Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

Commission File Number 000-49709

 

CARDIFF INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Florida	84-1044583
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

401 Las Olas Blvd., Unit 1400, Ft. Lauderdale, FL 33301

(Address of principal executive offices)

 

(844) 628-2100

(Registrant's telephone no., including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act: None

 

Securities registered pursuant to Section 12(g) of the Exchange Act: Par Value $0.001 Common Stock

 

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.

Yes ☒          No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒          No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

	Large accelerated filer  ☐	Accelerated filer  ☐
	Non-accelerated filer  ☐	Smaller reporting company  ☒
	Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐          No ☒

 

Common Stock outstanding at June 30, 2017, 38,817,810 shares of $0.001 par value Common Stock.

 

FORM 10-Q

 

CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

CARDIFF INTERNATIONAL, INC.

 

For the Quarter ending June 30, 2017

 

The following financial statements and schedules of the registrant are submitted herewith:

 

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6 – 25
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures, Evaluation of Disclosure Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Submission of Matters to a Vote of Security Holders	36
Item 5.	Other Information	36
Item 6.	Exhibits	38

 

 

 

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

 

CARDIFF INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2017 AND DECEMBER 31, 2016

 

		June 30, 2017				December 31, 2016
		(Unaudited)
ASSETS
Current assets
Cash		$	254,865			$	62,948
Accounts receivable, net			223,512				32,008
Inventory			151,732				42,229
Loans receivable			6,755,695				–
Prepaid and other			28,164				36,990
Total current assets			7,413,968				174,175
Property and equipment, net of accumulated depreciation of $929,435 and $838,736, respectively			715,621				736,672
Land			603,000				603,000
Intangible assets			11,865				24,105
Deposits			6,950				1,528
Due from related party			3,650				–
Goodwill			3,783,660				932,529
		$	12,538,714			$	2,472,009
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable		$	199,283			$	65,901
Accrued expenses			563,099				529,975
Accrued expenses - related parties			1,498,350				1,187,750
Interest payable			302,738				231,452
Accrued payroll taxes			42,486				41,783
Due to officers and shareholders			108,771				503,127
Line of credit			17,891				10,000
Common stock to be issued			500				500
Series I preferred shares to be issued - related party			10,000				–
Series H preferred shares to be issued			–				728,907
Series K preferred shares to be issued			2,389,950				–
Notes payable, unrelated party			7,674,519				259,320
Notes payable - related party			153,189				166,695
Convertible notes payable, net of debt discounts of $313,194 and $21,833, respectively			406,453				157,452
Convertible notes payable - related party			165,000				165,000
Derivative Liability			814,911				–
Tax payable			20,444				23,444
Total current liabilities			14,367,584				4,071,306
Preferred stock
Series A preferred			–				–
Preferred Stock Series B, D, E, F, F-1, H			8,816				5,480
Series C preferred			–				–
Common stock; 200,000,000 shares authorized with $0.001 par value; 38,817,810 and 25,223,578 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively			38,818				25,224
Additional paid-in capital			44,956,745				43,831,356
Retained deficit			(46,833,249	)			(45,461,357	)
Total shareholders' equity (deficiency)			(1,828,870	)			(1,599,297	)
Total liabilities and shareholders' equity (deficiency)		$	12,538,714			$	2,472,009

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

 

CARDIFF INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016

 

		For The Three Months Ended								For The Six Months Ended
		June 30, 2017				June 30, 2016				June 30, 2017				June 30, 2016
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
REVENUE
Rental income		$	48,687			$	40,360			$	94,697			$	80,973
Sales of pizza			150,640				168,923				284,877				383,516
Sales of ice cream			361,159				–				621,812				–
Financing services			594,612				–				594,612				–
Other			–				–				3,745				18,090
Total revenue			1,155,098				209,283				1,599,743				482,579
COST OF SALES
Rental business			45,566				51,000				79,187				80,970
Pizza restaurants			106,253				96,254				200,556				203,157
Ice cream stores			420,956				–				572,261				–
Financing services			325,033				–				325,033				–
Other			–				–				–				–
Total cost of sales			897,808				147,254				1,177,037				284,127
GROSS MARGIN			257,290				62,029				422,706				198,452
OPERATING EXPENSES			667,929				292,794				1,278,670				623,627
GAIN (LOSS) FROM OPERATIONS			(410,639	)			(230,765	)			(855,964	)			(425,175	)
OTHER INCOME (EXPENSE)
(Loss) Gain from extinguishment of debt			–				3,000				(45,933	)			3,000
Change in value of derivative liability			(996	)			–				19,797				1,731
Interest expense			(73,549	)			(11,877	)			(99,186	)			(20,618	)
Amortization of debt discounts			(360,329	)			–				(390,606	)			–
(Loss) from disposal of fixed assets			–				(2,709	)			–				(5,151	)
Total other income (expenses)			(434,874	)			(11,586	)			(515,928	)			(21,038	)
NET INCOME (LOSS) FOR THE PERIOD			(845,513	)			(242,351	)			(1,371,892	)			(446,213	)
INCOME (LOSS) PER COMMON SHARE
-BASIC		$	(0.02	)		$	(0.02	)		$	(0.04	)		$	(0.04	)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES - BASIC AND DILUTED			37,710,275				11,836,014				33,943,629				10,682,020

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

 

 

 

CARDIFF INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

 

		For The Six Months Ended
		June 30, 2017				June 30, 2016
		(Unaudited)				(Unaudited)
Net (loss) from continuing operations		$	(1,371,892	)		$	(446,213	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization			91,286				35,772
Loss (gain) from disposal of fixed assets			–				5,151
Loss (gain) on extinguishment of debt			45,933				(3,000	)
Amortization of loan discount			390,606				–
Change in value of derivative liability			(19,797	)			(1,731	)
Stock based compensation			300,216				–
Warrants expenses			67,799				–
Convertible note issued for services rendered			84,000				50,000
(Increase) decrease in:
Accounts receivable			(180,732	)			–
Inventory			(109,503	)			–
Deposits			(5,422	)			6,950
Prepaids and other			9,083				(6,779	)
Increase (decrease) in:
Accounts payable			77,778				(10,311	)
Accrued expenses			(162,899	)			196,699
Interest payable			83,705				18,694
Tax payable			(3,000	)			–
Accrued payroll taxes			703				(261	)
Accrued officers' salaries			310,600				91,755
Net cash (used in) operating activities			(391,536	)			(63,274	)
INVESTING ACTIVITIES
Proceeds on sale of fixed assets			53,661				31,637
Loans receivable			(572,101	)			–
Purchase of fixed assets			(7,041	)			(3,974	)
Net cash provided by (used in) investing activities			(525,481	)			27,663
FINANCING ACTIVITIES
Due from / to related party			25,303				31,197
Proceeds from sales of stock			40,000				24,000
Proceeds from convertible notes payable			465,000				20,684
(Repayments to) convertible notes payable			(10,000	)			–
(Repayments to) notes payable - related party			–				(10,500	)
Proceeds from line of credit			7,891				–
Proceeds from notes payable			528,887				1,037
Net cash provided by financing activities			1,057,081				66,418
NET (DECREASE) IN CASH AND CASH EQUIVALENTS			140,064				30,807
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			114,801				31,559
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	254,865			$	62,366
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued upon conversion of notes payable		$	41,057			$	14,600
Series H preferred shares issued for Repicci Group		$	728,907			$	–
Common stock issued to settle related party loan		$	436,815				–
Cash carried over from acquisition		$	51,853			$	–
Reclassified Derivative liabilities to Additional Paid in Capital		$	228,556			$	12,217

 

The accompanying notes are an integral part of these unaudited consolidated financial statements

 

CARDIFF INTERNATIONAL, INC.

Notes to Condensed Consolidated Financial Statements

 

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

 

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the years ended December 31, 2016 and 2015 thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2016.

