The following discussion of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements
including the related notes, and the other financial information included in
this report. For ease of reference, "the Company", "we," "us" or "our" refers to
Cardiff Lexington Corp., unless otherwise stated.
Cautionary Statement Concerning Forward-Looking Information
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations, business strategies, operating efficiencies or
synergies, competitive positions, growth opportunities for existing products,
plans and objectives of management, markets for stock of Cardiff Lexington Corp.
and other matters. Statements in this report that are not historical facts are
hereby identified as "forward-looking statements" for the purpose of the safe
harbor provided by Section 21E of the Exchange Act of 1934 and Section 27A of
the Securities Act of 1933. Such forward-looking statements, including, without
limitation, those relating to the future business prospects, revenue and income
of Cardiff Lexington Corp., wherever they occur, are necessarily estimates
reflecting the best judgment of the senior management of Cardiff Lexington Corp.
on the date on which they were made, or if no date is stated, as of the date of
this report. These forward-looking statements are subject to risks,
uncertainties and assumptions, including those described in the "Risk Factors"
in Item 1A of Part I of our most recent Annual Report on Form 10-K, filed with
the Securities and Exchange Commission ("SEC"), that may affect the operations,
performance, development and results of our business. Because the factors
discussed in this report could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statements made by us or
on our behalf, you should not place undue reliance on any such forward-looking
statements. New factors emerge from time to time, and it is not possible for us
to predict which factors will arise. In addition, we cannot assess the impact of
each factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements. The Company assumes no obligation and does not
intend to update these forward-looking statements, except as required by law.
Overview
Cardiff Lexington Corp. is a holding company with no stand-alone operations and
no material assets other than its ownership interest in its subsidiaries. All of
the Company's operations are conducted through, and its income derived from, its
various subsidiaries, which are organized and operated according to the laws of
their jurisdiction of incorporation, and consolidated by the Company.
To date, Cardiff consists of the following wholly owned subsidiaries:
We Three, LLC, d/b/a Affordable Housing Initiative ("AHI"), which we acquired on
May 15, 2014, is an affordable home acquirer located in Maryville, Tennessee,
which acquirers' mobile homes and mobile home parks and either sells them or
rents the homes to individual families. The acquisition of mobile homes or
mobile home parks allows AHI to provide an alternative to traditional housing,
which is a popular option for a homeowner wishing to avoid large down payments,
expensive maintenance costs, monthly mortgage payments and high property taxes.
The typical arrangement with potential buyers is a lease-to-own arrangement on
an individual home. The fundamentals of that arrangement obligate the tenant(s)
to the terms of the lease with AHI retaining ownership. In addition, the
tenant(s) pay non-refundable option monies prior to the start of the lease. This
option consideration enables them to purchase the home at the end of the lease
if they choose. A typical lease is 7 years. We have found that most tenants move
out before the end of that period and thus never satisfy the terms that would
enable them to purchase the home.
Edge View Properties, Inc. ("Edge View"),which we acquired on July 16, 2014, is
a real estate company that owns 30 acres of land; 23.5 acres zoned MDR (Medium
Density Residential) with 12 lots already platted and 48 lots zoned HDR (High
Density Residential), 4 acres of dedicated river front property zoned for
recreation on the Salmon River, Idaho's premier whitewater river and 2.5 acres
zoned for commercial use. All the land is in the city limits of Salmon and
adjacent to the Frank church Wilderness Park (the largest wilderness park in the
lower 48 states). Edge View's plan is to enter into a joint venture agreement
with a developer for construction of single-family homes on the property. The
Company has yet to enter into a joint venture agreement for the development of
single-family homes.
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Platinum Tax Defenders, LLC ("Platinum Tax"), which we acquired on July 31,
2018, is a full-service tax resolution firm located in Los Angeles, CA. Since
2011, Platinum Tax has been assisting all types of taxpayers resolve any and all
issues with IRS and applicable state tax agencies. Platinum Tax provides
fee-based tax resolution services to individuals and companies that have federal
and state tax liabilities by assisting its clients to settle outstanding tax
debts. Specifically, the Platinum Tax teams tax relief services include but are
not limited to, back taxes, offer in compromise, audit representation, amending
tax returns, tax preparation, tax resolution, wage garnishment relief, removal
of bank levies and liens, bookkeeping, and other financial challenges. Platinum
Tax has a team of 28 which includes tax attorneys, accountants, and enrolled
agents that have an aggregate of more than 90 years of experience in the
financial services industry and have resolved tax issues for thousands of
clients.
