement agreement | $ | $ | ||||||
| Right of use assets acquired | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 9 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(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 predominantly conducted through, and its income derived from, its Nova Ortho and Spine, LLC (“Nova”) subsidiary. Its subsidiaries include:
| · | Nova, which was acquired on May 31, 2021; | |
| · | Edge View Properties, Inc. (“Edge View”), which was acquired on July 16, 2014; and | |
| · | Platinum Tax Defenders (“Platinum Tax”), which was acquired on July 31, 2018 and sold on November 10, 2023. As a result, Platinum Tax is presented as a discontinued operation. |
Principles of Consolidation
The consolidated financial statements include the accounts of Cardiff and its wholly owned subsidiaries, Nova, Edge View, and Platinum Tax and (collectively, the “Company”). Subsidiaries shown as discontinued operations include Platinum Tax. All significant intercompany accounts and transactions are eliminated in consolidation.
Reverse Stock Split
On January 9, 2024, the Company effected a
All share and per share data throughout these consolidated financial statements have been retroactively adjusted to reflect the reverse stock split. The total number of authorized shares of common stock did not change. As a result of the reverse stock split, an amount equal to the decreased value of the common stock was reclassified from “common stock” to “additional paid-in capital.”
| 10 |
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.
Accounts Receivable
In the normal course of business, the Company is in the lien based medical industry providing orthopedic healthcare servicing an uninsured market insulated by a letter of protection which insulates the Company and insures payment in full from insurance settlements. Accounts receivable consists of amounts due from attorneys and insurance providers for services provided to patients under the letter of protection. Accounts receivable are recorded at the expected settlement realization amount, which is less contractual adjustments and an allowance for credit losses. The Company recognizes an allowance for credit losses for its accounts receivable to present the net amount expected to be collected as of the balance sheet date. This allowance is determined based on the history of net settlements received, where the net settlement amount is not collected. No collection can happen if no settlement is reached with the defendant’s insurance company and the plaintiff (the patient) loses the case at trial, or the case is abandoned, then the Company will not be able to collect on its letter of protection and its receivable will not be collected. The Company monitors outstanding cases as they develop through ongoing discussions with attorneys, doctors and third-party medical billing company and additionally monitors settlement realization rates over time. Additionally, the Company considers economic factors and events or trends expected to affect future collections experience. The no collection history of the Company’s customers is considered in future assessments of collectability as these patterns are established over a longer period. The Company uses the term collection and collection rate in its disclosures to describe the historical less than 1% occurrence of not collecting under a contract, which aligns with the Company’s credit loss accounting under ASC 326.
The Company does not have a significant exposure
to credit losses as it has historically had a less than 1.0% loss rate where the Company received no settlement amount for its outstanding
accounts receivable. Although possible, claims resulting in zero collection upon settlement are rare based on the Company’s historical
experience and has historically been 0.5% to 1.0% of its outstanding accounts receivable, thereby resulting in a collection rate of 99%.
The Company uses the loss rate method to record its allowance for credit losses. The Company applies the loss rate method by reviewing
its zero collection history on a quarterly basis and updating its estimates of credit losses to adjust for changes in loss data. The Company
typically collects on its accounts receivable between eighteen and twenty-four months after recording. The Company does not record an
allowance for credit losses based on an aging of its accounts receivable as the aging of the Company’s receivables do not influence
the credit loss rate due to the nature of its business and the letter of protection. The Company does not adjust its receivables for the
effects of a significant financing component at contract inception as the timing of variable consideration is determined by the settlement,
which is outside of the Company’s control. As of September 30, 2024 and December 31, 2023, the Company’s allowance for
credit losses 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 |
| 11 |
Goodwill
Goodwill is not amortized but is evaluated for
impairment annually or when indicators of a potential impairment are present. 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. Goodwill
is tested first for impairment based on qualitative factors on an annual basis or in between if an event occurs or circumstances change
that indicate the fair value may be below its carrying amount, otherwise known as a ‘triggering event’. An assessment is made
of these qualitative factors as such to determine whether it is more likely than not the fair value is less than the carry amount, including
goodwill. The annual evaluation for impairment of Goodwill, if needed, 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, 2024 and 2023, 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 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.
Revenue Recognition
The Company’s primary source of revenue is its healthcare subsidiary, which records revenues from providing licensed and/or certified orthopedic procedures. Revenue is recognized at a point in time in accordance with ASC 606 and at an estimated net settlement realization rate based on gross billed charges. The Company’s healthcare subsidiary does not have contract liabilities or deferred revenue as there are no amounts prepaid for services. The Company applies the following five-step ASC 606 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 obligations | |
| · | Recognition of revenue when performance obligations are satisfied. |
At contract inception, 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 a performance obligation and assesses whether each promised service is distinct.
The Company’s contracts 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.
| 12 |
Accordingly, the Company recognizes net revenue 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 the Company’s patients are satisfied; generally, at the time of patient care.
In determining net revenue to record under ASC 606, the Company must estimate the transaction price, including estimates of variable consideration in the contract at inception. In order to estimate variable consideration, the Company uses established billings rates (also described as “gross charges”) for the procedures being performed, however, the 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 by the customer, insurance carriers and other payors, and therefore are not reported in the consolidated financial statements at that rate. The Company is typically paid amounts based on established charges per procedure with guidance from the annually updated Current Procedural Terminology (“CPT”) guidelines that designates relative value units and a suggested range of charges for each procedure which is then assigned a CPT code. This gross charge 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. These adjustments are considered variable consideration under ASC 606 and are deducted from the calculated fee to arrive at the net transaction price. The Company also estimates changes in the contract price as a result of price concessions, changes to deductibles, co-pays and other contractual adjustments to determine the eventual settlement amount the Company expects to receive. The Company uses the term settlement realization in its disclosures to describe the amount of cash the Company expects to receive based on its estimate of the transaction price under the expected value method of ASC 606.
Where appropriate, the Company utilizes the expected value method to determine the appropriate amount for estimates of variable consideration, which has been based on a historical 12-month lookback of its actual settlement realization rates. The estimates of reserves established for variable consideration reflect current contractual requirements, the Company’s historical experience, specific known market events and trends, industry data and forecasted patient data and settlement patterns. Settlement realization patterns are assessed based on actual settlements and based on expected settlement realization trends obtained from discussions with attorneys, doctors and our third-party medical billing company. Settlement amounts are negotiated, and prolonged settlement negotiations are not indicative of a greater likelihood of reduced settlement realization or zero settlement.
The Company may accept a lower settlement realization rate in order to receive faster payment. The Company obtains information about expected settlement realization trends from discussions with doctors and attorneys and its third-party medical billing company vendor, which handles settlement claims and negotiations. Settlement amounts are presented to the Company’s third-party medical billing company vendor.
Settlement rates of 49% or higher based on gross billed amounts are typically accepted without further negotiation. Proposed settlement rates below 49% are negotiated when possible and longer negotiations typically result in higher settlement rates. If the Company accepts a lower settlement realization rate in order to receive payments more quickly, the Company considers that a price concession and estimates these concessions at contract inception. The various forms of variable consideration described above included in the transaction price may be constrained and are included in net revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company has not constrained any of its estimates of variable consideration for any of the periods presented.
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. As described above, 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 and other adjustments based on its historical settlement realization experience. 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.
| 13 |
The Company satisfies performance obligations as services are performed and then billed to the patient. Payment in most cases is made by an attorney for such services to our patients which are due upon final settlement of patients claims. During the claims process, legal counsel warranties such claim through the letter of protection, which is sent to the Company, as a medical provider, on behalf of the client patient. This letter states that the attorney is responsible for paying the client’s medical bills when the case is fully developed and settles. The medical professional agrees to provide treatment to the injured person and refrain from attempting to collect payment as it is developing and until the case is resolved. Once the personal injury case is finalized with the insurance company, the attorney pays the outstanding medical bills from the settlement.
Settlement Rates
Prior to its fiscal year 2024, the Company
has historically had a 49% settlement realization rate from its total gross billed charges. Accordingly, the Company has historically
recognized net healthcare service revenue as 49% of gross billed amounts. During the nine months ended September 30, 2024, the Company
underwent efforts to accelerate cash settlements by accepting lower settlement realization rates in order to settle outstanding accounts
receivable more quickly, which is expected to continue for the foreseeable future. This new initiative caused the Company to reassess
the average settlement rate used to recognize healthcare service revenue as a prospective change in estimate given new information available.
Accordingly, during the third quarter of 2024, the Company completed a thorough review of its third-party billing data, including reviewing
historical reports and new reporting methods as a part of its updated analysis. Based upon this review it was determined that a 24-month
lookback period should be used in the analysis of its historical settlement realization rates. Accordingly, its estimate of its settlement
realization rate was reduced from 49% to 44%, resulting in a $
The Company will continue to evaluate its estimate of its settlement realization rates in the future, which will include a monthly review of the Company’s trailing 24-month historical settlement realization rate, along with estimates of current and pending settlements through ongoing discussions with attorneys, doctors and the Company’s third-party medical billing company in order to determine its variable consideration under ASC 606 and the net transaction price. The Company will update its settlement realization rate estimate used in determining its accounts receivable and revenue each quarter based on this review.
