10-Q/A: Cardiff Lexington Reports Wider Q1 Loss, Restates Financials
Quarterly Report Amendment
Cardiff Lexington Corporation filed an amended quarterly report revealing a significantly wider net loss for Q1 2024, driven by revenue declines and increased share-based compensation, alongside a going concern warning.
Summary
- Cardiff Lexington Corporation reported a net loss of $283,104 for the three months ended March 31, 2024, a substantial increase from the $15,991 net loss in the same period of 2023.
- Total revenue decreased by 14.20% to $2,322,132 in Q1 2024 from $2,706,399 in Q1 2023, primarily due to a shift towards lower-revenue pain management treatments and a reduced average settlement rate for accounts receivable.
- The company adopted a 42.9% average settlement rate for gross billed charges in Q1 2024, down from a historical 49%, resulting in a $339,834 reduction to net revenue.
- Gross profit declined by 21.49% to $1,373,978 in Q1 2024, with the gross margin falling to 59.17% from 64.67%.
- Operating expenses increased, notably due to $300,225 in share-based compensation in Q1 2024, compared to $0 in Q1 2023, attributed to stock issuances for investor relations, board members, and new employment bonuses.
- Loss from discontinued operations increased to $111,312 in Q1 2024, up from $45,490 in Q1 2023, partly due to a $111,312 share loss from the Red Rock settlement.
- The company's accumulated deficit grew to $69,118,853 as of March 31, 2024.
- Cash and cash equivalents increased to $1,253,552 as of March 31, 2024, from $866,943 at December 31, 2023, largely driven by proceeds from a $1,310,478 line of credit.
- A 1-for-75,000 reverse stock split was effected on January 9, 2024, and significant amounts of preferred stock (Series B, C, I, J) were converted into common stock during Q1 2024.
- The filing includes restatements for Q1 2024 to reclassify non-cash interest expense from financing to operating activities and credit loss expense to net revenue, with no impact on total cash flows or net loss.
Sentiment
Score: 2
Explanation: The company faces significant financial distress, evidenced by a widening net loss, declining revenue and gross profit, and an explicit 'going concern' warning. While cash increased due to a line of credit, this is debt-fueled, and the operational strategy of accepting lower settlement rates for cash indicates underlying liquidity pressure. The need for substantial capital raises and material weaknesses in internal controls further contribute to a highly negative outlook.
Positives
- Cash and cash equivalents increased to $1,253,552 as of March 31, 2024, from $866,943 at December 31, 2023.
- Total other expenses decreased to $390,784 in Q1 2024 from $728,049 in Q1 2023, primarily due to lower interest expense.
- Selling, general and administrative expenses decreased by 13.82% to $851,396 in Q1 2024, mainly due to reduced professional fees.
Negatives
- Net loss for the period significantly widened to $283,104 in Q1 2024 from $15,991 in Q1 2023.
- Total revenue decreased by 14.20% in Q1 2024, attributed to a less favorable service mix and a reduced settlement realization rate.
- Gross profit declined by 21.49% and gross margin decreased from 64.67% to 59.17%.
- Share-based compensation increased significantly to $300,225 in Q1 2024 from $0 in Q1 2023.
- The company reported a net loss before discontinued operations of $171,792 in Q1 2024, a reversal from a $29,499 income in Q1 2023.
- Loss from discontinued operations increased to $111,312 in Q1 2024.
- The accumulated deficit increased to $69,118,853 as of March 31, 2024.
- Many convertible notes payable are in default, accruing higher interest rates (e.g., 20% to 24% per annum).
Risks
- The company has sustained recurring operating losses since its inception and has an accumulated deficit of $69,118,853, raising substantial doubt about its ability to continue as a going concern.
- Additional funds from new financing and/or future equity raises are required for continued operations and to execute the business plan, with no assurance of obtaining sufficient capital on acceptable terms.
- Inability to raise sufficient funds may lead to curtailment or cessation of operations.
