Cardiff Lexington Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following management’s discussion and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment and understanding of our plans and financial condition . The following financial information is derived from our financial statements and should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein. Use of Terms Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” and “our company” are to Cardiff Lexington Corporation, a Nevada corporation, and its consolidated subsidiaries. Special Note Regarding Forward-Looking Statements This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about: · our ability to successfully identify and acquire additional businesses; · our ability to effectively integrate and operate the businesses that we acquire; · our expectations around the performance of our current businesses; · our ability to maintain our business model and improve our capital efficiency; · our ability to effectively manage the growth of our business; · our ability to maintain profitability; · the competitive environment in which our businesses operate; · trends in the industries in which our businesses operate; · the regulatory environment in which our businesses operate under; · changes in general economic or business conditions or economic or demographic trends in the United States, including changes in interest rates and inflation; · our ability to service and comply with the terms of indebtedness; · our ability to retain or replace qualified employees of our businesses; · labor disputes, strikes or other employee disputes or grievances; · casualties, condemnation or catastrophic failures with respect to any of our business’ facilities; · costs and effects of legal and administrative proceedings, settlements, investigations and claims; and · extraordinary or force majeure events affecting the business or operations of our businesses. In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2025, or the Form 10-K. 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. 40 In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Overview Our company is a targeted healthcare holding company dedicated to acquiring and building middle-market niche healthcare clinics, primarily in orthopedics, spine care, and pain management. Our partnership-driven culture emphasizes service excellence, teamwork, accountability, and performance. We are focused on the acquisition of orthopedic and related modality practices with strong organic growth plans that are materially cash generative to maximize value and provide greater coverage for our patients, and diversification and risk mitigation for our stockholders. All current revenue is derived from Nova Ortho and Spine, LLC, or Nova, which was acquired on May 31, 2021. It operates a group of regional primary specialty and ancillary care facilities across Florida and Georgia that provide traumatic injury victims with primary care evaluations, interventional pain management, and specialty consultation services, including emergency medical condition assessments. We currently primarily focus on plaintiff-related care and provide healthcare to uninsured patients. Our patients have typically been in an accident and have filed a lawsuit as a plaintiff against the defendant who is allegedly responsible for the accident as the result of negligence or another tort. 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 does not currently have any plans to develop this property and expects to eventually sell the property. All of our operations are conducted through, and our income derived from, our two subsidiaries. Recent Developments Common Stock Purchase Agreement On July 13, 2026, the Company issued 166,667 shares of common stock for the Commitment Shares required under the Purchase Agreement described below. Additionally, on July 13, 2026, the Company completed a purchase under the Purchase Agreement and issued 20,619 shares of common stock for proceeds of $30,000. Segments As of June 30, 2026, 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) 41 These segments are a result of differences in the nature of the products and services sold. Corporate administration costs, which include, but are not limited to, general accounting, human resources, legal and credit and collections, are partially allocated to the two operating segments. 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 revenues, cost of sales, operating expenses, and income (loss) before taxes to evaluate and measure its subsidiaries’ success. To help the segments achieve optimal operating performance, management retains the prior owners of the subsidiaries and allows them to do what they do best, which is run the business. Additionally, management monitors key metrics primarily revenues and income from operations in order to allocate resources accordingly. Results of Operations Comparison of Three Months Ended June 30, 2026 and 2025 The following table sets forth key components of our results of operations during the three months ended June 30, 2026 and 2025, both in dollars and as a percentage of our revenue. Three Months Ended June 30, 2026 2025 Amount % of Revenue Amount % of Revenue Total revenue $ 2,159,557 100.00 % $ 2,789,007 100.00 % Total cost of sales 977,242 45.25 % 1,093,748 39.22 % Gross profit 1,182,315 54.75 % 1,695,259 60.78 % Operating expenses Depreciation expense 253 0.01 % 763 0.03 % Share-based compensation 366,939 16.99 % 97,500 3.50 % Selling, general and administrative 1,359,766 62.97 % 987,319 35.40 % Total operating expenses 1,726,958 79.97 % 1,085,582 38.92 % (Loss) income from operations (544,643 ) (25.22)% 609,677 21.86 % Other (expense) income Derivative liability gain on issuance and changes in fair value 226,049 10.47 % – – Interest expense (2,137,419 ) (98.97)% (1,836,072 ) (65.83)% Amortization of debt discounts (22,893 ) (1.06)% – – Total other expense (1,934,263 ) (89.57)% (1,836,072 ) (65.83)% Net loss $ (2,478,906 ) (114.79)% $ (1,226,395 ) (43.97)% 42 Revenue . For the three months ended June 30, 2026 and 2025, all our revenue was generated by our healthcare segment, which generates revenue through a full range of diagnostic and surgical services. Our total revenue decreased by $629,450, or 22.57%, to $2,159,557 for the three months ended June 30, 2026 from $2,789,007 for the three months ended June 30, 2025. The decline in revenue was mainly driven by a lower implicit realization rate on patient case claim settlements, slightly offset by gradually increasing overall patient visits volumes and billed procedures. The realization rate decreased to 41% for the second quarter of 2026 (unchanged from the prior quarter 2026), compared with 43% for the second quarter of 2025 (unchanged from the prior quarter 2025). Cost of sales . Our cost of sales consists of surgical center and laboratory fees, physician and professional fees, salaries and wages and medical supplies. Our total cost of sales decreased by $116,506, or 10.65%, to $977,242 for the three months ended June 30, 2026 from $1,093,748 for the three months ended June 30, 2025. As a percentage of revenue, cost of sales increased from 39.22% for the three months ended June 30, 2025 to 45.25% for the three months ended June 30, 2026. The increase is attributable to a decrease in revenue as noted above, which more than offset decreases in personnel related expenses and laboratory fees. Gross profit . As a result of the foregoing, our total gross profit decreased by $512,944, or 30.26%, to $1,182,315 for the three months ended June 30, 2026 from $1,695,259 for the three months ended June 30, 2025. Our total gross margin (as a percentage of revenue) decreased from 60.78% for the three months ended June 30, 2025 to 54.75% for the three months ended June 30, 2026. Depreciation expense . Our depreciation expense was $253, or 0.01% of revenue, for the three months ended June 30, 2026, as compared to $763, or 0.03% of revenue, for the three months ended June 30, 2025. Share-based compensation expense . Share-based compensation expense was $366,939 and $97,500 for the three months ended June 30, 2026 and 2025, respectively. Share-based compensation expense in 2026 consisted of expense related to the issuance of common stock to our board of directors, officers and employees, our investor relations firm and other consultants for services provided. Share-based compensation expense in 2025 consisted of expense related to the issuance of common stock to our investor relations firm. 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, credit losses, rent expense, insurance and other expenses incurred in connection with general operations. Our selling, general and administrative expenses increased by $372,447, or 37.72%, to $1,359,766 for the three months ended June 30, 2026 from $987,319 for the three months ended June 30, 2025. As a percentage of revenue, our selling, general and administrative expenses were 62.97% and 35.40% for the three months ended June 30, 2026 and 2025, respectively. The increase in selling, general and administrative expenses was primarily attributable to an increase in professional fees. Total other (expense) income . We had $1,934,263 in total other expense, net, for the three months ended June 30, 2026, as compared to $1,836,072 in total other expense, net, for the three months ended June 30, 2025. Total other expense, net, for the three months ended June 30, 2026 consisted of interest expense of $2,137,419 and amortization of debt discounts of $22,893, offset slightly by a $226,049 gain from the change in fair value of the derivative liability. Other expense, net, for the three months ended June 30, 2025 consisted entirely of interest expense. The increase in interest expense is primarily attributable to the increase in initial and incremental fees charged on the number of existing purchases and claims under the line of credit described below. The convertible notes derivative liabilities are remeasured at fair value each reporting period using a Monte Carlo simulation model and the commitment shares derivative liability using a Black-Scholes option-pricing model. Changes in assumptions, as well as changes in our stock price during the period, resulted in a decrease in the estimated fair value of the derivative liability and the corresponding gain. Net loss . As a result of the cumulative effect of the factors described above, our net loss was $2,478,906 for the three months ended June 30, 2026, as compared to $1,226,395 for the three months ended June 30, 2025, an increase in loss of $1,252,511, or 102.13%. 