Cardiff Lexington Corp 10-K/A for FY2023
Cardiff Lexington Corp (CDIX)
About this 10-K/A
Cardiff Lexington Corp filed this 10-K/A on July 24, 2024, covering the fiscal year ended December 31, 2023 (FY2023).
Headline figures
Fiscal year ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $11.85M
- up 10.8% from $10.69M a year earlier
- Net income
- $3.03M
- compared with a net loss of $5.43M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 2)
(Mark One)
For the fiscal year ended:
For the transition period from ____________ to _____________
Commission File No.
| (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) |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨
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 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
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ¨
Indicate by check mark whether registrant is a
shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No
As of September 30, 2023 (the last business day
of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s common
stock held by non-affiliates (based upon the closing price of such shares as reported on OTC Pink Market) was approximately $
As of March 22, 2024, there were a total of shares of common stock of the registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
EXPLANATORY NOTE
Cardiff Lexington Corporation (the “Company”) is filing this Amendment No. 2 on Form 10-K/A (“Amendment”) to amend its Annual Report on Form 10-K for the year ended December 31, 2023, which was originally filed with the Securities and Exchange Commission on March 27, 2024 and was previously amended on July 24, 2024 (the “Form 10-K”).
This Amendment is being filed solely to file the correct report of the Company’s independent registered public accounting firm with the Company’s financial statements as the previous amendment inadvertently included the prior report, as well as to file the correct version of Exhibit 23.1. Except for the foregoing, no other changes are made to the Form 10-K. The Form 10-K, as amended by this Amendment, continues to be as of March 27, 2024 and does not reflect events occurring after March 27, 2024.
Cardiff Lexington Corporation
Annual Report on Form 10-K
Year Ended December 31, 2023
TABLE OF CONTENTS
| Item 1. | Business. | 1 |
| Item 1A. | Risk Factors. | 15 |
| Item 1B. | Unresolved Staff Comments. | 34 |
| Item 1C. | Cybersecurity. | 34 |
| Item 2. | Properties. | 35 |
| Item 3. | Legal Proceedings. | 35 |
| Item 4. | Mine Safety Disclosures. | 35 |
| Item 15. | Exhibit and Financial Statement Schedules. | 61 |
| Item 16. | Form 10-K Summary. | 63 |
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INTRODUCTORY NOTES
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” and elsewhere in this report. 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.
Reverse Stock Split
On January 9, 2024, we effected a 1-for-75,000 reverse split of our outstanding common stock. All share and per share data set forth in this report has been retroactively adjusted to reflect this reverse stock split.
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PART I
| ITEM 1. | BUSINESS. |
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.
Our Corporate History and Structure
We were incorporated on September 3, 1986 in Colorado as Cardiff International Inc. On November 10, 2005, we merged with Legacy Card Company and became Cardiff Lexington Corporation. On August 27, 2014, we redomiciled and became a corporation under the laws of Florida. On April 13, 2021, we redomiciled and became a corporation under the laws of Nevada.
All of our operations are conducted through our operating subsidiaries, Nova and Edge View. Nova was organized in the State of Florida on December 3, 2018 and Edge View was incorporated in the State of Idaho on February 9, 2005.
The following chart depicts our current organizational structure:
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During the year ended December 31, 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. Through this subsidiary, we 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.
We also previously owned all of the equity interests of We Three, LLC, d/b/a Affordable Housing Initiative, or AHI, an affordable home acquirer located in Maryville, Tennessee. On October 31, 2022, we entered into a buyback agreement to sell AHI back to the original owners in exchange for the return of 175,045 shares of series F preferred stock by the original owners and our issuance of 67,500 shares of series B preferred stock to the original owners.
Our Business Strategy
We employ an acquisition and value creation strategy, with the goal of locating undervalued and undercapitalized healthcare companies and providing them capitalization and leadership in order to maximize the value and potential of their private, often family run, enterprises while also providing diversification and risk mitigation for our stockholders. Our primary focus is on the healthcare sector, with holdings and real estate, where we utilize our management team’s relationship networks, industry experiences and deal sourcing capabilities to target companies we believe have an experienced management team and compelling assets which we believe are well positioned for growth. Our culture emphasizes core values, teamwork, accountability, and performance. 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). Our acquisition strategy is driven by structure, transaction value, alignment, resources and return on investment. As we identify potential targets, it is also our strategy and goal to identify and recruit the right operating executive partners that have the requisite tools and experience to manage and grow our existing and newly acquired subsidiaries. Based on our management’s long history and experience in building relationships with a vast number of executives and their teams, we are confident that we have placed or left successful executives in charge of our current subsidiaries and will be able to identify appropriate executives to add long term value to any future acquisitions.
After our acquisitions, the entities become wholly owned subsidiaries and the target company’s management team either maintains responsibility for the day-to-day operations or we locate suitable executives to overtake responsibility for the entities. We believe that we can then provide these entities with some of the benefits of being a publicly traded company, including but not limited to, providing them with increased access to funding that we can obtain on their behalf in the capital markets for operations or expansion and our management team’s experience operating businesses. Our combined acquisition and value creation strategy drives our goal to deliver our public stockholders an opportunity to own a long term, stable, durable compounding equity investment that can produce strong returns.
Our Market Opportunity
Utilizing our management teams and principals’ expansive network of relationships, we believe there are a substantial number of small to mid-sized healthcare companies, second stage startups – emerging businesses with a strong organic growth plan that is materially cash generative and income producing real estate holdings that we can seek to acquire that can potentially generate attractive returns for our stockholders. We further believe the economic and market dislocation resulting from the COVID-19 pandemic enhanced our opportunity to obtain potentially profitable businesses, which are facing lingering working capital challenges post pandemic, but have rebounded and returned to or near previous levels of profitability. In this environment, we believe the expertise and relationships of our management team represent a compelling value proposition for potential business targets looking for additional working capital infusion, a pathway to exit some equity, and leadership to assist them to grow and expand.
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Our Acquisition Process
In evaluating a potential target business, we conduct a comprehensive due diligence review to determine a company’s quality and its intrinsic value. That due diligence review may include, among other things, financial statement analysis, detailed document reviews, multiple meetings with management, consultations with relevant industry experts, competitors, customers, and suppliers, as well as a review of additional information that we will seek to obtain as part of our analysis of a target company. Upon the consummation of an acquisition agreement with a target company, it becomes a wholly owned subsidiary of our company.
We anticipate structuring our acquisitions in such a way so that the post-business combination subsidiary company will own or acquire 100% of the equity interests or assets of the target business or businesses. We may, however, structure future acquisitions such that the post-business combination company owns or acquires less than 100% of such interests or assets of the target business in order to meet certain objectives of the target management team or stockholders or for other reasons, but we will only complete such acquisition if the post-business subsidiary company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires a controlling interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act.
If our board of directors is not able to independently determine the fair market value of the target business or businesses, we will obtain an opinion from an independent investment banking firm or an independent valuation or appraisal firm with respect to the satisfaction of such criteria. While we consider it unlikely that our board of directors will not be able to make an independent determination of the fair market value of a target business or businesses, it may be unable to do so if the board of directors is less familiar or experienced with the target company’s business, there is a significant amount of uncertainty as to the value of the company’s assets or prospects, including if such company is at an early stage of development, operations or growth, or if the anticipated transaction involves a complex financial analysis or other specialized skills and the board of directors determines that outside expertise would be helpful or necessary in conducting such analysis.
We finance acquisitions primarily through additional equity and debt financings. We believe that having the ability to finance most, if not all, acquisitions with the general capital resources raised by our company, rather than financing relating to the acquisition of individual businesses, provides us with an advantage in acquiring attractive businesses by minimizing delay and closing conditions that are often related to acquisition-specific financings. Because the timing and size of acquisitions cannot be readily predicted, we may need to be able to obtain funding on short notice to benefit fully from attractive acquisition opportunities. The sale of additional shares of any class of equity will be subject to market conditions and investor demand for such shares at prices that may not be in the best interest of our stockholders. The sale of additional equity securities could also 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. See also Item 1A “Risk Factors—Risks Related to Our Business and Structure—We may not be able to successfully fund acquisitions due to the unavailability of equity or debt financing on acceptable terms, which could impede the implementation of our acquisition strategy.”
The time required to select and evaluate a target business and to structure and complete acquisitions, and the costs associated with this process, are not currently ascertainable with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which any acquisition is not ultimately completed will result in our incurring losses and will reduce the funds we can use to complete another acquisition.
Members of our management team, including our officers and directors, will directly or indirectly own a majority of our securities following this offering and, accordingly, may have a conflict of interest in determining whether a particular target company is an appropriate business with which to effectuate our initial business combination.
We have not selected any specific business combination target for our next acquisition, and we have not entered into any letters of intent, nor has anyone on our behalf, initiated any substantive acquisition discussions, directly or indirectly, with any specific business combination target.
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To the extent we effect any future acquisition with a company or business that may be financially unstable or in its early stages of development or growth, we may be affected by numerous risks inherent in such company or business. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all significant risk factors.
There are several risks associated with our acquisition strategy, including the following risks, which are described more fully in Item 1A “Risk Factors—Risks Related to Our Business and Structure”:
| · | our acquisition strategy exposes us to substantial risk; | |
| · | we may experience difficulty as we evaluate, acquire and integrate businesses that we may acquire, which could result in drains on our resources, including the attention of our management, and disruptions of our on-going business; | |
| · | we may not be able to effectively integrate the businesses that we acquire; | |
| · | we face competition for businesses that fit our acquisition strategy and, therefore, we may have to acquire targets at sub-optimal prices or, alternatively, forego certain acquisition opportunities; | |
| · | we may not be able to successfully fund acquisitions due to the unavailability of debt or equity financing on acceptable terms, which could impede the implementation of our acquisition strategy; and | |
| · | we may change our management and acquisition strategies without the consent of our stockholders, which may result in a determination by us to pursue riskier business activities. |
Competition
In identifying, evaluating, and selecting potential target business for acquisition, we may encounter intense competition from other entities having a business objective similar to ours, including blank check companies, private equity groups and leveraged buyout funds, and operating businesses seeking strategic acquisitions. Many of these entities are well established and have extensive experience identifying and effecting acquisitions directly or through affiliates. Moreover, many of these competitors possess greater financial, technical, human, and other resources than us. Our ability to acquire larger target businesses will be limited by our available financial resources. This inherent limitation gives others an advantage in pursuing the acquisition of a target business. Any of these factors may place us at a competitive disadvantage in successfully negotiating an acquisition.
Competitive Strengths
We believe that we have several competitive advantages that differentiate us from other holding companies. Our competitive strengths include:
| · | Management Operating and Investing Experience. Our directors and executive officers have significant executive, investment and operational experience in the management and growing of small and middle market companies. We believe that this breadth of experience provides us with a competitive advantage in evaluating businesses and acquisition opportunities. | |
| · | Extensive Network of Small to Middle Market Companies. As a result of their experience with acquisitions and in providing services to small to middle market companies around the United States, our management team members have developed a broad array of contacts at private and closely held companies. We believe that these contacts will be important in generating potential acquisition opportunities for us. |
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| · | Public Company Benefits. We believe our structure will make us an attractive business transaction partner to prospective acquisition targets. As an existing public company, we will be able to raise capital to deploy to our acquired businesses for their business operations. Additionally, we will be able to offer to the employees of our subsidiaries equity in our company as an additional means of creating management incentives that are better aligned with stockholder’s interests. | |
| · | Maintaining of day-to-day control of operations. As part of our acquisition criteria for a target company, we search for companies with what we believe are strong management teams, which allows us to have the management team maintain control of the day-to-day operations of the companies. We believe this model is attractive to target companies with management desiring to obtain the benefits of being a public company while maintaining control over the operations of their company. |
Intellectual Property
We do not have any intellectual property at our holding company.
Employees
As of December 31, 2023, our company had three full-time employees (excluding our operating subsidiaries described below). None of our employees are represented by labor unions, and we believe that we have an excellent relationship with our employees.
Regulation
We do not expect that our holding company will be subject to material governmental regulation. However, it is our policy to fully comply with all governmental regulation and regulatory authorities.
Healthcare Business
Our healthcare business is operated by Nova, which we acquired on May 31, 2021. This business accounted for all of our revenues for the years ended December 31, 2023 and 2022.
Overview
We operate 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 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.
The Healthcare Market
The healthcare sector is defined as end users whose primary business is the delivery of medical, patient care or treatment, medical diagnostic services, or medical care provided in connection with disaster relief, including, but not limited to (i) professional medical and healthcare service companies, businesses, institutions and enterprises, (ii) medical diagnostics facilities and laboratories having patient interaction, (iii) government and private organizations providing medical care in connection with disaster relief and (iv) firms selling products or services into such end users. Examples of such end users are: hospitals, including their pharmacies; integrated medical service provider networks and their member facilities; surgery centers, including their pharmacies; blood banks; bone and tissue centers; physician and medical clinic offices including their pharmacies; psychiatric health facilities, including their pharmacies; clinics in retail outlets that perform or provide medical services or care; long-term medical care facilities, including their pharmacies; medical care components of the Red Cross or other disaster relief organizations; and dental care facilities.
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Services
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. Orthopedic and pain procedure services include hip and knee replacement, shoulder reconstruction, fracture care and hand surgery, as well as spinal surgery.
Our service model is designed to promote referral relationships, facilitate patient access, and coordinate administration among our company, as a medical provider, personal injury attorneys, and chiropractors. This “referral relationship” approach to case management results in increased revenue as attorneys consider the value of our patient management process when brokering settlements. As EMC and early stage continued care providers, we believe that we have superior access to patient information to determine the validity of each case and manage cases appropriately.
Revenue is primarily provided by bodily injury policies, general liability policies, and personal injury protection policies, which partially insulates our business from the declining reimbursement programs paid from or correlated to Medicare/Medicaid and traditional health insurance companies.
Healthcare Facilities
We currently operate ten facilities, most of which were opened in the last twenty-four months. As of December 31, 2023, management estimates that the ten facilities are operating at 35% capacity. We believe that the most important factors relating to the overall utilization of a facility include adequate working capital, the quality and market position of the facility and the number, quality and specialties of physicians providing patient care within the facility. Other factors that affect utilization include general and local economic conditions, market penetration, the degree of outpatient use, the availability of reimbursement programs such as Medicare and Medicaid, and demographic changes such as the growth in local populations. Utilization across the industry is also being affected by improvements in clinical practice, medical technology and pharmacology. Current industry trends in utilization and occupancy have been significantly affected by changes in reimbursement policies of third party payers. We are also unable to predict the extent to which these industry trends will continue or accelerate.
Customers, Sales and Marketing
As of December 31, 2023, we provide services to approximately 150-180 patients per month at ten facilities. Patients are primarily referred through a growing network of personal injury attorneys, insurance carriers, physical therapy providers, and chiropractic care providers.
Competition
The health care industry is highly competitive. In recent years, competition among healthcare providers for patients, such as our company, has intensified in the United States due to, among other things, regulatory and technological changes, increasing use of managed care payment systems, cost containment pressures and a shift toward outpatient treatment. In all of the geographical areas in which we operate, there are other facilities that provide services comparable to those offered by our facilities. In addition, some of our competitors include hospitals that are owned by tax-supported governmental agencies or by nonprofit corporations and may be supported by endowments and charitable contributions and exempt from property, sale and income taxes. Such exemptions and support are not available to us.
Certain of our competitors may have greater financial resources, be better equipped and offer a broader range of services than us. The increase in outpatient treatment and diagnostic facilities, outpatient surgical centers and freestanding ambulatory surgical also increases competition for us.
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The number and quality of the physicians on a facility’s staff are important factors in determining a facility’s success and competitive advantage. Typically, physicians are responsible for making admissions decisions and for directing the course of patient treatment. We believe that physicians refer patients to a facility primarily on the basis of the patient’s needs, the quality of other physicians on the medical staff, the location of the facility and the breadth and scope of services offered at the facility. We strive to retain and attract qualified doctors by maintaining high ethical and professional standards and providing adequate support personnel, technologically advanced equipment and facilities that meet the needs of those physicians.
In addition, we depend on the efforts, abilities, and experience of our medical support personnel, including our nurses, pharmacists and lab technicians and other health care professionals. We compete with other health care providers in recruiting and retaining qualified management, nurses and other medical personnel. Our healthcare facilities are experiencing the effects of a nationwide staffing shortage, which has caused and may continue to cause an increase in salaries, wages and benefits expense in excess of the inflation rate. In addition, there are requirements to maintain specified nurse-staffing levels. To the extent we cannot meet those levels, we may be required to limit the healthcare services provided, which would have a corresponding adverse effect on our net operating revenues.
Although most of our revenue is provided by bodily injury policies, general liability policies, and personal injury protection policies, our ability to negotiate favorable service contracts with purchasers of group health care services also affects our competitive position and significantly affects the revenues and operating results of our facilities. Managed care plans attempt to direct and control the use of services and to demand that we accept lower rates of payment. In addition, employers and traditional health insurers are increasingly interested in containing costs through negotiations with facilities for managed care programs and discounts from established charges. In return, facilities secure commitments for a larger number of potential patients. Generally, facilities compete for service contracts with group health care service purchasers on the basis of price, market reputation, geographic location, quality and range of services, quality of the medical staff and convenience. The importance of obtaining contracts with managed care organizations varies from market to market depending on the market strength of such organizations.
A key element of our growth strategy is expansion through opening additional locations and the acquisition of additional facilities in select markets. The competition to acquire healthcare facilities is significant. We compete for acquisitions with other for-profit healthcare companies, private equity and venture capital firms, as well as not-for-profit entities. Some of our competitors have greater resources than we do. We intend to selectively seek opportunities to expand our base of operations by adhering to our disciplined program of rational growth but may not be successful in accomplishing acquisitions on favorable terms.
Competitive Strengths
We believe that we have several competitive advantages, including the following:
| · | Broad array of services focusing on plaintiff related care. 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 with a focus on plaintiff related care. From sports injuries, to sprains, strains, and fractures, orthopedic and pain procedure services include hip and knee replacement, shoulder reconstruction, fracture care and hand surgery, as well as spinal surgery. Our service model is designed to promote referral relationships, facilitate patient access, and coordinate administration among our company, as a medical provider, personal injury attorneys, and chiropractors. As a result, our revenue is primarily provided by bodily injury policies, general liability policies, and personal injury protection policies, which partially insulates our business from the declining reimbursement programs paid from or correlated to Medicare/ Medicaid and traditional health insurance companies. | |
| · | Opportunities for accelerated growth. We have a track record of delivering strong growth through a combination of organic growth, new contract additions and selective acquisitions. Organic growth has historically been supported by consistent underlying market volume trends, stable pricing and a diversified payor mix. We believe that our networks of high-quality providers position us to take advantage of these trends. We have successfully executed on new contract growth by providing a set of differentiated services and delivering integrated, efficient, high-quality care, which has helped us expand our relationships with our existing customers and compete effectively in the bidding process for new contracts. Additionally, we believe we will have opportunities to expand our services through acquisitions, as discussed in more detail below. |
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| · | Focus on clinical excellence. We are focused on achieving the best clinical outcomes for our patients through the application of rigorous recruiting and credentialing standards, the promotion of a physician-led leadership culture and the monitoring of our clinical quality measures. Through extensive clinical and leadership development programs, we train our healthcare professionals to continually enhance their skills and deliver innovative and patient-focused experiences and outcomes. We provide internally developed continuing medical education accredited courses to our healthcare professionals, including instructor-led and on-line education sessions. We have developed and implemented quality measurement systems that track multiple key indicators, which assist our professionals in systematically monitoring, examining and analyzing outcomes and processes. These quality measurement systems are supplemented by our active peer review infrastructure designed to ensure the development and implementation of actionable items that will improve patient outcomes. Our ability to deliver high levels of customer service and patient care is a direct result of this focus, which helps us to differentiate our services, and to attract and retain providers. | |
| · | Ability to attract and retain high-quality providers. Through our processes, we are able to identify and target high-quality providers to match the needs of our customers. We believe that our operating infrastructure enables us to provide attractive opportunities for our providers to enhance their skills through extensive clinical and leadership development programs. We believe that our differentiated recruiting, training and development programs strengthen our customer and provider relationships, enhance our contract and clinician retention rates and allow us to efficiently recruit providers to support our new contract pipeline. |
Growth Strategies
The key elements of our strategy to grow our business include:
| · | Capitalize on organic growth opportunities. As noted above, management estimates that our ten facilities are operating at 35% capacity as of December 31, 2023. Accordingly, we believe that we have an opportunity for organic growth at our existing facilities. We also believe our physician-led, patient-focused culture and approach to clinical solutions will allow us to continue to successfully recruit and retain clinical professionals. | |
| · | Supplement organic growth with strategic acquisitions. The market in which we compete is highly fragmented, presenting significant opportunities for additional acquisitions. We will continue to follow a disciplined strategy in exploring future acquisitions by analyzing the strategic rationale, financial impact and organic growth profile of each potential opportunity. Our current focus for future acquisitions is MRI imaging, followed by medical billing and outpatient surgery centers. We have been in discussions with several privately owned MRI facilities. Key targets are strategically located within our market territory. We believe that the addition of these profitable businesses would be immediately enhanced by significant additional new business that we would direct to them. | |
| · | Enhance operational efficiencies and productivity. We believe there are significant opportunities to continue to build upon our success in improving our productivity and profitability. We continue to focus on initiatives to improve productivity, including more efficient scheduling, continued use of mid-level providers, enhancing our leadership training programs, improving and realigning compensation programs. We believe that our processes related to managed care contracting, billing, coding, collection and compliance have driven a strong track record of efficient revenue cycle management. We have made significant investments in infrastructure, including management information systems that we believe will continue to enable us to improve clinical results and key client metrics while reducing the cost of providing patient care. We have dedicated teams with business and clinical expertise that are responsible for implementing best practices. Furthermore, we will continue to utilize risk mitigation programs for loss prevention and early intervention. We believe that our significant investments in scalable technology systems will facilitate additional cost reductions and efficiencies. |
Intellectual Property
Our healthcare business does not own any intellectual property.
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Employees and Medical Staff
As of December 31, 2023, we had 10 employees. Our facilities are staffed by licensed physicians who have been admitted to the medical staff of individual facilities. Members of the medical staff of our facilities also serve on the medical staffs of facilities not owned by us and may terminate their affiliation with our facilities at any time. Each of our facilities is managed on a day-to-day basis by a managing director. In addition, a Board of Governors, including members of the facility’s medical staff, governs the medical, professional and ethical practices at each facility. We believe that our relations with our employees are satisfactory.
None of our employees are represented by labor unions, and we believe that we have an excellent relationship with our employees.
Regulation
The healthcare industry is subject to numerous laws, regulations and rules including, among others, those related to government healthcare participation requirements, various licensure and accreditations, reimbursement for patient services, health information privacy and security rules, and Medicare and Medicaid fraud and abuse provisions (including, but not limited to, federal statutes and regulations prohibiting kickbacks and other illegal inducements to potential referral sources, false claims submitted to federal or state health care programs and self-referrals by physicians). Providers that are found to have violated any of these laws and regulations may be excluded from participating in government healthcare programs, subjected to significant fines or penalties and/or required to repay amounts received from the government for previously billed patient services. Although we believe our policies, procedures and practices comply with governmental regulations, no assurance can be given that we will not be subjected to additional governmental inquiries or actions, or that we would not be faced with sanctions, fines or penalties if so subjected. Even if we were to ultimately prevail, a significant governmental inquiry or action under one of the above laws, regulations or rules could have a material adverse impact on us.
Licensing, Certification and Accreditation: All of our facilities are subject to compliance with various federal, state and local statutes and regulations and receive periodic inspection by state licensing agencies to review standards of medical care, equipment and cleanliness. Our facilities s must also comply with the conditions of participation and licensing requirements of federal, state and local health agencies, as well as the requirements of municipal building codes, health codes and local fire departments. Various other licenses and permits are also required in order to dispense narcotics, operate pharmacies, handle radioactive materials and operate certain equipment. All of our eligible hospitals have been accredited by The Joint Commission. All of our facilities are certified as providers of Medicare and Medicaid services by the appropriate governmental authorities. If any of our facilities were to lose its Joint Commission accreditation or otherwise lose its certification under the Medicare and Medicaid programs, the facility may be unable to receive reimbursement from the Medicare and Medicaid programs and other payers. We believe our facilities are in substantial compliance with current applicable federal, state, local and independent review body regulations and standards. The requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, it may become necessary for us to make changes in our facilities, equipment, personnel and services in the future, which could have a material adverse impact on operations.
Certificates of Need: Many states, including Florida, have enacted certificates of need, or CON, laws as a condition prior to capital expenditures, construction, expansion, modernization or initiation of major new services. Failure to obtain necessary state approval can result in our inability to complete an acquisition, expansion or replacement, the imposition of civil or, in some cases, criminal sanctions, the inability to receive Medicare or Medicaid reimbursement or the revocation of a facility’s license, which could harm our business. In addition, significant CON reforms have been proposed in a number of states that would increase the capital spending thresholds and provide exemptions of various services from review requirements. In the past, we have not experienced any material adverse effects from those requirements, but we cannot predict the impact of these changes upon our operations.
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Conversion Legislation: Many states have enacted or are considering enacting laws affecting the conversion or sale of not-for-profit healthcare facilities to for-profit entities. These laws generally require prior approval from the attorney general, advance notification and community involvement. In addition, attorneys general in states without specific conversion legislation may exercise discretionary authority over these transactions. Although the level of government involvement varies from state to state, the trend is to provide for increased governmental review and, in some cases, approval of a transaction in which a not-for-profit entity sells a health care facility to a for-profit entity. The adoption of new or expanded conversion legislation and the increased review of not-for-profit conversions may limit our ability to grow through acquisitions of not-for-profit facilities.
Utilization Review: Federal regulations require that admissions and utilization of facilities by Medicare and Medicaid patients must be reviewed in order to ensure efficient utilization of facilities and services. The law and regulations require Peer Review Organizations, or PROs, to review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, the validity of diagnosis related group classifications and the appropriateness of cases of extraordinary length of stay. PROs may deny payment for services provided, assess fines and also have the authority to recommend to the Department of Health and Human Services, or HHS, that a provider that is in substantial non-compliance with the standards of the PRO be excluded from participating in the Medicare program. We have contracted with PROs to perform the required reviews.
Audits: Most healthcare facilities are subject to federal audits to validate the accuracy of Medicare and Medicaid program submitted claims. If these audits identify overpayments, we could be required to pay a substantial rebate of prior years’ payments subject to various administrative appeal rights. The federal government contracts with third-party “recovery audit contractors” and “Medicaid integrity contractors,” on a contingent fee basis, to audit the propriety of payments to Medicare and Medicaid providers. Similarly, Medicare zone program integrity contractors target claims for potential fraud and abuse. Additionally, Medicare administrative contractors must ensure they pay the right amount for covered and correctly coded services rendered to eligible beneficiaries by legitimate providers. The Centers for Medicare and Medicaid Services announced its intent to consolidate many of these Medicare and Medicaid program integrity functions into new unified program integrity contractors, though it remains unclear what effect, if any, this consolidation may have. We have undergone claims audits related to our receipt of federal healthcare payments during the last three years, the results of which have not required material adjustments to our consolidated results of operations. However, potential liability from future federal or state audits could ultimately exceed established reserves, and any excess could potentially be substantial. Further, Medicare and Medicaid regulations also provide for withholding Medicare and Medicaid overpayments in certain circumstances, which could adversely affect our cash flow.