- The company's strategy of accelerating cash settlements by accepting lower realization rates on accounts receivable may continue to negatively impact net revenue.
- Material weaknesses in internal control over financial reporting were identified in the Annual Report on Form 10-K for December 31, 2023, and are still being remediated, posing risks to financial reporting reliability.
- Many convertible notes are in default, which could lead to further financial penalties or demands for immediate repayment.
- The company's business model relies on the lien-based medical industry, where collection is dependent on insurance settlements, which can be prolonged and uncertain.
Future Outlook
Management believes that current working capital and expected additional financing should be sufficient to fund operations for at least one year. However, additional funds from new financing and/or future equity raises are required for continued operations and to execute the business plan, specifically for acquiring additional businesses. The company aims to raise between $4 million to $8 million, potentially up to $10 million, for acquisitions, depending on sellers' willingness to accept non-cash consideration. The company expects the trend of accepting lower settlement realization rates to continue in the short term to generate cash flow for operations.
Management Comments
- Management is in continuous discussions with prospective investors and believes the raising of capital will allow the Company to fund its cash flow shortfalls and pursue new acquisitions.
- Management retains the prior owners of the subsidiaries and allows them to run the business, monitoring key metrics primarily revenues and net income from operations.
- The company underwent efforts to accelerate cash settlements of accounts receivable throughout 2024 by shortening settlement negotiations and accepting lower settlement realization rates to generate cash flow for operating purposes.
Industry Context
Cardiff Lexington operates primarily in the healthcare industry through Nova Ortho and Spine, LLC, providing orthopedic and pain management services, particularly to traumatic injury victims in a lien-based medical model. This model insulates the company from uninsured patients by relying on letters of protection and insurance settlements. The real estate segment (Edge View Properties, Inc.) holds land for residential development. The company's strategy of acquiring undervalued and undercapitalized companies, primarily in healthcare, aligns with a broader trend of consolidation and strategic investment in niche healthcare sectors. However, the reliance on prolonged legal settlements for revenue collection and the need to accept lower settlement rates for faster cash flow indicate challenges specific to its lien-based healthcare model, which may not be typical across the broader healthcare industry.
Comparison to Industry Standards
- NA The filing does not provide specific comparable companies, projects, or industry benchmarks to assess the results against global standards. The unique lien-based medical billing model makes direct comparisons challenging without more specific industry data on similar operational structures.
Management Changes
| Role | Previous Person | New Person | Effective Date | Reason |
|---|---|---|---|---|
| Chief Financial Officer | Previous Chief Financial Officer (name not specified, but compensation mentioned) | Matthrew Shafer | 2024-01-02 | New employment agreement effective. |
| Chief Accounting Officer | NA | Zia Choe | 2024-01-02 | New employment agreement effective. |
Corporate Governance
| Change Type | Description | Effective Date | Impact Assessment |
|---|---|---|---|
| Internal Control Remediation | Management and board are committed to designing and implementing internal control over financial reporting. Remedial procedures include training financial team, implementing proper documentation, reinforcing compensating controls, and hiring external consultants for ASC 606 and ASC 326 accounting. | 2024-01-01 | Aims to address identified material weaknesses in internal controls, which are crucial for reliable financial reporting. Success is not assured. |
| Disclosure Controls Enhancement | Enhanced review procedures for the statement of cash flows, including additional cross-checks between the disclosure checklist, supporting schedules, and the general ledger, following a classification error. | 2024-01-01 | Intended to improve the accuracy and reliability of financial disclosures, particularly cash flow reporting. |
Legal Proceedings
- The company may become involved in various lawsuits and legal proceedings in the ordinary course of business.
- Management is not currently aware of any legal proceedings or claims that are believed to have a material adverse effect on the company's business, financial condition, or operating results.
Related Party Transactions
- The company owes $4,979 to previous owners of Edge View (current managers), due on demand and non-interest bearing.