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 settled on a contingency
basis. Prior to April 2023, these cases were sold to a factor who bears the risk of economic benefit or loss. Generally, the sale of these
cases to a third-party factor resulted in an approximate 54% reduction from the accounts receivables amounts. After selling patient cases
to the factor, any additional funds settled by us were remitted to the factor. The Company evaluated the factored adjustments considering
the actual factored amounts per patient on a quarterly interval, and the reductions from accounts receivable that were factored were recorded
in finance charges as other expenses on the consolidated statement of operations. As a result of the Company’s eighteen to twenty-four
month settlement realization timeframe, the Company has an accrued liability resulting from the settlement of receivables sold to the
third-party factors which fluctuates as settlements are made and remitted to those third-party factors. These accounts receivables sold
to these third-party factors are not included in the Company’s financial statements accounts receivable balance once sold and therefore
are not part of the assessment of the net realizable value of accounts receivable. For the nine months ended September 30, 2023, the Company
factored a total of $
Advertising Costs
Advertising costs are expensed as incurred. Advertising
costs are included as a component of cost of sales in the consolidated statements of operations and changes in stockholders’ equity.
The Company recognized advertising and marketing expense of $
| 14 |
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 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, series R 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 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 Financial Accounting Standards Board (“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 the consolidated statements of operations.
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.
| 15 |
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, 2024 and 2023, the Company
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 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 Company had sustained recurring operating losses since its inception
and has an accumulated deficit of $
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 is in continuous discussions with 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, if overall Company expenses increase, the Company may need to implement 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.
Recently Issued Accounting Standards
The FASB issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting: Improvements to Reportable Segment Disclosures” (“Topic 280”) in November 2023. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. Topic 280 improves “reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.” In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The purpose of the amendments is to enable “investors to better understand an entity’s overall performance” and assess “potential future cash flows.” Management is evaluating the impact of ASU 2023-07 on the consolidated financial statements and does not expect there to be any changes or impact to the financial statements.
| 16 |
Recently Adopted Accounting Standards
The FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 81540).” The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within that period. The FASB also specified that an entity must adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period, other than the first interim period of their fiscal year. ASU 2020-06 reduces the number of accounting models for convertible debt and convertible preferred stock instruments and makes certain disclosure amendments to improve the information provided to users. There were no material impacts on the consolidated financial statements at adoption.
| 2. |
RESTATEMENT OF FINANCIAL STATEMENTS
|
During the preparation of the financial statements for the year ended December 31, 2023, the Company identified and corrected its classification and accounting treatment for its series R convertible preferred stock and the related dividend accrual. Pursuant to ASC 250, Accounting changes and error corrections issued by FASB and Staff Accounting Bulletin 99 Materiality, issued by Securities and Exchange Commission, the Company determined the impact of the error was immaterial. The impact of the error correction is reflected in the consolidated balance sheet as of September 30, 2023 as a $274,982 increase to the mezzanine equity and offsetting decrease to the series R convertible preferred stock and subject to possible redemption mezzanine equity line item. In addition, the impact of the unpaid dividend accrual was reflected as of September 30, 2023 as a $24,681 increase to mezzanine equity and offsetting decrease to the accumulated deficits.
During the preparation of the financial statements
for three months ended March 31, 2024, the Company identified and corrected its classification for all its outstanding common stock amount
per par value of $
On November 10, 2023, the Company sold Platinum Tax, which was a full-service tax resolution firm located in Los Angeles, California. The Company presented in prior periods operating loss as loss from discontinued operations of $3,705 and $93,005 on the consolidated statement of operations for the three and nine months ended September 30, 2023, respectively.
The impact of the error corrections also reflected a $136.12 increase of basic earnings per share, and a $2.30 increase of diluted earnings per share on the consolidated statement of operations for the three months ended September 30, 2023. For the nine months ended September 30, 2023, the impact of the error correction reflected a $167.33 increase of basic earnings per share, and an increase of $2.40 of diluted earnings per share.
The following tables summarize the impact of the corrections on the Company’s condensed consolidated balance sheet as of September 30, 2023, the condensed consolidated statement of operations for the three and nine months ended September 30, 2023, and the condensed consolidated statement of cash flows for the nine months ended September 30, 2023:
| Balance sheet | ||||||||||||
| Impact of correction of error | ||||||||||||
| September 30, 2023 (Unaudited) | As previously reported | Adjustments | As restated | |||||||||
| Total assets | $ | $ | ( | ) | $ | |||||||
| Total liabilities | ( | ) | ||||||||||
| Mezzanine equity | ||||||||||||
| Total stockholders' equity | $ | $ | ( | ) | $ | |||||||
| 17 |
Statement of operations
| Impact of correction of error | ||||||||||||
| Three months ended September 30, 2023 (Unaudited) | As previously reported | Adjustments | As restated | |||||||||
| Revenue | $ | $ | ( |
) | $ | |||||||
| Cost of sales | ( |
) | ||||||||||
| Gross profit | ( |
) | ||||||||||
| Operating expense | ( |
) | ||||||||||
| Income from operations | ||||||||||||
| Other income (expense), net | ( |
) | ( |
) | ||||||||
| Net income before discontinued operations | ||||||||||||
| Loss from discontinued operations | ( |
) | ( |
) | ||||||||
| Net income for the period | $ | $ | $ | |||||||||
| Preferred stock dividends | $ | ( |
) | $ | $ | ( |
) | |||||
| Net income attributable to common shareholders | $ | $ | $ | |||||||||
| Basic earnings per share for continuing operations | $ | $ | $ | |||||||||
| Diluted earnings per share for continuing operations | $ | $ | $ | |||||||||
| Impact of correction of error | ||||||||||||
| Nine months ended September 30, 2023 (Unaudited) | As previously reported | Adjustments | As restated | |||||||||
| Revenue | $ | $ | ( | ) | $ | |||||||
| Cost of sales | ( | ) | ||||||||||
| Gross profit | ( | ) | ||||||||||
| Operating expense | ( | ) | ||||||||||
| Income from operations | ||||||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||
| Net income before discontinued operations | ||||||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||||||
| Net income for the period | $ | $ | $ | |||||||||
| Preferred stock dividends | $ | ( | ) | $ | $ | ( | ) | |||||
| Net income attributable to common shareholders | $ | $ | $ | |||||||||
| Basic earnings per share for continuing operations | $ | $ | $ | |||||||||
| Diluted earnings per share for continuing operations | $ | $ | $ | |||||||||
| 18 |
Statement of Cash Flows
| Impact of correction of error | ||||||||||||
| Nine months ended September 30, 2023 (Unaudited) | As previously reported | Adjustments | As restated | |||||||||
| Net cash used in operating activities of continuing operations | $ | ( | ) | $ | $ | ( | ) | |||||
| Net cash provided by financing activities of continuing operations | $ | $ | ( | ) | $ | |||||||
| 3. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
| September 30, 2024 | December 31, 2023 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued credit cards | ||||||||
| Accrued liability for settlement of previously factored receivables | ||||||||
| Accrued income and property taxes | ||||||||
| Accrued professional fees | ||||||||
| Accrued board fees | ||||||||
| Accrued dividend | ||||||||
| Accrued public company fees | ||||||||
| Accrued travel expense | ||||||||
| Accrued payroll | ||||||||
| Total | $ | $ | ||||||
The Company is delinquent paying certain property
taxes. As of September 30, 2024 and December 31, 2023, the balance for these property taxes was $
| 4. | PLANT AND EQUIPMENT, NET |
Property and equipment as of September 30, 2024 and December 31, 2023 is as follows:
| September 30, 2024 | December 31, 2023 | |||||||
| Medical equipment | $ | $ | ||||||
| Computer Equipment | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Leasehold Improvement | ||||||||
| Total | ||||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||||
| Property and equipment, net | $ | $ | ||||||
For the three months ended September 30, 2024
and 2023, depreciation expense was $
| 19 |
| 5. | LAND |
As of September 30, 2024 and December 31, 2023,
the Company had 27 acres of land of approximately $
| 6. | RELATED PARTY TRANSACTIONS |
In connection with the acquisition of Edge View
on July 16, 2014, the Company assumed amounts due from 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 is $
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, 2024 and December 31, 2023, the Company
owed the Chairman $
See also Note 8. Convertible Notes Payable and the disclosure regarding Note payable 41.
See also Note 13. Commitments and Contingencies for compensation paid to employees of the Company.
| 7. | NOTES AND LOANS PAYABLE |
Notes payable at September 30, 2024 and December 31, 2023 are summarized as follows:
| September 30, 2024 | December 31, 2023 | |||||||
| Notes and loans payable | $ | $ | ||||||
| Less current portion | ( | ) | ( | ) | ||||
| Long-term portion | $ | $ | ||||||
Long-term debt matures as follows:
| Amount | ||||
| 2024 (remainder of year) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
| 20 |
Promissory Note – Settlement Agreement
On June 11, 2024, the Company entered into a settlement
agreement and release of claims with the holder of shares of series R convertible preferred stock and certain convertible promissory
notes (see Notes 29-2, 37-1, 37-2, and 37-3 referenced in Note 8. Convertible Notes Payable). Pursuant to the settlement agreement
and release of claims, the holder agreed to cancel its shares of series R convertible preferred stock and convertible promissory notes
in exchange for a new fixed amount settlement promissory note in the principal amount of $
The note does not bear interest and requires
fixed payments as follows:
Loans and Notes Payable – Unrelated Party
On March 12, 2009, the Company issued a debenture
in the principal amount of $20,000. The debenture bore interest at 12% per year 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 $
| 21 |
Line of Credit
On September 29, 2023, the Company and Nova entered
into a two-year revolving purchase and security agreement with DML HC Series, LLC (“DML”) to sell, with recourse, Nova’s
accounts receivables for a revolving financing up to a maximum advance amount of $
| 8. | CONVERTIBLE NOTES PAYABLE |
As of September 30, 2024 and December 31, 2023,
the Company had convertible debt outstanding net of amortized debt discount of $
During the nine months ended September 30, 2023,
the Company received net proceeds of $
During the nine months ended September 30, 2024,
the Company converted $
Convertible notes as of September 30, 2024 and December 31, 2023 are summarized as follows:
| September 30, 2024 | December 31, 2023 | |||||||
| Convertible notes payable | $ | $ | ||||||
| Discounts on convertible notes payable | ( |
) | ||||||
| Total convertible debt less debt discount | ||||||||
| Current portion | ||||||||
| Long-term portion | $ | $ | ||||||
| 22 |
The following is a schedule of convertible notes payable as of and for the nine months ended September 30, 2024.