The Stark Law: The Social Security Act includes a provision commonly known as the “Stark Law.” This law prohibits physicians from referring Medicare and Medicaid patients to entities with which they or any of their immediate family members have a financial relationship unless an exception is met. These types of referrals are known as “self-referrals.” Sanctions for violating the Stark Law include civil penalties up to $26,125 for each violation, and up to $174,172 for sham arrangements. There are a number of exceptions to the self-referral prohibition, including an exception for a physician’s ownership interest in an entire facility as opposed to an ownership interest in a facility department unit, service or subpart. However, federal laws and regulations now limit the ability of facilities relying on this exception to expand aggregate physician ownership interest or to expand certain facilities. This regulation also places a number of compliance requirements on physician-owned facilities related to reporting of ownership interest. There are also exceptions for many of the customary financial arrangements between physicians and providers, including employment contracts, leases and recruitment agreements that adhere to certain enumerated requirements. The Centers for Medicare and Medicaid Services, or CMS, issued a final rule in 2020 that created a new Stark exception for value-based models. Although the final regulations provide exceptions to the Stark Law, there may remain regulatory risks for participating hospitals, as well as financial and operational risks. We monitor all aspects of our business and have developed a comprehensive ethics and compliance program that is designed to meet or exceed applicable federal guidelines and industry standards. Nonetheless, because the law in this area is complex and constantly evolving, there can be no assurance that federal regulatory authorities will not determine that any of our arrangements with physicians violate the Stark Law.
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Anti-kickback Statute: A provision of the Social Security Act known as the “anti-kickback statute” prohibits healthcare providers and others from directly or indirectly soliciting, receiving, offering or paying money or other remuneration to other individuals and entities in return for using, referring, ordering, recommending or arranging for such referrals or orders of services or other items covered by a federal or state health care program. However, changes to the anti-kickback statute have reduced the intent required for violation; one is no longer required to have actual knowledge or specific intent to commit a violation of the anti-kickback statute in order to be found in violation of such law. The anti-kickback statute contains certain exceptions, and the Office of the Inspector General of the Department of Health and Human Services, or the OIG, has issued regulations that provide for “safe harbors,” from the federal anti-kickback statute for various activities. These activities, which must meet certain requirements, include (but are not limited to) the following: investment interests, space rental, equipment rental, practitioner recruitment, personnel services and management contracts, sale of practice, referral services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary coinsurance and deductible amounts, managed care arrangements, obstetrical malpractice insurance subsidies, investments in group practices, freestanding surgery centers, donation of technology for electronic health records and referral agreements for specialty services. In 2020, the OIG issued a final rule that established an anti-kickback statute safe harbor for value based models. Although the final regulations provide safe harbors, there may remain regulatory risks for participating facilities, as well as financial and operational risks. The fact that conduct or a business arrangement does not fall within a safe harbor or exception does not automatically render the conduct or business arrangement illegal under the anti-kickback statute. However, such conduct and business arrangements may lead to increased scrutiny by government enforcement authorities. Although we believe that our arrangements with physicians and other referral sources have been structured to comply with current law and available interpretations, there can be no assurance that all arrangements comply with an available safe harbor or that regulatory authorities enforcing these laws will determine these financial arrangements do not violate the anti-kickback statute or other applicable laws. Violations of the anti-kickback statute may be punished by a criminal fine of up to $100,000 for each violation or imprisonment, however, under 18 U.S.C. Section 3571, this fine may be increased to $250,000 for individuals and $500,000 for organizations. Civil money penalties may include fines of up to $105,563 per violation and damages of up to three times the total amount of the remuneration and/or exclusion from participation in Medicare and Medicaid.
Similar State Laws: Many states, including Florida, have adopted laws that prohibit payments to physicians in exchange for referrals similar to the anti-kickback statute and the Stark Law, some of which apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties as well as loss of licensure. In many instances, the state statutes provide that any arrangement falling in a federal safe harbor will be immune from scrutiny under the state statutes. However, in most cases, little precedent exists for the interpretation or enforcement of these state laws. These laws and regulations are extremely complex and, in many cases, we do not have the benefit of regulatory or judicial interpretation. It is possible that different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated one or more of these laws, or the public announcement that we are being investigated for possible violations of one or more of these laws, could have a material adverse effect on our business, financial condition or results of operations and our business reputation could suffer significantly. In addition, we cannot predict whether other legislation or regulations at the federal or state level will be adopted, what form such legislation or regulations may take or what their impact on us may be. If we are deemed to have failed to comply with the anti-kickback statute, the Stark Law or other applicable laws and regulations, we could be subjected to liabilities, including criminal penalties, civil penalties (including the loss of our licenses to operate one or more facilities), and exclusion of one or more facilities from participation in the Medicare, Medicaid and other federal and state health care programs. The imposition of such penalties could have a material adverse effect on our business, financial condition or results of operations.
Federal False Claims Act and Similar State Regulations: A current trend affecting the health care industry is the increased use of the federal False Claims Act, and, in particular, actions being brought by individuals on the government’s behalf under the False Claims Act’s qui tam, or whistleblower, provisions. Whistleblower provisions allow private individuals to bring actions on behalf of the government by alleging that the defendant has defrauded the Federal government. When a defendant is determined by a court of law to have violated the False Claims Act, the defendant may be liable for up to three times the actual damages sustained by the government, plus mandatory civil penalties of between $12,537 to $25,076 for each separate false claim. There are many potential bases for liability under the False Claims Act. Liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government. The Fraud Enforcement and Recovery Act of 2009, or FERA, amended and expanded the number of actions for which liability may attach under the False Claims Act, eliminating requirements that false claims be presented to federal officials or directly involve federal funds. FERA also clarifies that a false claim violation occurs upon the knowing retention, as well as the receipt, of overpayments. In addition, recent changes to the anti-kickback statute have made violations of that law punishable under the civil False Claims Act. Further, a number of states have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit on behalf of the state in state court. The False Claims Act requires that federal healthcare program overpayments be returned within 60 days from the date the overpayment was identified, or by the date any corresponding cost report was due, whichever is later. Failure to return an overpayment within this period may result in additional civil False Claims Act liability.
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Other Fraud and Abuse Provisions: The Social Security Act also imposes criminal and civil penalties for submitting false claims to Medicare and Medicaid. False claims include, but are not limited to, billing for services not rendered, billing for services without prescribed documentation, misrepresenting actual services rendered in order to obtain higher reimbursement and cost report fraud. Like the anti-kickback statute, these provisions are very broad. Further, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, broadened the scope of the fraud and abuse laws by adding several criminal provisions for health care fraud offenses that apply to all health benefit programs, whether or not payments under such programs are paid pursuant to federal programs. HIPAA also introduced enforcement mechanisms to prevent fraud and abuse in Medicare. There are civil penalties for prohibited conduct, including, but not limited to billing for medically unnecessary products or services.
HIPAA Administrative Simplification and Privacy Requirements: The administrative simplification provisions of HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, require the use of uniform electronic data transmission standards for health care claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the health care industry. HIPAA also established federal rules protecting the privacy and security of personal health information. The privacy and security regulations address the use and disclosure of individual health care information and the rights of patients to understand and control how such information is used and disclosed. Violations of HIPAA can result in both criminal and civil fines and penalties. We believe that we are in material compliance with the privacy regulations of HIPAA, as we continue to develop training and revise procedures to address ongoing compliance. The HIPAA security regulations require health care providers to implement administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of patient information. HITECH has since strengthened certain HIPAA rules regarding the use and disclosure of protected health information, extended certain HIPAA provisions to business associates, and created new security breach notification requirements. HITECH has also extended the ability to impose civil money penalties on providers not knowing that a HIPAA violation has occurred. We believe that we have been in substantial compliance with HIPAA and HITECH requirements to date. Recent changes to the HIPAA regulations may result in greater compliance requirements for healthcare providers, including expanded obligations to report breaches of unsecured patient data, as well as create new liabilities for the actions of parties acting as business associates on our behalf.
Red Flags Rule: In addition, the Federal Trade Commission, or the FTC, Red Flags Rule requires financial institutions and businesses maintaining accounts to address the risk of identity theft. The Red Flag Program Clarification Act of 2010, signed on December 18, 2010, appears to exclude certain healthcare providers from the Red Flags Rule, but permits the FTC or relevant agencies to designate additional creditors subject to the Red Flags Rule through future rulemaking if the agencies determine that the person in question maintains accounts subject to foreseeable risk of identity theft. Compliance with any such future rulemaking may require additional expenditures in the future.
Patient Safety and Quality Improvement Act of 2005: On July 29, 2005, the Patient Safety and Quality Improvement Act of 2005 was enacted, which has the goal of reducing medical errors and increasing patient safety. This legislation establishes a confidential reporting structure in which providers can voluntarily report patient safety work product, or PSWP, to patient safety organizations, or PSOs. Under the system, PSWP is made privileged, confidential and legally protected from disclosure. PSWP does not include medical, discharge or billing records or any other original patient or provider records but does include information gathered specifically in connection with the reporting of medical errors and improving patient safety. This legislation does not preempt state or federal mandatory disclosure laws concerning information that does not constitute PSWP. PSOs are certified by the Secretary of the HHS for three-year periods and analyze PSWP, provide feedback to providers and may report non-identifiable PSWP to a database. In addition, PSOs are expected to generate patient safety improvement strategies.
Environmental Regulations: Our healthcare operations generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. Infectious waste generators, including healthcare facilities, face substantial penalties for improper disposal of medical waste, including civil penalties of up to $25,000 per day of noncompliance, criminal penalties of up to $50,000 per day, imprisonment, and remedial costs. In addition, our operations, as well as our purchases and sales of facilities are subject to various other environmental laws, rules and regulations. We believe that our disposal of such waste is in material compliance with all state and federal laws.
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Corporate Practice of Medicine: Several states, including Florida, have laws and/or regulations that prohibit corporations and other entities from employing physicians and practicing medicine for a profit or that prohibit certain direct and indirect payments or fee-splitting arrangements between health care providers that are designed to induce or encourage the referral of patients to, or the recommendation of, particular providers for medical products and services. Possible sanctions for violation of these restrictions include loss of license and civil and criminal penalties. In addition, agreements between the corporation and the physician may be considered void and unenforceable. These statutes and/or regulations vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. We do not expect these state corporate practice of medicine proscriptions to significantly affect our operations. Many states have laws and regulations which prohibit payments for referral of patients and fee-splitting with physicians. We do not make any such payments or have any such arrangements.
Health Care Industry Investigations: We are subject to claims and suits in the ordinary course of business, including those arising from care and treatment afforded by our facilities and are party to various government investigations and litigation. In addition, currently, and from time to time, some of our facilities are subjected to inquiries and/or actions and receive notices of potential non-compliance of laws and regulations from various federal and state agencies. Providers that are found to have violated these laws and regulations may be excluded from participating in government healthcare programs, subjected to potential licensure, certification, and/or accreditation revocation, subjected to fines or penalties or required to repay amounts received from the government for previously billed patient services. We monitor all aspects of our business and have developed a comprehensive ethics and compliance program that is designed to meet or exceed applicable federal guidelines and industry standards. Because the law in this area is complex and constantly evolving, governmental investigation or litigation may result in interpretations that are inconsistent with industry practices, including ours. Although we believe our policies, procedures and practices comply with governmental regulations, no assurance can be given that we will not be subjected to inquiries or actions, or that we will not be faced with sanctions, fines or penalties in connection with the investigations. Even if we were to ultimately prevail, the government’s inquiry and/or action in connection with these matters could have a material adverse effect on our future operating results. It is possible that governmental entities could initiate additional investigations or litigation in the future and that such matters could result in significant penalties as well as adverse publicity. It is also possible that our executives and/or managers could be included as targets or witnesses in governmental investigations or litigation and/or named as defendants in private litigation.
Medical Malpractice Tort Law Reform: Medical malpractice tort law has historically been maintained at the state level. All states have laws governing medical liability lawsuits. Over half of the states have limits on damages awards. Almost all states have eliminated joint and several liability in malpractice lawsuits, and many states have established limits on attorney fees. Many states had bills introduced in their legislative sessions to address medical malpractice tort reform. Proposed solutions include enacting limits on non-economic damages, malpractice insurance reform, and gathering lawsuit claims data from malpractice insurance companies and the courts for the purpose of assessing the connection between malpractice settlements and premium rates. Reform legislation has also been proposed, but not adopted, at the federal level that could preempt additional state legislation in this area.
Real Estate Business
Our real estate business is operated by Edge View, which we acquired on July 16, 2014. Except in connection with the sale of three parcels of land in 2021, this business has not generated any revenues to date.
Our Property
We own five (5) acres zoned medium density residential (MDR) with 12 lots already platted; six (6) acres zoned high-density residential (HDR) that can be platted in various configurations to meet current housing needs; and twelve (12) acres zoned in Lemhi County as Agriculture that is available for further annexation into the City of Salmon for development, as well as a common area for landowners to view wildlife, provide access to the Salmon River and fishing in a two (2) acre pond. Salmon is known as Idaho’s premier whitewater destination as well as one of the easier accesses to the Frank Church Wilderness Area - the largest wilderness in the lower 48 states. Salmon’s airport has service to Boise, Idaho and serves as a hub to access whitewater rafting start points and wilderness landing strips. Management has invested years working to develop a new and exciting housing development in Salmon, Idaho and plans to enter into a joint venture agreement with a developer for this planned concept development.
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Intellectual Property
Edge View does not own any intellectual property.
Employees
Edge View does not have any employees.
Regulation
Federal, State and/or Local Regulatory Compliance
We are subject to a variety of Federal, state, and/or local statutes, ordinances, rules, and regulations covering the purchase, development, construction and operation of real estate assets. These regulatory requirements include zoning and land use, building design, construction, worksite safety, traffic, and other matters, such as local rules that may impose restrictive zoning and developmental requirements. We are subject to various licensing, registration, and filing requirements in connection with our real estate assets. Finally, state and/or local governments retain certain rights with respect to eminent domain which could enable them to restrict or alter the use of our property. These requirements may lead to increases in our overall costs. The need to comply with these requirements may significantly delay development and/or construction with regard to our properties or lead us to alter our plans regarding our real estate assets.
Environmental Regulatory Compliance
Under various Federal, state and/or local laws, ordinances and regulations, a current or previous owner or operator of a property may be required to investigate and/or clean-up hazardous or toxic substances released at that property. That owner or operator also may be held liable to third parties for bodily injury or property damage (investigation and/or clean-up costs) incurred by those parties in connection with the contamination at that site. These laws often impose liability without regard to whether the owner or operator knew of or otherwise caused the release of the hazardous or toxic substances. In addition, persons who arrange for the disposal or treatment of hazardous substances or other regulated materials also may be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such persons.
The costs of remediation or removal of hazardous or toxic substances can be substantial, and the presence of contamination, or the failure to remediate contamination discovered, at a property we own or operate may adversely affect our ability to develop, construct on, sell, lease, or borrow upon that property.
In addition, our properties may be exposed to a risk of contamination originating from other sources. While a property owner generally is not responsible for remediating contamination that has migrated on-site from an off-site source, the contaminant’s presence could have adverse effects on our ability to develop, construct on, operate, sell, lease, or borrow upon that property. Certain environmental laws may create a lien on a contaminated site in favor of the government for damages and costs the government may incur to remediate that contamination. Moreover, if contamination is discovered on a property, environmental laws may impose restrictions on the manner in which that property may be used, or how businesses may be operated on that property, thus reducing our ability to maximize our investment in that property. Our properties have been subjected to varying degrees of environmental assessment at various times; however, the identification of new areas of contamination, a change in the extent or known scope of contamination, or changes in environmental regulatory standards and/or cleanup requirements could result in significant costs to us.
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| ITEM 1A. | RISK FACTORS. |
An investment in our securities involves a high degree of risk. You should carefully read and consider all of the risks described below, together with all of the other information contained or referred to in this report, before making an investment decision with respect to our securities. If any of the following events occur, our financial condition, business and results of operations (including cash flows) may be materially adversely affected. In that event, the market price of our shares could decline, and you could lose all or part of your investment.
Risks Related to Our Business and Structure
The report of our independent registered public accounting firm included a “going concern” explanatory paragraph.
The report of our independent registered public accounting firm that accompanies our financial statements for the year ended December 31, 2023 contains an explanatory paragraph relating to our ability to continue as a going concern. We had previously sustained operating losses since our inception, have an accumulated deficit of $68,684,115 and $70,932,435 as of December 31, 2023 and 2022, respectively, and had negative cash flow from operating activities of $1,807,987 and $1,099,461 during the years ended December 31, 2023 and 2022, respectively. These factors raise a substantial doubt about our ability to continue as a going concern.
However, management believes, 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 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.
Although we do not believe that we will require additional cash to continue our operations over the next twelve months, there are no assurances that we will be able to raise our revenues to a level which supports profitable operations and provides sufficient funds to pay obligations in the future. Our prior losses have had an adverse effect on our financial condition. In addition, continued operations and our ability to acquire additional businesses may be dependent on our ability to obtain additional financing in the future, and there are no assurances that such financing will be available to us at all or will be available in sufficient amounts or on reasonable terms. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. If we are unable to generate additional funds in the future through our operations, financings or from other sources or transactions, we will exhaust our resources and will be unable to continue operations. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in our company.
Our typical accounts receivable collection lifecycle is between eighteen and twenty-four months. This extended period creates several risks relating to our liquidity and cash flow, exposure to bad debt, dependence on external financing, negative impact on our financial metrics and operational challenges.
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We operate in the lien-based medical industry. We provide orthopedic healthcare to uninsured patients. Our patients have typically been in an accident and have filed a lawsuit as plaintiff against the defendant who is allegedly responsible for the accident as the result of negligence or another tort. Since the patient is uninsured, we must wait for payments of amounts owed to us until the patient’s lawyer settles the claim against the defendant’s insurance company or the defendant himself. As a result of our need to wait for such a settlement, we experience an extended accounts receivable collection period, which typically ranges from eighteen to twenty-four months. This extended accounts receivable collection period is very different from a traditional product or service business that collects a majority of receivables within 30, 60, and/or 90-day increments. We routinely receive a letter of protection from our patient and its legal counsel which ensures payment in full from insurance settlements. A letter of protection is a legally binding contract that exists between the patient’s personal injury attorney, the patient, and our company, as the healthcare provider. The letter promises that the patient will pay the medical expenses after the patient’s injury claim reaches its settlement.
This prolonged collection cycle presents several risks that could materially and adversely affect our business, financial condition, and results of operations, including the following.
| · | Liquidity and Cash Flow Constraints: The long duration between the sale of our products or services and the receipt of payment from our customers can significantly strain our liquidity and cash flow. This extended time period can limit our ability to invest in growth opportunities, meet our operating expenses, and fulfill our obligations as they become due. |
| · | Increased Exposure to Bad Debt: Notwithstanding that we typically receive a letter of protection, extended collection periods increase the risk that customers may default on their obligations especially if the settlement is not achieved or achieved in an amount that is not sufficient to cover our cost. Economic downturns, financial difficulties of our customers, or changes in their operational priorities can exacerbate this risk, potentially leading to higher than anticipated bad debt expenses. |
| · | Dependence on External Financing: To mitigate the impact of delayed collections, we may need to rely more heavily on external financing sources such as factoring arrangements, lines of credit, loans, or equity financing. Such dependence may result in increased interest expenses, dilution of shareholders' equity, or restrictive covenants that could limit our operational flexibility. |
| · | Impact on Financial Metrics: Prolonged accounts receivable cycles can distort our financial metrics, including working capital ratios, days sales outstanding (DSO), and cash conversion cycle. These distorted metrics may negatively influence investor perceptions, credit ratings, and our overall financial health. |
| · | Operational Challenges: Managing long accounts receivable cycles requires robust credit risk management and collections processes. Failure to effectively manage these processes could lead to inefficiencies and higher operational costs. |
As a result of these risks relating to our extended accounts receivable collection cycles, our financial condition, prospects and results of operations may be materially adversely affected.
We lack systematic processes and resources to support the aging of our accounts receivables, which can result in inefficiencies and higher operational costs. In order to remedy this issue, we expect to make significant expenditures.
Our business model involves providing healthcare services to patients who have been involved in accidents, with payment for these services typically collected from the patient’s settlement with the defendant’s insurer. This business model results in an extended accounts receivable collection period of eighteen to twenty-four months. The lengthy collection period may adversely impact our cash flow and liquidity, making it more challenging to meet operational and financial obligations.
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Historically, we have not maintained systematic processes and resources to manage and monitor the aging of our accounts receivables. The settlement process is complex and ongoing patient care can further complicate the accurate aging of receivables. These complexities may lead to difficulties in assessing the true financial health of our company and in predicting cash flow accurately. Currently, our third-party billing company only captures the first date of service for each patient. This first date of service may be months before surgery or before any significant services have been rendered. The receivable relating to the patient continues to grow over time, which distorts the actual aging of the receivable. With regard to facilities and anesthesiology services, our third-party billing company historically had not captured any first date of service, so we do not have historical data relating to the aging of accounts receivable relating to these services. Recently, we have been working with our third-party billing company to resolve the systematic issue with respect to facilities and anesthesiology services in order to begin to capture the first date of service. We believe that these changes to our financial systems will assist us going forward, but we expect an eighteen to twenty-four month lag before we are able to obtain relevant aging data with regard to these receivables.
We expect that it will take eighteen to twenty-four months to support the aging of our accounts receivables and ensure accurate estimation of the receivable lifecycle, and will require us to devote significant resources during that period. These resources include additional dedicated personnel. We do not expect a significant additional out-of-pocket cost to remedy this situation.
We are in the process of implementing enhanced practices to better capture and manage the aging of its billings for accounts receivable. However, these practices are not yet fully operational. Until these new practices are effectively in place, we remain exposed to risks associated with delayed collections and potential inaccuracies in financial reporting.
If we are unable to successfully implement and maintain these enhanced processes, we may face continued challenges in managing our accounts receivables, which could have a material adverse effect on its financial condition, results of operations, and cash flows. Investors should consider these risks when evaluating our financial stability and performance.
Our acquisition strategy exposes us to substantial risk.
Our acquisition of companies is subject to substantial risk, including but not limited to the failure to identify material problems during due diligence (for which we may not be indemnified post-closing), the risk of over-paying for assets (or not making acquisitions on an accretive basis), the ability to obtain or retain customers and the risks of entering markets where we have limited experience. While we perform due diligence on prospective acquisitions, we may not be able to discover all potential operational deficiencies in such entities.
Our prior and future businesses may not perform as expected or the returns from such businesses may not support the financing utilized to acquire them or maintain them. Furthermore, integration and consolidation of acquired businesses requires substantial human, financial and other resources and may divert management’s attention from our existing business concerns, disrupt our ongoing business or not be successfully integrated. Even if we consummate businesses that we believe will be accretive, those businesses may in fact result in a decrease in revenues as a result of incorrect assumptions in our evaluation of such businesses, unforeseen consequences, or other external events beyond our control. Furthermore, if we consummate any future acquisitions, our capitalization and results of operations may change significantly, and stockholders will generally not have the opportunity to evaluate the economic, financial, and other relevant information that we will consider in determining the application of these funds and other resources. As a result, the consummation of acquisitions may have a material adverse effect on our business, financial condition, results of operations and cash flows.
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We may experience difficulty as we evaluate, acquire and integrate businesses that we may acquire, which could result in drains on our resources, including the attention of our management, and disruptions of our on-going business.
We acquire small to mid-sized businesses in various industries. Generally, because such businesses are privately held, we may experience difficulty in evaluating potential target businesses as much of the information concerning these businesses is not publicly available. Therefore, our estimates and assumptions used to evaluate the operations, management and market risks with respect to potential target businesses may be subject to various risks and uncertainties. Further, the time and costs associated with identifying and evaluating potential target businesses may cause a substantial drain on our resources and may divert our management team’s attention away from the operations of our businesses for significant periods of time.
In addition, we may have difficulty effectively integrating and managing acquisitions. The management or improvement of businesses we acquire may be hindered by a number of factors, including limitations in the standards, controls, procedures and policies implemented in connection with such acquisitions. Further, the management of an acquired business may involve a substantial reorganization of the business’ operations resulting in the loss of employees and customers or the disruption of our ongoing businesses. We may experience greater than expected costs or difficulties relating to an acquisition, in which case, we might not achieve the anticipated returns from any particular acquisition.
We may not be able to effectively integrate the businesses that we acquire.
Our ability to realize the anticipated benefits of acquisitions will depend on our ability to integrate those businesses with our own. The combination of multiple independent businesses is a complex, costly and time-consuming process and there can be no assurance that we will be able to successfully integrate businesses into our business, or if such integration is successfully accomplished, that such integration will not be costlier or take longer than presently contemplated. Integration of future acquisitions may include various risks and uncertainties, including the factors discussed in the paragraph below. If we cannot successfully integrate and manage the businesses within a reasonable time, we may not be able to realize the potential and anticipated benefits of such acquisitions, which could have a material adverse effect on our stock price, business, cash flows, results of operations and financial position.
We will consider acquisitions that we believe will complement, strengthen and enhance our growth. We evaluate opportunities on a preliminary basis from time to time, but these transactions may not advance beyond the preliminary stages or be completed. Such acquisitions are subject to various risks and uncertainties, including:
| · | the inability to effectively integrate the operations, products, technologies, and personnel of the acquired companies (some of which are in diverse geographic regions) and achieve expected synergies; | |
| · | the potential disruption of existing business and diversion of management’s attention from day-to-day operations; | |
| · | the inability to maintain uniform standards, controls, procedures, and policies; | |
| · | the need or obligation to divest portions of the acquired companies; | |
| · | the potential failure to identify material problems and liabilities during due diligence review of acquisition targets; | |
| · | the potential failure to obtain sufficient indemnification rights to fully offset possible liabilities associated with acquired businesses; and | |
| · | the challenges associated with operating in new geographic regions. |
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Failure to manage our growing and changing business could have a material adverse effect on our business, prospects, financial condition, and results of operations.
As we grow, we expect to encounter additional challenges to our internal processes, capital commitment process, and acquisition funding and financing capabilities. Our existing operations, personnel, systems, and internal control may not be adequate to support our growth and expansion and may require us to make additional unanticipated investments in our infrastructure. To manage the future growth of our operations, we will be required to improve our administrative, operational, and financial systems, procedures, and controls, and maintain, expand, train, and manage our growing employee base. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies successfully or respond to competitive pressures. As a result, our business, prospects, financial condition, and results of operations could be materially and adversely affected.
We face competition for businesses that fit our acquisition strategy and, therefore, we may have to acquire targets at sub-optimal prices or, alternatively, forego certain acquisition opportunities.
We have been formed to acquire and manage small to mid-sized businesses. In pursuing such acquisitions, we expect to face strong competition from a wide range of other potential purchasers. Although the pool of potential purchasers for such businesses is typically smaller than for larger businesses, those potential purchasers can be aggressive in their approach to acquiring such businesses. Furthermore, we expect that we may need to use third-party financing in order to fund some or all of these potential acquisitions, thereby increasing our acquisition costs. To the extent that other potential purchasers do not need to obtain third-party financing or are able to obtain such financing on more favorable terms, they may be in a position to be more aggressive with their acquisition proposals. As a result, in order to be competitive, our acquisition proposals may need to be aggressively priced, including at price levels that exceed what we originally determined to be fair or appropriate. Alternatively, we may determine that we cannot pursue on a cost-effective basis what would otherwise be an attractive acquisition opportunity.