- The company owed $45,844 to the Chairman of the Board as of March 31, 2024, for short-term advances that are non-interest bearing and due on demand.
- Accrued compensation for the Chief Executive Officer is $2,365,500 as of March 31, 2024 (50% paid in cash, 50% accrued from $360,000 annual salary and $200,000 targeted annual incentives).
- Accrued compensation for the Chairman of the Board is $2,440,500 as of March 31, 2024 (50% paid in cash, 50% accrued from $360,000 annual salary and $200,000 targeted annual incentives).
- The previous Chief Financial Officer has $17,057 in outstanding accrued compensation as of March 31, 2024.
- Nova principals (three doctors) have management agreements with annual base salaries ($372,000, $450,000, $372,000 respectively) and performance-based annual cash bonuses and stock equity (e.g., $300,000 cash and 180,000 Series J Preferred Shares for 2024 if EBITDA target of $5.5M is met).
Stakeholder Impact
- **Shareholders**: Face significant dilution risk from ongoing preferred stock conversions into common stock and potential future equity raises. The widening net loss and going concern warning indicate substantial risk to investment value. The reverse stock split also impacts share count and per-share metrics.
- **Employees/Management**: Key executives and board members received significant share-based compensation, but accrued compensation for CEO and Chairman remains high. Performance-based incentives for Nova principals are tied to EBITDA targets.
- **Creditors/Noteholders**: Many convertible notes are in default, potentially impacting their ability to recover principal and accrued interest. The company's reliance on a new line of credit increases overall indebtedness.
- **Customers (Patients)**: The company's strategy of accepting lower settlement rates for faster cash flow might imply less aggressive negotiation on their behalf, though the filing doesn't directly state customer impact.
- **Suppliers/Vendors**: The company's liquidity challenges and going concern risk could impact its ability to pay accounts payable and accrued expenses in a timely manner, though current accounts payable are relatively stable.
Next Steps
- Continue efforts to accelerate cash settlements of accounts receivable, potentially by shortening negotiation timeframes and accepting lower settlement amounts.
- Seek additional financing through new debt or equity raises to fund operations and future acquisitions.
- Continue remediation of identified material weaknesses in internal control over financial reporting, including providing training to the financial team, implementing proper documentation procedures, and reinforcing compensating controls.
- Evaluate updated internal controls design and determine their effectiveness during 2024.
- Continue monthly review of trailing 24-month historical settlement realization rate and estimates of current/pending settlements.
- Enter into a joint venture agreement with a developer for the planned housing development in Salmon, Idaho (Real Estate segment).
Key Dates
| Date | Description |
|---|---|
| 1986-09-03 | Cardiff Lexington Corporation originally incorporated in Colorado as Cardiff International Inc. |
| 2005-11-10 | Cardiff merged with Legacy Card Company, LLC and changed its name to Cardiff Lexington Corporation. |
| 2009-03-12 | Company issued a debenture in the principal amount of $20,000. |
| 2009-09-12 | Maturity date of the $20,000 debenture. |
| 2014-07-16 | Acquisition of Edge View Properties, Inc. |
| 2014-08-27 | Cardiff redomiciled to Florida. |
| 2016-09-12 | Issuance date of Convertible Promissory Note 9. |
| 2017-01-24 | Issuance date of Convertible Promissory Note 10. |
| 2018-07-31 | Acquisition of Platinum Tax Defenders. |
| 2019-05-10 | Issuance date of Convertible Promissory Note 29. |
| 2019-11-08 | Note 29 purchased and assigned to an unrelated party, issued as Note 29-1 and Note 29-2. |
| 2020-06-02 | Company obtained an SBA loan of $150,000. |