43 Comparison of Six Months Ended June 30, 2026 and 2025 The following table sets forth key components of our results of operations during the six months ended June 30, 2026 and 2025, both in dollars and as a percentage of our revenue. Six Months Ended June 30, 2026 2025 Amount % of Revenue Amount % of Revenue Total revenue $ 4,381,837 100.00 % $ 5,704,574 100.00 % Total cost of sales 1,881,467 42.94 % 2,168,782 38.02 % Gross profit 2,500,370 57.06 % 3,535,792 61.98 % Operating expenses Depreciation expense 846 0.02 % 4,128 0.07 % Loss on disposal of fixed assets – – 12,593 0.22 % Share-based compensation 1,031,135 23.53 % 97,500 1.71 % Selling, general and administrative 2,524,191 57.61 % 2,267,960 39.76 % Total operating expenses 3,556,172 81.16 % 2,382,181 41.76 % (Loss) income from operations (1,055,802 ) (24.09)% 1,153,611 20.22 % Other (expense) income Other income (expense) 10,081 0.23 % (1,597 ) (0.03)% Derivative liability loss on issuance and changes in fair value (442,772 ) (10.10)% – – Interest expense (4,048,156 ) (92.38)% (2,829,186 ) (49.60)% Amortization of debt discounts (34,331 ) (0.78)% – – Total other expense (4,515,178 ) (103.04)% (2,830,783 ) (49.62)% Net loss $ (5,570,980 ) (127.14)% $ (1,677,172 ) (29.40)% Revenue . For the six months ended June 30, 2026 and 2025, all our revenue was generated by our healthcare segment, which generates revenue through a full range of diagnostic and surgical services. Our total revenue decreased by $1,322,737, or 23.19%, to $4,381,837 for the six months ended June 30, 2026 from $5,704,574 for the six months ended June 30, 2025. The decrease in revenue is mainly attributable to a slight decrease in billed surgical procedure services in the first half of 2026 from the first half of 2025 as well as a lower implicit realization rate on patient case claim settlements. The realization rate decreased to 41% for the first half of 2026, compared with 43% for the first half of 2025. Cost of sales . Our total cost of sales decreased by $287,315, or 13.25%, to $1,881,467 for the six months ended June 30, 2026 from $2,168,782 for the six months ended June 30, 2025. As a percentage of revenue, cost of sales increased from 38.02% for the six months ended June 30, 2025 to 42.94% for the six months ended June 30, 2026. The increase is attributable to a decrease in revenue as noted above, which more than offset decreases in personnel related expenses and laboratory fees. Gross profit . As a result of the foregoing, our total gross profit decreased by $1,035,422, or 29.28%, to $2,500,370 for the six months ended June 30, 2026 from $3,535,792 for the six months ended June 30, 2025. Our total gross margin (as a percentage of revenue) decreased from 61.98% for the six months ended June 30, 2025 to 57.06% for the six months ended June 30, 2026. Depreciation expense . Our depreciation expense was $846, or 0.02% of revenue, for the six months ended June 30, 2026, as compared to $4,128, or 0.07% of revenue, for the six months ended June 30, 2025. 44 Loss on disposal of fixed assets . For the six months ended June 30, 2025, we recognized a loss on disposal of fixed assets of $12,593, which resulted from the identification of certain medical equipment that was no longer functional in our medical facilities. Share-based compensation expense . Share-based compensation expense was $1,031,135 and $97,500 for the six months June 30, 2026 and 2025, respectively. Share-based compensation expense in 2026 consisted of expense related to the issuance of common stock to our board of directors, officers and employees, our investor relations firm and other consultants for services provided. Share-based compensation expense in 2025 consisted of expense related to the issuance of common stock to our investor relations firm. Selling, general and administrative expenses . Our selling, general and administrative expenses increased by $256,231, or 11.30%, to $2,524,191 for the six months ended June 30, 2026 from $2,267,960 for the six months ended June 30, 2025. As a percentage of revenue, our selling, general and administrative expenses were 57.61% and 39.76% for the six months ended June 30, 2026 and 2025, respectively. The increase in selling, general and administrative expenses was primarily attributable to an increase in professional fees, offset slightly by lower rent expense and travel expenses as well as a lower credit loss expense recorded. Total other (expense) income . We had $4,515,178 in total other expense, net, for the six months ended June 30, 2026, as compared to $2,830,783 in total other expense, net, for the six months ended June 30, 2025. Total other expense, net, for the six months ended June 30, 2026 consisted of interest expense of $4,048,156, a $442,772 loss from issuance or change in fair value of the derivative liability, and amortization of debt discounts of $34,331. These expenses were offset slightly by other income of $10,081 from the return of funds related to a fraudulent