JM Enterprises 1, Inc. (DBA) Key Tax Group ("Key Tax"), which we acquired on May
13, 2019, is a full-service tax resolution firm located in Jacksonville, FL. Key
Tax assists businesses and individuals around the nation with tax debt issues.
Key Tax has a team of twelve members, including tax lawyers, enrolled agents,
and support staff with an aggregate of more than 35 years of experience in the
tax industry, who are well versed in both the accounting portion of tax debt as
well as the resolution side with substantial experienced in working successfully
with revenue officers and collectors. Among other services, Key Tax offers Tax
Audit Representation, IRS Installment Agreements, Sales Tax Representation,
940/941 Payroll Tax, Representation, Foreign Bank Account Report Filings,
OIC/Fresh Start Program, Wage Garnishment, Bank Levies, Tax Lien Removal, State
Tax Resolution, Audit Reconsideration, and Penalty Abatement.
Impact of COVID-19 Outbreak
The Company's financial condition and results of operations for the fiscal year
2020 is being adversely affected and is expected to continue to be adversely
affected by the COVID-19 pandemic. Public health officials have recommended and
mandated precautions to mitigate the spread of COVID-19, including prohibitions
on congregating in heavily populated areas and shelter-in-place orders or
similar measures. As a result, we have during periods of 2020 temporarily closed
certain of our operations for several months. All operations are now open and
operating. Our results will be adversely impacted by these closures and other
actions taken to contain or treat the impact of COVID-19, and the extent of such
impact will depend on future developments, which are highly uncertain and cannot
be predicted.
Due to the COVID-19 pandemic, client enrollment has been at a slower pace at
certain of our tax resolution subsidiary companies than initially expected. In
addition, during 2020 certain of our tax resolution subsidiaries have
temporarily suspended enrollment due to facility closures, quarantine, travel
restrictions and other governmental restrictions. As a result, we expect the
performance from our tax resolution subsidiaries to be affected, which we expect
will have a material adverse impact on their market share growth plans and
timelines. Additionally, we have taken certain measures to account for the
ongoing significant negative impact of the pandemic, including divestiture of
our holdings in the food services sector. These businesses no longer fit within
our longer-term strategy and given their impact from COVID-19 for these
companies to remain subsidiaries of a public entity exerts additional and
unnecessary cost and pressure. While COVID-19 changed the trajectory of that
growth, we are planning to get back on track quickly with the acquisition and we
remain committed to making the investments necessary to drive long term company
growth.
The extent to which COVID-19 or any other health epidemic may impact the
Company's results for 2020 and beyond will depend on future developments, which
are highly uncertain and cannot be predicted, including new information which
may emerge concerning the severity of the economic impact of the COVID-19
pandemic. Accordingly, COVID-19 could have a material adverse effect on the
Company's business, results of operations, financial condition, and prospects
during 2020 and beyond.
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Results of Operations
For the Three For the Three
Months Ended Months Ended
March 31, 2021 March 31, 2020
Revenues:
Affordable Housing Rentals $ 38,979 $ 38,212
Financial Services 892,947 922,514
Total revenues $ 931,926 $ 960,726
Cost of Sales:
Affordable Housing Rentals $ 40,167 $ 36,821
Financial Services 451,788 394,798
Total cost of sales $ 491,955 $ 431,619
Income (Loss) from Operations From Subsidiaries:
Affordable Housing Rentals $ (1,364 ) $ 791
Financial Services (81,835 ) 16,937
Total Income (Loss) from operations from subsidiaries $ (83,199 ) $ 17,728
Loss From Operations from Cardiff Lexington $ (292,648 ) $ (250,610 )
Total loss from operations $ (375,847 ) $ (232,882 )
Revenues were $931,926 and $960,726 for the three months ended March 31, 2021
and 2020, respectively a decrease of $28,800 or 3%. The decrease was primarily
attributable to the COVID-19 pandemic's impact on the financial services
segment. We believe the significant increase in unemployment directly affected
our subsidiaries prospect and customer base and reduced their ability to afford
our services.