| Note # | Issuance | Maturity | Principal Balance 12/31/23 | Settlements and/or Principal Conversions | New Loans or (Cash Paydown) | Shares Issued Upon Conversion or Exchange | Principal Balance 09/30/24 | Accrued Interest on Convertible Debt at 12/31/23 | Interest On Convertible Debt For the Period Ended 09/30/24 | Accrued Interest on Convertible Debt at 09/30/24 | Unamortized Debt Discount At 09/30/24 | |||||||||||||||||||||||||||||
| 9 | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||
| 10 | ||||||||||||||||||||||||||||||||||||||||
| 10-1 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 10-2 | ||||||||||||||||||||||||||||||||||||||||
| 10-3 | ||||||||||||||||||||||||||||||||||||||||
| 29-2 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 31 | ( | ) | ||||||||||||||||||||||||||||||||||||||
| 37-1 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 37-2 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 37-3 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 40-1 | ( | ) | (1) | ( | ) | |||||||||||||||||||||||||||||||||||
| 40-2 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 40-3 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 40-4 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 40-5 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 40-6 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 40-7 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 40-8 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 40-9 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 40-10 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| 41 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||
| (1) |
Note 9
On September 12, 2016, the Company issued a convertible
promissory note in the principal of $80,000 for services rendered, which matured on September 12, 2017. Note 9 was in default and accrued
at a default interest rate of 20% per annum. In May of 2024, the $
Note 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). In May of 2024, the $
| 23 |
Notes 29-2, 37-1, 37-2 and 37-3
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.
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).
On June 11, 2024, the Company entered into a settlement
agreement and release of claims with the holder of Notes 29-2, 37-1, 37-2 and 37-3 (see Note 7. Notes and Loans Payable for further
details). Pursuant to the settlement agreement and release of claims, the holder agreed to cancel these notes, along with the cancellation
of their holding in the series R preferred stock, in exchange for a new fixed amount settlement promissory note in the principal amount
of $
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 December 21, 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 $136,667, less original issue discount and fee of $39,167 (Note 40-7). On June 13, 2023, the Company 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, the Company 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, the Company 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). On December 1, 2023, the Company executed amendment on Notes series 40 consolidated senior secured convertible promissory note to extend the expired tranche note 40-1 through 40-5’ due date to September 20, 2024. 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.
On April 11, 2024, the Company issued shares of series Y senior convertible preferred stock in exchange for the settlement of the principal and interest in full on Notes 40-1, 40-2, 40-3, 40-4, 40-5, 4-6, 40-7, 40-8, 40-9 and 40-10. See also Note 9. Capital Stock.
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. In August of 2024, the remaining outstanding principal and interest of $
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| 9. | CAPITAL STOCK |
On May 8, 2024, the Company amended its Articles
of Incorporation to increase its authorized stock. The total amended authorized shares are
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 convertible preferred stock, shares of series X senior convertible preferred stock and shares of series Y 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 recognizes the series N senior convertible preferred stock, series R convertible preferred stock and series X senior convertible preferred stock as mezzanine equity in accordance with ASC 480, “Distinguishing Liabilities from Equity”.
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
would increase by 8% per annum. Dividends accrued from day to day, whether or not declared, and are cumulative. Dividends are payable
quarterly in arrears on each dividend payment date in cash or common stock at the Company’s discretion. Dividends payable in common
stock are to 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, 2024 and December 31, 2023, cumulative dividends earned on the series N senior convertible preferred
stock were $
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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) are to 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 is 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, is 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 does not apply to any financing transaction the use of proceeds of which would 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 share of series N senior convertible preferred stock, plus all accrued and unpaid dividends thereon, are 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 $900 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 can 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.
Series R Convertible Preferred Stock
The series R convertible preferred stock was cancelled as part of the June 2024 promissory note and settlement agreement. See also Note 7. Notes and Loans Payable and Note 8. Convertible Notes Payable.
Ranking. The series R convertible preferred stock ranked, 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 convertible preferred stock; (ii) on parity with each class or series that is not expressly subordinated or made senior to the series R convertible 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 convertible 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
R convertible preferred stock were entitled to receive cumulative dividends in the amount of twelve percent (12%) per annum, payable quarterly.
In addition, holders of series R convertible preferred stock were 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. Any dividends that were not paid when due were to continue to accrue and entailed a late fee, which must be paid in cash,
at the rate of 18% per annum or the lesser rate permitted by applicable law which was to accrue and compound daily from the missed payment
date through and including the date of actual payment in full. At September 30, 2024 and December 31, 2023, cumulative dividends on Series
R Preferred Stock were $
Liquidation Rights. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of series R convertible preferred stock were entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to the stated value ($1,200), plus any accrued and unpaid dividends thereon and any other fees or liquidated damages then due and owing, for each share of series R convertible preferred stock before any distribution or payment shall be made to the holders of any junior securities.
Voting Rights. The holders of series R convertible preferred stock voted together with the common stock on an as-converted basis. However, as long as any shares of series R convertible preferred stock were outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the then outstanding shares of the series R convertible preferred stock, directly and/or indirectly (i) alter or change adversely the powers, preferences or rights given to the series R convertible preferred stock or alter or amend the certificate of designation, (ii) authorize or create any class of stock ranking as to redemption or distribution of assets upon a liquidation senior to, or otherwise pari passu with, the series R convertible preferred stock, or authorize or create any class of stock ranking as to dividends senior to, or otherwise pari passu with, the series R convertible preferred stock, (iii) amend its articles of incorporation or other charter documents in any manner that adversely affects any rights of the holders of the series R convertible preferred stock, (iv) increase the number of authorized shares of series R convertible preferred stock, or (v) enter into any agreement with respect to any of the foregoing.
Conversion Rights. Each share of series R convertible preferred stock was 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 ($1,200 per share) by a conversion price equal to the lower of (i) $75.0 and (ii) the lowest daily VWAP during the twenty (20) trading days immediately prior to the applicable conversion date. Notwithstanding the foregoing, the Company shall not effect any conversion of the series R convertible preferred stock, and a holder shall not have the right to convert any portion of the series R convertible preferred stock, to the extent that, after giving effect to the conversion, such holder (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own in excess of 4.99% of the then outstanding common stock. The conversion price was subject to adjustment for any stock dividend, stock split, stock combination, reclassification or similar transaction that proportionately decreases or increases the common stock, as well as for mergers, business combinations and certain other fundamental transactions. In addition, subject to certain exceptions, upon any issuance by the Company or any of its subsidiaries of common stock or common stock equivalents for cash consideration, indebtedness or a combination of units thereof (a “Subsequent Financing”), the holder could have elected, in its sole discretion, to exchange (in lieu of conversion), if applicable, all or some of the shares of series R convertible preferred stock then held for any securities or units issued in a Subsequent Financing on a $1.00 for $1.00 basis.
Participation Rights. Subject to certain exceptions, upon a Subsequent Financing, a holder of at least 100 shares of series R convertible preferred stock were to have the right to participate in up to an amount of the Subsequent Financing equal to 100% of the Subsequent Financing on the same terms, conditions and price provided for in the Subsequent Financing.
Company Redemption Rights. The Company had the right to redeem all (but not less than all), shares of the series R convertible preferred stock issued and outstanding at any time upon three (3) business days’ notice, at a redemption price per share equal to the product of (i) the Premium Rate multiplied by (ii) the sum of (x) the stated value ($1,200), (y) all accrued but unpaid dividends, and (z) all other amounts due to the holder. “Premium Rate” means (a) 1.1 if all of the series R convertible preferred stock is redeemed within ninety (90) calendar days from the issuance date thereof; (b) 1.2 if all of the series R convertible preferred stock is redeemed after ninety (90) calendar days and within one hundred twenty (120) calendar days from the issuance date thereof; (c) 1.3 if all of the series R convertible preferred stock is redeemed after one hundred twenty (120) calendar days and within one hundred eighty (180) calendar days from the issuance date thereof; and (iv) 1.0 if all of the series R convertible preferred stock is redeemed after one hundred eighty (180) calendar days.