bank transaction. Other expense, net, for the six months ended June 30, 2025 consisted of interest expense of $2,829,186 and other expense of $1,597. The increase in interest expense is primarily attributable to the increase in initial and incremental fees charged on the number of existing purchases and claims under the line of credit described below. The derivative liability is remeasured at fair value each reporting period using a Monte Carlo simulation model. Changes in assumptions, as well as changes in our stock price during the period, resulted in a decrease in the estimated fair value of the derivative liability and the corresponding loss. Net loss . As a result of the cumulative effect of the factors described above, our net loss was $5,570,980 for the six months ended June 30, 2026, as compared to $1,677,172 for the six months ended June 30, 2025, an increase in loss of $3,893,808, or 232.17%. Liquidity and Capital Resources As of June 30, 2026, we had $217,654 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. The accompanying condensed consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. We have sustained operating losses since inception and have an accumulated deficit of $85,617,319 as of June 30, 2026 and have a negative cash flow from operations of $668,649 for the six months ended June 30, 2026. These factors raise a substantial doubt about our company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result if we are unable to continue as a going concern. The ability of our 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 us to fund our cash flow shortfalls and pursue new acquisitions. However, 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. Furthermore, the sale of additional equity securities could result in dilution to our stockholders and 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. Should we be unable to raise sufficient funds, we may be required to curtail our operating plans. In addition, increases in expenses 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. Should we not be able to raise sufficient funds, it may cause cessation of operations. 45 Summary of Cash Flow The following table provides detailed information about our net cash flow for the six months ended June 30, 2026 and 2025. Six Months Ended June 30, 2026 2025 Net cash used in operating activities $ (668,649 ) $ (1,889,003 ) Net cash provided by financing activities 567,768 1,260,533 Net change in cash (100,881 ) (628,470 ) Cash at beginning of period 318,535 1,188,185 Cash at end of period $ 217,654 $ 559,715 Our net cash used in operating activities from continuing operations was $668,649 for the six months ended June 30, 2026, as compared to $1,889,003 for the six months ended June 30, 2025. The primary drivers of our net cash used in operating activities for the six months ended June 30, 2026 are our net loss of $5,570,980 and an increase of $1,684,667 in accounts receivable, offset by an increase of $4,165,687 in interest expense from the line of credit, the loss on issuance or change in value of the derivative liability of $442,772, stock compensation expense or shares issued for services rendered of $1,031,135, an increase of $339,108 in accounts payable and other accrued expenses, and an increase in accrued related parties compensation expense of $626,247. For the six months ended June 30, 2025, the primary drivers of our net cash used in operating activities was our net loss of $1,677,172 and an increase of $3,371,656 in accounts receivable, offset by increases of $2,579,283 in interest expense in the line of credit balance, $119,855 in accounts payable and other accrued expenses, $112,468 in accrued related parties compensation, and $137,211 in accrued interest. We monitor outstanding patient cases as they develop through ongoing discussions with attorneys, doctors and our third-party medical billing company and additionally monitor our settlement realization rates over time. We currently have one primary method of accelerating our cash settlement of our revenue and related accounts receivable through accepting lower settlement amounts during the final negotiations of the settlement, which is coordinated through our third-party medical billing company. When our third-party medical billing company is provided with a settlement amount of 49% of gross charges or greater they will accept. When presented with a lower amount we will discuss the reasons for the reduced rate and negotiate a higher rate. Shortening our negotiation time frame will typically result in a lower settlement realization rate, but will accelerate the cash settlement of the outstanding accounts receivable. We began employing this method in 2024, which reduced our settlement realization rate as described below. We may employ this method in the future. The most recent average realization time for accounts receivable was approximately 12 to 24 months from the initial date of service. Typically, a patient will have a series of dates of service over an average of 12 to 16 months. We periodically evaluate our estimated settlement realization rate at which revenue is recorded in accordance with ASC 606. This includes a monthly review