Cost of sales were $491,955 and $431,619 for the three months ended March 31,
2021 and 2020, respectively, a increase of $60,336 or 14%. The increase is
primarily attributable to increase in contract labor due to its flexibility
necessary to match costs with the fluctuation in revenues.
Gross margins were $439,971 and $529,107 for the three months ended March 31,
2021 and 2020, respectively a decrease of $89,136 or 17%. The decrease is
primarily due to lower revenues and higher costs due to the COVID-19 pandemic as
described above.
Operating expenses were $815,818 and $763,349 for the three months ended March
31, 2021 and 2020, respectively, an increase of $52,469 or 6.9%. The increase is
primarily due to an increase in professional fees.
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The Company has been affected by the economic pressure of the COVID-19 pandemic
and the subsequent directives and responses to this crisis taken by the federal,
state, and local government. Several of our subsidiaries have been hard-hit by
the pandemic. We were able to secure Paycheck Protection Program (PPP) loans to
offset the reduction in revenues and profitability.
Furthermore, the stock market has been severely adversely impacted with our
stock price experiencing a period of high volatility. In light of current
circumstances arising from the COVID-19 pandemic, the Company as a public
reporting company must evaluate what we should and are obligated to do in order
to protect shareholders from the negative effects of this pandemic. In order to
adequately sustain funding for 2020 operations and continue our growth through
acquisitions the Board Of Directors have initiated a reverse stock split of
10,000:1 which became effective May 2020.
The Company raised $103,000 in convertible notes and $347,050 in SBA and PPP
loans. Also, the Company entered into an agreement on April 29, 2020 engaging an
exclusive financial advisor in connection with a transaction or related series
or combination of transactions involving a merger, share capital exchange, asset
acquisition, share purchase, reorganization or similar business combination. The
advisor is a boutique investment bank created by experienced professionals that
have worked together for over a decade, collectively financing over $50 billion
of public and private capital raises, restructurings, and mergers and
acquisitions. The term of the agreement is 1 year and the fees include shares of
common stock and out-of-pocket expenses as defined in the agreement.
Additionally, the Company entered into an agreement August 26, 2020 with the
same firm to underwrite a registered public offering. The term of the agreement
is the earlier of the consummation of the offering or 1 year and fees include
cash and equity as defined in the agreement.
Inflation
We do not believe that inflation will negatively impact our business plans.
Liquidity and Capital Resources
Since inception, the principal sources of cash have been funds raised from the
sale of common stock, advances from shareholders, and loans in the form of
debenture convertible notes and conventional notes payable. At March 31, 2021,
we had $510,760 in cash and cash equivalents, total assets of $5,161,138 and
total liabilities of $13,879,060. See footnote 2 for further discussion.
Net cash used in (provided by) operating activities was $208,951 and $(45,476)
for the three months ended March 31, 2021 and 2020, respectively. The negative
cash flows from operating activities during the periods were primarily
attributable to the net losses of $1,749,432 and $4,298,331. These amounts were
partially offset by amortization of debt discount of $454,958 and $246,185,
respectively and change in derivative liability related to convertible notes of
$552,039 and $3,738,099, respectively, and warrant amortization $260,443 and $0,
respectively. The change in value of derivative liability is due primarily to a
reduction in the stock price used in the Black-Scholes Option Pricing Model. See
footnote 2 for further discussion.
Net cash provided by financing activities was $440,400 and $73,631 for the three
months ended March 31, 2021 and 2020, respectively. The increase in financing
activities during the periods were primarily attributable to proceeds from
convertible notes of $103,500 and SBA loans of $345,269 during the three months
ended March 31, 2021 compared to proceeds from convertible notes of $150,000 for
the same period in 2020.
There can be no assurance that we 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 us. Should we be unable to raise sufficient funds, we may be
required to curtail our operating plans and possibly relinquish rights to
portions of our technology or services provided. In addition, increases in
expenses may adversely impact our cash position and may require cost reductions.
No assurance can be given that we will be able to operate profitably on a
consistent basis, or at all, in the future.
In order to continue our operations and implementation of our business plan, we
need additional financing. We are currently attempting to obtain additional
working capital in an equity transaction.
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Off Balance Sheet Arrangements
As of March 31, 2021, we had no off-balance sheet arrangements.
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