 

Organization and Nature of Operations

 

Legacy Card Company (“Legacy”) was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, Legacy converted from a California Limited Liability Company to a Nevada Corporation. On November 10, 2005, Legacy merged with Cardiff International, Inc. (“Cardiff”, the “Company”), a publicly held corporation. In the first quarter of 2013, it was decided to restructure Cardiff into a holding company that adopted a new business model known as "Collaborative Governance," a form of governance enabling businesses to take advantage of the power of a public company. Cardiff began targeting the acquisition of undervalued, niche companies with high growth potential, income-producing commercial real estate properties, and high return investments, all designed to pay a dividend to the Company’s shareholders. The reason for this strategy was to protect the Company’s shareholders by acquiring profitable small- to minimum-sized businesses with little to no debt, seeking support with both financing and management that had the ability to offer a return to investors. The plan is to establish new classes of preferred stock to streamline voting rights, negate debt, and acquire new businesses. By December of 2013, the Company had negated more than 90% of all its debt; by June 30, 2017, the Company had completed the acquisition of seven businesses: We Three, LLC; Romeo’s NY Pizza; Edge View Properties, Inc.; FDR Enterprises, Inc.; Refreshment Concepts, LLC; Repicci’s Franchise Group, LLC and Ride Today Acceptance, LLC. In addition, there are two acquisitions: Titancare, LLC and York County In Home Care, Inc. pending as of the date of this report.

 

Description of Business

 

Cardiff is a holding company that adopted a new business model known as "Collaborative Governance.” To date, the Company is not aware of any other domestic holding company using the same business philosophy or governing policies. The Company’s business footprint is to acquire strong companies that meet the following criteria: (1) in business for a minimum of two years; (2) profitable; (3) good management team; (4) little to no debt; and (5) assets of a minimum of $1,000,000. Cardiff continues to practice all business ethics under the Securities Exchange Act of 1934 (“1934 Act”) and acknowledges that there are more than 43 successful Business Development Companies subject to the Investment Company Act of 1940 (“1940 Act”), all of which may be considered competition to Cardiff and that are established and available to the public for investment. These companies offer experienced management, dividends and financial security.

 

To date, Cardiff consists of the following whole-owned subsidiaries:

 

We Three, LLC (Affordable Housing Initiative) acquired on May 15, 2014;

Romeo’s NY Pizza acquired on June 30, 2014;

Edge View Properties, Inc acquired on July 16, 2014;

FDR Enterprises, Inc. acquired on August 10, 2016;

Refreshment Concepts, LLC acquired on August 10, 2016;

Repicci’s Franchise Group, LLC acquired on August 10, 2016.

Ride Today Acceptance, LLC acquired on April 1, 2017

 

 

 

 

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 is in the development stage and, as such, has sustained operating losses since its inception and has negative working capital and an accumulated deficit. These factors raise substantial doubts about the Company’s ability to continue as a going concern. As of June 30, 2017, the Company had shareholders’ deficit of $1,828,870. The accompanying 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 the Company is unable to continue as a going concern. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2016 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

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 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.

 

2. ACQUISITIONS

 

On April 1, 2017, the Company completed the acquisitions of American Cycle Finance, formally, “Ride Today Acceptance, LLC” (Private; “ACF”). Pursuant to the acquisition agreement, the Company agreed to issue 9,607,840 shares of Series K Preferred Stock as consideration for the acquisition of ACF. The book value of ACF was $(461,181) as set forth below. Based on the price of $.249 per share for the Series K Preferred Stock, which was determined by the market price of common stock at $.199 per share on the acquisition date multiplied by the conversion ratio of 1:1.25, the fair value of the stock issuance of Series K Preferred Stock was $2,389,950, resulting in the goodwill of $2,851,131. The 9,607,840 shares of Series K Preferred Stock were issued subsequently to the date of this report. Accordingly, the Company recorded Series K Preferred Stock to be issued of $2,389,950 in the consolidated balance sheet as of June 30, 2017.

 

		Fair Value
Cash		$	51,852
Accounts receivable			10,772
Other assets			6,430,561
Property and equipment			104,873
Goodwill			2,851,131
Liabilities			(7,059,239	)
Total		$	2,389,950

 

 

ACF was formed in 2015 to take advantage of a unique financing opportunity in the U.S. sub-prime motorcycle finance market. ACF believed a lack of sub-prime financing options, the flat slope of collateral deprecation curves and overall flat sales in the motorcycle market since the 2008 recession presented a market void that ACF could fill. The U.S. new motorcycle market is a $350 million annual market and the used motorcycle market is estimated to be $1.3 billion annually, representing approximately 3% of the size of the U.S. auto market. There are approximately 10,000 dealers in the U.S., of which 2,500 are franchise dealers. ACF focuses on providing motorcycle financing for these franchise dealers. ACF is able to finance customers with lower FICO scores than the larger competitors. Currently, the majority of ACF’s sales comes from approximately 40 dealers. ACF hopes to double its dealer base during 2017.

 

The results of the operations for ACF have been included in the consolidated financial statements since the date of the acquisitions (April 1, 2017). The following table presents the unaudited pro forma results of continuing operations for the three and six months ended June 30, 2017 and 2016, respectively, as if the acquisitions had been consummated at the beginning of the period presented. The pro forma results of continuing operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the beginning of the period presented or the results which may occur in the future.

 

 

 

CARDIFF INTERNATIONAL, INC.

Pro Forma Condensed Combined Statement of Operations

For the three months ended June 30, 2017 

 

		CDIF and subsidiaries				Ride Today Acceptance, LLC				Pro forma adjustment				Pro forma combined total
Revenue			560,486				594,612				–				1,155,098
NET INCOME (LOSS) FOR THE PERIOD		$	(575,911	)		$	(269,602	)		$	–			$	(845,513	)
INCOME (LOSS) PER COMMON SHARE
-BASIC		$	(0.02	)			–				–			$	(0.02	)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES - BASIC			37,710,275				–				–				37,710,275

 

 

 

CARDIFF INTERNATIONAL, INC.

Pro Forma Condensed Combined Statement of Operations

For the six months ended June 30, 2017  

 

		CDIF and subsidiaries				Ride Today Acceptance, LLC				Pro forma adjustment				Pro forma combined total
Revenue			1,005,131				1,025,299				–				2,030,430
NET INCOME (LOSS) FOR THE PERIOD		$	(1,440,391	)		$	121,379			$	–			$	(1,319,012	)
INCOME (LOSS) PER COMMON SHARE
-BASIC		$	(0.04	)			–				–			$	(0.04	)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES - BASIC			33,943,629				–				–				33,943,629

 

 

 

 

CARDIFF INTERNATIONAL, INC.

Pro Forma Condensed Combined Statement of Operations

For the three months ended June 30, 2016  

 

		CDIF and subsidiaries				ACF				Pro forma adjustment				Pro forma combined total
Revenue			209,283				231,032				–				440,315
NET INCOME (LOSS) FOR THE PERIOD		$	(242,351	)		$	(73,375	)		$	–			$	(315,726	)
INCOME (LOSS) PER COMMON SHARE
-BASIC		$	(0.02	)			–				–			$	(0.03	)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES - BASIC			11,836,014				–				–				11,836,014

 

 

CARDIFF INTERNATIONAL, INC.

Pro Forma Condensed Combined Statement of Operations

For the six months ended June 30, 2016  

 

		CDIF and subsidiaries				Ride Today Acceptance, LLC				Pro forma adjustment				Pro forma combined total
Revenue			482,579				439,971				–				922,550
NET INCOME (LOSS) FOR THE PERIOD		$	(446,213	)		$	(245,719	)		$	–			$	(691,932	)
INCOME (LOSS) PER COMMON SHARE
-BASIC		$	(0.04	)			–				–			$	(0.06	)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES - BASIC			10,682,020				–				–				10,682,020

 

 

 

 

 

 

3. FIXED ASSETS

 

Plant and equipment, net as of June 30, 2017 and December 31, 2016 was $715,621 and $736,672, respectively, consisting of the following:

 

		June 30, 2017				December 31, 2016
Furniture, fixture and equipment			1,012,922				903,249
Leasehold improvements			632,134				672,159
			1,645,056				1,575,408
Less: accumulated depreciation			(929,435	)			(838,736	)
Plant and equipment, net			715,621				736,672

 

During the six months ended June 30, 2017 and 2016, depreciation and amortization expense was $91,286 and $35,772, respectively.