| 2020-09-03 | Issuance date of Convertible Promissory Note 37-1. |
| 2020-11-02 | Issuance date of Convertible Promissory Note 37-2. |
| 2020-12-29 | Issuance date of Convertible Promissory Note 37-3. |
| 2021-04-13 | Cardiff redomiciled to Nevada. |
| 2021-05-31 | Acquisition of Nova Ortho and Spine, LLC. |
| 2022-09-22 | Issuance date of Convertible Promissory Note 40-1. |
| 2022-11-04 | Issuance date of Convertible Promissory Note 40-2. |
| 2022-11-28 | Issuance date of Convertible Promissory Note 40-3. |
| 2022-12-21 | Issuance date of Convertible Promissory Note 40-4. |
| 2023-01-24 | Issuance date of Convertible Promissory Note 40-5. |
| 2023-02-10 | Execution of second tranche under Note 10 (Note 10-1). |
| 2023-03-21 | Issuance date of Convertible Promissory Note 40-6. |
| 2023-03-30 | Execution of third tranche under Note 10 (Note 10-2). |
| 2023-06-05 | Issuance date of Convertible Promissory Note 40-7. |
| 2023-06-13 | Issuance date of Convertible Promissory Note 40-8. |
| 2023-07-19 | Issuance date of Convertible Promissory Note 40-9. |
| 2023-07-24 | Issuance date of Convertible Promissory Note 40-10. |
| 2023-08-11 | Execution of fourth tranche under Note 10 (Note 10-3). |
| 2023-08-25 | Issuance date of Convertible Promissory Note 41 to CEO. |
| 2023-09-29 | Company and Nova entered into a two-year revolving purchase and security agreement with DML HC Series, LLC. |
| 2023-11-10 | Sale of Platinum Tax Defenders subsidiary. |
| 2023-12-01 | Amendment executed on Notes series 40 to extend due date to September 20, 2024. |
| 2024-01-02 | Employment agreements effective for Chief Finance Officer and Chief Accounting Officer. |
| 2024-01-09 | Company effected a 1-for-75,000 reverse stock split. |
| 2024-01-19 | Issued 62,500 shares of Series I preferred stock to Chairman and CEO for bonus compensation. |
| 2024-01-31 | Issued 5,000 shares of Series I preferred stock to CFO and 2,500 shares to Chief Accounting Officer for compensation. |
| 2024-02-01 | Common stock issued as part of Red Rock settlement. |
| 2024-03-05 | Issued 7,500 shares of common stock to an investor relation service provider. |
| 2024-03-26 | Issued 30,000 shares of common stock to three board members. |
| 2024-03-31 | End of the quarterly period covered by the report. |
| 2024-05-08 | Company filed amendment of Articles of Incorporation, increasing authorized shares. |
| 2024-05-10 | Original filing date of the Form 10-Q for the three months ended March 31, 2024. |
| 2024-06-30 | Subsequent to this date, the company identified a further reduction in settlement realization rate to 44.2%. |
| 2024-10-17 | First amendment to the Form 10-Q was filed. |
| 2025-08-18 | Date of common stock issued and outstanding count (19,682,213 shares). |
| 2025-08-19 | Filing date of this Amendment No. 2 on Form 10-Q/A. |
Recommendation
strong sellCardiff Lexington Corporation is in a highly precarious financial state, marked by a significantly widening net loss, declining revenue and gross profit, and an explicit 'going concern' warning. The company's strategy of accepting lower settlement rates to accelerate cash flow indicates severe liquidity pressure, and a substantial capital raise is deemed necessary for continued operations, which will likely lead to further significant dilution for existing shareholders. The presence of multiple defaulted convertible notes and identified material weaknesses in internal controls further compounds the risk. Given the deteriorating financial performance, high operational risks, and the explicit doubt about its ability to continue as a going concern, the stock presents a strong sell recommendation for any seasoned investor or institution.
Keywords
Healthcare, Real Estate, SEC Filing, 10-Q/A, Financial Results, Net Loss, Revenue Decline, Going Concern, Capital Raise, Convertible Notes, Accounts Receivable, Share-Based Compensation, Internal Controls, Corporate Governance, CDIF
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