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Redemption Upon Triggering Events. Upon the occurrence of a Triggering Event (as defined below), each holder of series R convertible preferred stock had (in addition to all other rights it may have) the right, exercisable at the sole option of such holder, to require the Company to (A) redeem all of the series R convertible preferred stock then held by such holder for a redemption price, in cash, equal to the Triggering Redemption Amount (as defined below), or (B) at the option of each holder either (i) redeem all of the series R convertible preferred stock then held by such holder though the issuance to such holder of such number of shares of common stock equal to the quotient of (x) the Triggering Redemption Amount, divided by (y) the lowest of (1) the conversion price, and (2) 75% of the average of the 10 VWAPs immediately prior to the date of election, or (ii) increase the dividend rate on all of the outstanding series R convertible preferred stock held by such holder retroactively to the initial issuance date to 18% per annum thereafter. “Triggering Redemption Amount” means, for each share of series R convertible preferred stock, the sum of (a) the greater of (i) 130% of the stated value and (ii) the product of (y) the VWAP on the trading day immediately preceding the date of the Triggering Event, multiplied by (z) the stated value divided by the then applicable conversion price, (b) all accrued but unpaid dividends thereon and (c) all liquidated damages, late fees and other costs, expenses or amounts due in respect of the series R convertible preferred stock including, but not limited to legal fees and expenses of legal counsel to the holder in connection with, related to and/or arising out of a Triggering Event. A “Triggering Event” means any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
| · | the Company shall fail to deliver the shares of common stock issuable upon a conversion prior to the fifth (5th) trading day after such shares are required to be delivered, or the Company shall provide written notice to any holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversion of any shares of series R convertible preferred stock in accordance with the terms of the certificate of designation; | |
| · | the Company shall fail for any reason to pay in full the amount of cash due pursuant to a Buy-In (as defined in the certificate of designation) within five (5) trading days after notice therefor is delivered; | |
| · | the Company shall fail to have available a sufficient number of authorized and unreserved shares of common stock to issue to such holder upon a conversion; | |
| · | unless specifically addressed elsewhere in the certificate of designation as a Triggering Event, the Company shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of the Transaction Documents (as defined in the certificate of designation), and such failure or breach shall not, if subject to the possibility of a cure by the Company, have been cured within five (5) calendar days after the date on which written notice of such failure or breach shall have been delivered; | |
| · | the Company shall redeem junior securities or pari passu securities; | |
| · | the Company shall be party to a Change of Control Transaction (as defined in the certificate of designation); | |
| · | there shall have occurred a Bankruptcy Event (as defined in the certificate of designation); | |
| · | any monetary judgment, writ or similar final process shall be entered or filed against the Company, any subsidiary or any of their respective property or other assets for more than $50,000 (provided that amounts covered by the Company’s insurance policies are not counted toward this $50,000 threshold), and such judgment, writ or similar final process shall remain unvacated, unbonded or unstayed for a period of thirty (30) trading days; | |
| · | the electronic transfer by the Company of shares of common stock through the Depository Trust Company or another established clearing corporation once established subsequent to the date of the certificate of designation is no longer available or is subject to a ‘freeze” and/or “chill;” or | |
| · | any “Event of Default,” as defined in the Purchase Agreement (as defined in the certificate of designation). |
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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
was to increase by 5% per annum. Dividends accrue from day to day, whether or not declared, and are cumulative. Dividends are payable
quarterly in arrears on each dividend payment date. At September 30, 2024 and December 31, 2023, cumulative dividends earned on the series
X senior convertible 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) are to 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 is 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, is 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 does not apply to any financing transaction the use of proceeds of which were to 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 share of series X senior convertible preferred stock, plus all accrued and unpaid dividends thereon, are 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 convertible 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 the 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 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 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 as follows: (i) if the closing market price of the common stock on the principal trading market on which the common stock is then traded or quoted is less than $4.00 per share, then each share of series B preferred stock shall be convertible into a number of shares of common stock equal to two (2) times the stated value ($4.00 per share), divided by such closing market price on the date of conversion; or (ii) if such closing market price is equal to or greater than $4.00 per share, then each share of series B preferred stock shall be convertible into two (2) shares of common stock. 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 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 in accordance with the provisions above. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock reclassifications and similar events (but not for reverse stock splits).
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 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 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.
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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.
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 reclassifications and similar events (but not for reverse stock splits).
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 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 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.
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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.
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 as follows: (i) if the closing market price of the common stock on the principal trading market on which the common stock is then traded or quoted is less than $4.00 per share, then each share of series E preferred stock shall be convertible into a number of shares of common stock equal to two (2) times the stated value ($4.00 per share), divided by such closing market price on the date of conversion; or (ii) if such closing market price is equal to or greater than $4.00 per share, then each share of series E preferred stock shall be convertible into two (2) shares of common stock. 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 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 in accordance with the provisions above. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock reclassifications and similar events (but not for reverse stock splits).
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 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 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 as follows: (i) if the closing market price of the common stock on the principal trading market on which the common stock is then traded or quoted is less than $4.00 per share, then each share of series F-1 preferred stock shall be convertible into a number of shares of common stock equal to two (2) times the stated value ($4.00 per share), divided by such closing market price on the date of conversion; or (ii) if such closing market price is equal to or greater than $4.00 per share, then each share of series F-1 preferred stock shall be convertible into two (2) shares of common stock. 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 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 in accordance with the provisions above. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock reclassifications and similar events (but not for reverse stock splits).
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 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 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 as follows: (i) if the closing market price of the common stock on the principal trading market on which the common stock is then traded or quoted is less than $4.00 per share, then each share of series I preferred stock shall be convertible into a number of shares of common stock equal to two (2) times the stated value ($4.00 per share), divided by such closing market price on the date of conversion; or (ii) if such closing market price is equal to or greater than $4.00 per share, then each share of series I preferred stock shall be convertible into two (2) shares of common stock. 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 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 in accordance with the provisions above. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock reclassifications and similar events (but not for reverse stock splits).
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 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 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 as follows: (i) if the closing market price of the common stock on the principal trading market on which the common stock is then traded or quoted is less than $4.00 per share, then each share of series J preferred stock shall be convertible into a number of shares of common stock equal to two (2) times the stated value ($4.00 per share), divided by such closing market price on the date of conversion; or (ii) if such closing market price is equal to or greater than $4.00 per share, then each share of series J preferred stock shall be convertible into two (2) shares of common stock. 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 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 in accordance with the provisions above. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock reclassifications and similar events (but not for reverse stock splits).
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 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 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 as follows: (i) if the closing market price of the common stock on the principal trading market on which the common stock is then traded or quoted is less than $4.00 per share, then each share of series L preferred stock shall be convertible into a number of shares of common stock equal to two (2) times the stated value ($4.00 per share), divided by such closing market price on the date of conversion; or (ii) if such closing market price is equal to or greater than $4.00 per share, then each share of series L preferred stock shall be convertible into two (2) shares of common stock. 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 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 in accordance with the provisions above. Such conversion price is subject to standard adjustments in the event of any stock dividends, stock reclassifications and similar events (but not for reverse stock splits).
Redemption Rights. Holders of series L preferred stock do not have any redemption rights.
Series Y Senior Preferred Stock
On May 15, 2024, in conjunction with the exchange
of certain senior secured convertible promissory notes, shares of series Y preferred senior convertible preferred stock were issued
with an aggregate value of $
Ranking. The series Y 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 series of preferred stock, and to each other class or series that is not expressly made senior to or on parity with the series Y senior convertible preferred stock; (ii) on parity with each class or series that is not expressly subordinated or made senior to the series Y senior convertible preferred stock; and (iii) junior to each class or series that is expressly made senior to the series Y senior convertible preferred stock.
Dividend Rights. Holders of series Y 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 Y 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 and may be paid in cash or common stock at our discretion; provided that
the Company may only pay dividends in common stock if such common stock is free-trading, freely transferable, and does not contain a legend
(or be subject to stop transfer or similar instructions) restricting the resale or transferability thereof. Dividends payable in common
stock shall be calculated based on a price equal to eighty percent (80%) of the VWAP during the five (5) trading days immediately prior
to the applicable payment date. At September 30, 2024, cumulative dividends earned on the series Y senior convertible 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 event (as defined in the certificate of designation), 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 Y senior convertible preferred stock shall be entitled to receive an amount of cash equal to the greater of (i) 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 or (ii) such amount per share as would have been payable had all shares of series Y senior convertible preferred stock been converted into common stock immediately prior to such liquidation event.
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Voting Rights. Holders of series Y senior convertible preferred stock do not have any voting rights; provided that, so long as any shares of series Y senior convertible preferred stock are outstanding, the affirmative vote of holders of a majority of the series Y senior convertible preferred stock, which majority must include Leonite Capital LLC so long as it holds any shares of series Y 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, prior to the Company’s issuance of additional shares of series Y senior convertible preferred stock or prior to the creation or issuance of any securities that are not subordinate to the series Y senior convertible preferred stock 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 Y senior convertible preferred stock in full.
Conversion Rights. Commencing on the first anniversary of the date on which the Company’s common stock begins trading on the Nasdaq Stock Market, each share of series Y 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 lowest VWAP during the five (5) trading days immediately prior to the applicable conversion date. Such conversion price is subject to adjustment if the Company issues common stock at a price lower than such conversion price, subject to certain exceptions. Notwithstanding the foregoing, in no event shall the holder of any series Y 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 Y 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.