of historical data and settlement realization rates, along with estimates of current and pending settlements through ongoing discussions with attorneys, doctors and the Company’s third-party medical billing company in order to determine the variable consideration under ASC 606 and the net transaction price. For the six months ended June 30, 2026 and 2025, we realized a 41% and 43% average settlement rate of its gross billed charges, respectively. We had no investing activities for the six months ended June 30, 2026 and 2025. Our net cash provided by financing activities was $567,768 for the six months ended June 30, 2026, as compared to $1,260,533 for the six months ended June 30, 2025. Net cash provided by financing activities for the six months ended June 30, 2026 consisted of proceeds from the issuance of convertible notes totaling $1,113,889, offset by net payments on the line of credit of $236,646, payments of debt issuance costs of $195,089, payment of note payable of $110,000 and repayments of the Small Business Administration loan described below of $4,386. Net cash provided by financing activities for the six months ended June 30, 2025 consisted of proceeds from line of credit of $1,464,919, offset by the payment of note payable of $150,000, payment of preferred stock dividends of $50,000 and repayments of the Small Business Administration loan described below of $4,386. 46 Convertible Notes As of June 30, 2026, we had convertible debt outstanding, at carrying value, of $302,765. During the six months ended June 30, 2026, we received $918,800 in net proceeds from convertible notes and settled accrued interest totaling $10,784 in 4,175 shares of our common stock. Debt discounts associated with the convertible debt at June 30, 2026 were $1,061,124. Please see Note 8. Convertible Notes Payable to the accompanying unaudited condensed consolidated financial statements for a description of the terms of our convertible debt. 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 June 30, 2026 and the accrued interest was $10,842. We assigned all our receivables from consumer activations of the rewards program as collateral on this debenture. 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 June 30, 2026 was $141,843 and $0, respectively. Line of Credit We maintain a revolving purchase and security agreement with DML HC Series, LLC, or DML, which is accounted for as a secured borrowing. Under the facility, eligible accounts receivable are pledged as collateral, and advances of up to 70% of eligible receivables may be requested, subject to a maximum advance amount of $23,000,000. The related accounts receivable remain recorded as assets on our balance sheet, and the amounts drawn are recorded as a liability under ‘Line of Credit’ until repaid. We are required to repurchase or replace certain ineligible or uncollected receivables. Collections on pledged receivables are remitted directly to the lender and applied against outstanding borrowings. The revolving purchase and security agreement includes discounts recorded as interest expense on each funding and matures on September 28, 2028. As of June 30, 2026, we had an outstanding balance of $21,138,949 against the revolving receivable line of credit and accrued interest of $653,551. Related Party Loans On June 30, 2026, we issued an unsecured promissory note in the principal amount of $233,333 to Daniel Thompson, our former Chairman of the Board and a significant stockholder, to resolve outstanding accrued compensation obligations. The note bears interest at 5% annually and matures on June 30, 2028. As of June 30, 2026, we had an outstanding balance of $233,333 on this note and accrued interest of $1,446. On March 6, 2026, we entered into a lock-up and compensation resolution agreement with Daniel Thompson to resolve outstanding accrued compensation obligations. Under the agreement, we issued an unsecured promissory note in the principal amount of $116,667 bearing interest at 10% annually, payable interest-only in year one and 50% principal in each of years two and three, with all amounts due within three years. As of June 30, 2026, we had an outstanding balance of $116,667 on this note and accrued interest of $22,071. On December 21, 2025, in connection with bonuses earned by certain employees, we issued promissory notes in the aggregate principal amount of $1,085,703, in lieu of cash payment, including a promissory note in the principal amount of $460,000 to Alex Cunningham, our Chairman and Chief Executive Officer, a promissory note in the principal amount of $122,550 to Matthew T. Shafer, our Chief Financial Officer, and a promissory note in the principal amount of $460,000 to Daniel Thompson. These notes bear interest of 5% per annum and matured on June 30, 2026. As of June 30, 2026, these loans are in default, had an outstanding balance of $1,085,703 and accrued interest of $28,555. 47 Contractual Obligations Our principal commitments consist mostly of obligations under the loans described above. Critical Accounting Policies The preparation of our unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in the Form 10-K. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.