 

4. INTANGIBLE ASSETS

 

As of June 30, 2017 and December 31, 2016, net intangible assets was $11,865 and $24,105, respectively, due to the franchise fee paid by Repicci’s Group.

 

5. GOODWILL

 

As of June 30, 2017 and December 31, 2016, the Company had goodwill of $3,783,660 and $932,529, respectively, in connection with the acquisition of ACF on April 1, 2017 (see Note 2) and acquisition of Repicci’s Group on August 10, 2016.

 

Goodwill is not amortized, but are evaluated for impairment annually or when indicators of a potential impairment are present. The annual evaluation for impairment of goodwill is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and operating plans. The Company believe such assumptions are also comparable to those that would be used by other marketplace participants. The Company determined no impairment adjustment was necessary for the periods presented.

 

6. ACCRUED EXPENSES

 

As of June 30, 2017 and December 31, 2016, the Company had accrued expenses of $2,061,449 and $1,717,725, respectively, consisted of the following:

 

		June 30, 2017				December 31, 2016
Accrued salaries			114,629				250,381
Accrued salaries – related party			1,473,100				1,162,500
Lease payable – related party			25,250				25,250
Accrued expenses - other			448,470				279,594
Total			2,061,449				1,717,725

 

7. RELATED PARTY TRANSACTIONS

 

Due to Officers and Officer Compensation

 

Refreshment Concepts, LLC leases its premises from its prior owner under a month-to-month lease at the rate of $1,500 per month. As of June 30, 2017, the Company had lease payable of $25,250 to the related party.

 

On January 24, 2017, the Company issued 2,010,490 shares of Common Stock to settle $402,098 due to the prior owner of Refreshment Concepts LLC, pursuant to the Acquisition Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt in amount of $80,420. As of June 30, 2017, in addition to the lease payable of $25,250, the outstanding balance due to the same prior owner was $13,231.

 

 

 

 

On January 24, 2017, the Company issued 173,585 shares of Common Stock to settle $34,717 due to the prior owner of Repicci’s Franchise Group LLC, pursuant to the Acquisition Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt in amount of $6,943. As of June 30, 2017, the outstanding balance due to the same prior owner was $1,000.

 

During the second quarter of 2017, the prior owner of Repicci’s Franchise Group LLC submitted a subscription agreement to the Company regarding the purchase of 90,909 shares of the Company’s Series I Preferred Stock by cash payment of $10,000, which was collected during the second quarter of 2017. The transaction was independently negotiated between the Company and the related party. The proceeds from the subscription agreement mitigated the Company’s cash pressure in short term.

 

The 90,909 shares of Series I Preferred Stock was not issued as of June 30, 2017. Accordingly, the Company recorded Series I preferred shares to be issued to related party in amount of $10,000 as of June 30, 2017.

 

During the second quarter of 2017, the Company issued 906,907 shares of Common Stock to a related party for services rendered. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.0799 per share. Accordingly, the Company recognized stock based compensation of $72,462 to the consolidated statements of operations for the six months ended June 30, 2017.

 

The Company borrows funds from Daniel Thompson, who is a Shareholder and Officer of the Company. The terms of repayment stipulate the loans are due 24 months after the launch of the Legacy Tuition Card (or prior to such date) at an annual interest rate of six percent. As of June 30, 2017 and December 31, 2016, the Company had $94,540 and $84,540 due to Daniel Thompson, respectively.

 

In addition, the Board of Directors of the Company approved to increase Daniel Thompson’s compensation to $25,000 per month from $20,000 effective January 1, 2017. Accordingly, a total salary of $150,000 and $120,000 were accrued and reflected as an expense to Daniel Thompson during the six months ended June 30, 2017 and 2016, respectively. The accrued salaries payable to Daniel Thompson was $837,500 and $742,500 as of June 30, 2017 and December 31, 2016, respectively.

 

The Company had an employment agreement with a former Chief Operating Officer, Mr. Levy, whereby the Company provided for compensation of $15,000 per month in 2015 and $10,000 per month in 2016. Mr. Levy resigned on June 7, 2016. A total salary of $0 and $60,000 were accrued and reflected as an expense during the six months ended June 30, 2017 and 2016, respectively. The total balance due to Mr. Levy for accrued salaries at June 30, 2017 and December 31, 2016 were $240,000 and $240,000, respectively.

 

The Company had an employment agreement with the Chief Operating Officer, Mr. Roberts, whereby the Company provided for compensation of $10,000 per month effective in June 2016. A total salary of $60,000 and $0 were accrued and reflected as an expense during the six months ended June 30, 2017 and 2016, respectively. The total balance due to Mr. Roberts for accrued salaries at June 30, 2017 and December 31, 2016 were $80,000 and $60,000, respectively. In addition, the Company agreed to grant Mr. Roberts stock options for a minimum of 300,000 shares of the Company's common stock at an exercise price of 50% of the current last ten (10) day stock average per share, and 600,000 shares of common stock as a key officer employment incentive to be earned and vested on a pro rata basis at 25,000 shares per month for twenty -four (24) months. The fair value of both 300,000 options and 600,000 shares were determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.226 per share. Accordingly, the accrued expense was $135,600 as of June 30, 2017. On August 8, 2017, Mr. Roberts accepted the offer from the Company to issue 1,000,000 common shares to supersede all his options and warrants in the employment agreement.

 

The Board of Directors of the Company approved to increase Chief Executive Officer, Mr. Cunningham’s compensation to $25,000 per month from $15,000 effective January 1, 2017. A total salary of $150,000 and $90,000 were accrued and reflected as an expense during the six months ended June 30, 2017 and 2016, respectively. The total balance due to Mr. Cunningham for accrued salaries at June 30, 2017 and December 31, 2016 were $420,000 and $360,000, respectively.

 

Notes Payable – Related Party

 

The Company has entered into several loan agreements with related parties (see below; Footnote 8, Notes Payable – Related Party; and Footnote 8, Convertible Notes Payable – Related Party).

 

 

 

 

 

8. NOTES PAYABLE

 

Notes payable at June 30, 2017 and December 31, 2016 are summarized as follows:

 

		June 30, 2017				December 31, 2016
Notes Payable – Unrelated Party		$	7,674,519			$	259,320
Notes Payable – Related Party			153,189				166,695
Total		$	7,827,708			$	426,015
Current portion			(7,827,708	)			(426,015	)
Long-term portion		$	–			$	–

 

Notes Payable – Unrelated Party

 

On March 12, 2009, the Company entered into a preferred debenture agreement with a shareholder for $20,000. The note bore interest at 12% per year and matured on September 12, 2009. In conjunction with the preferred debenture, the Company issued 2,000,000 warrants to purchase its Common Stock, exercisable at $0.10 per share and expired on March 12, 2014. As a result of the warrants issued, the Company recorded a $20,000 debt discount during 2009 which has been fully amortized. The Company assigned all of its receivables from consumer activations of the rewards program as collateral on this debenture. On March 24, 2011, the Company amended the note and the principal balance was reduced to $15,000. The Company was due to pay annual principal payments of $5,000 plus accrued interest beginning March 12, 2012. On July 20, 2011, the Company repaid $5,000 of the note. No warrants had been exercised before the expiration. As of June 30, 2017, the Company was in default on this debenture. The balance of the note was $10,989 and $10,989 at June 30, 2017 and December 31, 2016, respectively.

  

As of June 30, 2017, the Company had lease payable of $149,582 in connection with 2 capital leases on 2 Mercedes Sprinter Vans for the ice cream section. There are purchase options at the end of all lease terms that are based on the fair market value of the vans at the time.

 

As of June 30, 2017, the Company had short-term loan of $7,337,726 that was used to support American Cycle Finance LLC’s business model, of which $5,737,326 was the line of credit from Avidia Bank and $1,600,000 was subordinated debt.

 

In addition, the Company had notes payable of $111,831 to variable creditors for working capital of American Cycle Finance LLC.

 

The balance of $64,391 in notes payable to unrelated party was due to the auto loan for the vehicles used in the Pizza restaurants and Repicci’s Group and for daily operations.