Preferred Stock Transactions
During the nine months ended September 30, 2024, the Company executed the following transactions:
| · | On January 19, 2024, the Company issued shares of series I preferred stock to each of Daniel R. Thompson, the Chairman of the Board, and Alex Cunningham, the Company’s Chief Executive Officer, for $ bonus compensation for the fiscal year of 2023, at the fair value of $4.48 per share. | |
| · | On January 31, 2024, the Company issued shares of series I preferred stock to Matthew Shafer, the Company’s Chief Financial Officer, for $ | |
| · | On January 31, 2024, the Company issued shares of series I preferred stock to Zia Choe, the Company’s Chief Accounting Officer, for $ | |
| In connection with these aforementioned shares issuances on January 19, 2024 and January 31, 2024, the Company engaged a valuation specialist to perform a business valuation monte carlo simulation for the series I preferred stock resulting in those indicated fair values. | ||
| · | An aggregate of shares of series B preferred stock were converted into an aggregate of shares of common stock. | |
| · | An aggregate of shares of series C preferred stock were converted into an aggregate of shares of common stock. | |
| · | An aggregate of shares of series E preferred stock were converted into an aggregate of shares of common stock. |
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| · | An aggregate of shares of series F-1 preferred stock were converted into an aggregate of shares of common stock. | |
| · | An aggregate of shares of series I preferred stock were converted into an aggregate of shares of common stock. | |
| · | An aggregate of shares of series J preferred stock were converted into an aggregate of shares of common stock. | |
| · | shares of series C preferred stock were cancelled, which were issued erroneously. | |
| · | shares of series R preferred stock were cancelled as part of the settlement agreement described in Note 7. Notes and Loans Payable | |
| · | On May 15, 2024, in conjunction with the exchange of certain senior secured convertible promissory notes, shares of series Y senior convertible preferred stock were issued with an aggregate value of $ | |
| · | On September 25, 2024, shares of series Y senior convertible preferred stock were issued with an aggregate value of $ |
During the nine months ended September 30, 2023, the Company executed the following transaction:
| · | 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 $ |
Common Stock
In addition to the issuance of common stock from the conversions of preferred stock noted above, during the nine months ended September 30, 2024, the Company executed the following transactions:
| · | The Company issued an aggregate of shares of common stock in payment of various accrued dividends on the series N, series X and series Y preferred stock. | |
| · | The Company issued shares of common stock upon conversion of certain convertible notes. | |
| · | On March 5, 2024, the Company issued shares of common stock to an investor relation service provider. The Company recognized the fair value for the issuance of the 7,500 shares at $ per share on the closing market price of March 5, 2024 and recorded selling, general and administrative expense of $ | |
| · | On March 26, 2024, the Company issued an aggregate of shares of common stock to three board members. The Company recognized the fair value for the issuance of 30,000 shares at $ per share on the closing market price of March 26, 2024 and recorded share-based compensation expense of $ in the consolidated statement of operations. |
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| · | In February 2024, as part of the Red Rock settlement executed in July 2022, the Company issued an aggregate of shares of common stock to six previous owners. The Company recognized the fair value for the issuance of 37,104 shares at $ per share on the closing market price of February 4 through February 6, 2024, and recorded share loss from discontinued operations of $ | |
| · | In September 2024, the Company issued an aggregate of shares of common stock as part of a legal settlement. |
During the nine months ended September 30, 2023, the Company executed the following transaction:
| · | During the nine months ended September 30, 2023, the Company issued shares of common stock upon conversion of certain convertible notes. |
| 10. | WARRANTS |
The table below sets forth warrant activity during the nine months ended September 30, 2024 and 2023:
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Balance at January 1, 2024 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ( | ) | ||||||
| Balance at September 30, 2024 | ||||||||
| Warrants Exercisable at September 30, 2024 | $ | |||||||
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Balance at January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ( | ) | ||||||
| Balance at September 30, 2023 | ||||||||
| Warrants Exercisable at September 30, 2023 | $ | |||||||
| 11. | DISCONTINUED OPERATIONS |
On November 10, 2023, the Company sold Platinum Tax, which was a full-service tax resolution firm located in Los Angeles, California. Through this subsidiary the Company provided fee-based tax resolution services to individuals and companies that have federal and state tax liabilities by assisting clients to settle outstanding tax debts. As part of the Asset Purchase Agreement between the Company and the purchaser, the assets that were purchased included substantially all assets, rights, interests, and licenses except for banks accounts in place prior to the sale for the purchase consideration of 15% of cash collected by the purchaser within one year following the sale date.
| 40 |
In February 2024, as part of the Red Rock settlement
executed in July 2022, the Company issued an aggregate of shares of common stock to six previous owners. The Company recognized
the fair value for the issuance of 37,104 shares at $ per share on the closing market price of February 4 through February 6, 2024, and
recorded share loss from discontinued operations of $
| Net liabilities of discontinued operations | September 30, 2024 | December 31, 2023 | ||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Net liabilities of discontinued operations | $ | ( | ) | $ | ( | ) | ||
| Three Months Ended September 30, | ||||||||
| Gain (Loss) from discontinued operations | 2024 | 2023 | ||||||
| Revenue | $ | $ | ||||||
| Cost of sales | ( | ) | ||||||
| Selling, general and administrative expenses | ( | ) | ||||||
| Interest expense | ( | ) | ||||||
| Settlement loss | ||||||||
| Loss from discontinued operations | $ | $ | ( | ) | ||||
| Nine Months Ended September 30, | ||||||||
| Gain (Loss) from discontinued operations | 2024 | 2023 | ||||||
| Revenue | $ | $ | ||||||
| Cost of sales | ( | ) | ||||||
| Selling, general and administrative expenses | ( | ) | ||||||
| Interest expense | ( | ) | ||||||
| Settlement loss | ( | ) | ||||||
| Loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||
| 12. | GOODWILL |
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, 2024 and 2023, the Company determined there to be
| 41 |
| 13. | 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. 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. |
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 leases twelve medical facilities and
one vehicle as operating leases as of September 30, 2024. The Company recorded operating lease expenses of $
The Company has operating leases with future commitments as follows:
| Amount | ||||
| October 2024 – September 2025 | $ | |||
| October 2025 – September 2026 | ||||
| October 2026 – September 2027 | ||||
| Total Future Undiscounted Lease Payments | $ | |||
| Less imputed interest | ||||
| Total lease obligations | $ | |||
The following table summarizes supplemental information about the Company’s leases:
| Weighted-average remaining lease term | |||
| Weighted-average discount rate |
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 50%
was being paid in cash and 50% was being accrued through December 31, 2023. As of January 1, 2024, these are being paid in cash. The total
outstanding accrued compensation as of September 30, 2024 and December 31, 2023 was $
| 42 |
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 50%
was being paid in cash and 50% was being accrued through April 30, 2024. As of May 1, 2024, these are being paid in cash. The total outstanding
accrued compensation as of September 30, 2024 and December 31, 2023 was $
The Company agreed to pay $
The Company agreed to pay $
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 |
| 14. | 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.
| 15. | INCOME TAXES |
At September 30, 2024, the Company had federal
and state net operating loss carry forwards of approximately $
| 43 |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for federal and state income tax purposes. The Company has a deferred tax asset that consists of net operating loss carry forwards calculated using federal and state effective tax rates. Because of the Company’s lack of past earnings history, the deferred tax asset has been fully offset by a valuation allowance.
| 16. | SEGMENT REPORTING |
As of September 30, 2024, the Company had two 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) | Healthcare (Nova) | |
| (2) | 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 two operating segments. Other revenue consists of nonrecurring items.
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.
Management uses numerous tools and methods to evaluate and measure of its subsidiaries’ success. To help succeed, management retains the prior owners of the subsidiaries and allow them to do what they do best is run the business. Additionally, management monitors key metrics primarily revenues and net income from operations.
| Asset: | September 30, 2024 | December 31, 2023 | ||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ||||||||
| Corporate, administration and other | ||||||||
| Consolidated assets | $ | $ | ||||||
| 44 |
| Three Months Ended September 30, | ||||||||
| 2024 | 2023 (Restated) | |||||||
| Revenues: | ||||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ||||||||
| Consolidated revenues | $ | $ | ||||||
| Cost of sales: | ||||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ||||||||
| Consolidated cost of sales | $ | $ | ||||||
| Income from operations from subsidiaries | ||||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ( | ) | ( | ) | ||||
| Income from operations from subsidiaries | $ | $ | ||||||
| Loss from operations from Cardiff Lexington | $ | ( | ) | $ | ( | ) | ||
| Total income from operations | $ | ( | ) | $ | ||||
| Income (loss) before taxes | ||||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ( | ) | ( | ) | ||||
| Corporate, administration and other non-operating expenses | ( | ) | ( | ) | ||||
| Consolidated (loss) income before taxes | $ | ( | ) | $ | ||||
| 45 |
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 (Restated) | |||||||
| Revenues: | ||||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ||||||||
| Consolidated revenues | $ | $ | ||||||
| Cost of sales: | ||||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ||||||||
| Consolidated cost of sales | $ | $ | ||||||
| Income (loss) from operations from subsidiaries | ||||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ( | ) | ( | ) | ||||
| Income from operations from subsidiaries | $ | $ | ||||||
| Loss from operations from Cardiff Lexington | $ | ( | ) | $ | ( | ) | ||
| Total (loss) income from operations | $ | ( | ) | $ | ||||
| Income (loss) before taxes | ||||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ( | ) | ( | ) | ||||
| Corporate, administration and other non-operating expenses | ( | ) | ( | ) | ||||
| Consolidated (loss) income before taxes | $ | ( | ) | $ | ||||
| 17. | SUBSEQUENT EVENTS |
The Company has evaluated its operations subsequent to September 30, 2024 to the date these consolidated financial statements were available to be issued and determined the following subsequent events and transactions required disclosure in these consolidated financial statements.
| · | On October 14, 2024, the Company issued 9,453 shares of series X senior convertible preferred stock with an aggregate value of $37,808 as payment of accrued dividends. | |
| · | On October 25, 2024, an aggregate of 41,812 shares of series B preferred stock were converted into an aggregate of 83,624 shares of common stock. | |
| · | On October 25, 2024, an aggregate of 8 shares of series C preferred stock were converted into an aggregate of 80,000 shares of common stock. | |
| · | On October 25, 2024, an aggregate of 50,000 shares of series I preferred stock were converted into an aggregate of 100,000 shares of common stock. | |
| · | On October 25, 2024, the Company issued 26,256 shares of series N senior convertible preferred stock with an aggregate value of $105,023 as payment of accrued dividends. | |
| · | On October 28, 2024, 1 share of series C preferred stock was converted into 10,000 shares of common stock. |
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| 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 ability to maintain 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, 2023. 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).