We may not be able to successfully fund acquisitions due to the unavailability of equity or debt financing on acceptable terms, which could impede the implementation of our acquisition strategy.
We finance acquisitions primarily through additional equity and debt financings. Because the timing and size of acquisitions cannot be readily predicted, we may need to be able to obtain funding on short notice to benefit fully from attractive acquisition opportunities. The sale of additional shares of any class of equity will be subject to market conditions and investor demand for such shares at prices that may not be in the best interest of our stockholders. The sale of additional equity securities could also 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. These risks may materially adversely affect our ability to pursue our acquisition strategy.
We may change our management and acquisition strategies without the consent of our stockholders, which may result in a determination by us to pursue riskier business activities.
We may change our strategy at any time without the consent of our stockholders, which may result in our acquiring businesses or assets that are different from, and possibly riskier than, the strategy described in this prospectus. A change in our strategy may increase our exposure to interest rate and currency fluctuations, subject us to regulation under the Investment Company Act or subject us to other risks and uncertainties that affect our operations and profitability.
We are a holding company and rely on distributions and other payments, advances, and transfers of funds from our subsidiaries to meet our obligations.
Our primary business is the holding and managing of controlling interests our operating businesses. Therefore, we will be dependent upon the ability of our businesses to generate cash flows and, in turn, distribute cash to us in the form of distributions, advances and other transfers of funds to enable us to satisfy our financial obligations. The ability of our businesses to make payments to us may also be subject to limitations under laws of the jurisdictions in which they are incorporated or organized.
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In the future, we may seek to enter into credit facilities to help fund our acquisition capital and working capital needs. These credit facilities may expose us to additional risks associated with leverage and may inhibit our operating flexibility.
We may seek to enter into credit facilities with third-party lenders to help fund our acquisitions. Such credit facilities will likely require us to pay a commitment fee on the undrawn amount and will likely contain a number of affirmative and restrictive covenants. If we violate any such covenants, our lenders could accelerate the maturity of any debt outstanding. Such debt may be secured by our assets, including the stock we may own in businesses that we acquire and the rights we have under intercompany loan agreements that we may enter into with our businesses. Our ability to meet our debt service obligations may be affected by events beyond our control and will depend primarily upon cash produced by businesses that we currently manage and may acquire in the future and distributed or paid to us. Any failure to comply with the terms of our indebtedness may have a material adverse effect on our financial condition.
In addition, we expect that such credit facilities will bear interest at floating rates which will generally change as interest rates change. We will bear the risk that the rates that we are charged by our lenders will increase faster than we can grow the cash flow from our businesses or businesses that we may acquire in the future, which could reduce profitability, materially adversely affect our ability to service our debt, cause us to breach covenants contained in our third-party credit facilities and reduce cash flow available for distribution.
The loss of the services of the current officers and directors could severely impact our business operations and future development, which could result in a loss of revenues and one’s ability to ever sell any shares.
Our performance is substantially dependent upon the professional expertise of the current officers and board of directors. Each has extensive expertise in business development and acquisitions, and we are dependent on their abilities. If they are unable to perform their duties, this could have an adverse effect on business operations, financial condition, and operating results if we are unable to replace them with other individuals qualified to develop and market our business. The loss of their services could result in a loss of revenues, which could result in a reduction of the value of any shares you hold as well as the complete loss of your investment.
Our future success is dependent on the management teams of our businesses, the loss of any of whom could materially adversely affect our financial condition, business, and results of operations.
The future success of our existing and future businesses depends on the respective management teams of those businesses because we intend to operate our businesses on a stand-alone basis, primarily relying on their existing management teams for day-to-day operations. Consequently, their operational success, as well as the success of any organic growth strategy, will be dependent on the continuing efforts of the management teams of our businesses. We will seek to provide these individuals with equity incentives and to have employment agreements with certain persons we have identified as key to their businesses. However, these measures may not prevent these individuals from leaving their employment. The loss of services of one or more of these individuals may materially adversely affect our financial condition, business, and results of operations.
We may engage in a business transaction with one or more target businesses that have relationships with our executive officers, our directors, or any of their respective affiliates, which may create or present conflicts of interest.
We may decide to engage in a business transaction with one or more target businesses with which our executive officers, our directors, or any of their respective affiliates, have a relationship, which may create or present conflicts of interest. Regardless of whether we obtain a fairness opinion from an independent investment banking firm with respect to such a transaction, conflicts of interest may still exist with respect to a particular acquisition and, as a result, the terms of the acquisition of a target business may not be as advantageous to our shareholders as it would have been absent any conflicts of interest.
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The operational objectives and business plans of our businesses may conflict with our operational and business objectives or with the plans and objective of another business we own and operate.
Our businesses operate in different industries and face different risks and opportunities depending on market and economic conditions in their respective industries and regions. A business’ operational objectives and business plans may not be similar to our objectives and plans or the objectives and plans of another business that we own and operate. This could create competing demands for resources, such as management attention and funding needed for operations or acquisitions, in the future.
If, in the future, we cease to control and operate our businesses or other businesses that we acquire in the future or engage in certain other activities, we may be deemed to be an investment company under the Investment Company Act.
We have the ability to make investments in businesses that we will not operate or control. If we make significant investments in businesses that we do not operate or control, or that we cease to operate or control, or if we commence certain investment-related activities, we may be deemed to be an investment company under the Investment Company Act. Our decision to sell a business will be based upon financial, operating, and other considerations rather than a plan to complete a sale of a business within any specific time frame. If we were deemed to be an investment company, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the Securities and Exchange Commission, or the SEC, or modify our investments or organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially adversely affect our financial condition, business, and results of operations, materially limit our ability to borrow funds or engage in other transactions involving leverage and require us to add directors who are independent of us and otherwise will subject us to additional regulation that will be costly and time-consuming.
We have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential shareholders could lose confidence in our financial statements, which would harm the trading price of our common shares.
Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large, accelerated filers or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies, like us, are not required to include an attestation report of their auditors in annual reports.
A report of our management is included under Item 9A “Controls and Procedures.” We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in our annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive a positive attestation from our independent auditors.
During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2023, management identified material weaknesses. These material weaknesses were associated with our lack of (i) formal documentation over internal control procedures and environment, (ii) proper segregation of duties and multiple level of reviews and (iii) expertise in accounting of derivative liabilities. We also have not developed and effectively communicated our accounting policies and procedures to our employees, which has resulted in inconsistent practices. We are undertaking remedial measures, which measures will take time to implement and test, to address these material weaknesses. There can be no assurance that such measures will be sufficient to remedy the material weaknesses identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price.
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Risks Related to Our Healthcare Business
Our ability to grow our business through organic expansion either by developing new facilities or by modifying existing facilities is dependent upon many factors.
Our ability to grow our business through organic expansion is dependent on capacity and occupancy at our facilities. Should our facilities reach maximum occupancy, we may need to implement other growth strategies either by developing new facilities or by modifying existing facilities.
Our facilities typically need to be purpose-designed in order to enable the type and quality of service that we provide. Consequently, we must either develop sites to create facilities or purchase or lease existing facilities, which may require substantial modification. We must be able to identify suitable sites and there is no guarantee that such sites will be available at all, or at an economically viable cost or in areas of sufficient demand for our services. The subsequent successful development and construction of a new facility is contingent upon, among other things, negotiation of construction contracts, regulatory permits and planning consents and satisfactory completion of construction. Similarly, our ability to expand existing facilities is also dependent upon various factors, including identification of appropriate expansion projects, permitting, licensure, financing, integration into our relationships with payors and referral sources, and margin pressure as new facilities are filled with patients.
Delays caused by difficulties in respect of any of the above factors may lead to cost overruns and longer periods before a return is generated on an investment, if at all. We may incur significant capital expenditure but due to a regulatory, planning, or other reason, may find that we are prevented from opening a new facility or modifying an existing facility. Moreover, even when incurring such development capital expenditure, there is no guarantee that we can fill beds when they become available. Upon operational commencement of a new facility, we typically expect that it will take approximately 12-18 months to reach our targeted occupancy level. Any delays or stoppages in our projects, the unsatisfactory completion or construction of such projects or the failure of such projects to increase our occupancy levels could have a material adverse effect on our business, results of operations and financial condition.
Changes to payment rates or methods of third-party payors, including government healthcare programs, changes to the laws and regulations that regulate payments for medical services, the failure of payment rates to increase as our costs increase, or changes to our payor mix, could adversely affect our operating margins and revenues.
Our revenue is primarily provided by bodily injury policies, general liability policies, and personal injury protection policies, which partially insulates our business from the declining reimbursement programs paid from or correlated to Medicare/Medicaid and traditional health insurance companies. However, we do also depend on private and governmental third-party sources of payment for the services provided to patients and assume financial risks related to changes in third-party reimbursement rates and changes in payor mix. In some cases, our revenue decreases if our volume or reimbursement decreases, but our expenses, including physician compensation, may not decrease proportionately.
The amount we receive for our services may be adversely affected by market and cost factors as well as other factors over which we have no control, including changes to the Medicare and Medicaid payment systems. Health reform efforts at the federal and state levels may increase the likelihood of significant changes affecting government healthcare programs and private insurance coverage. Government healthcare programs are subject to, among other things, statutory and regulatory changes, administrative rulings, interpretations, and determinations concerning patient eligibility requirements, funding levels and the method of calculating payments or reimbursements, all of which could materially increase or decrease payments we receive from these government programs. Further, Medicare reimbursement rates are increasingly used by private payors as benchmarks to establish commercial reimbursement rates and any adjustment in Medicare reimbursement rates may impact our reimbursement rates from such private payors as well.
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There are significant private and public sector pressures to restrain healthcare costs and to restrict reimbursement rates for medical services, and we believe that such pressures will continue. Many states are continuing to collect less revenue than they did in prior years, and as a result may face ongoing budget shortfalls and underfunded pension and other liabilities. Deteriorating financial conditions in the states in which we operate could lead to reduced or delayed funding for Medicaid programs, which may reduce or delay the reimbursement we receive for services provided. Major payors of healthcare, including federal and state governments and private insurers, have taken steps in recent years to monitor and control costs, eligibility for and use and delivery of healthcare services, and to revise payment methodologies. As part of their efforts to contain healthcare costs, purchasers increasingly are demanding discounted or global fee structures or the assumption by healthcare providers of all or a portion of the financial risk through shared risk, capitation, and care management arrangements, often in exchange for exclusive or preferred participation in their benefit plans. Further, the ability of commercial payors to control healthcare costs may be enhanced by the increasing consolidation of insurance and managed care companies, which may reduce our ability to negotiate favorable contracts with such payors.
We expect efforts to impose greater discounts and more stringent cost controls by government and other payors to continue, thereby reducing the payments we receive for our services. The effect of cost containment trends will depend, in part, on our payor mix. We cannot assure you that we will be able to offset reduced operating margins through cost reductions, increased volume, the introduction of additional procedures or otherwise. In addition, we cannot assure you that future changes to reimbursement rates by government healthcare programs, cost containment measures by private third-party payors, including fixed fee schedules and capitated payment arrangements, or other factors affecting payments for healthcare services will not adversely affect our future revenues, operating margins, or profitability.
An increase in uninsured or underinsured patients or the deterioration in the collectability of the accounts of such patients could harm our results of operations.
Collection of receivables from third-party payors and patients is critical to our operating performance. Our primary collection risks relate to uninsured patients and the portion of the bill that is the patient’s responsibility, which primarily includes co-payments and deductibles. We determine the transaction price based on established billing rates reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients and implicit price concessions. Contractual adjustments and discounts are based on contractual agreements, discount policies and historical experience. Implicit price concessions are based on historical collection experience. Significant changes in business office operations, payor mix, economic conditions, or trends in federal and state governmental health coverage could affect our collection of accounts receivable, cash flow and results of operations. If we experience unexpected increases in the growth of uninsured and underinsured patients or in bad debt expenses, our results of operations will be harmed.
Failure to timely or accurately bill for services could have a negative impact on our net revenue, bad debt expense and cash flow.
Billing for healthcare services is an important but complex aspect of our business. In particular, the current practice of providing physician services in advance of payment or, in some cases, irrespective of the patient’s ability to pay for such services, may have significant negative impact on our net revenue, bad debt expense and cash flow. We bill numerous and varied payors, such as bodily injury policies, general liability policies, and personal injury protection policies, self-pay patients, managed care payors and Medicare and Medicaid. These different payors typically have different billing requirements that must be satisfied prior to receiving payment for services rendered. Reimbursement is typically conditioned on our documenting medical necessity, the appropriate level of service and correctly applying diagnosis codes. Incorrect or incomplete documentation and billing information could result in non-payment for services rendered.
Additional factors that could complicate our ability to timely or accurately bill payors include:
| · | disputes between payors as to which party is responsible for payment; | |
| · | failure of information systems and processes to submit and collect claims in a timely manner; |
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| · | variation in coverage for similar services among various payors; | |
| · | our reliance on third-parties to provide billing services for certain of our service lines; | |
| · | the difficulty of adherence to specific compliance requirements, diagnosis coding and other procedures mandated by various payors; and | |
| · | in connection with billing for physician services, failure to obtain proper physician credentialing and documentation in order to bill various payors. |
To the extent that the complexity associated with billing for healthcare services we provide causes delays in our cash collections, we may experience increased carrying costs associated with the aging of our accounts receivable as well as increased potential for bad debt expense.
Our facilities face competition for patients from other healthcare providers.
The healthcare industry is highly competitive, and competition among healthcare providers for patients and physicians has intensified in recent years. In all of the geographical areas in which we operate, there are other facilities that provide services comparable to those offered by our facilities. Some of our competitors include facilities that are owned by tax-supported governmental agencies or by nonprofit corporations and may be supported by endowments and charitable contributions and exempt from property, sales, and income taxes. Such exemptions and support are not available to us.
Certain of our competitors may have greater financial resources, be better equipped and offer a broader range of services than we offer. The number of facilities in the geographic areas in which we operate has increased significantly. As a result, most of our facilities operate in an increasingly competitive environment.
If our competitors are better able to attract patients, recruit physicians and other healthcare professionals, expand services or obtain favorable managed care contracts at their facilities, we may experience a decline in patient volume and our business may be harmed.
Our performance depends on our ability to recruit and retain quality physicians.
The success and competitive advantage of our facilities depends, in part, on the number and quality of the physicians on the medical staffs of our facilities, the admitting practices of those physicians and our maintenance of good relations with those physicians. Physicians generally are not employees of our facilities and may have admitting privileges at other similar facilities to ours. They may terminate their affiliation with us at any time. If we are unable to provide high ethical and professional standards, adequate support personnel and technologically advanced equipment and facilities that meet the needs of those physicians, they may be discouraged from referring patients to our facilities and our results of operations may decline.
Our performance depends on our ability to attract and retain qualified nurses and medical support staff and we face competition for staffing that may increase our labor costs and harm our results of operations.
We depend on the efforts, abilities, and experience of our medical support personnel, including our nurses, pharmacists and lab technicians and other healthcare professionals. We compete with other healthcare providers in recruiting and retaining qualified hospital management, nurses, and other medical personnel.
The nationwide shortage of nurses and other clinical staff and support personnel has been a significant operating issue facing us and other healthcare providers. In particular, like others in the healthcare industry, we continue to experience a shortage of nurses and other clinical staff and support personnel at our facilities in many geographic areas, which shortage was exacerbated by the COVID-19 pandemic. In some areas, the increased demand for care is putting a strain on our resources and staff, which has required us to utilize higher-cost temporary labor and pay premiums above standard compensation for essential workers. This staffing shortage may require us to further enhance wages and benefits to recruit and retain nurses and other clinical staff and support personnel or require us to hire expensive temporary personnel. To the extent we cannot maintain sufficient staffing levels at our facilities, we may be required to limit our services at certain of our facilities, which would have a corresponding adverse effect on our net revenues.
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We cannot predict the degree to which we will be affected by the future availability or cost of attracting and retaining talented medical support staff. If our general labor and related expenses increase, we may not be able to raise our rates correspondingly. Our failure to either recruit and retain qualified management, nurses and other medical support personnel or control our labor costs could harm our results of operations.
If we do not continually enhance our facilities with the most recent technological advances in diagnostic and surgical equipment, our ability to maintain and expand our markets will be adversely affected.
The technology used in medical equipment and related devices is constantly evolving and, as a result, manufacturers and distributors continue to offer new and upgraded products to healthcare providers. To compete effectively, we must continually assess our equipment needs and upgrade when significant technological advances occur. If our facilities do not stay current with technological advances in the healthcare industry, patients may seek treatment from other providers and/or physicians may refer their patients to alternate sources, which could adversely affect our results of operations and harm our business.
If we fail to comply with extensive laws and government regulations, we could suffer civil or criminal penalties or be required to make significant changes to our operations that could reduce our revenue and profitability.
The healthcare industry is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things: hospital billing practices and prices for services; relationships with physicians and other referral sources; adequacy of medical care and quality of medical equipment and services; ownership of facilities; qualifications of medical and support personnel; confidentiality, maintenance, privacy and security issues associated with health-related information and patient medical records; certification, licensure and accreditation of our facilities; operating policies and procedures, and; construction or expansion of facilities and services.
Among these laws are the federal False Claims Act, HIPAA and the federal anti-kickback statute and the provision of the Social Security Act commonly known as the “Stark Law.” These laws, and particularly the anti-kickback statute and the Stark Law, impact the relationships that we may have with physicians and other referral sources. We have a variety of financial relationships with physicians who refer patients to our facilities. The Office of the Inspector General of the Department of Health and Human Services, or OIG, has enacted safe harbor regulations that outline practices that are deemed protected from prosecution under the anti-kickback statute. A number of our current arrangements, including financial relationships with physicians and other referral sources, may not qualify for safe harbor protection under the anti-kickback statute. Failure to meet a safe harbor does not mean that the arrangement necessarily violates the anti-kickback statute but may subject the arrangement to greater scrutiny. We cannot assure you that practices that are outside of a safe harbor will not be found to violate the anti-kickback statute. The Centers for Medicare and Medicaid Services, or CMS, published a Medicare self-referral disclosure protocol, which is intended to allow providers to self-disclose actual or potential violations of the Stark Law. Because there are only a few judicial decisions interpreting the Stark Law, there can be no assurance that our facilities will not be found in violation of the Stark Law or that self-disclosure of a potential violation would result in reduced penalties.
Federal regulations issued under HIPAA contain provisions that require us to implement and, in the future, may require us to implement additional costly electronic media security systems and to adopt new business practices designed to protect the privacy and security of each of our patient’s health and related financial information. Such privacy and security regulations impose extensive administrative, physical, and technical requirements on us, restrict our use and disclosure of certain patient health and financial information, provide patients with rights with respect to their health information and require us to enter into contracts extending many of the privacy and security regulatory requirements to third parties that perform duties on our behalf. Additionally, recent changes to HIPAA regulations may result in greater compliance requirements, including obligations to report breaches of unsecured patient data, as well as create new liabilities for the actions of parties acting as business associates on our behalf.
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These laws and regulations are extremely complex, and, in many cases, we do not have the benefit of regulatory or judicial interpretation. In the future, it is possible that different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. A determination that we have violated one or more of these laws, or the public announcement that we are being investigated for possible violations of one or more of these laws, could have a material adverse effect on our business, financial condition or results of operations and our business reputation could suffer significantly. In addition, we cannot predict whether other legislation or regulations at the federal or state level will be adopted, what form such legislation or regulations may take or what their impact on us may be.
If we are deemed to have failed to comply with the anti-kickback statute, the Stark Law or other applicable laws and regulations, we could be subjected to liabilities, including criminal penalties, civil penalties (including the loss of our licenses to operate one or more facilities), and exclusion of one or more facilities from participation in the Medicare, Medicaid, and other federal and state healthcare programs. The imposition of such penalties could have a material adverse effect on our business, financial condition, or results of operations.
We are subject to occupational health, safety and other similar regulations and failure to comply with such regulations could harm our business and results of operations.
We are subject to a wide variety of federal, state, and local occupational health and safety laws and regulations. Regulatory requirements affecting us include, but are not limited to, those covering: (i) air and water quality control; (ii) occupational health and safety (e.g., standards regarding blood-borne pathogens and ergonomics, etc.); (iii) waste management; (iv) the handling of asbestos, polychlorinated biphenyls, and radioactive substances; and (v) other hazardous materials. If we fail to comply with those standards, we may be subject to sanctions and penalties that could harm our business and results of operations.
We may be required to spend substantial amounts to comply with statutes and regulations relating to privacy and security of protected health information.
There are currently numerous legislative and regulatory initiatives in the U.S. addressing patient privacy and information security concerns. In particular, federal regulations issued under HIPAA require our facilities to comply with standards to protect the privacy, security and integrity of protected health information, or PHI. These requirements include the adoption of certain administrative, physical, and technical safeguards; development of adequate policies and procedures, training programs and other initiatives to ensure the privacy of PHI is maintained; entry into appropriate agreements with so-called business associates; and affording patients certain rights with respect to their PHI, including notification of any breaches. Compliance with these regulations requires substantial expenditures, which could negatively impact our business, financial condition, or results of operations. In addition, our management has spent, and may spend in the future, substantial time, and effort on compliance measures.
Violations of the privacy and security regulations could subject our operations to substantial civil monetary penalties and substantial other costs and penalties associated with a breach of data security, including criminal penalties. We may also be subject to substantial reputational harm if we experience a substantial security breach involving PHI.
State efforts to regulate the construction or expansion of health care facilities could impair our ability to expand.
Many states, including Florida, have enacted CON laws as a condition prior to capital expenditures, construction, expansion, modernization, or initiation of major new services. Failure to obtain necessary state approval can result in our inability to complete an acquisition, expansion or replacement, the imposition of civil or, in some cases, criminal sanctions, the inability to receive Medicare or Medicaid reimbursement or the revocation of a facility’s license, which could harm our business. In addition, significant CON reforms have been proposed in a number of states that would increase the capital spending thresholds and provide exemptions of various services from review requirements. In the past, we have not experienced any material adverse effects from those requirements, but we cannot predict the impact of these changes upon our operations.
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A cyber security incident could cause a violation of HIPAA, breach of member privacy, or other negative impacts.
We rely extensively on our information technology, or IT, systems to manage clinical and financial data, communicate with our patients, payers, vendors and other third parties and summarize and analyze operating results. In addition, we have made significant investments in technology to adopt and utilize electronic health records and to become meaningful users of health information technology pursuant to the American Recovery and Reinvestment Act of 2009. Our IT systems are subject to damage or interruption from power outages, facility damage, computer and telecommunications failures, computer viruses, security breaches including credit card or personally identifiable information breaches, vandalism, theft, natural disasters, catastrophic events, human error and potential cyber threats, including malicious codes, worms, phishing attacks, denial of service attacks, ransomware and other sophisticated cyber-attacks, and our disaster recovery planning cannot account for all eventualities. As cyber criminals continue to become more sophisticated through evolution of their tactics, techniques, and procedures, we have taken, and will continue to take, additional preventive measures to strengthen the cyber defenses of our networks and data. However, if any of our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss or corruption of critical data such as protected health information or other data subject to privacy laws and proprietary business information and interruptions or disruptions and delays in our ability to perform critical functions, which could materially and adversely affect our businesses and results of operations and could result in significant penalties or fines, litigation, loss of customers, significant damage to our reputation and business, and other losses. In addition, our future results of operations, as well as our reputation, could be adversely impacted by theft, destruction, loss, or misappropriation of public health information, other confidential data, or proprietary business information.
We may fail to deal with clinical waste in accordance with applicable regulations or otherwise be in breach of relevant medical, health and safety or environmental laws and regulations.
As part of our normal business activities, we produce and store clinical waste which may produce effects harmful to the environment or human health. The storage and transportation of such waste is strictly regulated. Our waste disposal services are outsourced and should the relevant service provider fail to comply with relevant regulations, we could face sanctions or fines which could adversely affect our brand, reputation, business, or financial condition. Health and safety risks are inherent in the services that we provide and are constantly present in our facilities, primarily in respect of food and water quality, as well as fire safety and the risk that service users may cause harm to themselves, other service users or employees. From time to time, we have experienced, like other providers of similar services, undesirable health, and safety incidents. Some of our activities are particularly exposed to significant medical risks relating to the transmission of infections or the prescription and administration of drugs for residents and patients. If any of the above medical or health and safety risks were to materialize, we may be held liable, fined and any registration certificate could be suspended or withdrawn for failure to comply with applicable regulations, which may have a material adverse impact on our business, results of operations and financial condition.
If any of our existing healthcare facilities lose their accreditation or any of our new facilities fail to receive accreditation, such facilities could become ineligible to receive reimbursement under Medicare or Medicaid.
The construction and operation of healthcare facilities are subject to extensive federal, state, and local regulation relating to, among other things, the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection. Additionally, such facilities are subject to periodic inspection by government authorities to assure their continued compliance with these various standards.
All of our healthcare facilities are deemed certified, meaning that they are accredited, properly licensed under the relevant state laws and regulations and certified under the Medicare program. The effect of maintaining certified facilities is to allow such facilities to participate in the Medicare and Medicaid programs. We believe that all of our healthcare facilities are in material compliance with applicable federal, state, local and other relevant regulations, and standards. However, should any of our healthcare facilities lose their deemed certified status and thereby lose certification under the Medicare or Medicaid programs, such facilities would be unable to receive reimbursement from either of those programs and our business could be materially adversely effected.
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We could be subject to lawsuits which could harm the value of our business, including litigation for which we are not fully reserved.
From time-to-time we are involved in lawsuits, claims, audits, and investigations, including those arising out of services provided, personal injury claims, professional liability claims, billing and marketing practices, employment disputes and contractual claims. Physicians, hospitals, and other participants in healthcare delivery have become subject to an increasing number of lawsuits alleging medical malpractice and related legal theories such as negligent hiring, supervision and credentialing. Some of these lawsuits may involve large claim amounts and substantial defense costs.
We generally procure professional liability insurance coverage for our medical professionals. A substantial portion of our professional liability loss risks are provided by third-party insurers. Moreover, in the normal course of our business, we are involved in lawsuits, claims, audits, and investigations, including those arising out of our billing and marketing practices, employment disputes, contractual claims and other business disputes for which we may have no insurance coverage, and which are not subject to actuarial estimates. The outcome of these matters could have a material effect on our results of operations in the period when we identify the matter, and the ultimate outcome could have a material adverse effect on our financial position, results of operations, or cash flows.
We may become subject to future lawsuits, claims, audits, and investigations that could result in substantial costs and divert our attention and resources and adversely affect our business condition. In addition, since our current growth strategy includes acquisitions, among other things, we may become exposed to legal claims for the activities of an acquired business prior to the acquisition. These lawsuits, claims, audits, or investigations, regardless of their merit or outcome, may also adversely affect our reputation and ability to expand our business.
Risks Related to Our Real Estate Business
We are subject to demand fluctuations in the real estate industry. Any reduction in demand could adversely affect our business, results of operations, and financial condition.
Demand for properties similar to those owned by us is subject to fluctuations that are often due to factors outside our control. We are not able to predict the course of the real estate markets or whether the current favorable trends in those markets can, or will, continue. In the event of an economic downturn, our results of operations may be adversely affected, and we may incur significant impairments and other write-offs and substantial losses from this business.
Adverse weather conditions, natural disasters, and other unforeseen and/or unplanned conditions could disrupt our real estate developments.