 

Notes Payable – Related Party

 

On September 7, 2011, the Company entered into a Promissory Note agreement (“Note 1”) with a related party for $50,000. Note 1 bears interest at 8% per year and matures on September 7, 2016. Interest is payable annually on the anniversary of Note 1, and the principal and any unpaid interest will be due upon maturity. In conjunction with Note 1, the Company issued 2,500,000 shares of its Common Stock to the lender. As a result of the shares issued in conjunction with Note 1, the Company recorded a $50,000 debt discount during 2011. The balance of Note 1, net of debt discount, was $50,000 and $50,000 at June 30, 2017 and December 31, 2016, respectively. Note 1 is currently in default.

 

On November 17, 2011, the Company entered into a Promissory Note agreement (“Note 2”) with a related party for $50,000. Note 2 bears interest at 8% per year and matures on November 17, 2016. Interest is payable annually on the anniversary of Note 2, and the principal and any unpaid interest will be due upon maturity. In conjunction with Note 2, the Company issued 2,500,000 shares of its Common Stock to the lender. As a result of the shares issued in conjunction with Note 2, the Company recorded a $50,000 debt discount during 2011. The balance of Note 2, net of debt discount, was $50,000 and $50,000 at June 30, 2017 and December 31, 2016, respectively. Note 2 is currently in default.

 

 

 

On August 4, 2015, the Company entered into a Promissory Note agreement (“Note 3”) with a related party for $19,500. Note 3 bears interest at 6% per year and matures on December 31, 2016. Interest is payable annually on the anniversary of Note 3, and the principal and any unpaid interest will be due upon maturity. The Company repaid $10,500 to the related party in 2016, therefore, the balance of Note 3 was $9,000 at June 30, 2017. Note 3 is currently in default.

 

As of June 30, 2017, the Company also had note payable of $44,189 to the prior owner of Repicci’s Group.

 

The following is a schedule showing the future minimum loan payments in the future 5 years.

 

Year ending December 31,
2017		$	7,827,708
2018			0
2019			0
2020			0
2021			0
Total		$	7,827,708

 

 

9. CONVERTIBLE NOTES PAYABLE

 

Some of the Convertible Notes issued as described below included an anti-dilution provision that allowed for the adjustment of the conversion price. The Company considered the guidance provided by the FASB in “Determining Whether an Instrument Indexed to an Entity’s Own Stock,” the result of which indicates that the instrument is not indexed to the issuer’s own stock. Accordingly, the Company determined that, as the conversion price of the Notes issued in connection therewith could fluctuate based future events, such prices were not fixed amounts. As a result, the Company determined that the conversion features of the Notes issued in connection therewith are not considered indexed to the Company’s stock and characterized the value of the conversion feature of such notes as derivative liabilities upon issuance.

 

Convertible notes at June 30, 2017 and December 31, 2016 are summarized as follows:

 

		June 30, 2017				December 31, 2016
Convertible Notes Payable – Unrelated Party		$	719,647			$	179,285
Convertible Notes Payable – Related Party			165,000				165,000
Discount on notes			(313,194	)			(21,833	)
Total - Current		$	571,453			$	322,452

 

Convertible Notes Payable – Unrelated Party

 

On April 17, 2014, the Company entered into an unsecured Convertible Note (“Note 4”) in the amount of $9,000. Note 4 was convertible into Common Shares of the Company at $0.005 per share at the option of the holder. Note 4 bore interest at eight percent per year, matured on June 17, 2014, and was unsecured. All principal and unpaid accrued interest was due at maturity. The Company is currently in default on Note 4. On August 17, 2015, a portion of principal of $1,500 was converted into 300,000 shares of Common Stock of the Company upon the request of the holder. During the year ended December 31, 2016, the note holder converted $3,715 principal and $1,310 accrued interest payable into 1,005,000 shares of common stock at a conversion price of $0.005 per share. And $3,000 of principal is forgiven by the note holder. In addition, the Company agreed to reimburse the holder’s certificate processing cost by adding $1,000 to the principal for each note conversion pursuant to an addendum, dated February 3, 2016. During the first quarter of 2017, the note holder converted $2,785 principal, $1,000 processing cost reimbursement and $102 accrued interest into 777,400 shares of common stock at a conversion price of $0.005 per share. Note 4 was paid in full as of June 30, 2017.

On May 6, 2015, the Company entered into a 10% convertible promissory note (“Note 5”) with an unrelated entity in the amount of $12,200. Note 5 bore interest at ten percent per year, matured on September 3, 2015, and was unsecured. Note 5 was convertible into Common Shares of the Company at the conversion ratio of 50% discount to market at the lowest traded price within 20 business days prior to “Notice of Conversion”. This gives rise to derivative liability accounting related to this Note since the conversion ratio is considered floorless.

 

 

 

 

Accordingly, Note 5 has been evaluated with respect to the terms and conditions of the conversion features contained in Note 5 to determine whether they represent embedded or freestanding derivative instruments under the provisions of ASC 815. The Company determined that the conversion features contained in Note 5 for $12,200 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Black-Scholes valuation model at the inception date of Note 5 and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. On March 8, 2016, the Company entered into an addendum to Note 5 to change the conversion price to $0.005 per share. As a result, the embedded derivative liability of $12,217 at March 8, 2016 was reclassified as additional paid-in capital.

 

The table below sets forth the assumptions for Black-Scholes valuation model on May 6, 2015 (inception) and December 31, 2015, and March 8, 2016, respectively. For the three months ended March 31, 2016, the Company decreased the derivative liability of $13,948 at December 31, 2015 by $1,731, resulting in a derivative liability of $12,217 at March 8, 2016.

 

Reporting Date	Fair Value	Term (Years)	Assumed Conversion Price	Market Price on Issuance Date	Volatility Percentage	Risk-free Rate
5/6/2015	$22,495	0.33	$0.83	$1.69	507%	0.0002
12/31/2015	$13,948	0.003	$0.04	$0.08	533%	0.0014
3/8/2016	$12,217	0.003	$0.03	$0.05	569%	0.0027

 

As of June 30, 2017, the principal and accrued interest of Note 5 were paid in full.

 

On July 29, 2015, the Company entered into an 8% convertible promissory note (“Note 6”) with an unrelated entity in the amount of $10,000. Note 6 bore interest at eight percent per year, matured on November 26, 2015, and was unsecured. Note 6 was convertible into Common Shares of the Company at the conversion ratio of 50% discount to market at the conversion date. However, if the closing bid price of the Company’s Common Shares falls below $0.10 per share, the conversion price will be changed to $0.01 per share and remain intact from that point forward. Since the Company’s common stock was $0.075 per share at December 31, 2015, the conversion feature contained in Note 6 no longer meets the requirements for liability classification under ASC 815. As a result, the embedded derivative liability of $10,008 at December 31, 2015 was reclassified as additional paid-in capital.

 

The table below sets forth the assumptions for Black-Scholes valuation model on July 29, 2015 (inception) and December 31, 2015, respectively. For the period ended December 31, 2015, the Company had initial loss of $8,041 due to derivative liabilities, and decreased the derivative liability of $18,041 by $8,033, resulting in a derivative liability of $10,008 at December 31, 2015. The derivative liabilities is reclassified as additional paid in capital due to the conversion price become fixed price as of January 1, 2016.

 

Reporting Date	Fair Value	Term (Years)	Assumed Conversion Price	Market Price on Issuance Date	Volatility Percentage	Risk-free Rate
7/29/2015	$18,041	0.33	$0.30	$0.60	513%	0.0006
12/31/2015	$10,008	0.003	$0.038	$0.075	533%	0.0014

 

Note 6 and accrued interest totaled $11,666 was paid in full by cash on May 1, 2017. Resulting from the tainted issue by the derivative financial instrument of the convertible notes, the Company determined that the conversion features contained in Note 6 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability, which will be reclassified into additional paid in capital upon conversion. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model with assumptions set forth in the table below and the fair value of $95,001 was credited to additional paid in capital on the conversion date.