On May 31, 2021, we acquired Nova Ortho and Spine, LLC, or Nova, which 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.
We also own a real estate company, Edge View Properties, Inc., or Edge View, which we acquired on July 16, 2014. Edge View 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. 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.
All of our operations are conducted through, and our income derived from, our two subsidiaries.
Segments
As of September 30, 2024, we had two 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) | Healthcare (Nova) | |
| (2) | 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.
| 48 |
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.
Management uses numerous tools and methods to evaluate and measure our subsidiaries’ success. To help succeed, management retains the prior owners of the subsidiaries and allows them to do what they do best is run the business. Additionally, management monitors key metrics primarily revenues and net income from operations.
Discontinued Operations
On November 10, 2023, we sold our financial services (tax resolution) business, Platinum Tax Defenders, or Platinum Tax, that we acquired on July 31, 2018, which was a full-service tax resolution firm located in Los Angeles, California. As part of the asset purchase agreement between us and the purchaser, the assets that were purchased included substantially all assets, rights, interests, and licenses, except for bank accounts in place prior to the sale, for the purchase consideration of 15% of cash collected by the purchaser within one year following the sale date.
Results of Operations
Comparison of Three Months Ended September 30, 2024 and 2023
The following table sets forth key components of our results of operations during the three months ended September 30, 2024 and 2023, both in dollars and as a percentage of our revenue.
| Three Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 (Restated) | |||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | |||||||||||||
| Total revenue | $ | 1,355,641 | 100.00% | $ | 3,405,859 | 100.0% | ||||||||||
| Total cost of sales | 1,000,601 | 73.81% | 551,423 | 16.19% | ||||||||||||
| Gross profit | 355,040 | 26.19% | 2,854,436 | 83.81% | ||||||||||||
| Operating expenses | ||||||||||||||||
| Depreciation expense | 3,365 | 0.25% | 3,365 | 0.10% | ||||||||||||
| Selling, general and administrative | 936,835 | 69.11% | 577,677 | 16.96% | ||||||||||||
| Total operating expenses | 940,200 | 69.35% | 581,042 | 17.06% | ||||||||||||
| (Loss) income from continuing operations | (585,160 | ) | (43.16)% | 2,273,394 | 66.75% | |||||||||||
| Other expense | ||||||||||||||||
| Other expense | (6,767 | ) | (0.50)% | (1 | ) | – | ||||||||||
| Penalties and fees | – | – | (16,000 | ) | (0.47)% | |||||||||||
| Interest expense | (1,386,041 | ) | (102.24)% | (226,119 | ) | (6.64)% | ||||||||||
| Amortization of debt discounts | – | – | (46,048 | ) | (1.35)% | |||||||||||
| Total other expense | (1,392,808 | ) | (102.74)% | (288,168 | ) | (8.46)% | ||||||||||
| Net (loss) income before discontinued operations | (1,977,968 | ) | (145.91)% | 1,985,226 | 58.29% | |||||||||||
| Loss from discontinued operations | – | – | (3,705 | ) | (0.11)% | |||||||||||
| Net (loss) income | $ | (1,977,968 | ) | (145.91)% | $ | 1,981,521 | 58.18% | |||||||||
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Revenue. For the three months ended September 30, 2024, and 2023, all of our revenue was generated by our healthcare segment, which generates revenue through a full range of diagnostic and surgical services. Our total revenue decreased by $2,050,218, or 60.20%, to $1,355,641 for the three months ended September 30, 2024 from $3,405,859 for the three months ended September 30, 2023. The decrease in revenue is primarily attributable to the following factors:
| · | The 2024 third quarter revenue was negatively impacted by the hurricanes that occurred in Florida during this timeframe. The harsh weather caused several of our facilities to shut down for periods of time due to storm damage as well as patients not being able to attend their appointments. All of our facilities have reopened. | |
| · | Prior to fiscal year 2024 we historically realized a 49% settlement rate from total gross billed charges. Accordingly, we had historically recognized net healthcare service revenue as 49% of gross billed amounts. Throughout the first half of 2024 as well as the third quarter of 2024, we underwent efforts to accelerate cash settlement of our accounts receivable to generate cash flow for operations. We did this by shortening our settlement negotiations timespan with attorneys and insurance companies and accepting lower settlement amounts. We expect this trend to continue in the short term as we work to settle our accounts receivables more quickly to generate cash flow for operations. | |
| · | Additionally, during the third quarter of 2024, we completed a thorough review of our third-party billing data, including reviewing historical reports and new reporting methods as a part of our updated analysis. Based upon this review it was determined that a 24-month lookback period should be used in the analysis of our historical settlement realization rates. As a result of the new efforts to accelerate cash settlement during the nine months ended September 30, 2024, we realized a 44% average settlement rate of our gross billed charges during this time frame, which were historically recorded in accounts receivable and revenue at 49% of gross billings. With the reduction in our estimate of our settlement realization rate from 49% to 44%, a $1,650,474 change in accounting estimate was taken during the third quarter of 2024 in our accounts receivable and revenue. |
Cost of sales. Our cost of sales consists of surgical center and laboratory fees, physician and professional fees, salaries and wages and medical supplies. Our total cost of sales increased by $449,178, or 81.46%, to $1,000,601 for the three months ended September 30, 2024 from $551,423 for the three months ended September 30, 2023. As a percentage of revenue, cost of sale increased from 16.19% for the three months ended September 30, 2023 to 73.81% for the three months ended September 30, 2024. This increase is mainly attributable to increases in laboratory fees.
Gross profit. As a result of the foregoing, our total gross profit decreased by $2,499,396, or 87.56%, to $355,040 for the three months ended September 30, 2024 from $2,854,436 for the three months ended September 30, 2023. Our total gross margin (as a percent of revenue) decreased from 83.81% for the three months ended September 30, 2023 to 26.19% for the three months ended September 30, 2024.
Depreciation expense. Our depreciation expense was $3,365, or 0.25% of revenue, for the three months ended September 30, 2024, as compared to $3,365, or 0.10% of revenue, for the three months ended September 30, 2023.
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, bonuses plus related payroll taxes and stock compensation expense, advertising expenses, professional advisor fees, rent expense, insurance and other expenses incurred in connection with general operations. Our selling, general and administrative expenses increased by $359,158, or 62.17%, to $936,835 for the three months ended September 30, 2024 from $577,677 for the three months ended September 30, 2023. As a percentage of revenue, our selling, general and administrative expenses were 69.11% and 16.96% for the three months ended September 30, 2024 and 2023, respectively. Increases were primarily attributable to increases in salaries and wages expense of $265,346, professional fees of $153,624, rent expense of $33,386, payroll taxes of $20,010, and board fee expense of $15,000, offset by a decrease in management fees of $180,000.
Total other income (expense). We had $1,392,808 in total other expense, net, for the three months ended September 30, 2024, as compared to total other expense, net, of $288,168 for the three months ended September 30, 2023. Other expense, net, for the three months ended September 30, 2024 consisted of interest expense of $1,386,041 and other expense of $6,767. Other expense, net, for the three months ended September 30, 2023 consisted of interest expense of $226,119, amortization of debt discounts of $46,048, financing penalties and fees of $16,000 and other expense of $1.
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Discontinued operations. For the three months ended September 30, 2024 and 2023, we recorded a loss from discontinued operations of $0 and $3,705, respectively.
Net income (loss). As a result of the cumulative effect of the factors described above, our net loss was $1,977,968 for the three months ended September 30, 2024, as compared to net income of $1,981,521 for the three months ended September 30, 2023, a decrease of $3,959,489.