Adverse weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, floods, droughts, and fires, could have serious impacts on our ability to develop and market our real estate assets. Properties may also be affected by unforeseen planning, engineering, environmental, or geological conditions or problems, including conditions or problems which arise on third party properties adjacent to or in the vicinity of properties which own, and which may result in unfavorable impacts on our properties. Any adverse event or circumstance could cause a delay in, prevent the completion of, or increase the cost of, one or more of our properties expected to be developed and brought to market by us, thereby resulting in a negative impact on our operations and financial results.
If the market value of our real estate investments decreases, our results of operations will also likely decrease.
The market value of our real estate assets will depend on market conditions. If local and/or global economic conditions deteriorate, or if the demand for our properties decreases, we may not be able to make a profit on such property. As a result of declining economic conditions, we may experience lower than anticipated profits and/or may not be able to recover our costs of a project when a property is brought to market.
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Changes in tax laws, taxes or fees may increase the cost of development, and such changes could adversely impact our finances and operational results.
Any increase or change in such laws, taxes, or fees, including real estate property taxes, could increase the cost of development and thus have an adverse effect on our operations. Such changes could also negatively impact potential and/or actual users and purchasers of our properties because potential buyers may factor such changes into their decisions to utilize or purchase a property.
The real estate industry is highly competitive and if other property developers are more successful or offer better value to customers, our business could suffer.
The real estate industry is highly competitive, regardless of locale. Competitors range from small local companies to large international conglomerates with financial resources much greater than those of our company. We have to compete for raw materials, construction components, financing, environmental resources, utilities, infrastructure, labor, skilled management, governmental permits and licensing and other factors critical to the successful development of our real estate assets. We compete against both new and existing developments and developers. Any increase in or change to any competitive factor could result in our inability to begin development of our real estate assets in a timely manner and/or increase costs for the design, development, and completion. As a result, we may experience decreased profits due to these factors, impacting our operations and our overall financial results.
We may incur environmental liabilities with respect to our real estate assets.
Our properties are subject to a variety of local, state, and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. Environmental laws may result in delays, may cause us to incur substantial compliance and other costs and may prohibit or severely restrict development. Furthermore, under various federal, state, and local laws, ordinances and regulations, an owner of real property may be liable for the costs or removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such liability without regard to whether we knew of, or were responsible for, the presence of such hazardous or toxic substances. The cost of any required remediation and our liability therefor as to our properties are generally not limited under such laws and could exceed the value of the property and/or the aggregate assets of our company. The presence of such substances, or the failure to properly remediate contamination from such substances, may adversely affect our ability to sell real estate or to borrow using such property as collateral.
Our co-venture partners or other partners in co-ownership arrangements could take actions that decrease the value of our real estate assets.
The development of our real estate assets could involve joint ventures or other co-ownership arrangements with third parties. Such relationships may involve risks, including, for example:
| · | the possibility that a co-venturer or partner might become bankrupt; | |
| · | the possibility that development may require additional capital that we or our partner do not have; | |
| · | the possibility that a co-venturer or partner might breach a loan agreement or other agreement or otherwise, by action or inaction, act in a way detrimental to us; | |
| · | that such co-venturer or partner may at any time have economic or business interests or goals that are or that become inconsistent with the business interests or goals of our company; | |
| · | the possibility that we may incur liabilities as the result of the action taken by our partner; |
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| · | that such co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; or | |
| · | that such co-partner may exercise buy/sell rights that force us to or dispose of our share, at a time and price that may not be consistent with our objectives. |
Any of the above might subject our real estate assets to liabilities in excess of those contemplated and thus reduce our returns on our investment.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect the value of your stock.
The nature of our activities could expose us to potential liability for personal injuries and, in certain instances, property damage claims. For instance, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, pollution, environmental matters, or extreme weather conditions such as hurricanes, floods, and snow storms that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. We may not carry all the usual and customary insurance policies which would be carried by a similarly-positioned company, and we may not be carrying those insurance policies in amounts and types sufficient to cover every risk which may be encountered by our company. Insurance risks associated with potential terrorist acts could sharply increase the premiums we will pay for coverage against property and casualty claims. We cannot assure you that we will have adequate coverage for all losses. If any of our properties incur a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss. In addition, other than the capital reserve or other reserves we may establish, we do not expect to have any contingent sources of funding in place to repair or reconstruct any uninsured damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in a decreased value attributed to our publicly traded stock.
Risks Related to Ownership of Our Common Stock
Our common stock is eligible for quotation on the Pink Market, which may have an unfavorable impact on our stock price and liquidity.
Our common stock is eligible for quotation on the Pink Market operated by OTC Markets Group Inc. The Pink Market is a regulated quotation service that displays real-time quotes, last sale prices and volume information in over-the-counter securities. The Pink Market is not an issuer listing service, market, or exchange. The requirements for quotation on the Pink Market are considerably lower and less regulated than those of an exchange. Because of this, it is possible that fewer brokers or dealers will be interested in making a market in our common stock because the market for such securities is more limited, the stocks are more volatile, and the risk to investors is greater, which may impact the liquidity of our common stock. Even if an active market begins to develop in our common stock, the quotation of our common stock on the Pink Market may result in a less liquid market available for existing and potential stockholders to trade common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future. If an active market is never developed for our common stock, it will be difficult or impossible for you to sell any common stock you purchase.
Our common stock may be subject to significant price volatility which may have an adverse effect on your ability to liquidate your investment in our common stock.
The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect that our stock price will be more volatile than a seasoned issuer for the indefinite future. The potential volatility in our stock price is attributable to a number of factors. First, our common stock may be sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our common stock could, for example, decline precipitously if a large number of our shares of common stock are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb those sales without adverse impact on its stock price. Secondly, an investment in us is a speculative or “risky” investment due to our lack of meaningful profits to date and uncertainty of future profits. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.
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Our officers and directors own a significant percentage of our outstanding voting securities which could reduce the ability of minority stockholders to effect certain corporate actions.
Our executive officers and directors are collectively able to exercise approximately 83.47% of our total voting power. As a result, they possess significant influence and can elect a majority of our board of directors and authorize or prevent proposed significant corporate transactions without the votes of any other stockholders. They are expected to have significant influence over a decision to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders, regardless of whether or not our other stockholders believe that such transaction is in our best interests. Such concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination, which could, in turn, have an adverse effect on the market price of our common stock or prevent our stockholder from realizing a premium over the then-prevailing market price for their common stock.
We have no current plans to pay cash dividends on our common stock for the foreseeable future, and you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions, and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it and any potential investor who anticipates the need for current dividends should not purchase our securities.
Future issuances of our common stock or securities convertible into, or exercisable or exchangeable for, our common stock could cause the market price of our common stock to decline and would result in the dilution of your holdings.
Future issuances of our common stock or securities convertible into, or exercisable or exchangeable for, our common stock, or the expiration of lock-up agreements that restrict the issuance of new common stock or the trading of outstanding common stock, could cause the market price of our common stock to decline. We cannot predict the effect, if any, of future issuances of our securities, or the future expirations of lock-up agreements, on the price of our common stock. In all events, future issuances of our common stock would result in the dilution of your holdings. In addition, the perception that new issuances of our securities could occur could adversely affect the market price of our common stock.
Rule 144 sales in the future may have a depressive effect on our stock price.
All of the outstanding common stock held by the present officers, directors, and affiliate stockholders are “restricted securities” within the meaning of Rule 144 under the Securities Act. As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that a person who is an affiliate or officer or director who has held restricted securities for six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1.0% of a company’s outstanding common shares. There is no limitation on the amount of restricted securities that may be sold by a non-affiliate after the owner has held the restricted securities for a period of six months if our company is a current reporting company under the Exchange Act. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registration of common stock of present stockholders, may have a depressive effect upon the price of our common stock in any market that may develop.
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Future issuances of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future issuances of preferred stock, which could rank senior to our common stock for the purposes of dividends and liquidating distributions, may adversely affect the level of return you may be able to achieve from an investment in our common stock.
In the future, we may attempt to increase our capital resources by offering debt securities. Upon bankruptcy or liquidation, holders of our debt securities, and lenders with respect to other borrowings we may make, would receive distributions of our available assets prior to any distributions being made to holders of our common stock. Moreover, if we issue preferred stock, the holders of such preferred stock could be entitled to preferences over holders of common stock in respect of the payment of dividends and the payment of liquidating distributions. Because our decision to issue debt or preferred stock in any future offering, or borrow money from lenders, will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any such future offerings or borrowings. Holders of our common stock must bear the risk that any future offerings we conduct or borrowings we make may adversely affect the level of return, if any, they may be able to achieve from an investment in our common stock.
If our common stocks become subject to the penny stock rules, it would become more difficult to trade our common stock.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not obtain a listing on a national securities exchange and if the price of our common stock is less than $5.00, our common stock could be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.
If securities industry analysts do not publish research reports on us, or publish unfavorable reports on us, then the market price and market trading volume of our common stock could be negatively affected.
Any trading market for our common stock may be influenced in part by any research reports that securities industry analysts publish about us. We do not currently have and may never obtain research coverage by securities industry analysts. If no securities industry analysts commence coverage of us, the market price and market trading volume of our common stock could be negatively affected. In the event we are covered by analysts, and one or more of such analysts downgrade our securities, or otherwise reports on us unfavorably, or discontinues coverage of us, the market price and market trading volume of our common stock could be negatively affected.
We are subject to ongoing public reporting requirements that are less rigorous than for larger, more established companies, which could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.
We are a “smaller reporting company” within the meaning of the Exchange Act. Rule 12b-2 of the Exchange Act defines a “smaller reporting company” as an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that had (i) a public float of less than $250 million or (ii) annual revenues of less than $100 million and either had no public float or a public float of less than $700 million.
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As a smaller reporting company, we will not be required and may not include a compensation discussion and analysis section in our proxy statements and we will provide only two years of financial statements. We also will have other “scaled” disclosure requirements that are less comprehensive than issuers that are not smaller reporting companies.
Because we will be subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not smaller reporting companies, our stockholders could receive less information than they might expect to receive from more mature public companies. We cannot predict if investors will find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our common stock.
Anti-takeover provisions in our charter documents and under Nevada law could make an acquisition of our company more difficult, and limit attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated articles of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control of our company or changes in our management. As described above, our executive officers and directors are collectively able to exercise a significant portion of our voting power. Furthermore, neither the holders of our common stock nor the holders of our preferred stock have cumulative voting rights in the election of our directors. The combination of the present ownership by our management of a significant portion of our issued and outstanding voting power and lack of cumulative voting makes it more difficult for other stockholders to replace our board of directors or for a third party to obtain control of our company by replacing its board of directors.
In addition, our authorized but unissued shares of common stock are available for our board of directors to issue without stockholder approval. We may use these additional shares for a variety of corporate purposes, including raising additional capital, corporate acquisitions, and employee stock plans. The existence of our authorized but unissued shares of common stock could render it more difficult or discourage an attempt to obtain control of our company by means of a proxy context, tender offer, merger, or other transaction since our board of directors can issue large amounts of capital stock as part of a defense to a take-over challenge. In addition, we have authorized in our amended and restated articles of incorporation 1,000,000,000 shares of preferred stock. Our board acting alone and without approval of our stockholders can designate and issue one or more series of preferred stock containing super-voting provisions, enhanced economic rights, rights to elect directors, or other dilutive features, that could be utilized as part of a defense to a take-over challenge.
In addition, various provisions of our amended and restated bylaws may also have an anti-takeover effect. These provisions may delay, defer, or prevent a tender offer or takeover attempt of our company that a stockholder might consider in his or her best interest, including attempts that might result in a premium over the market price for the shares held by our stockholders. Our amended and restated bylaws may be adopted, amended, or repealed only by our board of directors. Our amended and restated bylaws also contain limitations as to who may call special meetings as well as require advance notice of stockholder matters to be brought at a meeting. Additionally, our amended and restated bylaws also provide that no director may be removed by less than a two-thirds vote of the issued and outstanding shares entitled to vote on the removal. Our amended and restated bylaws also permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships. These provisions will prevent a stockholder from increasing the size of our board of directors and gaining control of our board of directors by filling the resulting vacancies with its own nominees.
Our amended and restated bylaws also establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the board of directors. Stockholders at an annual meeting will only be able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given us timely written notice, in proper form, of the stockholder’s intention to bring that business before the meeting. Although our amended and restated bylaws do not give the board of directors the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, our amended and restated bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of our company.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.
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| ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
Not applicable.
| ITEM 1C. | CYBERSECURITY. |
Risk Management and Strategy
We maintain a technology and cybersecurity program, which includes information security, as part of our overall risk management process with the aim that our information systems, including those of our vendors and other third-parties, will be resilient, effective, and capable of safeguarding against emerging risks and cybersecurity threats.
A key element of our technology and cybersecurity program strategy is fostering training and awareness for our employees.
Our technology and cybersecurity program focuses on the defense, rapid detection and rapid remediation of cybersecurity threats and incidents. Our program also includes cybersecurity policies and a crisis response and management plan that is intended to allow rapid management and response and appropriate communication of cybersecurity threats and incidents.
Our cybersecurity crisis management plan sets forth the items, procedures, and actions we expect to address and follow in the event of a cybersecurity incident, including detection, response, mitigation and remediation. When a potential threat or incident is identified, our cyber security incident response team will assign a risk level classification and initiate the escalation and other steps called for by our plan. All incidents that are initially assessed by the cybersecurity incident response team as potentially high-risk are escalated promptly to our Chief Executive Officer, who will determine whether and what elements of our cybersecurity crisis response and management plan should be activated, including escalation to other senior management. Our Chief Executive Officer will inform our board of directors of cybersecurity incidents, as appropriate, considering a variety of factors, including financial, operational, legal, or reputational impact.
We have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially affected or are reasonably likely to materially affect us, including our operations, business strategy, results of operations, or financial condition.
Risk Governance
We are committed to appropriate cybersecurity governance and oversight. Our board of directors oversees management’s processes for identifying and mitigating risks, including cybersecurity and information security risks. As noted elsewhere in this report, we plan to establish a standing audit committee. Once we establish an audit committee, we anticipate that the audit committee will oversee risks related to cybersecurity and report to the full board regarding its activities, including those related to cybersecurity.
Our board of directors meets regularly with our executive management and receives updates on the status and overall effectiveness of our technology and cybersecurity program, relevant information technology operations, any changes in material cybersecurity risks and any significant cybersecurity incidents consistent with our technology and cybersecurity program. The board also discusses with executive management the steps management has taken to monitor and mitigate privacy, data security, and cybersecurity risk exposures, our information governance policies and programs, and major legislative and regulatory developments that could materially impact our exposure regarding privacy, data security risk, and cybersecurity. The board of directors considers cybersecurity as part of our business strategy, financial planning, and capital allocation.
For additional information on our cybersecurity risks, please see Item 1A “Risk Factors—Risks Related to Our Business and Structure—A cyber security incident could cause a violation of HIPAA, breach of member privacy, or other negative impacts.”
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| ITEM 2. | PROPERTIES. |
Our principal office is located at 3753 Howard Hughes Parkway, Suite 200, Las Vegas, NV 89169.
Nova operates a group of regional primary specialty and ancillary care facilities throughout Florida. The main office is located at 1903 S 25th Street, Suite 103 Fort Perc, FL 34947. We lease all of these facilities.
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.
We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our businesses.
| ITEM 3. | 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. Except as set forth below, we are not currently 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.
On August 24, 2021, charges were filed by Absolute Medical Group, LLC against our company for breach of contract in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida seeking damages. We filed a counterclaim alleging violations of the management agreement between the parties and rightful termination for cause including damages. This case is pending.
On October 8, 2021, we filed a complaint in Idaho against Mark Adams, seeking an award of damages against him and asserting the following claims: (1) constructive trust; (2) breach of contract; (3) breach of fiduciary duties; and (4) conversion. We also seek costs and attorney’s fees. On August 31, 2021, without our knowledge or consent and in a manner to conceal his unlawful actions, a property manager used a new company check from Summit National Bank to withdraw $50,000 from the company account. The defendant is being charged with intentional, oppressive, fraudulent, malicious, and outrageous damages. On November 11, 2021, the defendant filed a counterclaim alleging that no valid contract existed between the parties and asked to dissolve the company, grant his counterclaim, dismiss our complaint, and award of attorney fees. This case is pending.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market Information
Our common stock eligible for quotation on the Pink Market OTC Markets Group Inc. under the symbol “CDIX.” The following table sets forth, for the periods indicated, the high and low closing prices of our common stock. These prices reflect inter-dealer prices, without retain mark-up or commission, and may not represent actual transactions.
| Closing Prices | ||||||||
| High | Low | |||||||
| Fiscal Year Ended December 31, 2022 | ||||||||
| 1st Quarter | $ | 375.00 | $ | 7.50 | ||||
| 2nd Quarter | $ | 15.00 | $ | 15.00 | ||||
| 3rd Quarter | $ | 375.00 | $ | 15.00 | ||||
| 4th Quarter | $ | 217.50 | $ | 22.50 | ||||
| Fiscal Year Ended December 31, 2023 | ||||||||
| 1st Quarter | $ | 412.50 | $ | 15.00 | ||||
| 2nd Quarter | $ | 75.00 | $ | 7.50 | ||||
| 3rd Quarter | $ | 60.00 | $ | 7.50 | ||||
| 4th Quarter | $ | 105.00 | $ | 7.50 | ||||
Number of Holders of Our Common Shares
As of March 22, 2024, there were approximately 881 stockholders of record of our common stock. In computing the number of holders of record of our common stock, each broker-dealer and clearing corporation holding shares on behalf of its customers is counted as a single stockholder.
Securities Authorized for Issuance Under Equity Compensation Plans
As of December 31, 2023, we did not have in effect any compensation plans under which our equity securities were authorized for issuance, and we did not have any outstanding share options.
Dividend Policy
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the near future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions, and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur.
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Recent Sales of Unregistered Securities
Except as set forth below, we have not sold any equity securities during the 2023 fiscal year that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the 2023 fiscal year.
Purchases of Equity Securities
No repurchases of our common stock were made during the fourth quarter of 2023.
| ITEM 6. | [RESERVED] |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity, and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
Overview
We are an acquisition holding company focused on locating undervalued and undercapitalized companies, primarily in the healthcare industry, and providing them capitalization and leadership to maximize the value and potential of their private enterprises while also providing diversification and risk mitigation for our stockholders. Specifically, we have and will continue to look at a diverse variety of acquisitions in the healthcare sector in terms of growth stages and capital structures and we intend to focus our portfolio of subsidiaries approximately as follows: 80% will be targeted to established profitable niche small to mid-sized healthcare companies and 20% will be targeted to second stage startups in healthcare and related financial services (emerging businesses with a strong organic growth plan that is materially cash generative).
All of our operations are conducted through, and our income derived from, our various subsidiaries. As of December 31, 2023, we operate the following businesses through our wholly owned subsidiaries.
| · | Healthcare Business. Nova, which we acquired May 31, 2021, operates a group of regional primary specialty and ancillary care facilities throughout Florida that provide traumatic injury victims with primary care evaluations, interventional pain management, and specialty consultation services. We focus on plaintiff related care are and a highly efficient provider of 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. | |
| · | Real Estate Business. Edge View, which we acquired on July 16, 2014, is a real estate company that owns five (5) acres zoned medium density residential (MDR) with 12 lots already platted; six (6) acres zoned high-density residential (HDR) that can be platted in various configurations to meet current housing needs; and twelve (12) acres zoned in Lemhi County as Agriculture that is available for further annexation into the City of Salmon for development, as well as a common area for landowners to view wildlife, provide access to the Salmon River and fishing in a two (2) acre pond. 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. |
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Segments
As of December 31, 2023, 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.
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 Platinum Tax, which was a full-service tax resolution firm located in Los Angeles, California. Through this subsidiary we 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 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.
We and the managers of AHI entered into a resignation, release and buyback agreement and addendum, effective October 31, 2022, pursuant to which the managers purchased AHI in exchange for returning 175,045 shares of series F preferred stock. There was a loss on disposal in the amount of $217,769 on October 31, 2022, which represented net assets and liabilities at the time of sale back.
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Results of Operations
Comparison of Years Ended December 31, 2023 and 2022
The following table sets forth key components of our results of operations during the years ended December 31, 2023 and 2022, both in dollars and as a percentage of our revenue.
| December 31, 2023 | December 31, 2022 | |||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | |||||||||||||
| Total revenue | $ | 11,853,266 | 100.00% | $ | 10,693,196 | 100.00% | ||||||||||
| Total cost of sales | 3,560,624 | 30.04% | 4,060,034 | 37.97% | ||||||||||||
| Gross profit | 8,292,642 | 69.96% | 6,633,162 | 62.03% | ||||||||||||
| Operating expenses | ||||||||||||||||
| Depreciation expense | 20,777 | 0.18% | 23,132 | 0.22% | ||||||||||||
| Selling, general and administrative | 3,076,820 | 25.96% | 2,703,141 | 25.28% | ||||||||||||
| Total operating expenses | 3,097,597 | 26.13% | 2,726,273 | 25.50% | ||||||||||||
| Income from continuing operations | 5,195,045 | 43.83% | 3,906,889 | 36.54% | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Other income (expense) | (49,795 | ) | (0.42)% | 150,250 | 1.41% | |||||||||||
| Gain on debt refinance and forgiveness | 115,448 | 0.97% | 1,397,271 | 13.07% | ||||||||||||
| Penalties and fees | (53,000 | ) | (0.45)% | (2,063,916 | ) | (19.30)% | ||||||||||
| Interest expense | (1,956,266 | ) | (16.50)% | (6,387,309 | ) | (59.73)% | ||||||||||
| Amortization of debt discounts | (136,518 | ) | (1.15)% | (253,823 | ) | (2.37)% | ||||||||||
| Total other income expense | (2,080,131 | ) | (17.55)% | (7,157,527 | ) | (66.94)% | ||||||||||
| Net income (loss) before discontinued operations | 3,114,914 | 26.28% | (3,250,638 | ) | (30.40)% | |||||||||||
| Loss from discontinued operations | – | – | (2,178,883 | ) | (20.38)% | |||||||||||
| Loss from disposal of discontinued operations | (86,520 | ) | (0.73)% | – | – | |||||||||||
| Net income (loss) | $ | 3,028,394 | 25.55% | $ | (5,429,521 | ) | (50.78)% | |||||||||
Revenue. For the years ended December 31, 2023 and 2022, 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 increased by $1,160,070, or 10.85%, to $11,853,266 for the year ended December 31, 2023 from $10,693,196 for the year ended December 31, 2022. Such increase was primarily due to increased Personal Injury Protection (PIP) services and the opening of a facility in the Healthcare segment.
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 decreased by $499,410, or 12.30%, to $3,560,624 for the year ended December 31, 2023 from $4,060,034 for the year ended December 31, 2022. Such decrease was primarily due to a decrease in surgical contracted services and laboratory fees.
Gross profit. As a result of the foregoing, our total gross profit increased by $1,659,480, or 25.02%, to $8,292,642 for the year ended December 31, 2023 from $6,633,162 for the year ended December 31, 2022. Our total gross margin (percent of revenue) increased from 62.03% for the year ended December 31, 2022 to 69.96% for the year ended December 31, 2023.
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Depreciation expense. Our depreciation expense was $20,777, or 0.18% of revenue, for the year ended December 31, 2023, as compared to $23,132, or 0.22% of revenue, for the year ended December 31, 2022. The decrease in depreciation expense was due to certain assets becoming fully depreciated during the years ended December 31, 2023 and 2022.
Selling, general and administrative expenses. Our selling, general and administrative expenses consist primarily of accounting, auditing, legal and public reporting expenses, personnel expenses, including employee salaries and bonuses plus related payroll taxes, advertising expenses, professional advisor fees, bad debts, rent expense, insurance and other expenses incurred in connection with general operations. Our selling, general and administrative expenses increased by $373,679, or 13.82%, to $3,076,820 for the year ended December 31, 2023 from $2,703,141 for the year ended December 31, 2022. As a percentage of revenue, our selling, general and administrative expenses were 25.96% and 25.28% for the years ended December 31, 2023 and 2022, respectively. Increases were attributable to credit losses of $132,281, professional fees of $167,155, and management bonus of $100,000.
Total other expense. We had $2,080,131 in total other expense, net, for the year ended December 31, 2023, as compared to other expense, net, of $7,157,527 for the year ended December 31, 2022. Other expense, net, for the year ended December 31, 2023 consisted of interest expense of $1,956,266, amortization of debt discounts of $136,518, financing penalties and fees of $53,000 and other expense of $49,795, offset by a gain on debt refinance and forgiveness of $115,448. Other expense, net, for the year ended December 31, 2022 consisted of interest expense of $6,387,309, financing penalties and fees of $2,063,916 and amortization of debt discounts of $253,823, offset by a gain on forgiveness of debt of $1,397,271 and other income of $150,250.
Discontinued operations. For the year ended December 31, 2023, we recorded a loss from disposal of discontinued operations of $86,520. For the year ended December 31, 2022, we recorded a loss from discontinued operations of $2,178,883.
Net income (loss). As a result of the cumulative effect of the factors described above, our net income was $3,028,394 for the year ended December 31, 2023, as compared to a net loss of $5,429,521 for the year ended December 31, 2022, a net increase of $8,457,915, or 155.78%.
Liquidity and Capital Resources
As of December 31, 2023, we had $866,943 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.
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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 all financial statement periods presented in this prospectus.
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities from continuing operations | $ | (1,807,987 | ) | $ | (1,099,461 | ) | ||
| Net cash provided by financing activities | 2,369,325 | 788,794 | ||||||
| Net change in cash | 647,858 | (361,883 | ) | |||||
| Cash and cash equivalents at beginning of year | 219,085 | 580,968 | ||||||
| Cash and cash equivalents at end of year | $ | 866,943 | $ | 219,085 | ||||
Our net cash used in operating activities from continuing operations was $1,807,987 for the year ended December 31, 2023, as compared to $1,099,461 for the year ended December 31, 2022. For the year ended December 31, 2023, our net income of $3,028,394, an increase in accrued officers’ compensation of $982,500, an increase in accrued interest of $486,165, and an increase in accounts payable and accrued expense of $341,261, offset by an increase in account receivable of $6,701,334, were the primary drivers of our net cash used in operating activities. For the year ended December 31, 2022, our net loss of $5,429,521 and a gain on refinance of debt of $1,397,271, offset by goodwill impairment of $2,092,048, a loss on finance penalties and fees of $2,063,916 and an increase in accrued officers’ compensation of $873,506, were the primary drivers for the cash used in operations.
Prior to fiscal year 2022, 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, which led to a significant increase in accounts receivable. We have a 99% collection rate based on net settlements recorded to our accounts receivable and revenue. Collection rates are estimated considering our 48-month historical collections with primary emphasis to the most current prior 12-month trailing payment and collection percentage rates. We use the loss rate method to measure expected credit losses, and in addition we qualitatively evaluate on an ongoing basis various factors, which include market conditions in which we operate, and the status of claims being settled. We have established billing rates, which are not the same as actual amounts recovered. These rates generally do not reflect what is ultimately paid by the customer, insurance carriers, law firms and other payors, which is typically received eighteen to twenty-four months later, and are not reported in the consolidated financial statements at those established billing rates. Our customers, the patients, typically pay amounts based on established charges per procedure with guidance from the annually updated Current Procedural Terminology, or CPT, guidelines (a code set maintained by the American Medical Association through the CPT Editorial Panel), that designates relative value units and a suggested range of charges for each procedure which is then assigned a CPT code. This fee is discounted to reflect the percentage paid to us “using a modifier” recognized by each insurance carrier for services, less deductible, co-pay, and contractual adjustments which are deducted from the calculated fee. The net revenue is recorded at the time the services are rendered. Collection of that revenue typically occurs eighteen to twenty-four months later and after the patient claim develops and settles. Historical collection rates are estimated using the most current prior 12-month historical payment and collection percentages. See also Note 1 to our consolidated financial statements.