 

Reporting Date	Fair Value	Term (Years)	Assumed Conversion Price	Market Price on Issuance Date	Volatility Percentage	Risk-free Rate
5/1/2017	$ 95,001	0.50	$0.01	$0.1050	111%	0.0098

 

 

 

 

On February 9, 2016, the Company entered into a 15% convertible line of credit (“Note 7”) with an unrelated entity in the amount up to $50,000. On February 9, 2016, the Company received $17,500 cash for the line of credit, matured on February 9, 2017, and unsecured. Note 7 is convertible into common shares of the Company at the conversion ratio of $0.03 or 50% discount of the lowest closing price on the primary trading market on which Company's common stock is quoted for the last five trading days prior to the conversion date, whichever is lower. The Company determined that the conversion features contained in Note 7 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.

 

The table below sets forth the assumptions for Binomial-Lattice valuation model on December 31, 2016 and June 30, 2017, respectively.

 

Reporting Date	Fair Value	Term (Years)	Assumed Conversion Price	Market Price on Issuance Date	Volatility Percentage	Risk-free Rate
12/31/2016	$ 74,750	0.11	$0.03	$0.2250	221%	0.0062
6/30/2017	$ 19,129	0.10	$0.03	$0.0799	111%	0.0114

 

Note 7 is currently in default and principal of $6,000 was converted into 200,000 shares of common stock at the end of 2016. During the six months ended June 30, 2017, the Company recorded interest expense, late fee and default interest related to Note 7 in total amount of $2,029 and amortization of debt discounts in amount of $3,500. There was no unamortized debt discount related Note 7 as of June 30, 2017.

 

On October 28, 2016, the Company received $25,000 cash pursuant to the terms of Note 7, matured on October 28, 2017 (“Note 7-1”). Note 7-1 was entitled to conversion after April 28, 2017 which met the requirements for liability classification under ASC 815.

 

The table below sets forth the assumptions for Binomial-Lattice valuation model on June 30, 2017.

 

Reporting Date	Fair Value	Term (Years)	Assumed Conversion Price	Market Price on Issuance Date	Volatility Percentage	Risk-free Rate
6/30/2017	$ 41,586	0.33	$0.03	$0.0799	111%	0.0114

 

During the six months ended June 30, 2017, the Company recorded interest expense related to Note 7-1 in amount of $1,344 and amortization of debt discount in amount of $8,750. This resulted in an unamortized debt discount of $16,250 as of June 30, 2017.

 

On March 8, 2016, the Company entered into a 15% convertible promissory note in the principal of $50,000 (“Note 8”) with an unrelated entity for services rendered. Note 8 is matured on March 8, 2017, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of $0.03 or 50% discount of the lowest closing price on the primary trading market on which Company's common stock is quoted for the last five trading days prior to the conversion date, whichever is lower. The Company determined that the conversion features contained in Note 8 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.

 

On February 16, 2017, a portion of principal of $6,000 was converted into 200,000 shares of common stock at a conversion price of $0.03 per share.

 

 

 

 

On April 13, 2017, a portion of principal of $12,853, including $1,000 conversion cost reimbursement, plus accrued interest of $12,247 were converted into 836,667 shares of common stock at a conversion price of $0.03 per share.

 

On May 4, 2017, a portion of principal of $6,000, including $2,000 conversion cost reimbursement, plus accrued interest of $70 were converted into 202,333 shares of common stock at a conversion price of $0.03 per share.

 

The table below sets forth the assumptions for Binomial-Lattice valuation model on December 31, 2016, February 16, 2017, April 13, 2017, May 4, 2017 and June 30, 2017, respectively.

 

Reporting Date	Fair Value	Term (Years)	Assumed Conversion Price	Market Price on Issuance Date	Volatility Percentage	Risk-free Rate
12/31/2016	$ 325,001	0.18	$0.03	$0.2250	221%	0.0062
2/16/2017	$ 62,000	0.05	$0.03	$0.3400	173%	0.0051
4/13/2017	$ 53,554	0.10	$0.03	$0.1550	111%	0.0076
5/4/2017	$ 18,000	0.16	$0.03	$0.1200	111%	0.0071
6/30/2017	$ 46,819	0.10	$0.03	$0.0799	111%	0.0114

 

Note 8 was in default with principal balance of $28,147 as of June 30, 2017. During the six months ended June 30, 2017, the Company recorded late fee and default interest related to Note 8 in total amount of $8,177 and amortization of debt discounts in amount of $18,333. There was no unamortized debt discount related Note 8 as of June 30, 2017. The fair value of total $133,554 was credited to additional paid in capital on the conversion dates.

 

On September 12, 2016, the Company entered into a 10% convertible promissory note in the principal of $80,000 (“Note 9”) with an unrelated entity for services rendered. Note 9 is matured on September 12, 2017, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of $0.03 or 50% discount of the lowest closing bid price on the primary trading market on which Company's common stock is quoted for the last five trading days prior to the conversion date, whichever is lower. The Company determined that the conversion features contained in Note 9 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.

 

The table below sets forth the assumptions for Binomial-Lattice valuation model on June 30, 2017.

 

Reporting Date	Fair Value	Term (Years)	Assumed Conversion Price	Market Price on Issuance Date	Volatility Percentage	Risk-free Rate
6/30/2017	$ 133,071	0.20	$0.03	$0.0799	111%	0.0114

 

As a result, Note 9 was discounted in the amount of $80,000 and amortized over the remaining life of this Note. During the six months ended June 30, 2017, the Company recorded interest expenses related to Note 9 in amount of $4,000 and amortization of debt discounts in amount of $48,889. This resulted in an unamortized debt discount of $31,111 as of June 30, 2017.

 

On January 24, 2017, the Company entered into a 10% convertible promissory note in the principal of $80,000 (“Note 10”) with an unrelated entity for services rendered. Note 10 is matured on January 24, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing bid price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. However, Note 10 is not convertible after 6 months of the effective date of this Note, which is July 24, 2017. Neither derivative liability accounting nor beneficial conversion feature will be considered before Note 10 is entitled for conversion. During the six months ended June 30, 2017, the Company recorded interest expense related to Note 10 in amount of $3,489.

 

 

 

 

On January 24, 2017, the Company entered into a 15% convertible line of credit (“Note 11”) with an unrelated entity in the amount up to $250,000. On January 27, 2017, the Company received $50,000 cash for the line of credit, matured on January 27, 2018, and unsecured. Note 11 is convertible into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. However, Note 11 is not convertible after 6 months of the effective date of this Note, which is July 27, 2017. Neither derivative liability accounting nor beneficial conversion feature will be considered before Note 11 is entitled for conversion. During the six months ended June 30, 2017, the Company recorded interest expense related to Note 11 in amount of $3,208.

 

On February 21, 2017, the Company received $25,000 cash pursuant to the terms of Note 11, matured on February 21, 2018 (“Note 11-1”). Note 11-1 is not convertible after 6 months of the effective date of this Note, which is August 21, 2017. Neither derivative liability accounting nor beneficial conversion feature will be considered before Note 11-1 is entitled for conversion. During the six months ended June 30, 2017, the Company recorded interest expense related to Note 11-1 in amount of $1,344.

 

On March 16, 2017, the Company received $40,000 cash pursuant to the terms of Note 11, matured on March 16, 2018 (“Note 11-2”). Note 11-2 is not convertible after 6 months of the effective date of this Note, which is September 16, 2017. Neither derivative liability accounting nor beneficial conversion feature will be considered before Note 11-2 is entitled for conversion. During the six months ended June 30, 2017, the Company recorded interest expense related to Note 11-2 in amount of $1,767.

 

On April 6, 2017, the Company entered into a 15% convertible promissory note with an unrelated entity in the amount $50,000 (“Note 12”). Note 12 is matured on April 6, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of $0.25 or 50% of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. However, Note 12 is not convertible after 6 months of the effective date of this Note, which is October 6, 2017. Neither derivative liability accounting nor beneficial conversion feature will be considered before Note 12 is entitled for conversion. During the six months ended June 30, 2017, the Company recorded interest expense related to Note 12 in amount of $1,771.

 

On April 21, 2017, the Company entered into a Securities Purchase Agreement with an unrelated entity, pursuant to which the purchasers agreed to pay the Company an aggregate of up to $600,000 for an aggregate of up to 660,000 in Principal Amount of Notes. The first tranche of $330,000 was closed simultaneously (“Note 13-1”). Note 13-1 is convertible into common shares of the Company at the conversion ratio of 60% of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date. The Company determined that the conversion features contained in Note 13-1 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.