Comparison of Nine Months Ended September 30, 2024 and 2023
The following table sets forth key components of our results of operations during the nine months ended September 30, 2024 and 2023, both in dollars and as a percentage of our revenue.
| Nine Months Ended September 30, | ||||||||||||||||
| 2024 | 2023 (Restated) | |||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | |||||||||||||
| Total revenue | $ | 5,149,416 | 100.00% | $ | 9,476,764 | 100.0% | ||||||||||
| Total cost of sales | 2,741,765 | 53.24% | 2,589,407 | 27.32% | ||||||||||||
| Gross profit | 2,407,765 | 46.76% | 6,887,357 | 72.68% | ||||||||||||
| Operating expenses | ||||||||||||||||
| Depreciation expense | 10,096 | 0.20% | 11,365 | 0.12% | ||||||||||||
| Share based compensation | 300,225 | 5.83% | – | – | ||||||||||||
| Selling, general and administrative | 2,622,981 | 50.94% | 2,095,611 | 22.11% | ||||||||||||
| Total operating expenses | 2,933,302 | 56.96% | 2,106,976 | 22.23% | ||||||||||||
| (Loss) income from continuing operations | (525,651 | ) | (10.21)% | 4,780,381 | 50.44% | |||||||||||
| Other income (expense) | ||||||||||||||||
| Other (expense) income | (4,720 | ) | (0.09)% | 204 | – | |||||||||||
| Gain on debt refinance and forgiveness | 78,834 | 1.53% | 390 | – | ||||||||||||
| Penalties and fees | (1,330 | ) | (0.03)% | (48,000 | ) | (0.51)% | ||||||||||
| Interest expense | (1,803,657 | ) | (35.03)% | (1,763,698 | ) | (18.61)% | ||||||||||
| Amortization of debt discounts | (24,821 | ) | (0.48)% | (94,664 | ) | (1.00)% | ||||||||||
| Total other expense | (1,755,694 | ) | (34.10)% | (1,905,768 | ) | (20.11)% | ||||||||||
| Net (loss) income before discontinued operations | (2,281,345 | ) | (44.30)% | 2,874,613 | 30.33% | |||||||||||
| Loss from discontinued operations | (111,312 | ) | (2.16)% | (93,005 | ) | (0.98)% | ||||||||||
| Net (loss) income | $ | (2,392,657 | ) | (46.46)% | $ | 2,781,608 | 29.35% | |||||||||
Revenue. Our total revenue decreased by $4,327,348, or 45.66%, to $5,149,416 for the nine months ended September 30, 2024 from $9,476,764 for the nine months ended September 30, 2023. The decrease in revenue is mainly attributable to the following factors:
| · | The 2024 third quarter revenue was negatively impacted by the hurricanes that occurred in Florida during this timeframe. The harsh weather caused several of our facilities to shut down for periods of time due to storm damage as well as patients not being able to attend their appointments. All of our facilities have reopened. |
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| · | Our mix of services provided during the first nine months of the year with lower settlement realization rates from surgical procedures performed and an increase in the lower revenue pain management treatments being performed for approximately the same number of patient visits in the current nine-month period as compared to the same nine-month period in the prior year, also contributed to the decrease in revenue. | |
| · | Prior to fiscal year 2024, we historically realized a 49% settlement rate from total gross billed charges. Accordingly, we had historically recognized net healthcare service revenue as 49% of gross billed amounts. During the nine months ended September 30, 2024, we underwent efforts to accelerate cash settlement of our accounts receivable throughout 2024 to generate cash flow for operations. We did this by shortening our settlement negotiations timespan with attorneys’ insurance companies and accepting lower settlement amounts. We expect this trend to continue in the short term as we work to settle our accounts receivables more quickly to generate cash flow for operations. | |
| · | Additionally, during the third quarter of 2024, we completed a thorough review of our third-party billing data, including reviewing historical reports and new reporting methods as a part of our updated analysis. Based upon this review it was determined that a 24-month lookback period should be used in the analysis of our historical settlement realization rates. As a result of the new efforts to accelerate cash settlement during the nine months ended September 30, 2024, we realized a 44% average settlement rate of our gross billed charges during this time frame, which were historically recorded in accounts receivable and revenue at 49% of gross billings. Accordingly, we recorded a reduction to net revenue of $1,199,155 for the nine months ended September 30, 2024. Additionally, with the reduction in our estimate of our settlement realization rate from 49% to 44%, a $1,650,474 change in accounting estimate was taken during the third quarter of 2024 in our accounts receivable and revenue. |
Cost of sales. Our total cost of sales increased by $152,358, or 5.88%, to $2,741,765 for the nine months ended September 30, 2024 from $2,589,407 for the nine months ended September 30, 2023. As a percentage of revenue, cost of sale increased from 27.32% for the nine months ended September 30, 2023 to 53.24% for the nine months ended September 30, 2024. This increase is mainly attributable to an increase in laboratory fees.
Gross profit. As a result of the foregoing, our total gross profit decreased by $4,479,706, or 65.04%, to $2,407,651 for the nine months ended September 30, 2024 from $6,887,357 for the nine months ended September 30, 2023. Our total gross margin (as a percent of revenue) decreased from 72.68% for the nine months ended September 30, 2023 to 46.76% for the nine months ended September 30, 2024.
Depreciation expense. Our depreciation expense was $10,096 or 0.20% of revenue, for the nine months ended September 30, 2024, as compared to $11,365, or 0.12% of revenue, for the nine months ended September 30, 2023.
Share based compensation expense. Our share-based compensation expense $300,225, or 5.83% of revenue, for the nine months ended September 30, 2024, as compared to $0 for the nine months ended September 30, 2023. The increase is due to stock issuances for investor relation services, stock issued to board members and stock issued as compensation for new employment bonuses to management.
Selling, general and administrative expenses. Our selling, general and administrative expenses increased by $527,370, or 25.17%, to $2,622,981 for the nine months ended September 30, 2024 from $2,095,611 for the nine months ended September 30, 2023. As a percentage of revenue, our selling, general and administrative expenses were 50.94% and 22.11% for the nine months ended September 30, 2024 and 2023, respectively. Increases were primarily attributable to increases in salaries and wages expense of $769,696, stock compensation expense of $93,600, professional fees of $60,367, investor relations and public company fees of $71,431, insurance expense of $71,635 and rent expense of $100,000, offset by decreases in management fees of $225,000, bad debt expense of $270,000, and penalties of $44,670.
Total other expense. We had $1,755,694 in total other expense, net, for the nine months ended September 30, 2024, as compared to total other expense, net, of $1,905,768 for the nine months ended September 30, 2023. Other expense, net, for the nine months ended September 30, 2024 consisted of interest expense of $1,803,657, amortization of debt discounts of $24,821, penalties and fees of $1,330, and other expenses of $4,720, offset by other income of $78,834 for the gain on debt refinance. Other expense, net, for the nine months ended September 30, 2023 consisted of interest expense of $1,763,698, amortization of debt discounts of $94,664 and financing penalties and fees of $48,000, offset by a gain on debt refinance and forgiveness of $390 and other income of $204.
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Discontinued operations. For the nine months ended September 30, 2024 and 2023, we recorded a loss from discontinued operations of $111,312 and $93,005, respectively.
Net income (loss). As a result of the cumulative effect of the factors described above, our net loss for the nine months ended September 30, 2024 was $2,392,657, as compared to net income of $2,781,608 for the nine months ended September 30, 2023, a decrease of $5,174,265.
Liquidity and Capital Resources
As of September 30, 2024, we had $1,949,000 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 $4 million to $8 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 financings. 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.
The financial statements were prepared on a going concern basis and do not include any adjustment with respect to these uncertainties.
Summary of Cash Flow
The following table provides detailed information about our net cash flow for the nine months ended September 30, 2024 and 2023.
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 (Restated) | |||||||
| Net cash used in operating activities from continuing operations | $ | (3,996,905 | ) | $ | (557,542 | ) | ||
| Net cash provided by financing activities from continuing operations | 4,968,250 | 426,671 | ||||||
| Net change in cash | 1,082,657 | (37,866 | ) | |||||
| Cash and cash equivalents at beginning of period | 866,943 | 219,085 | ||||||
| Cash and cash equivalents at end of period | $ | 1,949,600 | $ | 181,219 | ||||
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Our net cash used in operating activities from continuing operations was $3,996,905 for the nine months ended September 30, 2024, as compared to $557,542 for the nine months ended September 30, 2023. The primary drivers of our net cash used in operating activities for the nine months ended September 30, 2024 are our net loss of $2,392,657, decreases of $1,492,966 in accounts receivable, $691,072 in accounts payable and other accrued expenses and $380,001 in accrued officer’s compensation, offset by share based compensation of $788,600. For the nine months ended September 30, 2023, our net income of $2,781,608, an increase in accounts payable and accrued expenses of $733,125, an increase in accrued officer’s compensation of $514,000, bad debt expense of $270,000 and an increase in accrued interest of $380,020, offset by a decrease in accounts receivable of $5,510,098, were the primary drivers for the cash used in operations.
We monitor outstanding cases as they develop through ongoing discussions with attorneys, doctors and our third-party medical billing company and additionally monitor our settlement realization rates over time. We have two primary methods of accelerating our cash settlement of our revenue and related accounts receivable. The first is through factoring our receivables, which was done in 2023, but ended prior to April 2023. The second method is through accepting lower settlement amounts during the final negotiations of the settlement, which is coordinated through our third-party medical billing company. When our third-party medical billing company is provided with a settlement amount of 49% of gross charges or greater they will accept. When presented with a lower amount we will discuss the reasons for the reduced rate and negotiate a higher rate. Shortening our negotiation timeframe will typically result in a lower settlement realization rate, but will accelerate the cash settlement of the outstanding accounts receivable. We began employing this second method in 2024, which reduced our settlement realization rate as described below. We have employed both methods from time to time to accelerate our cash settlement and may employ one or both in the future.
Prior to April 2023, we factored (sold) the vast majority of our accounts receivable to third party(s) to generate working capital to fund ongoing business operations and growth. For the nine months ended September 30, 2023, we factored a total of $544,196 of our accounts receivable in exchange for cash of $253,750. We ceased factoring of accounts receivable in the first quarter of 2023. The most recent average realization time for accounts receivable was approximately eighteen to twenty-four months from the initial date of service. Typically, a patient will have a series of dates of service over an average of 12 to 16 months.