We had no investing activities for the years ended December 31, 2023 and 2022.
Our net cash provided by financing activities was $2,369,325 for the year ended December 31, 2023, as compared to $788,794 for the year ended December 31, 2022. Net cash provided by financing activities for the year ended December 31, 2023 consisted of net proceeds from the line of credit of $2,164,338 and proceeds from convertible notes payable of $421,375, offset by repayment of convertible notes payable of $175,000, repayment of line of credit of $39,293 and repayments to directors and officers of $2,195. Net cash provided by financing activities for the year ended December 31, 2022 consisted of proceeds from convertible notes payable of $879,083 and proceeds from preferred stock issuances of $25,000, offset by dividends on preferred stock of $102,740, repayment of convertible notes payable of $5,908, repayments to directors and officers of $3,573 and repayment of the SBA loan described below of $3,068.
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Convertible Notes
As of December 31, 2023, we had convertible debt outstanding net of amortized debt discount of $3,807,030. During the year ending December 31, 2023, we received net proceeds of $421,375 from convertible notes, repaid $175,000 and wrote off $12,406 to convertible noteholders.
The following is a schedule of convertible notes payable outstanding as of December 31, 2023:
| Note # | Issuance Date | Maturity Date | Principal Balance | Accrued Interest | Unamortized Debt Discount | |||||||||||
| 9 | 09/12/2016 | 09/12/2017 | $ | 50,080 | $ | 5,581 | $ | – | ||||||||
| 10 | 01/24/2017 | 01/24/2018 | 55,000 | 80,875 | – | |||||||||||
| 10-1 | 02/10/2023 | 02/10/2024 | 50,000 | 6,658 | – | |||||||||||
| 10-2 | 03/30/2023 | 03/30/2024 | 25,000 | 2,836 | – | |||||||||||
| 10-3 | 08/11/2023 | 08/11/2024 | 25,000 | 1,469 | – | |||||||||||
| 29-2 | 11/08/2019 | 11/08/2020 | 36,604 | 10,109 | – | |||||||||||
| 31 | 08/28/2019 | 08/28/2020 | – | 8,385 | – | |||||||||||
| 37-1 | 09/03/2020 | 06/30/2021 | 113,667 | 64,929 | – | |||||||||||
| 37-2 | 11/02/2020 | 08/31/2021 | 113,167 | 63,594 | – | |||||||||||
| 37-3 | 12/29/2020 | 09/30/2021 | 113,166 | 62,558 | – | |||||||||||
| 40-1 | 09/22/2022 | 09/22/2024 | 2,600,000 | 252,665 | – | |||||||||||
| 40-2 | 11/04/2022 | 09/22/2024 | 68,667 | 7,939 | – | |||||||||||
| 40-3 | 11/28/2022 | 09/22/2024 | 68,667 | 7,506 | – | |||||||||||
| 40-4 | 12/21/2022 | 09/22/2024 | 68,667 | 7,054 | – | |||||||||||
| 40-5 | 01/24/2023 | 09/22/2024 | 90,166 | 8,284 | – | |||||||||||
| 40-6 | 03/21/2023 | 03/21/2024 | 139,166 | 10,671 | – | |||||||||||
| 40-7 | 06/05/2023 | 06/05/2024 | 139,166 | 7,826 | 15,671 | |||||||||||
| 40-8 | 06/13/2023 | 06/13/2024 | 21,167 | 1,127 | 2,321 | |||||||||||
| 40-9 | 07/19/2023 | 07/19/2024 | 35,500 | 1,605 | 4,863 | |||||||||||
| 40-10 | 07/24/2023 | 07/24/2024 | 14,000 | 614 | 1,965 | |||||||||||
| 41 | 08/25/2023 | 08/25/2024 | 5,000 | 175 | – | |||||||||||
| $ | 3,831,850 | $ | 612,460 | $ | 24,820 | |||||||||||
Note 9. On September 12, 2016, we issued a convertible promissory note in the principal amount of $80,000 for services rendered, which matured on September 12, 2017. Note 9 is currently in default and accrues at a default interest rate of 20% per annum.
Note 10, 10-1, 10-2 and 10-3. On January 24, 2017, we issued a convertible promissory note in the principal amount of $80,000 for services rendered, which matured on January 24, 2018. Note 10 is currently in default and accrues interest at a default interest rate of 20% per annum. On February 10, 2023, we executed a second tranche under this note in the principal amount of $50,000 (Note 10-1). On March 30, 2023, we executed a third tranche under this note in the principal amount of $25,000 (Note 10-2). On August 11, 2023, we executed a fourth tranche under this note in the principal amount of $25,000 (Note 10-3). Notes 10-1, 10-2 and 10-3 accrue interest at a rate of 15% per annum.
Note 29-2. On May 10, 2019, we issued a convertible promissory note in the principal amount of $150,000. On November 8, 2019, this note (Note 29) was purchased by and assigned to an unrelated party. The amount assigned was the existing principal amount of $150,000 and accrued interest of $5,918, which was issued as Note 29-1, plus a new convertible promissory note in the principal amount of $62,367, which was issued as Note 29-2. Note 29-2 is currently in default and accrues interest at a default interest rate of 24% per annum.
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Note 31. On August 28, 2019, we issued a convertible promissory note in the principal amount of $120,000, which matured on August 28, 2020. The note is currently in default and accrues interest at a default interest rate of 24% per annum. There was no outstanding principal balance as of December 31, 2023.
Notes 37-1, 37-2 and 37-3. On September 3, 2020, we issued a convertible promissory note in the principal amount of $200,000, with original issue discount of $50,000, which could be drawn in several tranches. On September 3, 2020, we executed the first tranche in the principal amount of $67,000, less original issue discount of $17,000, which matured on June 30, 2021 (Note 37-1). On November 2, 2020, we executed the second tranche in the principal amount of $66,500, less original issue discount of $16,500, which matured on August 31, 2021 (Note 37-2). On December 29, 2020, we executed the third tranche in the principal amount of $66,500, less original issue discount of $16,500, which matured on September 30, 2021 (Note 37-3). Notes 37-1, 37-2 and 27-3 are currently in default and accrue interest at a default interest rate of 18% per annum.
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, we issued a convertible promissory note in the principal amount of $2,600,000 in exchange for total of $4,791,099 of defaulted promissory notes balances (Note 40-1). On November 4, 2022, we executed a second tranche under this note in the principal amount of $68,667, less an original issue discount and fee of $18,667 (Note 40-2). On November 28, 2022, we executed the third tranche under this note in the principal amount of $68,667, less an original issue discount and fee of $18,667 (Note 40-3). On December 21, 2022, we executed a fourth tranche under this note in the principal amount of $68,667, less an original issue discount and fee of $18,667 (Note 40-4). On January 24, 2023, we executed a fifth tranche under this note in the principal amount of $90,166, less an original issue discount and fee of $25,166 (Note 40-5). On March 21, 2023, we executed a sixth tranche under this note in the principal amount of $136,666, less an original issue discount and fee of $39,166 (Note 40-6). On June 5, 2023, we executed a seventh tranche under this note in the principal amount of $136,667, less original issue discount and fee of $39,167 (Note 40-7). On June 13, 2023, we executed an eighth tranche under this note in the principal amount of $21,167, less original issue discount and fee of $5,167 (Note 40-8). On July 19, 2023, we executed a ninth tranche under this note in the principal amount of $35,500, less an original issue discount and fee of $8,875 (Note 40-9). On July 24, 2023, we executed a tenth tranche under this note in the principal amount of $14,000, less an original issue discount and fee of $3,500 (Note 40-10). On December 1, 2023, we 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.
Note 41. On August 25, 2023, we issued a twelve-month convertible promissory note in the principal amount of $5,000 to our Chief Executive Officer for our operating expenses. The rate of interest is 10% per annum.
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 December 31, 2023 was $149,655 and $956, respectively. The principal balance and accrued interest at December 31, 2022 was $144,609 and $5,723, respectively.
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 December 31, 2023 and the accrued interest was $7,547. The principal balance and accrued interest at December 31, 2022 was $10,989 and $6,229, respectively. We assigned all of our receivables from consumer activations of the rewards program as collateral on this debenture.
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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 to sell, with recourse, Nova’s accounts receivables for a revolving financing up to a maximum advance amount of $4.5 million. As of December 31, 2023, we had $2,120,100 outstanding balance against the revolving receivable line of credit. 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 are $4,979 as of December 31, 2023 and 2022.
We have obtained short-term advances from the Chairman of the Board that are non-interest bearing and due on demand. As of December 31, 2023 and 2022, we owed the Chairman $120,997 and $123,192, respectively.
Contractual Obligations
Our principal commitments consist mostly of obligations under the loans described above.
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.
Critical Accounting Policies
The following discussion relates to critical accounting policies for our consolidated company. The preparation of financial statements in conformity with United States generally accepted accounting principles, or GAAP, requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:
Revenue Recognition. Our primary source of revenue is our healthcare subsidiary, which records revenues from providing licensed and/or certified orthopedic procedures .. Revenue is recognized at a point in time in accordance with Accounting Standards Codification, or ASC, 606. Our healthcare subsidiary does not have contract liabilities or deferred revenue as there are no amounts prepaid for services. We apply 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; |
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| · | determination of the transaction price; | |
| · | allocation of the transaction price to the separate performance obligations; and | |
| · | recognition of revenue when performance obligations are satisfied. |
We apply the five-step model when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, we assess services promised within each contract and determine those that are a performance obligation and assesses whether each promised service is distinct
Our contracts for both our contract and service fees each contain a single performance obligation (providing orthopedic services), as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct, as a result, the entire transaction price is allocated to this single performance obligation.
Accordingly, we recognize revenues (net) when the patient receives orthopedic care services. Our patient service contracts generally have performance obligations which are satisfied at a point in time. The performance obligation is for onsite or off-site care provided. Patient service contracts are generally fixed-price, and the transaction price is in the contract. Revenue is recognized when obligations under the terms of the contract with our patients are satisfied; generally, at the time of patient care.
Established billing rates are not the same as actual amounts recovered for our healthcare subsidiary. They generally do not reflect what we are ultimately paid by the customer, insurance carriers and other payors, and therefore are not reported in the consolidated financial statements at that rate. We are typically paid amounts based on established charges per procedure with guidance from the annually updated Current Procedural Terminology, or CPT, guidelines (a code set maintained by the American Medical Association through the CPT Editorial Panel), that designates relative value units and a suggested range of charges for each procedure which is then assigned a CPT code.
This fee is discounted to reflect the percentage paid to us “using a modifier” recognized by each insurance carrier for services, less deductible, co-pay, and contractual adjustments which are deducted from the calculated fee. The net revenue is recorded at the time the services are rendered.
Contract Fees (Non-PIP)
We have contract fees for amounts earned from our non-personal injury protection, or PIP, related procedures, typically car accidents, and are collected on a contingency basis. Historically, these cases were sold to a factor who bears the risk of economic benefit or loss. After selling patient cases to the factor, any additional funds collected by us were remitted to the factor.
Service Fees – Net (PIP)
We generate services fees from performing various procedures on the date the services are performed. These services primarily include slip and falls as well as smaller nominal non-PIP services. Fees are collected primarily from third party insurance providers. These revenues are based on established insurance billing rates, less allowances for contractual adjustments and uncollectible amounts. These contractual adjustments vary by insurance company and self-pay patients. We compute these contractual adjustments and collection allowances based on our historical collection experience.
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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.
Our healthcare revenues are generated from professional medical billings including facility and anesthesia services. With respect to facility and anesthesia services, we are the primary obligor as the facility and anesthesia services are considered part of one integrated performance obligation. Historically, we receive 49% of collections from total gross billed. Accordingly, we recognized net healthcare service revenue as 49% of gross billed amounts. Historical collection rates are estimated using the most current prior 12-month historical payment and collection percentages.
Historically through April 2023, our healthcare subsidiary has had contractual medical receivable sales and purchase agreements with third party factors which result in an approximately 54% reduction from the accounts receivables amounts when a receivable is sold to the factors. We 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 eighteen to twenty-four month collection timeframe, we have an accrued liability resulting from the collections of receivables sold to the third party factors which fluctuates as collections are made and remitted to those third party factors. These accounts receivables sold to these third party factors are not included in our financial statements accounts receivable balance once sold and therefore are not part of the assessment of accounts receivable collectability.
Accounts Receivable. In the normal course of business, we are in the lien based medical industry providing orthopedic healthcare servicing an uninsured market insulated by a letter of protection which insulates us and insures payment in full from insurance settlements. A letter of protection is a legally binding contract between the patient (i.e., our customer), the patient’s law firm and our company, as a medical provider. It serves as a critical legal agreement between an experienced personal injury attorney and a medical provider, allowing an injured victim to receive vital medical treatment needed after an accident without paying exorbitant out-of-pocket medical expenses prior to settlement. For medical professionals, letters of protection provide guaranteed payment out of settlement proceeds for services rendered as the provider does not have to attempt collection from an uninsured or underinsured injured patient. The medical provider knows that payment will come directly from the law firm out of the settlement. This legally binding contract offers crucial protection when someone is hurt due to another party’s negligence but lacks sufficient health insurance or faces denial of claim payments from insurance companies. Medical bills may not be paid for six months to two or more years until case resolution. Providers must be willing to wait for payment. Some complex cases settle in increments over several years instead of one lump payment at the end. A letter of protection enables injured clients to obtain essential care, avoid collections, restore their credit, and focus wholly on recovery. Attorneys utilize letters of protection to construct stronger injury claims, while medical professionals gain guaranteed payment out of settlement proceeds even if treatment is lengthy or ongoing.
In a personal injury case, the at-fault party is responsible for paying the medical bills of the injured person. However, insurance companies will often refuse to pay these medical expenses until liability has been determined. This can leave an injured person unable to get the medical treatment needed, especially if they do not have health insurance. A letter of protection allows an accident victim to receive medical care while the personal injury case is being resolved. An attorney sends a letter of protection to the 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. The letter of protection is fulfilled. 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 we will not be able to collect on our letter of protection and the receivable will not be collected. In the case of a partial settlement or award at trial, we might only be able to collect a portion of the receivable.
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We have a 99% collection rate based on net settlements recorded to its accounts receivable and revenue. Collection rates are estimated considering our 48-month historical collections with primary emphasis to the most current prior 12-month trailing payment and collection percentage rates. The method we use to measure expected credit losses is the loss rate method, and in addition we qualitatively evaluate on an ongoing basis various factors, which include market conditions in which we operate, and the status of claims being settled. We have established billing rates, which are not the same as actual amounts recovered. These rates generally do not reflect what is ultimately paid by the customer, insurance carriers, law firms and other payors, which is typically received eighteen to twenty-four months later, and are not reported in the consolidated financial statements at those established billing rates. Our customers, the patients, typically pay amounts based on established charges per procedure with guidance from the annually updated CPT guidelines that designates relative value units and a suggested range of charges for each procedure which is then assigned a CPT code. This fee is discounted to reflect the percentage paid to us “using a modifier” recognized by each insurance carrier for services, less deductible, co-pay, and contractual adjustments which are deducted from the calculated fee. The net revenue is recorded at the time the services are rendered. Collection of that revenue typically occurs eighteen to twenty-four months later and after the patient claim develops and settles. Historical collection rates are estimated using the most current prior 12-month historical payment and collection percentages.
We have adopted ASU 2016-13, “Financial Instruments – Credit Losses.” In accordance with this standard, we recognize an allowance for credit losses for our trade receivables to present the net amount expected to be collected as of the balance sheet date. This allowance is based on the credit losses expected to arise over the life of the asset and are based on current expected credit losses. Accounts receivable is reported on the balance sheet at the net amounts expected to be collected by us. Management closely monitors outstanding accounts receivable and recognized an additional allowance for credit losses in the amount of $122,190 and $0 as of December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, we had net accounts receivable of $13,305,254 and $6,603,920, respectively. Accounts receivables are primarily generated from our healthcare subsidiary in its normal course of business.
We calculate a forward-looking collectability rate which we then apply to our gross billings. The amount recorded in accounts receivables approximates the amount expected to actually be collected. The allowance for credit losses represents any adjustments deemed necessary to the collectability rate based upon an annual review of both actual collections, as well as any changes in industry billing and collection, and/or legal practices.
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 | 5 - 7 years |
| Medical equipment | 10 years |
| Leasehold improvements | 10 years or lease term, if shorter |
Goodwill and Other Intangible Assets. Goodwill and indefinite-lived assets are not amortized but are evaluated for impairment annually or when indicators of a potential impairment are present. Our impairment testing of goodwill is performed separately from our impairment testing of indefinite-lived intangibles. We review 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 indefinite-lived intangibles and, if then needed after the first step, Goodwill, is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and operating plans. We believe such assumptions are also comparable to those that would be used by other marketplace participants. For the year ended December 31, 2023, we determined there to be no impairment. For the year ended December 31, 2022, we recognized goodwill impairment in the amount of $2,092,048 in our former financial services segment, which is now reflected in discontinued operations. We based this decision on impairment testing of the underlying assets, expected cash flows, decreased asset value and other factors.
Valuation of Long-Lived Assets. In accordance with the provisions of 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 us 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.
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Distinguishing Liabilities from Equity. We account for our 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 our consolidated balance sheet.
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. |
Stock-Based Compensation. We account for our stock-based compensation in which we obtain employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB ASC. Pursuant to paragraph 718-10-30-6 of the FASB ASC, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur. Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest. The expense resulting from share-based payments is recorded in general and administrative expense in the consolidated statements of operations.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
The full text of our audited consolidated financial statements begins on page F-1 of this annual report.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| ITEM 9A. | 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.
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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 December 31, 2023. Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer determined that, because of the material weaknesses described below, our disclosure controls and procedures were not effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our principal executive officer and principal financial and accounting officer, and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, and includes those policies and procedures that:
| (1) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | |
| (2) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and | |
| (3) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this evaluation, management used the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on our evaluation, we determined that, as of December 31, 2023, our internal control over financial reporting was not effective due to the following material weaknesses.
| · | We had not developed and effectively communicated to our employees our accounting policies and procedure, which had resulted in inconsistent practices. | |
| · | We lacked formal documentation over internal control procedures and environment. | |
| · | We lacked proper segregation of duties and multiple level of reviews. | |
| · | We lacked sufficient process, systems and access to technical accounting resources to enable appropriate accounting for and reporting on complex and/or non-routine debt and equity financing transactions including accounting for derivatives, convertible debt, preferred stock. |
In order to cure the foregoing material weakness, we have begun to take the following remediation measures:
| · | We are making necessary changes by providing training to our financial team and our other relevant personnel on the GAAP accounting guidelines applicable to financial reporting requirements. |
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| · | We plan to implement proper documentation procedures for key functional areas, control objectives and our workflows. | |
| · | We plan to reinforce effective compensating controls can improve the design of the current process with limited human resources. |
We 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.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Controls over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
Except for the matters described above, there have been no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
We have no information to disclose that was required to be in a report on Form 8-K during the fourth quarter of fiscal year 2023 but was not reported.
None of our directors or executive officers
| ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. |
Not applicable.
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PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors and Executive Officers
The following sets forth information about our directors and executive officers as of the date of this report.
| Name | Age | Position | ||
| Daniel Thompson | 74 | Chairman of the Board Directors | ||
| Alex Cunningham | 68 | Chief Executive Officer, President, and Director | ||
| Matthew T. Shafer | 53 | Senior Vice President and Chief Financial Officer | ||
| Zia Choe | 42 | Chief Accounting Officer |
Daniel Thompson. Mr. Thompson has been Chairman of our board of directors since May 2014. Prior to serving as Chairman, Mr. Thompson served as Chief Executive Officer from February 2005 to May 2014 and also served as a consultant from January 2001 to February 2005. Prior to joining us, Mr. Thompson was founder, president and chief executive officer of Creative Entertainment Services, a full-service entertainment company specializing in Feature Film, Television, Closed Captioning and Game Show fulfilment, from 1982 to December 2001. Mr. Thompson also founded CableRep USA, a media sales firm specializing in local market cable advertising, which he sold to Cox Cable in 1981. Mr. Thompson attended Wayne State University, Bellevue College, and College of Continuing Studies at University of Nebraska at Omaha. We believe Mr. Thompson is well suited to serve as a director because of his previous business management and merger and acquisition experience.
Alex Cunningham. Mr. Cunningham has been our Chief Executive Officer and President and has served on our board of directors since June 2015. Prior to joining us, Mr. Cunningham founded Francnsult, Inc., a business development company representing franchise operations, where he was in charge of identifying prospects for franchising, mergers, and acquisitions, and was the managing partner at AH Cunningham & Associates, LLC, a firm which provided financial and operational consulting services to owners of small and medium-sized businesses, EB-5 immigrant investors, passive investment, franchise owners, and franchisors. Prior to his employment at Francnsult, Inc. and AH Cunningham & Associates, Mr. Cunningham was the president and chief executive officer of Profit Management Consulting, a management consulting company that assisted in the management of private and closely held middle-market companies, from 1996 to 2005. From 1991 to 1996, Mr. Cunningham was a partner at London Capital Corporation, a company which provides merger and acquisition services to small and medium-sized businesses. Mr. Cunningham received a BBA-Finance and Administration at the University of Kentucky and an MBA from Rollins College. We believe Cunningham is well suited to serve as a director because of his previous business management, financial, and merger and acquisition experience.
Matthew T. Shafer. Mr. Shafer has been our Senior Vice President and Chief Financial Officer since January 2024. Prior to joining us, Mr. Shafer served as strategic executive engagement consultant and advisor for the chief financial officer and chief accounting officer capacities during rapid growth, change and transitions at Proterra, a publicly traded manufacturer of electric vehicles and provider of related SaaS services, since March 2023. Prior to that, he served as vice president of finance at Aspire Technology Partners, a privately owned technology provider delivering custom digital infrastructures, SaaS solutions and professional services, from May 2022 to February 2023. From October 2021 to April 2022, he served as a strategic chief financial officer of Tatum, an interim executive consultancy practice of Randstad USA, and from September 2016 to September 2021, he held the positions of senior vice president, chief financial officer and treasurer of Ocean Power Technologies, Inc., a publicly traded green technology company providing cost-effective renewable ocean energy solutions. Earlier in his career, Mr. Shafer held senior finance positions at numerous privately owned and publicly traded companies, including, among others, business unit chief financial officer – for the Dentistry (OraPharma) division at Bauch Health Companies, a global publicly traded pharmaceutical company, and numerous executive level positions at Johnson Controls International plc (formerly Tyco International), a large publicly traded multinational manufacturing company. Mr. Shafer is a certified public accountant with a foundation in Big Four public accounting, beginning his career at Arthur Andersen LLP. He received his Bachelor of Science degree in accounting from W. Paul Stillman School of Business at Seton Hall University and has an MBA in finance from The Rutgers Business School at Rutgers University.
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Zia Choe. Ms. Choe has been our Chief Accounting Officer since January 2024. Prior to that, Ms. Choe served as Interim Chief Financial Officer from March 2023 to January 2024 and served as an outside accountant from March 2017 to March 2023. Ms. Choe founded STK FINANCIAL P.C., a California-licensed accounting firm, in June 2021. As a managing partner, Ms. Choe has provided financial attestation, managerial consulting, preparation of 10-Ks and 10-Qs and other high level accounting and financial services to privately and publicly held companies in the U.S. and internationally. Prior to her founding of STK FINANCIAL P.C., she was an audit team leader in the accounting and audit division at JNK Accountancy Group, LLP from September 2014 until June 2021, where she was in charge of financial attestation and due diligence projects for acquisition deals in various industries for seven years. Ms. Choe also had seven years of operational experience in accounting, sales and marketing at Hyundai Mobis Parts America, LLC, a subsidiary of Hyundai Motors, from March 2006 to March 2013. Ms. Choe received a B.S. in Hospitality Management at Florida International University, and she also has higher education in accounting at Ajou University Graduate School in South Korea.
Our directors currently have terms which will end at our next annual meeting of the stockholders or until their successors are elected and qualify, subject to their prior death, resignation, or removal. Officers serve at the discretion of the board of directors. There is no arrangement or understanding between any director or executive officer and any other person pursuant to which he was or is to be selected as a director, nominee, or officer.
Family Relationships
There are no family relationships among any of our officers or directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, except as described below, none of our directors or executive officers has, during the past ten years:
| • | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); | |
| • | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation, or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; | |
| • | been subject to any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; | |
| • | been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| • | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| • | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
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Governance Structure
We chose to appoint a separate Chairman of the Board who is not our Chief Executive Officer. Our board of directors has made this decision based on their belief that a separate Chairman of the Board can act as a balance to the Chief Executive Officer, who also serves as a non-independent director.
The Board’s Role in Risk Oversight
The board of directors oversees that the assets of our company are properly safeguarded, that the appropriate financial and other controls are maintained, and that our business is conducted wisely and in compliance with applicable laws and regulations and proper governance. Included in these responsibilities is the board’s oversight of the various risks facing our company. In this regard, our board seeks to understand and oversee critical business risks. Our board does not view risk in isolation. Risks are considered in virtually every business decision and as part of our business strategy. Our board recognizes that it is neither possible nor prudent to eliminate all risk. Indeed, purposeful, and appropriate risk-taking is essential for our company to be competitive on a global basis and to achieve its objectives.
While the board oversees risk management, company management is charged with managing risk. Management communicates routinely with the board and individual directors on the significant risks identified and how they are being managed. Directors are free to, and indeed often do, communicate directly with senior management.
Our board administers its risk oversight function as a whole by making risk oversight a matter of collective consideration; however, much of the work will be delegated to committees, which will meet regularly and report back to the full board. We plan to establish a standing audit committee, compensation committee and nominating and corporate governance committee of our board of directors. We anticipate that the audit committee will oversee risks related to our financial statements, the financial reporting process, accounting and legal matters, the compensation committee will evaluate the risks and rewards associated with our compensation philosophy and programs, and the nominating and corporate governance committee will evaluate risk associated with management decisions and strategic direction.
Material Changes to Director Nomination Procedures
There have been no material changes to the procedures by which stockholders may recommend nominees to our board of directors since such procedures were last disclosed.
Code of Ethics
We have adopted a code of ethics that applies to all of our directors, officers, and employees, including our principal executive officer, principal financial officer and principal accounting officer. Such code of ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations, and policies, including disclosure requirements under the federal securities laws, and reporting of violations of the code.
We are required to disclose any amendment to, or waiver from, a provision of our code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions. We intend to use our website as a method of disseminating this disclosure, as permitted by applicable SEC rules. Any such disclosure will be posted to our website within four (4) business days following the date of any such amendment to, or waiver from, a provision of our code of ethics.
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Insider Trading Policy
We have adopted an insider trading policy which prohibits our directors, officers, and employees from engaging in transactions in our common stock while in the possession of material non-public information; engaging in transactions in the stock of other companies while in possession of material non-public information that they become aware of in performing their duties; and disclosing material non-public information to unauthorized persons outside our company.