 

The table below sets forth the assumptions for Binomial-Lattice valuation model on June 30, 2017.

 

Reporting Date	Fair Value	Term (Years)	Assumed Conversion Price	Market Price on Issuance Date	Volatility Percentage	Risk-free Rate
6/30/2017	$ 299,852	0.81	$0.042	$0.0799	247%	0.0124

 

In addition, in connection with this Securities Purchase Agreement, the Company granted purchasers 2,357,143 warrants with exercise price of $0.14 per share (“Warrants A”), 1,885,715 warrants with exercise price of $0.175 per share (“Warrants B”) and 1,571,429 warrants with exercise price of $0.21 per share (“Warrants C”). Warrants A, B and C are exercisable on the grant date and expire in three years, each of which represents 100% of the Principal Amount at the Closing divided by the respective exercise price.

 

The fair value of these warrants was measured using the Black-Scholes valuation model at the grant date. The table below sets forth the assumptions for Black-Scholes valuation model on April 21, 2017. 

 

Reporting Date	Fair Value	Term (Years)	Exercise Price	Market Price on Grant Date	Volatility Percentage	Risk-free Rate
4/21/2017	$814,000	3	$0.14 - $0.21	$0.14	676%	0.0177

 

 

 

 

As a result, Note 13-1 was discounted in the amount of $330,000 and amortized over the remaining life of this Note. During the six months ended June 30, 2017, the Company recorded interest expenses related to Note 13-1 in amount of $3,208 and amortization of debt discounts in amount of $64,167. This resulted in an unamortized debt discount of $265,833 as of June 30, 2017.

 

Convertible Notes Payable – Related Party

 

On April 21, 2008, the Company entered into an unsecured Convertible Debenture (“Debenture 1”) with a shareholder in the amount of $150,000. Debenture 1 was convertible into Common Shares of the Company at $0.03 per share at the option of the holder no earlier than August 21, 2008. Debenture 1 bore interest at 12% per year, matured in August 2009, and was unsecured. All principal and unpaid accrued interest was due at maturity. In conjunction with the Debenture 1, the Company also issued warrants to purchase 5,000,000 shares of the Company’s Common Stock at $0.03 per share. The warrants expired on April 20, 2013. As a result of issued warrants, the Company recorded a $150,000 debt discount during 2008 which has been fully amortized. The Company was in default on Debenture 1, and no warrants had been exercised before expiration. The balance of Debenture 1 was $150,000 and $150,000 at June 30, 2017 and December 31, 2016, respectively. The Company recorded interest expense related to Debenture 1 in amount of $9,000 and $9,000 during the six months ended June 30, 2017 and 2016, respectively.

 

On March 11, 2009, the Company entered into an unsecured Convertible Debenture (“Debenture 2”) with a shareholder in the amount of $15,000. Debenture 2 was convertible into Common Shares of the Company at $0.03 per share at the option of the holder. Debenture 2 bore interest at 12% per year, matured on March 11, 2014, and was unsecured. All principal and unpaid accrued interest was due at maturity. The Company was in default on Debenture 2. The balance of Debenture 2 was $15,000 and $15,000 at June 30, 2017 and December 31, 2016, respectively. The Company recorded interest expense related to Debenture 1 in amount of $900 and $900 during the six months ended June 30, 2017 and 2016, respectively.

 

Resulting from the tainted issue by the derivative financial instrument of the convertible notes, The Company determined that the conversion features contained in Debenture 1 and Debenture 2 carrying value represents a embedded derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.

 

The table below sets forth the assumptions for Binomial-Lattice valuation model on December 31, 2016 and June 30, 2017, respectively.

 

Reporting Date	Fair Value	Term (Years)	Assumed Conversion Price	Market Price on Issuance Date	Volatility Percentage	Risk-free Rate
12/31/2016	$ 1,072,513	0.50	$0.03	$0.2250	221%	0.0062
6/30/2017	$     274,454	0.10	$0.03	$0.0799	111%	0.0114

 

The following is a schedule showing the future minimum loan payments in the future 5 years.

 

Year ending December 31,
2017		$	309,647
2018		$	575,000

 

10. DERIVATIVE LIABILITIES

 

As of June 30, 2017, the Company’s derivative liabilities are embedded derivatives associated with the Company’s convertible notes payable (see Note 9). Due to the Notes’ conversion feature, the actual number of shares of common stock that would be required if a conversion of the note as described in Note 9 was made through the issuance of the Company’s common stock cannot be predicted. As a result, the conversion feature requires derivative accounting treatment and will be bifurcated from the note and “marked to market” each reporting period through the statement of operations.

 

 

 

 

The Company measured the fair value of the derivative liabilities as $814,911 on June 30, 2017, and will subsequently remeasure the fair value at the end of each period, and record the change of fair value in the consolidated statement of operation during the corresponding period.

 

11. PAYROLL TAXES

 

The Company previously reported that it has failed to remit payroll tax payments since 2006, as required by various taxing authorities. Payroll taxes and estimated penalties were accrued in recognition of accrued salaries subsequently settled via stock issue and other agreements that did not result in reportable or taxable payroll transactions. These accruals were reversed for prior years, and a similar estimated accrual established for 2016 and 2015. As of June 30, 2017 and December 31, 2016, the Company estimated the amount of taxes, interest, and penalties that the Company could incur as a result of payroll related taxes and penalties to be $42,486 and $41,783, respectively.

 

12. NET LOSS PER SHARE

 

Basic net loss per share is computed using the weighted average number of common shares outstanding during the years.  There were no dilutive earnings per share for the three and six months ended June 30, 2017 and 2016 due to net loss during the periods.  

 

The following table sets forth the computation of basic net loss per share for the periods indicated:

 

		For the three months ended
		June 30, 2017				June 30, 2016
Numerator:
Net (loss)		$	(845,513	)		$	(242,351	)
Denominator:
Weighted-average shares outstanding			37,710,275				11,836,014
Basic earnings (loss) per share		$	(0.02	)		$	(0.02	)

 

		For the six months ended
		June 30, 2017				June 30, 2016
Numerator:
Net (loss)		$	(1,371,892	)		$	(446,213	)
Denominator:
Weighted-average shares outstanding			33,943,629				10,682,020
Basic earnings (loss) per share		$	(0.04	)		$	(0.04	)

 

 

13. CAPITAL STOCK

 

During the first quarter of 2017, the Company filed Amended Articles of Incorporation with the Secretary of State of Florida to amend the rights and privileges for series of Preferred Stock, and to authorize the issuance of Series I, F1, G1, H1, J1 and K1 Preferred Stock, which was effective on April 26, 2017.

 

Series A Preferred Stock

 

The Company has designated four shares of preferred stock as Series A Preferred Stock (“Series A”), with a par value of $.0001 per share, of which one share of preferred stock was issued and outstanding as of June 30, 2017. Series A is authorized to have four shares which do not bear dividends and converts to common shares at four times the sum of: all shares of Common Stock issued and outstanding at time of conversion plus all shares of Series B Preferred Stock issued and outstanding at time of conversion divided by the number of issued Class A shares at the time of conversion, and have voting rights four times the sum of: all shares of Common Stock issued and outstanding at time of voting plus all shares of Series B Preferred Stocks issued and outstanding at time of voting divided by the number of Class A shares issued at the time of voting.

 

 

 

 

Series B Preferred Stock

 

The Company has designated 3,000,000 shares of preferred stock as Series B Preferred Stock (“Series B”), with a par value $0.001 and $2.50 price per share, of which 2,825,204 shares of Series B preferred stock were issued and outstanding as of June 30, 2017. Shares of Series B are anti-dilutive to reverse splits. The conversion rate of shares of Series B, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Series B is awarded “Voting Right” at the ratio of 1 vote per share owned. Each one share of Series B converts to 5 shares of Common Stock. The price of each share of Series B may be changed either through a majority vote of the Board of Directors through a resolution at a meeting of the Board of Directors, or through a resolution passed at an Action Without Meeting of the unanimous Board of Directors, until such time as a listed secondary and/or listed public market develops for the shares.