Prior to fiscal year 2024, we historically realized a 49% settlement rate from total gross billed charges. Accordingly, we had historically recognized net healthcare service revenue as 49% of gross billed amounts. During the nine months ended September 30, 2024, we underwent efforts to accelerate cash settlement of our accounts receivable throughout 2024 to generate cash flow for operations. We did this by shortening our settlement negotiations with insurance companies and accepting lower settlement amounts. We expect this trend to continue in the short term as we work to settle our accounts receivables more quickly to generate cash flow for operations. Additionally, during the third quarter of 2024, we completed a thorough review of our third-party billing data, including reviewing historical reports and new reporting methods as a part of our updated analysis. Based upon this review it was determined that a 24-month lookback period should be used in the analysis of our historical settlement realization rates. As a result of the new efforts to accelerate cash settlement during the nine months ended September 30, 2024, we realized a 44% average settlement rate of our gross billed charges during this time frame, which were historically recorded in accounts receivable and revenue at 49% of gross billings. Accordingly, we recorded reductions to net revenue of $1,199,155 for the nine months ended September 30, 2024. Additionally, with the reduction in our estimate of our settlement realization rate from 49% to 44%, a $1,650,474 change in accounting estimate was taken during the third quarter of 2024 in our accounts receivable and revenue.
We had no investing activities for the nine months ended September 30, 2024 and 2023.
Our net cash provided by financing activities was $4,968,250 for the nine months ended September 30, 2024, as compared to $426,671 for the nine months ended September 30, 2023. Net cash provided by financing activities for the nine months ended September 30, 2024 consisted of the proceeds of $5,348,871 from line of credit, offset by the payment of $120,997 to a director, $105,080 paid on convertible notes payable, $100,000 in dividend payments, $50,000 paid on a note payable, and $4,545 in payments on the SBA loan described below. Net cash provided by financing activities for the nine months ended September 30, 2023 consisted of proceeds from convertible notes payable of $421,376 and proceeds from line of credit of $35,632, offset by repayments of line of credit of $28,784.
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Convertible Notes
As of September 30, 2024, we had convertible debt outstanding net of amortized debt discount of $105,000. During the nine months ended September 30, 2024, we made $105,080 in principal payments and paid the total outstanding accrued interest on these notes in the amount of $22,780. We also paid $100,000 of accrued interest to a convertible noteholder.
On June 11, 2024, we entered into a settlement agreement and release of claims with the holder certain notes. Pursuant to the settlement agreement and release of claims, the holder agreed to cancel such notes in exchange for the fixed amount settlement promissory note in the principal amount of $535,000 described below. Additionally, during the nine months ended September 30, 2024, we exchanged certain notes for the issuance of 938,908 shares of series Y senior convertible preferred stock to the noteholder.
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. This note is currently in default and accrues interest at a default interest rate of 20% per annum. On March 30, 2023, we executed an additional tranche under this note in the principal amount of $25,000. This note is currently in default and accrues interest at a default interest rate of 20% per annum. On August 11, 2023, we executed an additional tranche under this note in the principal amount of $25,000. This note accrues interest at a rate of 15% per annum.
Promissory Note – Settlement Agreement
On June 11, 2024, we entered into a settlement agreement and release of claims with the holder of 165 shares of series R convertible preferred stock and certain convertible promissory notes. Pursuant to the settlement agreement and release of claims, the holder agreed to cancel its shares of series R convertible preferred stock and convertible promissory notes in exchange for a new fixed amount settlement promissory note in the principal amount of $535,000. This transaction was accounted for as a debt extinguishment and a gain on settlement of $78,834 was recorded to the unaudited consolidated statement of operations for the nine months ended September 30, 2024, in accordance with FASB Topic 470 Borrower’s Accounting for Debt Modifications.
The note does not bear interest and requires fixed payments as follows: (i) if we raise at least $5 million but less than $6 million in our planned underwritten public offering, or the Offering, then we must pay $250,000 on the closing date of the Offering, with payments of $125,000, $125,000 and $35,000 to follow on the 90th, 180th, and 240th days following the closing of the Offering, respectively; (ii) if we raise at least $6 million but less than $7 million in the Offering, then we must pay $390,000 on the closing date of the Offering and $145,000 on the 90th day following the closing of the Offering; and (iii) if we raise at least $7 million in the Offering, then we must repay the entire principal amount on the closing date of the Offering. As the Offering was not completed by August 15, 2024, we are required to pay $25,000 on such date and to continue making payments of $25,000 on each monthly anniversary thereof until the entire principal amount is repaid in full. If the Offering is completed after August 15, 2024, then we are required to make payments as described in the schedule above. Notwithstanding the foregoing, if we abandon the Offering and conduct a new public offering thereafter, then we are required to make a payment of $100,000 on the closing date of such other public offering, a second payment of $100,000 on the 90th day following the closing of such offering and $35,000 each month thereafter until the entire principal amount is repaid in full. If any portion of the principal amount remains unpaid on the second (2nd) anniversary of the date of the note, it shall become immediately due and payable on such date. We may prepay the entire principal amount at any time without penalty. The note is unsecured and contains customary events of default for a loan of this type. Upon an event of default, interest would automatically begin to accrue at a simple interest rate of ten percent per annum. During the three and nine months ended September 30, 2024, we paid a total of $50,000 against the outstanding principal due.
Small Business Administration Loans
On June 2, 2020, we obtained a loan from the Small Business Administration of $150,000 at an interest rate of 3.75% with a maturity date of June 2, 2050. The principal balance and accrued interest at September 30, 2024 was $145,109 and $0, respectively.
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Debenture
On March 12, 2009, we issued a debenture in the principal amount of $20,000. The debenture bore interest at 12% per year and matured on September 12, 2009. The balance of the debenture was $10,989 at September 30, 2024 and the accrued interest was $8,537. We assigned all of our receivables from consumer activations of the rewards program as collateral on this debenture.
Line of Credit
On September 29, 2023, our company and Nova entered into a two-year revolving purchase and security agreement with DML HC Series, LLC, or DML, to sell, with recourse, Nova’s accounts receivables for a revolving financing up to a maximum advance amount of $4.5 million. A review is performed on a quarterly basis to assess the adequacy of the maximum amount. If mutually agreed upon by us and DML, the maximum amount may be increased. On April 24, 2024, we entered into amendment No. 1 with DML which increased the maximum advance amount to $8,000,000 and defined the discount fee equal to 2.25% per purchase and claims balance forward on new purchases with a minimum fee to now be $10,000. On June 11, 2024, we entered into amendment No. 2 with DML which further increased the maximum advance amount to $11,000,000. As of September 30, 2024, we had an outstanding balance of $7,468,971 against the revolving receivable line of credit and accrued interest of $252,628. The revolving purchase and security agreement includes discounts recorded as interest expense on each funding and matures on September 29, 2025.
Related Party Loans
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 is $4,979 as of September 30, 2024.
Contractual Obligations
Our principal commitments consist mostly of obligations under the loans described above.
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, 2023 filed with the Securities and Exchange Commission, or the SEC, on March 27, 2024.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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| 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, 2024. 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, 2023, which we are still in the process of remediating as of September 30, 2024, along with the error identified in our Quarterly Reports on Form 10-Q for the six months ended June 30, 2024 and the three months ended March 31, 2024, our disclosure controls and procedures were not effective. The errors identified in our Quarterly Reports on Form 10-Q were corrected in amended filings. Investors are directed to Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, 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 are evaluating our updated internal controls design and will determine whether the controls have operated effectively during 2024 in order to fully remediate the aforementioned material weakness in our internal control over financial reporting.
As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, our management has identified the steps necessary to address the material weaknesses, and in the third quarter of 2024, we continued to implement the following remedial procedures:
| · | We are making necessary changes by making strategic hiring decisions and providing training to our financial team, and other relevant personnel, on the GAAP accounting guidelines applicable to financial reporting requirements. | |
| · | We are implementing proper documentation procedures for key functional areas, control objectives and our workflows. | |
| · | We are enhancing our processes, routine and non-routine, to encompass segregation of duties as well as oversight of secondary independent reviews. | |
| · | We plan to reinforce effective compensating controls can improve the design of the current process with limited human resources. | |
| · | We hired external consultants to assist with our assessment and accounting for variable consideration as accounted for under ASC 606 and our credit loss expense as accounted for under ASC 326. |
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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 2024 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, 2024 that were not previously disclosed in a current report on Form 8-K that was filed during the quarter.
We did not repurchase any shares of our common stock during the three months ended September 30, 2024.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
| ITEM 5. | OTHER INFORMATION. |
None.
| ITEM 6. | EXHIBITS. |
| Exhibit No. | Description | |
| 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 Amendment to Amended and Restated Articles of Incorporation Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q filed on May 10, 2024) | |
| 3.3 | 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) | |
| 3.4 | 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) |
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| 3.5 | Certificate of Correction of Certificate of Designation of Series B Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.4 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 3.6 | 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) | |
| 3.7 | Certificate of Correction of Certificate of Designation of Series C Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.6 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 3.8 | 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) | |
| 3.9 | Certificate of Correction of Certificate of Designation of Series E Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.8 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 3.10 | 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) | |
| 3.11 | Certificate of Correction of Certificate of Designation of Series F-1 Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.10 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 3.12 | 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) | |
| 3.13 | Certificate of Correction of Certificate of Designation of Series I Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.12 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 3.14 | 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) | |
| 3.15 | Certificate of Correction of Certificate of Designation of Series L Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.16 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 3.16 | 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) | |
| 3.17 |
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) |
|
| 3.18 | Certificate of Designation of Series Y Senior Convertible Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on May 14, 2024) | |
| 3.19 | 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) | |
| 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 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 Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | 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 6, 2024 | CARDIFF LEXINGTON CORPORATION |
| /s/ Alex Cunningham | |
| Name: Alex Cunningham | |
| Title: Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ Matthew Shafer | |
| Name: Matthew Shafer | |
| Title: Chief Financial Officer | |
| (Principal Financial Officer) |
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