Our insider trading policy restricts trading by directors, officers, and certain key employees during blackout periods, which generally begin 15 calendar days before the end of each fiscal quarter and end two business days after the issuance of our earnings release for the quarter. Additional blackout periods may be imposed with or without notice, as the circumstances require.
Our insider trading policy also prohibits our directors, officers, and employees from purchasing financial instruments (such as prepaid variable forward contracts, equity swaps, collars and exchange funds) designed to hedge or offset any decrease in the market value of our common stock they hold, directly or indirectly. In addition, directors, officers, and employees are expressly prohibited from pledging our common stock to secure personal loans or other obligations, including by holding their common stock in a margin account, unless such arrangement is specifically approved in advance by the administrator of our insider trading policy, or making short-sale transactions in our common stock.
A copy of the insider trading policy may be found on our website.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers and beneficial holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our equity securities. We believe, based solely on a review of the copies of such reports furnished to us and representations of these persons, that none of the reports were timely filed for the year ended December 31, 2023. All of the delinquent reports were recently filed.
| ITEM 11. | EXECUTIVE COMPENSATION. |
Summary Compensation Table - Years Ended December 31, 2023 and 2022
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by, or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officers received total annual salary and bonus compensation in excess of $100,000.
| Name and Principal Position | Year |
Salary ($) |
Bonus ($) |
Other Compensation ($) |
Total ($) |
|
Alex Cunningham, Chief Executive Officer |
2023 | 360,000 | 250,000 | – | 560,000 |
| 2022 | 360,000 | 200,000 | – | 560,000 | |
|
Daniel Thompson, Chairman of the Board |
2023 | 360,000 | 250,000 | – | 560,000 |
| 2022 | 360,000 | 200,000 | – | 560,000 | |
|
Zia Choe, former Interim Chief Financial Officer(1) |
2023 | 145,048 | – | – | 145,048 |
| 2022 | – | – | 67,500 | 67,500 |
| (1) | Ms. Choe served as our Interim Chief Financial Officer from March 2023 to January 2024. Prior to that, she served as our outside accountant from January 2022 to February 2023. Other Compensation includes consulting fees that Ms. Choe received prior to her appointment as our Interim Chief Financial Officer. |
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Employment Agreements
Effective July 15, 2020, we entered into an employment agreement with Alex Cunningham, pursuant to which Mr. Cunningham agreed to serve as President and Chief Executive Officer. Pursuant to the employment agreement, Mr. Cunningham will earn $360,000 per year as his base salary. Mr. Cunningham is eligible for an annual bonus with respect to each fiscal year ending during his employment. Mr. Cunningham is also eligible to receive compensation in shares of preferred stock in the event that we are unable to pay his base salary in dollars. The term of employment agreement is from July 15, 2020 to December 31, 2025 with automatic extensions for additional successive one (1) year renewals terms unless terminated by notice of at least three (3) months from us or Mr. Cunningham of the termination. The employment agreement may be terminated immediately for cause (as such term is defined in the employment agreement), which would cause no severance payment obligations to Mr. Cunningham. In the event of termination without cause or for good reason, we must provide Mr. Cunningham with thirty (30) days prior written notice and would be required to pay all accrued payments, base salary and $200,000, Mr. Cunningham’s maximum target bonus amount for the twelve months after the termination. In the event of termination of employment without cause or for good reason following a change-in-control of our company, Mr. Cunningham would be entitled to all accrued payments, a lump sum separation allowance equal to two times the sum of his then base salary and then target bonus, any annual incentive bonuses, payment of benefits until the earlier of twenty-four months after termination or receipt of comparable benefits from subsequent employment and all then-outstanding equity awards under any equity plan will vest in full. The employment agreement also provides that Mr. Cunningham may not compete against us for a period of twelve (12) months after termination of his employment for any reason or solicit employees or customers from us for a period of twenty-four (24) months after termination of his employment for any reason.
Effective July 15, 2020, we entered into an employment agreement with Daniel Thompson, pursuant to which Mr. Thompson agreed to serve as Chairman of the Board. Pursuant to the employment agreement, Mr. Thompson will earn $360,000 per year as his base salary. Mr. Thompson is eligible for an annual bonus with respect to each fiscal year ending during his directorship. Mr. Thompson is also eligible to receive compensation in shares of preferred stock in the event that we are unable to pay his base salary in dollars. The term of agreement is from July 15, 2020 to December 31, 2025 with automatic extensions for additional successive one (1) year renewals terms unless terminated by notice of at least three (3) months from us or Mr. Thompson of the termination. The employment agreement may be terminated immediately for cause (as such term is defined in the employment agreement), which would cause no severance payment obligations to Mr. Thompson. In the event of termination without cause or for good reason, we must provide Mr. Thompson with thirty (30) days prior written notice and would be required to pay all accrued payments, base salary and $200,000, Mr. Thompson’s maximum target bonus amount for the twelve months after the termination. In the event of termination of employment without cause or for good reason following a change-in-control of our company, Mr. Thompson would be entitled to all accrued payments, a lump sum separation allowance equal to two times the sum of his then base salary and then target bonus, any annual incentive bonuses, payment of benefits until the earlier of twenty-four months after termination or receipt of comparable benefits from subsequent employment and all then-outstanding equity awards under any equity plan will vest in full. The employment agreement also provides that Mr. Thompson may not compete against us for a period of twelve (12) months after termination of his employment for any reason or solicit employees or customers from us for a period of twenty-four (24) months after termination of his employment for any reason.
On January 2, 2024, we entered into an employment agreement with Mr. Shafer setting forth the terms of his employment as Chief Financial Officer. Pursuant to the employment agreement, Mr. Shafer is entitled to an annual base salary of $228,000 and a signing bonus of 5,000 shares of our series I preferred stock. He is also eligible for consideration for a one-time achievement bonus equal to 35% of base salary within sixty (60) days upon our company uplisting to a national securities exchange. In addition, he is also eligible for an annual target bonus equal to 25% of base salary based on the achievement of certain performance goals and annual stock option grants. Mr. Shafer is also eligible to participate in all employee benefit plans, including health insurance, commensurate with his position. The term of the employment agreement is for one (1) year with automatic extensions for additional successive one (1) year renewal terms unless terminated by either party no later than thirty (30) days prior to the renewal date. The employment agreement may be terminated immediately by us with or without cause (as such term is defined in the employment agreement) or in the event of Mr. Shafer’s death or disability and may be terminated immediately by Mr. Shafer upon his voluntary resignation or other voluntary termination of employment. In the event of termination by us without cause, Mr. Shafer is entitled to the compensation and benefits described above for a period of three (3) months following termination. In the event of termination by Mr. Shafer for good reason (as defined in the employment agreement) or because Mr. Shafer cannot perform his services as result of physical or mental incapacitation, he will be eligible to receive three (3) months of base salary and medical and dental benefits under our medical and dental plans then in effect. Mr. Shafer is not entitled to receive any additional compensation upon termination by us for cause or upon a voluntary termination by Mr. Shafer. The employment agreement also contains customary confidentiality provisions and restrictive covenants prohibiting Mr. Shafer from owning or operating a business that competes with our company or soliciting our employees during the term of his employment and for a period of twelve months following the termination of his employment.
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On January 2, 2024, we entered into an employment agreement with Ms. Choe setting forth the terms of her employment as Chief Accounting Officer. Pursuant to the employment agreement, Ms. Choe is entitled to an annual base salary of $210,000 and a signing bonus of 2,500 shares of our series I preferred stock. She is also eligible for an annual bonus and annual stock option grants. Ms. Choe is also eligible to participate in all employee benefit plans, including health insurance, commensurate with her position. The term of the employment agreement is for one (1) year with automatic extensions for additional successive one (1) year renewal terms unless terminated by either party no later than thirty (30) days prior to the renewal date. The employment agreement may be terminated immediately by us with or without cause (as such term is defined in the employment agreement) or in the event of Ms. Choe’s death or disability and may be terminated immediately by Ms. Choe upon her voluntary resignation or other voluntary termination of employment. In the event of termination by us without cause, Ms. Choe is entitled to the compensation and benefits described above for a period of one (1) month following termination. In the event of termination by Ms. Choe for good reason (as defined in the employment agreement) or because Ms. Choe cannot perform her services as result of physical or mental incapacitation, she will be eligible to receive three (3) months of base salary and medical and dental benefits under our medical and dental plans then in effect. Ms. Choe is not entitled to receive any additional compensation upon termination by us for cause or upon voluntary termination by Ms. Choe. The employment agreement also contains customary confidentiality provisions and restrictive covenants prohibiting Ms. Choe from owning or operating a business that competes with the Company or soliciting our employees during the term of her employment and for a period of twelve months following the termination of her employment.
Outstanding Equity Awards at Fiscal Year-End
No executive officer named above had any unexercised options, stock that has not vested or equity incentive plan awards outstanding as of December 31, 2023.
Additional Narrative Disclosure
Retirement Benefits
We have not maintained, and do not currently maintain, a defined benefit pension plan, nonqualified deferred compensation plan or 401(k) plan.
Potential Payments Upon Termination or Change in Control
As described under “—Employment Agreements” above, Mr. Cunningham, Mr. Thompson, Mr. Shafer, and Ms. Choe are entitled severance if their employment is terminated without cause.
Director Compensation
Except for our Chairman, no member of our board of directors received any compensation for services as a director during the fiscal year ended December 31, 2023.
2024 Equity Incentive Plan
On January 31, 2024, our board of directors and stockholders adopted the Cardiff Lexington Corporation 2024 Equity Incentive Plan, or Plan. The following is a summary which describes the principal features of the Plan, but it is qualified in its entirety by reference to the full text of the Plan.
Purposes. The purpose of this Plan is to provide a means whereby employees, directors, consultants of our company and its affiliates develop a sense of proprietorship and personal involvement in the development and financial success of our company, and to encourage them to devote their best efforts to the business of our company, thereby advancing the interests of our company and its stockholders. A further purpose of this Plan is to provide a means through which we may attract able individuals to provide services to or for the benefit of our company and to provide a means for such individuals to acquire and maintain share ownership in our company, thereby strengthening their concern for the welfare of our company.
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Types of Awards. Awards that may be granted include incentive stock options, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards, and performance compensation awards. These awards offer our officers, employees, consultants, and directors the possibility of future value, depending on the long-term price appreciation of our common stock and the award holder’s continuing service with our company.
Eligible Recipients. Persons eligible to receive awards under the Plan will be those officers, employees, directors and consultants of our company and its subsidiaries who are selected by the administrator.
Administration. The Plan is administered by our board of directors; provided that if and when we establish a compensation committee, the compensation committee will administer the Plan. Among other things, the administrator has the authority to select persons who will receive awards, determine the types of awards and the number of shares to be covered by awards, and to establish the terms, conditions, performance criteria, restrictions, and other provisions of awards. The administrator has authority to establish, amend and rescind rules and regulations relating to the Plan.
Shares Available. The maximum number of shares of our common stock that may be delivered to participants under the Plan is 2,000,000, subject to adjustment for certain corporate changes affecting the common stock, such as stock splits. In addition, the number of shares of common stock available for issuance under the Plan will automatically increase on January 1 of each calendar year during the term of the Plan by an amount equal five percent (5%) of the total number of shares of common stock issued and outstanding on December 31 of the immediately preceding calendar year. Shares subject to an award under the Plan for which the award is canceled, forfeited or expires again become available for grants under the Plan. Shares subject to an award that is settled in cash will not again be made available for grants under the Plan.
Stock Options.
General. Share options give the option holder the right to acquire from us a designated number of common stock at a purchase price that is fixed upon the grant of the option. Stock options granted may be either tax-qualified stock options (so-called “incentive stock options”) or non-qualified stock options. Subject to the provisions of the Plan, the administrator has the authority to determine all grants of stock options. That determination will include: the number of stock subject to any option; the exercise price per stock; the expiration date of the option; the manner, time, and date of permitted exercise; other restrictions, if any, on the option or the stock underlying the option; and any other terms and conditions as the administrator may determine.
Option Price. The exercise price for stock options will be determined at the time of grant. Normally, the exercise price will not be less than the fair market value on the date of grant. As a matter of tax law, the exercise price for any incentive share option awarded may not be less than the fair market value of the shares on the date of grant. However, incentive stock option grants to any person owning more than 10% of our voting power must have an exercise price of not less than 110% of the fair market value on the grant date.
Exercise of Options. An option may be exercised only in accordance with the terms and conditions for the option agreement as established by the administrator at the time of the grant. The option must be exercised by notice to us, accompanied by payment of the exercise price. Payments may be made either: (i) in cash or its equivalent; (ii) by tendering (either by actual delivery or attestation) previously acquired stock having an aggregate fair market value at the time of exercise equal to the exercise price; (iii) a cashless exercise (broker-assisted exercise) through a “same day sale” commitment; (iv) by a combination of (i), (ii), and (iii); or (v) any other method approved or accepted by the administrator in its sole discretion.
Expiration or Termination. Options, if not previously exercised, will expire on the expiration date established by the administrator at the time of grant. In the case of incentive stock options, such term cannot exceed ten years provided that in the case of holders of more than 10% of our voting power, such term cannot exceed five years. Options will terminate before their expiration date if the holder’s service with our company or a subsidiary terminates before the expiration date. The option may remain exercisable for specified periods after certain terminations of employment, including terminations as a result of death, disability, or retirement, with the precise period during which the option may be exercised to be established by the administrator and reflected in the grant evidencing the award.
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Incentive and Non-Qualified Options. As described elsewhere in this summary, an incentive share option is an option that is intended to qualify under certain provisions of the U.S. Internal Revenue Code of 1986, as amended, or the Code, for more favorable tax treatment than applies to non-qualified share options. Any option that does not qualify as an incentive share option will be a non-qualified share option. Under the Code, certain restrictions apply to incentive stock options. For example, the exercise price for incentive stock options may not be less than the fair market value of the shares on the grant date and the term of the option may not exceed ten years. In addition, an incentive stock option may not be transferred, other than by will or the laws of descent and distribution and is exercisable during the holder’s lifetime only by the holder. In addition, no incentive stock options may be granted to a holder that is first exercisable in a single year if that option, together with all incentive stock options previously granted to the holder that also first become exercisable in that year, relate to shares having an aggregate fair market value in excess of $100,000, measured at the grant date.
Stock Appreciation Rights. Stock appreciation rights, or SARs, which may be granted alone or in tandem with options, have an economic value similar to that of options. When an SAR for a particular number of stock is exercised, the holder receives a payment equal to the difference between the market price of the stock on the date of exercise and the exercise price of the stock under the SAR. Again, the exercise price for SARs normally is the market price of the shares on the date the SAR is granted. Under the Plan, holders of SARs may receive this payment - the appreciation value - either in cash or shares valued at the fair market value on the date of exercise. The form of payment will be determined by us.
Restricted Awards. Restricted awards are shares awarded to participants at no cost. Restricted awards can take the form of awards of restricted stock, which represent issued and outstanding shares subject to vesting criteria, or restricted share units, which represent the right to receive shares subject to satisfaction of the vesting criteria. Restricted stock awards are forfeitable and non-transferable until the shares vest. The vesting date or dates and other conditions for vesting are established when the shares are awarded. These awards will be subject to such conditions, restrictions and contingencies as the administrator shall determine at the date of grant. Those may include requirements for continuous service and/or the achievement of specified performance goals.
Performance Criteria. Under the Plan, one or more performance criteria will be used by the administrator in establishing performance goals. Any one or more of the performance criteria may be used on an absolute or relative basis to measure the performance of our company, as the administrator may deem appropriate, or as compared to the performance of a group of comparable companies, or published or special index that the administrator deems appropriate.
Other Material Provisions. Awards will be evidenced by a written agreement, in such form as may be approved by the administrator. In the event of various changes to the capitalization of our company, such as stock splits, stock dividends and similar re-capitalizations, an appropriate adjustment will be made by the administrator to the number of shares covered by outstanding awards or to the exercise price of such awards. The administrator is also permitted to include in the written agreement provisions that provide for certain changes in the award in the event of a change of control of our company, including acceleration of vesting. Except as otherwise determined by the administrator at the date of grant, awards will not be transferable, other than by will or the laws of descent and distribution. Prior to any award distribution, we are permitted to deduct or withhold amounts sufficient to satisfy any employee withholding tax requirements. Our board also has the authority, at any time, to discontinue the granting of awards. The board also has the authority to alter or amend the Plan or any outstanding award or may terminate the Plan as to further grants, provided that no amendment will, without the approval of our stockholders, to the extent that such approval is required by law or the rules of an applicable exchange, increase the number of shares available under the Plan, change the persons eligible for awards under the Plan, extend the time within which awards may be made, or amend the provisions of the Plan related to amendments. No amendment that would adversely affect any outstanding award made under the Plan can be made without the consent of the holder of such award.
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| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The following table sets forth information regarding beneficial ownership of our voting stock as of March 22, 2024 by (i) each of our executive officers and directors; (ii) all of our executive officers and directors as a group; and (iii) each person who is known by us to beneficially own more than 5% of our common stock. Unless otherwise specified, the address of each of the persons set forth below is in care of our company, 3753 Howard Hughes Parkway, Suite 200, Las Vegas, NV 89169.
| Name and Address of Beneficial Owner | Title of Class | Amount and Nature of Beneficial Ownership(1) | Percent of Voting Stock(2) |
| Daniel Thompson, Chairman of the Board(3) | Common Stock | 46,591,457 | 40.93% |
| Alex Cunningham, Chief Executive Officer and Director(4) | Common Stock | 48,780,330 | 42.85% |
| Matthew T. Shafer, Chief Financial Officer(5) | Common Stock | 25,000 | * |
| Zia Choe, Chief Accounting Officer(6) | Common Stock | 18,800 | * |
| All executive officers and directors (4 persons) | Common Stock |
95,415,586 |
83.73% |
* Less than 1%
| (1) | Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock. | |
| (2) | Percentage of total voting stock represents total ownership with respect to all shares of our voting stock, which includes the common stock, series A preferred stock, series B preferred stock, series C preferred stock, series E preferred stock, series I preferred stock, series J preferred stock, series L preferred stock and series R convertible preferred stock, voting as a single class. As of March 22, 2024, there were 8,664,495 shares of common stock, 2 shares of series A preferred stock, 1,451,929 shares of series B preferred stock, 103 shares of series C preferred stock, 155,750 shares of series E preferred stock, 12,999,000 shares of series I preferred stock, 171,359 shares of series J preferred stock, 319,493 shares of series L preferred stock and 165 shares of series R convertible preferred stock issued and outstanding. Each share of series A preferred stock is entitled to a number of votes at any time equal to 25% of the number of votes then held or entitled to be made by all other equity securities of our company, plus one (equivalent to 18,952,492 votes as of March 22, 2024). Each share of series B preferred stock, series C preferred stock, series E preferred stock, series J preferred stock and series L preferred stock is entitled to one (1) vote per share. Each share of series I preferred stock is entitled to five (5) votes per share. Each share of series R convertible preferred stock is entitled to a number of votes equal to the number of shares into which the series R convertible preferred stock is convertible (estimated to be 51,833 votes per share as of March 22, 2024). For each beneficial owner above, any options, warrants or other convertible securities exercisable within 60 days have been included in the denominator. | |
| (3) | Includes (i) 1,000,337 shares of common stock held directly, (ii) 4 shares of common stock held by the 2007 Thompson Family Trust, (iii) 1 share of series A preferred stock held directly, (iv) 26,124 shares of common stock issuable upon the conversion of 13,062 shares of series B preferred stock held by the 2007 Thompson Family Trust, (v) 100,000 shares of common stock issuable upon the conversion of 1 share of series C preferred stock held directly and (vi) 5,302,500 shares of series I preferred stock. Mr. Thompson is the Trustee of the 2007 Thompson Family Trust and has voting and dispositive power over the shares held by it. | |
| (4) | Includes (i) 1,000,338 shares of common stock, (ii) 1 share of series A preferred stock, (iii) 12,500 shares of common stock issuable upon the conversion of 6,250 shares of series B preferred stock, (iv) 100,000 shares of common stock issuable upon the conversion of 1 share of series C preferred stock and (v) 5,743,000 shares of series I preferred stock. | |
| (5) | Represents 5,000 shares of series I preferred stock. | |
| (6) | Includes 6,300 shares of common stock issuable upon the conversion of 3,150 shares of series B preferred stock and 2,500 shares of series I preferred stock. |
We do not currently have any arrangements which if consummated may result in a change of control of our company.
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| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
Transactions with Related Persons
The following includes a summary of transactions since the beginning of our 2022 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under Item 11 “Executive Compensation” above). We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions.
We have obtained short-term advances from Daniel Thompson, the Chairman of the Board, that are non-interest bearing and due on demand. As of December 31, 2023 and 2022, we owed the Chairman $120,997 and $123,192, respectively.
Director Independence
We do not have any independent directors within the meaning of the rules of the Nasdaq Stock Market.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
Independent Auditors’ Fees
The following is a summary of the fees billed to us for professional services rendered for the fiscal years ended December 31, 2023 and 2022. Fees include those paid to Grassi & Co., CPAs, P.C. for audit fees.
| Year Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Audit Fees | $ | 125,869 | $ | 155,805 | ||||
| Audit-Related Fees | 12,844 | – | ||||||
| Tax Fees | 6,850 | – | ||||||
| All Other Audit Fees | – | – | ||||||
| TOTAL | $ | 145,563 | $ | 155,805 | ||||
“Audit Fees” consisted of fees billed for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-K and 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
“Audit-Related Fees” consisted of fees billed for assurance and related services by the principal accountant that were reasonably related to the performance of the audit or review of our financial statements and are not reported under the paragraph captioned “Audit Fees” above.
“Tax Fees” consisted of fees billed for professional services rendered by the principal accountant for tax returns preparation.
“All Other Fees” consisted of fees billed for products and services provided by the principal accountant, other than the services reported above under other captions of this Item 14.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our board of directors to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our board of directors pre-approved the audit service performed by Grassi & Co., CPAs, P.C. for our financial statements as of and for the year ended December 31, 2023.
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PART IV
| ITEM 15. | EXHIBIT AND FINANCIAL STATEMENT SCHEDULES. |
| (a) | List of Documents Filed as a Part of This Report: |
| (1) | Index to Financial Statements: |
| Report of Independent Registered Public Accounting Firm (PCAOB ID 606) | |
| Consolidated Balance Sheets as of December 31, 2023 and 2022 (restated) | |
| Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022 (restated) | |
| Consolidated Statements of Stockholders’ Equity (Deficiency) for the Years Ended December 31, 2023 and 2022 (restated) | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 (restated) | |
| Notes to Consolidated Financial Statements | |
| (2) | Index to Financial Statement Schedules: |
| All schedules have been omitted because the required information is included in the financial statements or the notes thereto, or because it is not required. | |
| (3) | Index to Exhibits: |
| See exhibits listed under Part (b) below. |
(b) 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 Designation of Series A Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.3 | Certificate of Designation of Series B Preferred Stock of Cardiff Lexington Corporation (incorporated by reference to Exhibit 3.3 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on August 3, 2023) | |
| 3.4 | Certificate of 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) | |
| 3.5 | 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) | |
| 3.6 | 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) | |
| 3.7 | 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) | |
| 3.8 | 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) | |
| 3.9 | 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) | |
| 3.10 | 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) | |
| 3.11 | 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) | |
| 3.12 | 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) |
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| 10.13 | Security and Pledge Agreement, dated September 3, 2020, between Cardiff Lexington Corporation and GHS Investments, LLC (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K filed on June 6, 2023) | |
| 10.14 | 8% Convertible Secured Redeemable Note issued by Cardiff Lexington Corporation to GHS Investments, LLC on November 8, 2019 (incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 filed on July 19, 2023) | |
| 10.15 | Convertible Promissory Note issued by Cardiff Lexington Corporation to Greentree Financial Group, Inc. on January 24, 2017 (incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K filed on June 6, 2023) | |
| 10.16 | Convertible Promissory Note issued by Cardiff Lexington Corporation to Greentree Financial Group, Inc. on September 12, 2016 (incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K filed on June 6, 2023) | |
| 10.17† | Employment Agreement, dated July 15, 2020, between the Cardiff Lexington Corporation and Alex Cunningham (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K filed on March 31, 2021) | |
| 10.18† | Employment Agreement, dated July 15, 2020, between Cardiff Lexington Corporation and Daniel Thompson (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K filed on March 31, 2021) | |
| 10.19† | Employment Agreement, dated January 2, 2024, between the Cardiff Lexington Corporation and Matthew T. Shafer (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 10.20† | Employment Agreement, dated January 2, 2024, between the Cardiff Lexington Corporation and Zia Choe (incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 10.21† | 2024 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed on February 6, 2024) | |
| 10.22† | Form of Stock Option Agreement relating to 2024 Equity Incentive Plan (incorporated by reference to Exhibit 10.22 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 10.23† | Form of Restricted Stock Award Agreement relating to 2024 Equity Incentive Plan (incorporated by reference to Exhibit 10.23 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 10.24† | Form of Restricted Stock Unit Award Agreement relating to 2024 Equity Incentive Plan (incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 14.1 | Code of Business Ethics and Conduct (incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K filed on June 6, 2023) | |
| 19.1 | Insider Trading Policy(incorporated by reference to Exhibit 19.1 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 21.1 | List of Subsidiaries of the registrant (incorporated by reference to Exhibit 21.1 to the Annual Report on Form 10-K filed on March 27, 2024) | |
| 23.1* | Consent of Grassi & Co., CPAs, P.C. | |
| 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 |
| † | Executive compensation plan or arrangement |
| ITEM 16. | FORM 10-K SUMMARY. |
None.
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FINANCIAL STATEMENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Cardiff Lexington Corporation and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Cardiff of Lexington Corporation and Subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, stockholders’ equity (deficiency), and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Restatement of Financial Statements
As discussed in Note 2 to the consolidated financial statements, the Company’s consolidated financial statements as of and for the years ended December 31, 2023 and 2022 have been restated to correct certain misstatements.
Substantial Doubt Regarding the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company has sustained an accumulated deficit and negative cash flows from operations, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Goodwill
Critical Audit Matter Description
As of December 31, 2023, the Company had approximately $5.7 million of goodwill. As discussed in Note 1 and Note 12 to the consolidated financial statements, goodwill is tested annually for impairment at the reporting unit level, or more frequently if impairment indicators arise.
The principal consideration for our determination that this was a critical audit matter resulted from the material balance of goodwill at year end and the Company’s goodwill impairment analyses requiring a high degree of management judgement. There was a high degree of subjective auditor judgment associated with the evaluation of management’s assertion with respect to the realizability of goodwill.
How we addressed the matter:
We obtained an understanding of the Company’s goodwill impairment evaluation process, including controls over management’s review of the significant assumptions. We considered the material weakness relating to management’s internal controls in determining the nature, timing and extent of audit tests applied in our audit.
Our primary substantive audit procedures to test the Company’s goodwill impairment analyses included evaluating the completeness and reasonableness of management’s qualitative assessment. We obtained management’s qualitative goodwill analysis and compared certain significant assumptions to existing market conditions and information. We also compared significant assumptions, where relevant, to the plans of the Company, including management’s expectations regarding the Company’s business model, customer base and other relevant factors. Finally, we assessed the adequacy of the disclosures in the consolidated financial statements.