 

During the first quarter of 2017, 1,406,829 shares of Series B Preferred Stock were converted into 7,034,145 shares of Common Stock of the Company per the preferred shareholder’s instruction.

 

On March 30, 2017, the Company issued 24,000 shares of Series B Preferred Stock to settle legal expenses of $60,000. Based on the price of $.9075 per share for the Series B Preferred Stock, which was determined by the market price of common stock at $.1815 per share on the issuance date multiplied by the conversion ratio of 1:5, the fair value of the stock issuance of Series B Preferred Stock was $21,780, resulting in gain from extinguishment of debt in amount of $38,220.

 

During the second quarter of 2017, 193,904 shares of Series B Preferred Stock were converted into 969,520 shares of Common Stock of the Company per the preferred shareholder’s instruction.

 

On June 27, 2017, the Company issued 15,906 shares of Series B Preferred Stock to 2 different consultants for services rendered. Based on the price of $.3995 per share for the Series B Preferred Stock, which was determined by the market price of common stock at $.0799 per share on the issuance date multiplied by the conversion ratio of 1:5, the fair value of the stock issuance of Series B Preferred Stock was $6,354, which was recorded as stock based compensation during the six months ended June 30, 2017.

 

During the six months ended June 30, 2016, 72,718 shares of Series B Preferred Stock were converted into 363,589 shares of Common Stock of the Company per the preferred shareholder’s instruction.

 

Series C Preferred Stock

 

The Company has designated 500 shares of preferred stock as Series C Preferred Stock (“Series C”), with a par value of $.001 per share, of which 117 shares were issued and outstanding as of June 30, 2017. Shares of Series C are non-dilutive to reverse splits. The conversion rate of shares of Series C, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share of Series C converts to 100,000 shares of Common Stock. Each share of Series C shall have one vote for any election or other vote placed before the shareholders of the Company. The price of each share of Series C may be changed either through a majority vote of the Board of Directors through a resolution at a meeting of the Board of Directors, or through a resolution passed at an Action Without Meeting of the unanimous Board of Directors, until such time as a listed secondary and/or listed public market develops for the shares. Shares of Series C may not be converted into shares of Common Stock for a period of: a) six months after purchase, if the Company voluntarily or involuntarily files public reports pursuant to Section 12 or 15 of the Securities Exchange Act of 1934; or b) 12 months if the Company does not file such public reports.

 

During the first quarter of 2017, 1 share of Series C Preferred Stock were converted into 100,000 shares of Common Stock of the Company per the preferred shareholder’s instruction.

 

Blank Check Preferred Stock

 

As of June 30, 2017, the Company has designated 100,000,000 shares of Blank Check Preferred Stock, of which 5,991,507 shares have been issued with Designations, Rights & Privileges. The following Series have been assigned from the inventory of Blank Check Preferred Shares. The amount of Blank Check Preferred Stock is 94,008,493 as of June 30, 2017.

 

Series D Preferred Stock

 

The Company has designated 800,000 shares of preferred stock as Series D Preferred Stock (“Series D”), with a par value of $.001 per share, of which 400,000 shares were issued and outstanding as of June 30, 2017. Series D is awarded “Voting Right” at the ratio of 1 vote per share owned. Each one share of Series D converts to 5 shares of Common Stock.

 

 

 

 

On June 30, 2014, the Company completed the acquisition of Romeo’s NY Pizza. The Company issued 400,000 shares of Series D Preferred Stock (“Series D”) as consideration for this acquisition. Based on the price of $2.50 per share, the acquisition consideration represents a $1,000,000 valuation. Shares of Series D are anti-dilutive to reverse splits. The conversion rate of shares of Series D, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share of Series D shall have voting rights equal to one vote of Common Stock. With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series D shall vote together with the holders of Common Stock, without regard to class, except as to those matters on which separate class voting is required by applicable law or the Corporation’s Certificate of Incorporation or Bylaws. The initial price of each share of Series D shall be $2.50.

 

There was no change in Series D Preferred Stock during the six months ended June 30, 2017 and 2016.

 

Series E Preferred Stock

 

The Company has designated 1,000,000 shares of preferred stock as Series E Preferred Stock (“Series E”), with a par value of $.001 per share, of which 241,199 shares were issued and outstanding as of June 30, 2017. Series E is awarded “Voting Right” at the ratio of 1 vote per share owned. Each one share of Series E converts to 5 shares of Common Stock.

 

On July 11, 2014, the Company completed the acquisition of Edge View Properties, Inc. The Company issued 241,199 shares of Series E Preferred Stock (“Series E”) as consideration for this acquisition. Based on the price of $2.50 per share, the acquisition consideration represents a $603,000 valuation. Shares of Series E are anti-dilutive to reverse splits. The conversion rate of shares of Series E, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share of Series E shall have voting rights equal to one vote of Common Stock. With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series E shall vote together with the holders of Common Stock, without regard to class, except as to those matters on which separate class voting is required by applicable law or the Corporation’s Certificate of Incorporation or Bylaws. The initial price of each share of Series E shall be $2.50.

 

There was no change in Series E Preferred Stock during the six months ended June 30, 2017 and 2016.

 

Series F Preferred Stock

 

The Company has designated 800,000 shares of preferred stock as Series F Preferred Stock (“Series F”), with a par value of $.001 per share, of which 280,069 shares were issued and outstanding as of June 30, 2017. Series F is awarded “Voting Right” at the ratio of 1 vote per share owned. Each one share of Series F converts to 5 shares of Common Stock.

 

The Company has designated 800,000 shares of preferred stock as Series F1 Preferred Stock (“Series F1”), with a par value of $.001 per share, of which 98,114 shares were issued and outstanding as of June 30, 2017. Series F1 is “non-Voting stock”. Each one share of Series F1 converts to 5 shares of Common Stock.

 

On May 15, 2014, the Company completed the acquisition of We Three, LLC (d/b/a Affordable Housing Initiative) (“AHI”). The Company issued 280,069 shares of Series F Preferred Stock (“Series F”) as consideration for this acquisition. The fair value of We Three LLC was $1,000,000. Based on the price of $2.50 per share for the Series F Preferred Stock, the fair value of the stock issuance of Series F Preferred Stock was $700,174, resulting in the gain of $299,826 on investment in We Three, which was offset the goodwill impairment at the end of 2014. In addition, the Company sold 156,503 shares of Series F-1 Preferred Stock (Series F-1”), to various investors at a price of $2.50 per share, or totaled $391,248 in cash. Shares of Series F are anti-dilutive to reverse splits. The conversion rate of shares of Series F, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share of Series F shall have voting rights equal to five votes of Common Stock. With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series F shall vote together with the holders of Common Stock, without regard to class, except as to those matters on which separate class voting is required by applicable law or the Corporation’s Certificate of Incorporation or Bylaws. The initial price of each share of Series F shall be $2.50.

 

During the first quarter of 2017, 31,997 share of Series F1 Preferred Stock were converted into 159,985 shares of Common Stock of the Company per the preferred shareholder’s instruction.

 

During the second quarter of 2017, 42,640 share of Series F1 Preferred Stock were converted into 213,200 shares of Common Stock of the Company per the preferred shareholder’s instruction.

 

 

 

 

During the period ended June 30, 2016, 10,000 shares of Series F Preferred Stock were converted into 50,000 shares of Common Stock of the Company per the preferred shareholder’s instruction.

 

There was no change in Series F1 Preferred Stock during the six months ended June 30, 2016.

 

Series G Preferred Stock

 

The Company has designated 20,000,000 shares of preferred stock as Series G Preferred Stock (“Series G”), with a par value of $.001 per share, of which 0 share was issued and outstanding as of June 30, 2017. Series G is awarded “Voting Right” at the ratio of 1 vote per share owned. Each one share of Series G converts to 1.25 shares of Common Stock.

 

The Company has designated 10,000,000 shares of preferred stock as Series G1 Preferred Stock (“Series G1”), with a par value of $.001 per share, of which 0 share was issued and outstanding as of June 30, 2017. Series G1 is “non-Voting stock”. Each one share of Series G1 converts to 1.25 shares of Common Stock.