We have served as the Company’s auditor since 2022.
March 27, 2024, except for Notes 1, 2 and 17, as to which date is July 23, 2024
| F-2 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2023 AND 2022
| December 31, | ||||||||
| 2023 | 2022 (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 | ||||||||
| Due from related party | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES, MEZZANINE EQUITY AND DEFICIENCY IN STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expense | $ | $ | ||||||
| Accrued expenses - related parties | ||||||||
| Accrued interest | ||||||||
| Right of use - liabilities | ||||||||
| Due to director and officer | ||||||||
| Notes payable | ||||||||
| Convertible notes payable, net of debt discounts of $ | ||||||||
| Net liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Other liabilities | ||||||||
| Notes payable | ||||||||
| Operating lease liability – long term | ||||||||
| Total liabilities | ||||||||
| Mezzanine equity | ||||||||
| Redeemable Series N Senior Convertible Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at December 31, 2023 and 2022 | ||||||||
| Redeemable Series R Senior Convertible Preferred Stock - shares authorized, $0.001 par value, stated value of $, shares issued and outstanding at December 31, 2023 and 2022 | ||||||||
| Redeemable Series X Senior Convertible Preferred Stock - shares authorized, $0.001 par value, stated value of $ par value; shares issued and outstanding at December 31, 2023 and 2022 | ||||||||
| Total Mezzanine Equity | ||||||||
| Stockholders' equity (deficit) | ||||||||
| Series B Preferred Stock - shares authorized, $0.001 par value, stated value of $, and shares issued and outstanding at December 31, 2023 and 2022, respectively | ||||||||
| Series C Preferred Stock - shares authorized, $0.001 par value, stated value of $, shares issued and outstanding at December 31, 2023 and 2022 | ||||||||
| Series E Preferred Stock - shares authorized, $0.001 par value, stated value $, and shares issued and outstanding at December 31, 2023 and 2022, respectively | ||||||||
| Series F-1 Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at December 31, 2023 and 2022 | ||||||||
| Series I Preferred Stock - shares authorized, $0.001 par value, stated value $, issued and outstanding at December 31, 2023 and 2022 | ||||||||
| Series J Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at December 31, 2023 and 2022 | ||||||||
| Series L Preferred Stock - shares authorized, $0.001 par value, stated value $, shares issued and outstanding at December 31, 2023 and 2022 | ||||||||
| Common Stock; shares authorized, $ par value; and shares issued and outstanding at December 31, 2023 and 2022, respectively | ||||||||
| Additional paid-in capital | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity (deficit) | ( | ) | ||||||
| Total liabilities, mezzanine equity and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements
| F-3 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
| December 31, | ||||||||
| 2023 | 2022 (Restated) | |||||||
| REVENUE | ||||||||
| Healthcare | $ | $ | ||||||
| Total revenue | ||||||||
| COST OF SALES | ||||||||
| Healthcare | ||||||||
| Total cost of sales | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES | ||||||||
| Depreciation expense | ||||||||
| Selling, general and administrative | ||||||||
| Total operating expenses | ||||||||
| INCOME FROM CONTINUING OPERATIONS | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||
| Other (expense) income | ( | ) | ||||||
| Gain on debt refinance and forgiveness | ||||||||
| Penalties and fees | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Amortization of debt discounts | ( | ) | ( | ) | ||||
| Total other expenses | ( | ) | ( | ) | ||||
| NET INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS | ( | ) | ||||||
| LOSS FROM DISCONTINUED OPERATIONS | ( | ) | ||||||
| LOSS FROM DISPOSAL OF DISCONTINUED OPERATIONS | ( | ) | ||||||
| LOSS FROM DISCONTINUED OPERATIONS | ( | ) | ( | ) | ||||
| NET INCOME (LOSS) FOR THE YEAR | $ | $ | ( | ) | ||||
| PREFERRED STOCK DIVIDENDS | ( | ) | ( | ) | ||||
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | $ | ( | ) | ||||
| BASIC EARNINGS (LOSS) PER SHARE | ||||||||
| CONTINUING OPERATIONS | $ | $ | ( | ) | ||||
| DISCONTINUED OPERATIONS | $ | ( | ) | $ | ( | ) | ||
| DILUTED EARNINGS (LOSS) 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 consolidated financial statements
| F-4 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
Preferred Stock Series A, K and I | Preferred Stock Series B, E, F-1,J, and L | Preferred Stock Series C | Treasury Stock | |||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
| Balance December 31, 2021 (Restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Issuance of series B preferred stock for contribution | – | – | – | |||||||||||||||||||||||||||||
| Issuance of series B preferred stock in exchange of series D preferred stock and series H preferred stock | – | – | – | |||||||||||||||||||||||||||||
| Cancellation of common stock | – | – | – | – | ||||||||||||||||||||||||||||
| Cancellation of series D preferred stock | – | ( | ) | ( | ) | – | – | |||||||||||||||||||||||||
| Cancellation of series H preferred stock | – | ( | ) | ( | ) | – | – | |||||||||||||||||||||||||
| Cancellation of series K preferred stock | ( | ) | ( | ) | – | – | – | |||||||||||||||||||||||||
| Issuance of series B preferred stock for settlement of employment | – | – | – | |||||||||||||||||||||||||||||
| Issuance of series B preferred stock in exchange for series F | – | – | – | |||||||||||||||||||||||||||||
| Cancellation of series F preferred stock | – | ( | ) | ( | ) | – | – | |||||||||||||||||||||||||
| Issuance of series J preferred stock | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock for settlement of Red Rock Travel | – | – | – | – | ||||||||||||||||||||||||||||
| Reclassification for cancelled shares | – | – | – | |||||||||||||||||||||||||||||
| Accrued preferred stock dividends | – | – | – | – | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Balance, December 31, 2022 (Restated) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Conversion of convertible notes payable | – | – | – | – | ||||||||||||||||||||||||||||
| Accrued preferred stock dividends | – | – | – | – | ||||||||||||||||||||||||||||
| Issuance of series B preferred stock | – | – | – | |||||||||||||||||||||||||||||
| Issuance of series E preferred stock | – | – | – | |||||||||||||||||||||||||||||
| Net income | – | – | – | – | ||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
| F-5 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY) (continued)
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance December 31, 2021 (Restated) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
| Issuance of series B preferred stock for contribution | – | ( | ) | |||||||||||||||||
| Issuance of series B preferred stock in exchange of series D preferred stock and series H preferred stock | – | |||||||||||||||||||
| Cancellation of common stock | – | ( | ) | |||||||||||||||||
| Cancellation of series D preferred stock | – | ( | ) | |||||||||||||||||
| Cancellation of series H preferred stock | – | ( | ) | |||||||||||||||||
| Cancellation of series K preferred stock | – | |||||||||||||||||||
| Issuance of series B preferred stock for settlement of employment | – | ( | ) | |||||||||||||||||
| Issuance of series B preferred stock in exchange for series F | – | |||||||||||||||||||
| Cancellation of series F preferred stock | – | ( | ) | |||||||||||||||||
| Issuance of series J preferred stock | – | |||||||||||||||||||
| Issuance of common stock for settlement of Red Rock Travel | ( | ) | ||||||||||||||||||
| Reclassification for cancelled shares | – | ( | ) | |||||||||||||||||
| Accrued preferred stock dividends | – | ( | ) | ( | ) | |||||||||||||||
| Net loss | – | ( | ) | ( | ) | |||||||||||||||
| Balance, December 31, 2022 (Restated) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
| Conversion of convertible notes payable | ( | ) | ||||||||||||||||||
| Accrued preferred stock dividends | – | ( | ) | ( | ) | |||||||||||||||
| Issuance of series B preferred stock | – | |||||||||||||||||||
| Issuance of series E preferred stock | – | ( | ) | |||||||||||||||||
| Net income | – | |||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
| F-6 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022
| December 31, | ||||||||
2023 Restated | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) from continuing operations | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Bad debt | ||||||||
| Amortization of debt discount | ||||||||
| Conversion and note issuance cost | ||||||||
| Share issuance for service rendered | ||||||||
| Other (income) or loss | ( | ) | ||||||
| Goodwill impairment | ||||||||
| Loss on finance penalties and fees | ||||||||
| Gain on refinance of debt | ( | ) | ||||||
| Gain on 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 | ||||||||
| Due to related party | ||||||||
| Accrued officers compensation | ||||||||
| Accrued interest | ||||||||
| Right of use - liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Net cash used in Discontinued Operations – Operating | ( | ) | ||||||
| FINANCING ACTIVITIES | ||||||||
| Repayments to directors and officers | ( | ) | ( | ) | ||||
| Proceeds from convertible notes payable | ||||||||
| Repayment of SBA loans | ( | ) | ||||||
| Proceeds from line of credit | ||||||||
| Repayment of line of credit | ( | ) | ||||||
| Repayment to convertible notes payable | ( | ) | ( | ) | ||||
| Dividend on preferred stock | ( | ) | ||||||
| Issuance of preferred stock | ||||||||
| Net cash provided by financing activities | ||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | ||||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Preferred stock issued for business acquisition | $ | $ | ||||||
| Preferred stock issued upon exchange of defaulted convertible notes payable | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements
| F-7 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization and Nature of Operations
Cardiff Lexington Corporation (“Cardiff”) was originally incorporated on September 3, 1986 in Colorado as Cardiff International Inc. On November 10, 2005, Cardiff merged with Legacy Card Company, LLC and changed its name to Cardiff Lexington Corporation. On August 27, 2014, Cardiff redomiciled and became a corporation under the laws of Florida. On April 13, 2021, Cardiff redomiciled and became a corporation under the laws of Nevada.
Cardiff is an acquisition holding company focused on locating undervalued and undercapitalized companies, primarily in the healthcare industry, and providing them capitalization and leadership to maximize the value and potential of their private enterprises while also providing diversification and risk mitigation for stockholders. All of Cardiff’s operations are conducted through, and its income derived from, its various subsidiaries, which includes:
| · | We Three, LLC dba Affordable Housing Initiative (“AHI”), which was acquired on May 15, 2014 and sold on October 31, 2022; | |
| · | Edge View Properties, Inc. (“Edge View”), which was acquired on July 16, 2014; | |
| · | Platinum Tax Defenders (“Platinum Tax”), which was acquired on July 31, 2018 and sold on November 10, 2023; and | |
| · | Nova Ortho and Spine, LLC (“Nova”), which was acquired on May 31, 2021. |
Principles of Consolidation
The consolidated financial statements include the accounts of Cardiff and its wholly owned subsidiaries, AHI, Edge View, Platinum Tax and Nova (collectively, the “Company”). Subsidiaries shown as discontinued operations include AHI and Platinum Tax. All significant intercompany accounts and transactions are eliminated in consolidation. Subsidiaries discontinued are shown as discontinued operations.
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.”
| F-8 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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. A letter of protection is a legally binding contract between the patient (i.e., the Company’s customer), the patient’s law firm and the Company, as a medical provider. It serves as a critical legal agreement between an experienced personal injury attorney and the Company, as a medical provider, allowing an injured victim to receive vital medical treatment needed after an accident without paying exorbitant out-of-pocket medical expenses prior to settlement. For medical professionals, letters of protection provide guaranteed payment out of settlement proceeds for services rendered as the provider does not have to attempt collection from an uninsured or underinsured injured patient. The medical provider knows that payment will come directly from the law firm out of the settlement. This legally binding contract offers crucial protection when someone is hurt due to another party’s negligence but lacks sufficient health insurance or faces denial of claim payments from insurance companies. Medical bills may not be paid for six months to two or more years until case resolution. Providers must be willing to wait for payment. Some complex cases settle in increments over several years instead of one lump payment at the end. A letter of protection enables injured clients to obtain essential care, avoid collections, restore their credit, and focus wholly on recovery. Attorneys utilize letters of protection to construct stronger injury claims, while medical professionals gain guaranteed payment out of settlement proceeds even if treatment is lengthy or ongoing.
In a personal injury case, the at-fault party is responsible for paying the medical bills of the injured person. However, insurance companies will often refuse to pay these medical expenses until liability has been determined. This can leave an injured person unable to get the medical treatment needed, especially if they do not have health insurance. A letter of protection allows an accident victim to receive medical care while the personal injury case is being resolved. An attorney sends a letter of protection 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. The letter of protection is fulfilled. 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. In the case of a partial settlement or award at trial, the Company might only be able to collect a portion of its receivable.
The Company has a 99% collection rate based on net settlements recorded to its accounts receivable and revenue. Collection rates are estimated considering the Company’s 48-month historical collections with primary emphasis to the most current prior 12-month trailing payment and collection percentage rates. The method the Company uses to measure expected credit losses is the loss rate method, and in addition the Company qualitatively evaluates on an ongoing basis various factors, which include market conditions in which the Company operates, and the status of claims being settled. The Company has established billing rates, which are not the same as actual amounts recovered. These rates generally do not reflect what is ultimately paid by the customer, insurance carriers, law firms and other payors, which is typically received eighteen to twenty-four months later, and are not reported in the consolidated financial statements at those established billing rates. The Company’s customers, its patients, typically pay amounts based on established charges per procedure with guidance from the annually updated Current Procedural Terminology (“CPT”) guidelines (a code set maintained by the American Medical Association through the CPT Editorial Panel), that designates relative value units and a suggested range of charges for each procedure which is then assigned a CPT code. This fee is discounted to reflect the percentage paid to the Company “using a modifier” recognized by each insurance carrier for services, less deductible, co-pay, and contractual adjustments which are deducted from the calculated fee. The net revenue is recorded at the time the services are rendered. Collection of that revenue typically occurs eighteen to twenty-four months later and after the patient claim develops and settles. Historical collection rates are estimated using the most current prior 12-month historical payment and collection percentages.
| F-9 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
The Company had adopted ASU 2016-13,
“Financial Instruments – Credit Losses.” In accordance with this standard, the Company recognizes an allowance for
credit losses for its trade receivables to present the net amount expected to be collected as of the balance sheet date. This
allowance is based on the credit losses expected to arise over the life of the asset and are based on current expected credit
losses. Accounts receivable is reported on the balance sheet at the net amounts expected to be collected by the Company. Management
closely monitors outstanding accounts receivable and recognized an additional allowance for credit losses in the amount of $
The Company calculates a forward-looking collectability rate which it then applies to its gross billings. The amount recorded in accounts receivables approximates the amount expected to actually be collected. The allowance for credit losses represents any adjustments deemed necessary to the collectability rate based upon an annual review of both actual collections, as well as any changes in industry billing and collection, and/or legal practices. The following table is the rollforward of allowance for credit losses.
| Beginning Balance January 1, 2023 | $ | – | ||
| Current period provision | (270,000 | ) | ||
| Write off charged against allowance | 147,810 | |||
| Balance at December 31, 2023 | $ | (122,190 | ) |
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:
| Schedule of estimated useful lives | |
| Classification | Useful Life |
| Equipment, furniture, and fixtures | |
| Medical equipment | |
| Leasehold improvements |
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived assets are not amortized
but are evaluated for impairment annually or when indicators of a potential impairment are present. The Company’s impairment testing
of goodwill is performed separately from its impairment testing of indefinite-lived intangibles. The 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 indefinite-lived intangibles and, if then needed after the
first step, Goodwill, 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.
For the year ended December 31, 2023, the Company determined there to be
| F-10 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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. 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. |
The Company applies the five-step model when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, the Company assesses services promised within each contract and determines those that are a performance obligation and assesses whether each promised service is distinct.
The Company’s contracts for both its contract and service fees each contain a single performance obligation (providing orthopedic services), as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct, as a result, the entire transaction price is allocated to this single performance obligation.
Accordingly, the Company recognizes revenues (net) when the patient receives orthopedic care services. The Company’s patient service contracts generally have performance obligations which are satisfied at a point in time. The performance obligation is for onsite or off-site care provided. Patient service contracts are generally fixed-price, and the transaction price is in the contract. Revenue is recognized when obligations under the terms of the contract with our patients are satisfied; generally, at the time of patient care.
| F-11 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Established billing rates are not the same as actual amounts recovered for the Company’s healthcare subsidiary. They generally do not reflect what the Company is ultimately paid 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 CPT guidelines that designates relative value units and a suggested range of charges for each procedure which is then assigned a CPT code.
This fee is discounted to reflect the percentage paid to the Company “using a modifier” recognized by each insurance carrier for services, less deductible, co-pay, and contractual adjustments which are deducted from the calculated fee. The net revenue is recorded at the time the services are rendered.
Contract Fees (Non-PIP)
The Company has contract fees for amounts earned from its Non-Personal Injury Protection (“PIP”) related procedures, typically car accidents, and are collected on a contingency basis. Historically, these cases were sold to a factor who bears the risk of economic benefit or loss. After selling patient cases to the factor, any additional funds collected by the Company were remitted to the factor.
Service Fees – Net (PIP)
The Company generates services fees from performing various procedures on the date the services are performed. These services primarily include slip and falls as well as smaller nominal Non-PIP services. Fees are collected primarily from third party insurance providers. These revenues are based on established insurance billing rates, less allowances for contractual adjustments and uncollectible amounts. These contractual adjustments vary by insurance company and self-pay patients. The Company computes these contractual adjustments and collection allowances based on its historical collection experience.
Completing the paperwork for each case and preparing it for billing takes approximately ten business days after a procedure is performed. The majority of claims are then filed electronically except for those remaining insurance carriers requiring paper filing. An initial response is usually received within four weeks from electronic filing and up to six weeks from paper filing. Responses may be a payment, a denial, or a request for additional information.
The Company’s healthcare revenues are generated from professional medical billings including facility and anesthesia services. With respect to facility and anesthesia services, the Company is the primary obligor as the facility and anesthesia services are considered part of one integrated performance obligation. Historically the Company receives 49% of collections from total gross billed. Accordingly, the Company recognized net healthcare service revenue as 49% of gross billed amounts. Historical collection rates are estimated using the most current prior 12-month historical payment and collection percentages.
Historically through April 2023, the Company’s healthcare subsidiary has had contractual medical receivable sales and purchase agreements with third party factors which result in approximately 54% reduction from the accounts receivables amounts when a receivable is sold to the factors. The Company evaluated the factored adjustments considering the actual factored amounts per patient 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.
| F-12 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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 $
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 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.
| F-13 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.
The expense resulting from share-based payments is recorded in general and administrative expense in the 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.
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.
For the years ended December 31, 2023 and 2022,
the Company did not have any interest and penalties associated with tax positions and did
FASB ASC Subtopic 260, Earnings Per Share, provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, warrants, and debts convertible into common stock. The dilutive effect of stock options and warrants are reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. The diluted effect of debt convertibles is reflected utilizing the if converted method.
Going Concern
The accompanying 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 previously sustained operating losses since its inception,
has an accumulated deficit of $
| F-14 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
The ability of the Company to continue as a going concern and the appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusions. Management has prospective investors and believes the raising of capital will allow the Company to fund its cash flow shortfalls and pursue new acquisitions. There can be no assurance that the Company will be able to obtain sufficient capital from debt or equity transactions or from operations in the necessary time frame or on terms acceptable to it. Should the Company be unable to raise sufficient funds, it may be required to curtail its operating plans. In addition, increases in expenses may require cost reductions. No assurance can be given that the Company will be able to operate profitably on a consistent basis, or at all, in the future. Should the Company not be able to raise sufficient funds, it may cause cessation of operations.
Recent Accounting Standards
The FASB issued ASU 2023-07 on November 27, 2023. The amendments “improve 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.” The 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.
| 2. | RESTATEMENT AND REVISION OF FINANCIAL STATEMENTS |
Restatement of Previously Issued Financial Statements
During a review of the year ended December 31, 2023 financial statements, the Company identified and corrected its classification of bad debt expense in its consolidated statements of cash flows. Bad debt expense was previously included as part of the change in accounts receivable in the consolidated statements of cash flows. Bad debt expense is now disclosed as a separate line on the consolidated statements of cash flows.
During the preparation of the year ended December 31, 2023 financial statements, the Company identified and corrected its classification and accounting treatment for its series R convertible preferred stock and the related dividend accrual in its balance sheet as of December 31, 2022 and 2021. Pursuant to ASC 250, “Accounting changes and error corrections” issued by FASB and SAB 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 a $198,000 increase to the mezzanine equity and offsetting decrease to the series R convertible preferred stock and subject to possible redemption mezzanine equity line item on the consolidated balance sheet as of December 31, 2021. In addition, the impact of the unpaid dividend accrual is reflected in $29,462 and $47,520 increase to mezzanine equity and offsetting decrease to the accumulated deficits as of December 31, 2022 and 2021, respectively. The impact of the error correction is also reflected in $29,462 and $47,520 increase of preferred share dividends and $28 and $5 decrease of earnings (loss) per share on the consolidated statement of operations for the years ended December 31, 2022 and 2021, respectively.
The following table summarizes the impacts of the error corrections on the Company's financial statements for each of the periods presented below:
i. Consolidated balance sheet
| Schedule of restated financial information | ||||||||||||||||
| Impact of correction of error | ||||||||||||||||
| December 31, 2021 | As previously reported | Adjustments | As restated | |||||||||||||
| Total assets | $ | $ | $ | |||||||||||||
| Total liabilities | ||||||||||||||||
| Mezzanine equity | ||||||||||||||||
| Total stockholders' equity | $ | $ | ( | ) | $ | |||||||||||
| F-15 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| Impact of correction of error | ||||||||||||
| December 31, 2022 | As previously reported | Adjustments | As restated | |||||||||
| Total assets | $ | $ | $ | |||||||||
| Total liabilities | ||||||||||||
| Mezzanine equity | ||||||||||||
| Total stockholders' equity | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Impact of correction of error | ||||||||||||
| March 31, 2023 | As previously reported | Adjustments | As restated | |||||||||
| Total assets | $ | $ | $ | |||||||||
| Total liabilities | ||||||||||||
| Mezzanine equity | ||||||||||||
| Total stockholders' equity | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Impact of correction of error | ||||||||||||
| June 30, 2023 | As previously reported | Adjustments | As restated | |||||||||
| Total assets | $ | $ | $ | |||||||||
| Total liabilities | ||||||||||||
| Mezzanine equity | ||||||||||||
| Total stockholders' equity | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| F-16 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| Impact of correction of error | ||||||||||||
| September 30, 2023 | As previously reported | Adjustments | As restated | |||||||||
| Total assets | $ | $ | $ | |||||||||
| Total liabilities | ||||||||||||
| Mezzanine equity | ||||||||||||
| Total stockholders' equity | $ | $ | ( | ) | $ | |||||||
ii. Consolidated statement of operations
| Impact of correction of error | ||||||||||||
| Year ended December 31, 2021 | As previously reported | Adjustments | As restated | |||||||||
| Net income for the year | $ | $ | $ | |||||||||
| Preferred stock dividends | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net income attributable to common shareholders | $ | $ | ( | ) | $ | |||||||
| Basic and diluted earnings (loss) per share for continuing operations | $ | $ | ) | $ | ||||||||
| Impact of correction of error | ||||||||||||
| Year ended December 31, 2022 | As previously reported | Adjustments | As restated | |||||||||
| Net loss for the year | $ | ( | ) | $ | $ | ( | ) | |||||
| Preferred stock dividends | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Basic and diluted earnings (loss) per share for continuing operations | $ | ) | $ | ) | $ | ) | ||||||
| F-17 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| Impact of correction of error | ||||||||||||
| Three months ended March 31, 2023 | As previously reported | Adjustments | As restated | |||||||||
| Net loss for the period | $ | ( | ) | $ | $ | ( | ) | |||||
| Preferred stock dividends | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Basic and diluted earnings (loss) per share for continuing operations | $ | ) | $ | ) | $ | ) | ||||||
| Impact of correction of error | ||||||||||||
| Three months ended June 30, 2023 | As previously reported | Adjustments | As restated | |||||||||
| 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 | ||||||||||||
| Six months ended June 30, 2023 | As previously reported | Adjustments | As restated | |||||||||
| 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 | $ | ) | $ | $ | ||||||||
| F-18 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| Impact of correction of error | ||||||||||||
| Three months ended September 30, 2023 | As previously reported | Adjustments | As restated | |||||||||
| 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 | As previously reported | Adjustments | As restated | |||||||||
| Net income for the year | $ | $ | $ | |||||||||
| Preferred stock dividends | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Net income attributable to common shareholders | $ | $ | ( | ) | $ | |||||||
| Basic earnings per share for continuing operations | $ | $ | ) | $ | ||||||||
| Diluted earnings per share for continuing operations | $ | $ | $ | |||||||||
Revision of Financial Statements
During the preparation of the financial statements for the year ended December 31, 2023, the Company found that the results of the settlement agreement with Red Rock Travel Group (“Red Rock”) were incorrectly reflected on the consolidated statement of stockholders’ equity (deficiency) as of December 31, 2022. The Company determined that these errors were immaterial to the previously issued consolidated financial statements, and as such no restatement was necessary. The revisions discussed below were made to the December 31, 2022 balance sheet and statement of stockholders’ equity (deficiency).
As a result of the settlement agreement with Red Rock on July 29, 2022, the Company reduced 35,000,000 shares of common shares on the consolidated financial statements as of December 31, 2022. The certificate of the common stock for 35,000,000 shares (0.047 shares after 10,000:1 and 75,000:1 reverse split) which were originally issued on February 24, 2020 was returned as part of the 2022 agreement with Red Rock and 0.047 common shares were cancelled, which were equivalent to 35,000,000 shares before the 10,000:1 and 75,000:1 reverse split on May 12, 2020 and January 9, 2024, respectively. Consequently, the December 31, 2022 financial statements as originally reported were understated by 34,996,500 common shares. The impact of the correction is reflected in the $35,097 increase to common stock and decrease the same amount to additional paid-in-capital on the consolidated statement of stockholders’ equity. The adjustment had no impact on earnings per share for any 2022 period.
| F-19 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
On July 31, 2018, the Company issued 8,200,562 shares of series K preferred stock to the prior owners of Red Rock for the consideration of the acquisition of Red Rock. The acquisition was not completed, and Red Rock returned the 8,200,562 shares of series K preferred stock during the year ended December 31, 2018. A total of 8,200,562 shares of series K preferred stock were cancelled. The impact of the correction is reflected in the $8,201 decrease to series K preferred stock and increase the same amount to additional paid-in-capital on the consolidated statement of stockholders’ equity (deficiency).
| 3. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
| Schedule of accounts payable and accrued expenses | ||||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued credit cards | ||||||||
| Accrued liability for collections of previously factored receivables | ||||||||
| Accrued property taxes | ||||||||
| Accrued professional fees | ||||||||
| Accrued payroll | ||||||||
| Accrue expense - other | ||||||||
| Accrued expense - dividend payable | ||||||||
| Total | $ | $ | ||||||
The Company is delinquent paying certain property
taxes. As of December 31, 2023 and 2022, the balance for these property taxes, was $
| 4. | PLANT AND EQUIPMENT, NET |
Property and equipment as of December 31, 2023 and 2022 is as follows:
| Schedule of property and equipment | ||||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Medical equipment | $ | $ | ||||||
| Computer Equipment | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Leasehold Improvement | ||||||||
| Total | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
For the years ended December 31, 2023 and 2022,
depreciation expense was $
| F-20 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| 5. | LAND |
As of December 31, 2023 and 2022, 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 to previous owners who are current managers of Edge View. These amounts are due on demand
and do not bear interest. The balance of these amounts are $
The Company obtained short-term advances from
the Chairman of the Board that are non-interest bearing and due on demand. As of December 31, 2023 and 2022, the Company owed the Chairman
$
See also Note 8 and the disclosure regarding Note 41.
See also Note 13 for compensation paid to employees of the Company.
| 7. | NOTES AND LOANS PAYABLE |
Notes payable at December 31, 2023 and 2022, respectively, are summarized as follows:
| Schedule of notes payable | ||||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Notes and loans payable | $ | $ | ||||||
| Less current portion | ( | ) | ( | ) | ||||
| Long-term portion | $ | $ | ||||||
Long-term debt matures as follows:
| Schedule of maturities of long-term debt | ||||
| Amount | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
| F-21 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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 $
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 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 December 31, 2023 and 2022, the Company
had convertible debt outstanding net of amortized debt discount of $
During the year ended December 31, 2023, the Company
converted $
On September 22, 2022, the Company entered into
a security exchange and purchase agreement with its largest lender to consolidate all promissory notes held by them and related accrued
interest in exchange for (1) one consolidated senior secured convertible promissory note (“New Promissory Note”) in the amount
of $
| F-22 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Convertible notes as of December 31, 2023 and 2022 are summarized as follows:
| Schedule of convertible notes | ||||||||
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Convertible notes payable | $ | $ | ||||||
| Discounts on convertible notes payable | ( | ) | ( | ) | ||||
| Total convertible debt less debt discount | ||||||||
| Current portion | ||||||||
| Long-term portion | $ | $ | ||||||
The following is a schedule of convertible notes payable as of and for the year ended December 31, 2023.
| Schedule of convertible notes payable | ||||||||||||||||||||||||||||||||
| Note # | Issuance | Maturity | Principal Balance 12/31/22 | New Loan | Principal Conversions | Cash Paydown |
Shares Issued Upon Conversion | Principal Balance 12/31/23 | Accrued Interest on Convertible Debt at 12/31/22 | Interest Expense On Convertible Debt For the Period Ended 12/31/23 | Accrued Interest on Convertible Debt at 12/31/23 | Unamortized Debt Discount At 12/31/23 | ||||||||||||||||||||
| 7-1 | $ | $ | ( |
) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| 9 | ||||||||||||||||||||||||||||||||
| 10 | ||||||||||||||||||||||||||||||||
| 10-1 | ||||||||||||||||||||||||||||||||
| 10-2 | ||||||||||||||||||||||||||||||||
| 10-3 | ||||||||||||||||||||||||||||||||
| 29-2 | ||||||||||||||||||||||||||||||||
| 31 | ||||||||||||||||||||||||||||||||
| 37-1 | ||||||||||||||||||||||||||||||||
| 37-2 | ||||||||||||||||||||||||||||||||
| 37-3 | ||||||||||||||||||||||||||||||||
| 38 | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| 39 | ( |
) | ||||||||||||||||||||||||||||||
| 40-1 | ||||||||||||||||||||||||||||||||
| 40-2 | ||||||||||||||||||||||||||||||||
| 40-3 | ||||||||||||||||||||||||||||||||
| 40-4 | ||||||||||||||||||||||||||||||||
| 40-5 | ||||||||||||||||||||||||||||||||
| 40-6 | ||||||||||||||||||||||||||||||||
| 40-7 | ||||||||||||||||||||||||||||||||
| 40-8 | ||||||||||||||||||||||||||||||||
| 40-9 | ||||||||||||||||||||||||||||||||
| 40-10 | ||||||||||||||||||||||||||||||||
| 41 | ||||||||||||||||||||||||||||||||
| $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | $ | $ | |||||||||||||||||||||
| F-23 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Note 7-1
On October 28, 2016, the Company issued a convertible promissory note in the principal amount of $50,000, which matured on October 28, 2017. Note 7-1 was fully converted into common shares and there was no outstanding balance as of December 31, 2023.
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 is currently in default and accrues at a default interest rate of 20% per annum.
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). Notes 10-1, 10-2 and 10-3 accrue interest at a rate of 15% per annum.
Note 29-2
On May 10, 2019, the Company issued a convertible promissory note in the principal amount of $150,000. On November 8, 2019, this note (Note 29) was purchased by and assigned to an unrelated party. The amount assigned was the existing principal amount of $150,000 and accrued interest of $5,918, which was issued as Note 29-1, plus a new convertible promissory note in the principal amount of $62,367, which was issued as Note 29-2. Note 29-2 is currently in default and accrues interest at a default interest rate of 24% per annum.
Note 31
On August 28, 2019, the Company issued a convertible promissory note in the principal amount of $120,000, which matured on August 28, 2020. Note 31 is currently in default and accrues interest at a default interest rate of 24% per annum. There was no outstanding principal balance as of December 31, 2023.
Notes 37-1, 37-2 and 37-3
On September 3, 2020, the Company issued a convertible promissory note in the principal amount of $200,000, with an original issue discount of $50,000, which could be drawn in several tranches. On September 3, 2020, the Company executed the first tranche in the principal amount of $67,000, less an original issue discount of $17,000, which matured on June 30, 2021 (Note 37-1). On November 2, 2020, the Company executed the second tranche in the principal amount of $66,500, less an original issue discount of $16,500, which matured on August 31, 2021 (Note 37-2). On December 29, 2020, the Company executed the third tranche in the principal amount of $66,500, less an original issue discount of $16,500, which matured on September 30, 2021 (Note 37-3). Notes 37-1, 37-2 and 27-3 are currently in default and accrue interest at a default interest rate of 18% per annum.
| F-24 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Note 38
On February 9, 2021, the Company issued a convertible promissory note in the principal amount $103,500, which matured on February 9, 2022. Note 38 was converted into common shares and the remaining balance was paid in cash. There was no outstanding balance on Note 38 as of December 31, 2023.
Note 39
On April 26, 2021, the Company issued a convertible promissory note in the principal amount $153,500, which matured on May 10, 2022. Note 39 was paid in cash and there was no outstanding balance as of December 31, 2023.
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.
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.
| 9. | CAPITAL STOCK |
Preferred Stock
The Company has designated multiple series of preferred stock, including shares of series A preferred stock, shares of series B preferred stock, shares of series C preferred stock, shares of series E preferred stock, shares of series F-1 preferred stock, shares of series I preferred stock, shares of series J preferred stock, shares of series L preferred stock, shares of series N senior convertible preferred stock, shares of series R convertible preferred stock and shares of series X senior convertible preferred stock.
| F-25 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
The following is a description of the rights and preferences of each series of preferred stock.
Redeemable Preferred Stock
The Company recognized the series N senior convertible preferred stock, 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
shall increase by 8% per annum. Dividends shall accrue from day to day, whether or not declared, and shall be cumulative. Dividends shall
be payable quarterly in arrears on each dividend payment date in cash or common stock at the Company’s discretion. Dividends payable
in common stock shall be calculated based on a price equal to eighty percent (80%) of the volume weighted average price for the common
stock on the Company’s principal trading market (the “VWAP”) during the five (5) trading days immediately prior to the
applicable dividend payment date. At December 31, 2023, cumulative dividends on Series N Preferred Stock were $
Liquidation Rights. Subject to the rights of creditors and the holders of any senior securities or parity securities (in each case, as defined in the certificate of designation), upon any liquidation of the Company or its subsidiaries, before any payment or distribution of the assets of the Company (whether capital or surplus) shall be made to or set apart for the holders of junior securities (as defined in the certificate of designation), including the common stock, each holder of outstanding series N senior convertible preferred stock shall be entitled to receive an amount of cash equal to 115% of the stated value of $4.00 per share, plus an amount of cash equal to all accumulated accrued and unpaid dividends thereon (whether or not declared) to, but not including the date of final distribution to such holders.
Voting Rights. Holders of series N senior convertible preferred stock do not have any voting rights; provided that, so long as any shares of series N senior convertible preferred stock are outstanding, the affirmative vote of holders of a majority of the series N senior convertible preferred stock, which majority must include SILAC Insurance Company so long as it holds any shares of series N senior convertible preferred stock, voting as a separate class, shall be necessary for approving, effecting or validating any amendment, alteration or repeal of any of the provisions of the certificate of designation or prior to the Company’s (or Nova’s) creation or issuance of any parity securities or new indebtedness (as defined in the certificate of designation); provided that the foregoing shall not apply to any financing transaction the use of proceeds of which will be used to redeem the series N senior convertible preferred stock and the warrants issued in connection therewith. In addition, the affirmative vote of holders of 66% of the series N senior convertible preferred stock, voting as a separate class, is required prior to the Company’s (or Nova’s) creation or issuance of any senior securities.
| F-26 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Conversion Rights. Each shares of series N senior convertible preferred stock, plus all accrued and unpaid dividends thereon, shall be convertible, at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of common stock determined by dividing the stated value ($4.00 per share), plus the value of the accrued, but unpaid, dividends thereon, by a conversion price of $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 may be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, upon not less than sixty-one (61) days’ prior notice to the Company.
Redemption Rights. The Company may redeem the series N senior convertible preferred stock at any time by paying in cash therefore a sum equal to 115% of the stated value of $4.00 per share, plus the amount of accrued and unpaid dividends and any other amounts due pursuant to the terms of the certificate of designation. In addition, any holder may require the Company to redeem some or all of its shares of series N senior convertible preferred stock on the same terms after a period of twelve months from the date of issuance; provided, however, that such redemption right shall only be exercisable if the Company raises at least $5,000,000 or the common stock is trading on the Nasdaq Stock Market or the New York Stock Exchange.
Series R Convertible Preferred Stock
Ranking. The series R convertible preferred stock ranks, with respect to the distribution of assets upon liquidation, (i) senior to all common stock, series A preferred stock, series B preferred stock, series C preferred stock, series E preferred stock, series F-1 preferred stock, series I preferred stock, series J preferred stock, series L preferred stock and to each other class or series that is not expressly made senior to or on parity with the series R 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.
Dividend Rights. The holders of series
R convertible preferred stock are 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 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. Any dividends that are not paid when due shall continue to accrue and shall entail 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 shall accrue and compound daily from the missed
payment date through and including the date of actual payment in full. At 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 shall be 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.
| F-27 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Voting Rights. The holders of series R convertible preferred stock will vote together with the common stock on an as-converted basis. However, as long as any shares of series R convertible preferred stock are 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 shares of series R convertible preferred stock 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 ($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 is 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 may elect, 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 shall 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 has 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.
| F-28 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Redemption Upon Triggering Events. Upon the occurrence of a Triggering Event (as defined below), each holder of series R convertible preferred stock shall (in addition to all other rights it may have) 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); |
| F-29 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| · | 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). |
Series X Senior Convertible Preferred Stock
Ranking. The series X senior convertible preferred stock ranks, with respect to the payment of dividends and the distribution of assets upon liquidation, (i) senior to all common stock and each other class or series that is not expressly made senior to or on parity with the series X senior convertible preferred stock; (ii) on parity with each class or series that is not expressly subordinated or made senior to the series X senior convertible preferred stock; and (iii) junior to the series N senior convertible preferred stock, all indebtedness and other liabilities with respect to assets available to satisfy claims against the Company and each class or series that is expressly made senior to the series X senior convertible preferred stock.
Dividend Rights. Holders of series X senior
convertible preferred stock are entitled to dividends at a rate per annum of 10.0% of the stated value ($4.00 per share); provided that
upon an event of default (as defined in the certificate of designation for the series X senior convertible preferred stock), such rate
shall increase by 5% per annum. Dividends shall accrue from day to day, whether or not declared, and shall be cumulative. Dividends shall
be payable quarterly in arrears on each dividend payment date. At December 31, 2023, cumulative dividends on Series X Preferred Stock
were $
Liquidation Rights. Subject to the rights of creditors and the holders of any senior securities, including the series N senior convertible preferred stock, or parity securities (in each case, as defined in the certificate of designation), upon any liquidation of the Company or its subsidiaries, before any payment or distribution of the assets of the Company (whether capital or surplus) shall be made to or set apart for the holders of junior securities (as defined in the certificate of designation), including the common stock, each holder of outstanding series N senior convertible preferred stock shall be entitled to receive an amount of cash equal to 100% of the stated value of $4.00 per share, plus an amount of cash equal to all accumulated accrued and unpaid dividends thereon (whether or not declared) to, but not including the date of final distribution to such holders.
Voting Rights. Holders of series X senior convertible preferred stock do not have any voting rights; provided that, so long as any shares of series X senior convertible preferred stock are outstanding, the affirmative vote of holders of a majority of the series X senior convertible preferred stock, which majority must include Leonite Capital LLC so long as it holds any shares of series X senior convertible preferred stock, voting as a separate class, shall be necessary for approving, effecting or validating any amendment, alteration or repeal of any of the provisions of the certificate of designation or prior to the creation or issuance of any parity securities or new indebtedness (as defined in the certificate of designation); provided that the foregoing shall not apply to any financing transaction the use of proceeds of which will be used to redeem the series X senior convertible preferred stock and the warrants issued in connection therewith. In addition, the affirmative vote of holders of 66% of the series X senior convertible preferred stock, voting as a separate class, is required prior to the creation or issuance of any senior securities.
| F-30 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
Conversion Rights. Each shares of series X senior convertible preferred stock, plus all accrued and unpaid dividends thereon, shall be convertible, at the option of the holder thereof, at any time and from time to time, into such number of fully paid and nonassessable shares of common stock determined by dividing the stated value ($4.00 per share), plus the value of the accrued, but unpaid, dividends thereon, by a conversion price equal to the lower of (i) the lowest VWAP during the five (5) trading days immediately prior to the applicable conversion date and (ii) the price per share paid in any subsequent financing (the “Fixed Price”). The Fixed Price is subject to standard adjustments in the event of any stock splits, stock combinations, stock reclassifications, dividends paid in common stock, sales of substantially all assets, mergers, consolidations or similar transactions, as well as a price based antidilution adjustment, pursuant to which, subject to certain exceptions, if the Company issues common stock at a price lower than the Fixed Price, the Fixed Price shall decrease to such lower price. Notwithstanding the foregoing, in no event shall the holder of any series X senior convertible preferred stock be entitled to convert any number of shares that upon conversion the sum of (i) the number of shares of common stock beneficially owned by the holder and its affiliates and (ii) the number of shares of common stock issuable upon the conversion of the series X senior convertible preferred stock with respect to which the determination of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.99% of the then outstanding common stock. This limitation may be waived (up to a maximum of 9.99%) by the holder and in its sole discretion, upon not less than sixty-one (61) days’ prior notice to the Company.
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 our company wherein the Company is not the surviving entity, or a sale of all or substantially all of the assets of the Company, the holders of each share of series A preferred stock shall be entitled to receive from any distribution of any of the assets or surplus funds of the Company, before and in preference of any holder of shares of common stock, an amount equal to the stated value of $250. Once the holders receive the foregoing from any such liquidation, dissolution or winding up, the holders shall not participate with the common stock or any other class of stock.
| F-31 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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.
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.
| F-32 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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.
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.
| F-33 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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.
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.
| F-34 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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.
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.
| F-35 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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.
| F-36 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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.
| F-37 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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.
| F-38 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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.
Preferred Stock Transactions
During the year ended December 31, 2023, the Company executed the following transactions:
| · | On May 25, 2023, the Company issued shares of series B preferred stock to Zia Choe, Chief Accounting
Officer, for $ | |
| · | On July 24, 2023, the Company issued shares of series E preferred stock as compensation for the property manager of Edge View in exchange for a bonus of $. |
During the year ended December 31, 2022, the Company executed the following transactions:
| · | In the second quarter of 2022, shares of series D preferred stock were cancelled and exchanged for shares of series B preferred stock and shares of series H preferred stock were cancelled and exchanged for shares of series B preferred stock. | |
| · | On September 7, 2022, the Company issued shares of series J preferred stock in connection with the acquisition of Nova. | |
| · | On September 12, 2022, the Company issued shares of series X senior convertible preferred stock
for $ | |
| · | On October 10, 2022, the Chief Operating Officer received shares of series B preferred stock in exchange for the settlement of employment at the fair value of $1 per share. | |
| · | On October 31, 2022, the Company entered into a buyback agreement, pursuant to which the managers of AHI
purchased back AHI and returned shares of series F preferred stock issued to them, which were remitted to treasury, in exchange
for shares of series B preferred stock. There was a loss on disposal in the amount of $ |
| F-39 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| · | On November 11, 2022, the Company issued shares of series B preferred stock to a third party in
exchange for $ | |
| · | On December 15, 2022, the Company issued shares of series B preferred stock to a third party in
exchange for $ |
Common Stock
During the year ended December 31, 2023, the Company issued shares of common stock upon the conversion of certain convertible notes.
During the year ended December 31, 2022, as part
of the Red Rock settlement, the Company issued
| 10. | WARRANTS |
The table below sets forth warrant activity during the years ended December 31, 2023 and 2022:
| Schedule of warrant activity | ||||||||
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Balance at January 1, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ( | ) | ||||||
| Balance at December 31, 2023 | ||||||||
| Warrants Exercisable at December 31, 2023 | $ | |||||||
| Number of Warrants | Weighted Average Exercise Price | |||||||
| Balance at January 1, 2022 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ( | ) | ||||||
| Balance at December 31, 2022 | ||||||||
| Warrants Exercisable at December 31, 2022 | $ | |||||||
As a result of the settlement agreement with Red Rock on July 29, 2022, the Company required the previous owners to relinquish warrants for 25,000 shares of common stock. The warrants were returned and cancelled during the second quarter of 2023. There was no impact on the consolidated financial statements as of December 31, 2022.
| F-40 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| 11. | DISCONTINUED OPERATIONS |
Platinum Tax
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 us 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.
The Company and the managers of AHI entered into
a resignation, release and buyback agreement and addendum, effective October 31, 2022, pursuant to which the managers purchased AHI in
exchange for returning shares of series F preferred stock. There was a loss on disposal in the amount of $
| Schedule of discontinued operations | ||||||||
| December 31, | ||||||||
| Net liabilities of discontinued operations | 2023 | 2022 | ||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Net liabilities of discontinued operations | $ | ( | ) | $ | ( | ) | ||
| Year Ended December 31, | ||||||||
| Gain (Loss) from discontinued operations | 2023 | 2022 | ||||||
| Revenue | $ | $ | ||||||
| Cost of sales | ( | ) | ( | ) | ||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Impairment of Goodwill | ( | ) | ||||||
| Loss on divestiture of subsidiary | ( | ) | ||||||
| Gain no change in estimate | ( | ) | ||||||
| Gain on reversal of Red Rock liability | ||||||||
| Loss on settlement | ( | ) | ||||||
| Loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||
| F-41 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| 12. | GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS, NET |
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 year ended December 31, 2023, the Company determined there to be
| 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. In transaction, lessees and lessors are required to recognize and measure leases at either the effective date (the “effective date method”) or the beginning of the earliest period presented (the “comparative method”) using a modified retrospective approach. Under the effective date method, the Company’s comparative period reporting is unchanged. In contrast, under the comparative method, the Company’s date of initial application is the beginning of the earliest comparative period presented, and the Topic 842 transition guidance is then applied to all comparative periods presented. Further, under either transition method, the standard includes certain practical expedients intended to ease the burden of adoption. The Company adopted ASC 842, January 1, 2020, using the effective date method and elected certain practical expedients allowing the Company not to reassess:
| · | whether expired or existing contracts contain leases under the new definition of a lease; | |
| · | lease classification for expired or existing leases; and | |
| · | whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. |
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 ten medical facilities and
one vehicle as operating leases as of December 31, 2023. The Company recorded operating lease expenses of $
The Company has operating leases with future commitments as follows:
| Schedule of operating leases | ||||
| Amount | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total | $ | |||
| F-42 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
The following table summarizes supplemental information about the Company’s leases:
| Schedule of supplemental information about 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 currently
50% is paid in cash and 50% is accrued. The total outstanding accrued compensation as of December 31, 2023 and 2022 were $
The Company agreed to pay $360,000 per year and
$200,000 of targeted annual incentives to the Chairman of the Board based on his employment agreement since July 1, 2020, of which currently
50% is paid in cash and 50% is accrued. The total outstanding accrued compensation as of December 31, 2023 and December 31, 2022 were
$
The Company agreed to pay $
The Company entered into a management agreement
effective May 31, 2021 for compensation to the principals of Nova in the form of an annual base salaries of $
| Schedule of annual objectives of financial performance | |||
| 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.
| F-43 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| 15. | INCOME TAXES |
At December 31, 2023, the Company had federal and state net operating loss carry forwards of approximately $24 million that expire in various years through the year 2039. Due to carryforwards of past net operating losses, there is no provision for current federal or state income taxes for the years ended December 31, 2023 and 2022.
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’s deferred tax asset at December
31, 2023 and 2022 consists of net operating loss carry forwards calculated using federal and state effective tax rates equating to approximately
$
The Company’s total deferred tax asset as of December 31, 2023 and 2022 is as follows:
| Schedule of deferred tax assets | ||||||||
| 2023 | 2022 | |||||||
| Deferred tax assets | $ | $ | ||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax asset | $ | $ | ||||||
| 16. | SEGMENT REPORTING |
As of December 31, 2023, 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 three 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.
| F-44 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
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.
| Schedule of segment reporting | ||||||||
| As of December 31, | ||||||||
| Asset: | 2023 | 2022 | ||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ||||||||
| Others | ||||||||
| Consolidated assets | $ | $ | ||||||
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| 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 (loss) from operations | $ | $ | ||||||
| Income (Loss) before taxes | ||||||||
| Healthcare | $ | $ | ||||||
| Real Estate | ( | ) | ( | ) | ||||
| Corporate, administration and other non-operating expenses | ( | ) | ( | ) | ||||
| Consolidated income (loss) before taxes | $ | $ | ( | ) | ||||
| F-45 |
CARDIFF LEXINGTON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023 AND 2022
| 17. | SUBSEQUENT EVENTS |
The Company has evaluated its operations subsequent to December 31, 2023 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 January 11, 2024, the Company issued 1,222 shares of common stock upon the conversion of a convertible note in the amount of $1,680.
On January 31, 2024, the Company issued 7,500 shares of series I preferred stock to the Company’ executives.
On March 5, 2024, the Company issued 7,500 shares of common stock to John Nesbett for professional services provided.
On March 13, 2024, the Company paid $50,000 to the noteholder for the accrued interest on Notes 40-1.
On May 13, 2024, the Company entered into a securities exchange agreement (the “Exchange Agreement”) with Leonite Capital LLC (“Leonite”), pursuant to which Leonite exchanged a consolidated senior secured convertible promissory note issued to Leonite on September 22, 2022 (see notes 40 described above in Note 8) with a balance of $3,755,632 as of such date (the “Note”) for 938,908 shares of the Company’s newly designated series Y senior convertible preferred stock. The Exchange Agreement contains customary representations and warranties and covenants for a transaction of this type. In addition, pursuant to the Exchange Agreement, so long as the shares of series Y senior convertible preferred stock are outstanding, the Company agreed that it will not, without Leonite’s prior written consent: (i) change the nature of its business; (ii) sell, divest, acquire, change the structure of any material assets other than in the ordinary course of business; (iii) enter into any Variable Rate Transactions (as defined in the Exchange Agreement) or solicit any offers for, respond to any unsolicited offers for, or conduct any negotiations with any other person or entity in respect of any Variable Rate Transactions; or (iv) accept a merchant-cash-advance in which the Company sells future receivables at a discount or any other factoring transactions, or similar financing instruments or financing transactions. Pursuant to the Exchange Agreement, the Company also granted Leonite with piggy-back registration rights to register the shares of common stock underlying the series Y senior convertible preferred stock.
On June 11, 2024, the Company entered into a settlement agreement and release of claims (the “Settlement Agreement”) with GHS Investments, LLC (“GHS”), the holder of 165 shares of series R convertible preferred stock and certain convertible promissory notes (see notes 29-2, 37-1 and 37-2 described above in Note 8). Pursuant to the Settlement Agreement, GHS 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 (the “New Note”). The New Note does not bear interest and requires fixed payments as follows: (i) if the Company raises at least $5 million but less than $6 million in its planned underwritten public offering (the “Offering”), then it 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 the Company raises at least $6 million but less than $7 million in the Offering, then it 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 the Company raises at least $7 million in the Offering, then it must repay the entire principal amount on the closing date of the Offering. If the Offering is not completed by August 15, 2024, then the Company is 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 the Company is required to make payments as described in the schedule above. Notwithstanding the foregoing, if the Company abandons the Offering and conducts a new public offering thereafter, then the Company is 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 New Note, it shall become immediately due and payable on such date. The Company may prepay the entire principal amount at any time without penalty. The New Note is unsecured and contains customary events of default for a loan of this type. Upon an event of default, interest shall automatically begin to accrue at a simple interest rate of ten percent (10%) per annum.
| F-46 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: July 24, 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) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURE | TITLE | DATE | |
| /s/ Alex Cunningham | Chief Executive Officer and Director (principal executive officer) | July 24, 2024 | |
| Alex Cunningham | |||
| /s/ Matthew Shafer | Chief Financial Officer (principal financial officer) | July 24, 2024 | |
| Matthew Shafer | |||
| /s/ Zia Cho | Chief Accounting Officer (principal accounting officer) | July 24, 2024 | |
| Zia Choe | |||
| /s/ Daniel Thompson | Chairman of the Board | July 24, 2024 | |
| Daniel Thompson | |||
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-276918) of our report dated March 27, 2024, except for Notes 1, 2 and 17, as to which date is July 23, 2024, related to our audit of the consolidated financial statements of Cardiff Lexington Corporation and Subsidiaries (the “Company”) as of and for the years ended December 31, 2023 and 2022, which appear in this Annual Report on form 10-K. Our report includes an explanatory paragraph relating to substantial doubt about the Company’s ability to continue as a going concern and an emphasis of matter paragraph with respect to a restatement of the 2023 and 2022 financial statements.
/s/ Grassi & Co., CPAs, P.C.
Jericho, New York
July 23, 2024
Exhibit 31.1
CERTIFICATIONS
I, Alex Cunningham, certify that:
| 1. | I have reviewed this annual report on Form 10-K/A of Cardiff Lexington Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: July 24, 2024
|
/s/ Alex Cunningham | |
| Alex Cunningham | |
|
Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Matthew Shafer, certify that:
| 1. | I have reviewed this annual report on Form 10-K/A of Cardiff Lexington Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: July 24, 2024
| /s/ Matthew Shafer | |
|
Matthew Shafer Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned Chief Executive Officer of Cardiff Lexington Corporation (the “Company”), DOES HEREBY CERTIFY that:
1. The Company’s Annual Report on Form 10-K/A for the year ended December 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
IN WITNESS WHEREOF, the undersigned has executed this statement on July 24, 2024.
|
/s/ Alex Cunningham | |
| Alex Cunningham | |
|
Chief Executive Officer (Principal Executive Officer) |
A signed original of this written statement required by Section 906 has been provided to Cardiff Lexington Corporation and will be retained by Cardiff Lexington Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
The undersigned Chief Financial Officer of Cardiff Lexington Corporation (the “Company”), DOES HEREBY CERTIFY that:
1. The Company’s Annual Report on Form 10-K/A for the year ended December 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
IN WITNESS WHEREOF, the undersigned has executed this statement on July 24, 2024.
| /s/ Matthew Shafer | |
|
Matthew Shafer Chief Financial Officer (Principal Financial Officer) |
A signed original of this written statement required by Section 906 has been provided to Cardiff Lexington Corporation and will be retained by Cardiff Lexington Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.