 

There was no change in Series G and G1 Preferred Stock during the six months ended June 30, 2017 and 2016.

 

Series H Preferred Stock

 

The Company has designated 4,859,379 shares of preferred stock as Series H Preferred Stock (“Series H”), with a par value of $.001 per share, of which 4,859,379 shares were issued and outstanding as of June 30, 2017. Series H is awarded “Voting Right” at the ratio of 1 vote per share owned. Each one share of Series H converts to 1.25 shares of Common Stock.

 

The Company has designated 3,000,000 shares of preferred stock as Series H1 Preferred Stock (“Series H1”), with a par value of $.001 per share, of which 0 share was issued and outstanding as of June 30, 2017. Series H1 is “non-Voting stock”. Each one share of Series H1 converts to 1.25 shares of Common Stock.

 

On August 10, 2016, the Company completed the acquisitions of FDR Enterprises, Inc.; Refreshment Concepts, LLC; and Repicci’s Franchise Group, LLC. (collectively referred to as “Repicci’s Group”). Pursuant to the acquisition agreement, the Company agreed to issue 4,859,379 shares of Series H Preferred Stock as consideration for the acquisition of Repicci’s Group. The combined book value of Repicci’s Group was $(203,622). Based on the price of $.15 per share for the Series H Preferred Stock, which was determined by the market price of common stock at $.12 per share on the acquisition date multiplied by the conversion ratio of 1:1.25, the fair value of the stock issuance of Series H Preferred Stock was $728,907, resulting in the goodwill of $932,529. The 4,859,379 shares of Series H Preferred Stock were issued during the first quarter of 2017.

 

There was no change in Series H and H1 Preferred Stock during the six months ended June 30, 2016.

 

Series I Preferred Stock

 

The Company has designated 20,000,000 shares of preferred stock as Series I Preferred Stock (“Series I”), with a par value of $.001 per share, of which 112,746 share was issued and outstanding as of June 30, 2017. Series H is awarded “Voting Right” at the ratio of 1 vote per share owned. Each one share of Series I converts to 1.50 shares of Common Stock.

 

During the first quarter of 2017, one investor submitted a subscription agreement to the Company regarding the purchase of 29,412 shares of the Company’s Series I Preferred Stock by cash payment of $10,000, which was collected during the first quarter of 2017. During the second quarter of 2017, the same investor submitted a subscription agreement to the Company regarding the purchase of 83,334 shares of the Company’s Series I Preferred Stock by cash payment of $10,000. The transactions were independently negotiated between the Company and the investor. The proceeds from the subscription agreement mitigated the Company’s cash pressure in short term. The total 112,746 shares of Series I Preferred Stock were issued during the second quarter of 2017.

 

During the second quarter of 2017, a related party submitted a subscription agreement to the Company regarding the purchase of 90,909 shares of the Company’s Series I Preferred Stock by cash payment of $10,000, which was collected during the second quarter of 2017. The transaction was independently negotiated between the Company and the related party. The proceeds from the subscription agreement mitigated the Company’s cash pressure in short term.

 

The 90,909 shares of Series I Preferred Stock was not issued as of June 30, 2017. Accordingly, the Company recorded Series I preferred shares to be issued to related party in amount of $10,000 as of June 30, 2017.

 

 

 

 

Series J Preferred Stock

 

The Company has designated 10,000,000 shares of preferred stock as Series J Preferred Stock (“Series J”), with a par value of $.001 per share, of which 0 share was issued and outstanding as of June 30, 2017. Series J is awarded “Voting Right” at the ratio of 1 vote per share owned. Each one share of Series J converts to 1.25 shares of Common Stock.

 

The Company has designated 7,500,000 shares of preferred stock as Series J1 Preferred Stock (“Series J1”), with a par value of $.001 per share, of which 0 share was issued and outstanding as of June 30, 2017. Series J1 is “non-Voting stock”. Each one share of Series J1 converts to 1.25 shares of Common Stock.

 

There was no change in Series J and J1 Preferred Stock during the six months ended June 30, 2016.

 

Series K Preferred Stock

 

The Company has designated 9,607,840 shares of preferred stock as Series K Preferred Stock (“Series K”), with a par value of $.001 per share, of which 0 share was issued and outstanding as of June 30, 2017. Series K is awarded “Voting Right” at the ratio of 1 vote per share owned. Each one share of Series K converts to 1.25 shares of Common Stock.

 

The Company has designated 35,000,000 shares of preferred stock as Series K1 Preferred Stock (“Series K1”), with a par value of $.001 per share, of which 0 share was issued and outstanding as of June 30, 2017. Series K1 is “non-Voting stock”. Each one share of Series K1 converts to 1.25 shares of Common Stock.

 

On April 1, 2017, the Company completed the acquisitions of American Cycle Finance Inc. (“ACF”). Pursuant to the acquisition agreement, the Company agreed to issue 9,607,840 shares of Series K Preferred Stock as consideration for the acquisition of ACF. The book value of ACF was $(461,181). Based on the price of $.249 per share for the Series K Preferred Stock, which was determined by the market price of common stock at $.199 per share on the acquisition date multiplied by the conversion ratio of 1:1.25, the fair value of the stock issuance of Series K Preferred Stock was $2,389,950, resulting in the goodwill of $2,851,131. The 9,607,840 shares of Series K Preferred Stock were issued subsequently to the date of this report. Accordingly, the Company recorded Series K Preferred Stock to be issued of $2,389,950 in the consolidated balance sheet as of June 30, 2017.

 

There was no change in Series K and K1 Preferred Stock during the six months ended June 30, 2017 and 2016.

 

Common Stock

 

On February 10, 2017, the Company entered into a consulting agreement with an unrelated party, pursuant to which the Company agreed to issue total 800,000 shares to the consultant in four allotments, or 200,000 shares each, for consulting services related to marketing and business development. During the first quarter of 2017, 250,000 shares were issued. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.235 per share. During the second quarter of 2017, the difference of 150,000 shares were not issued as of the date of the Report. The fair value of the 150,000 shares was $15,600, or approximately $.104 per share. Accordingly, the Company recognized stock based compensation of $74,350 to the consolidated statements of operations for the six months ended June 30, 2017 and recorded $15,600 as accrued expenses in the consolidated balance sheet as of June 30, 2017.

 

During the first quarter of 2017, the note holder converted $2,785 principal, $1,000 processing cost reimbursement and $102 accrued interest into 777,400 shares of common stock at a conversion price of $0.005 per share.

 

During the first quarter of 2017, the note holder converted $6,000 principal into 200,000 shares of common stock at a conversion price of $0.03 per share.

 

On January 24, 2017, the Company issued 173,585 shares of Common Stock to settle $34,717 due to the prior owner of Repicci’s Franchise Group LLC, pursuant to the Acquisition Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt in amount of $6,943.

 

On January 24, 2017, the Company issued 2,010,490 shares of Common Stock to settle $402,098 due to the prior owner of Refreshment Concepts LLC, pursuant to the Acquisition Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt in amount of $80,420.

 

 

 

 

On March 20, 2017, the Company issued 60,000 shares of Common Stock to settle consulting fees of $15,000. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.1965 per share, resulting in gain from extinguishment of debt in amount of $3,210.

 

During the first quarter of 2017, one investor submitted a subscription agreement to the Company regarding the purchase of 100,000 shares of Common Stock by cash payment of $10,000. The transaction was independently negotiated between the Company and the investor. The proceeds from the subscription agreement mitigated the Company’s cash pressure in short term.

 

During the second quarter of 2017, the Company issued 100,000 shares of Common Stock to an attorney for legal services. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.1145 per share. Accordingly, the Company recognized stock based compensation of $11,450 to the consolidated statements of operations for the six months ended June 30, 2017.

 

During the second quarter of 2017, the Company issued 906,907 shares of Common Stock to a related party for services rendered. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.0799 per share. Accordingly, the Company recognized stock based compensation of $72,462 to the consolidated statements of operations for the six months ended June 30, 2017.

 

During the second quarter of 2017, the Company redeemed 500,000 shares from a shareholder for a cash payment of $2,500. The 500,000 shares were return to the treasury for cancellation and the $2,500 was recorded as accrued liabilities in the consolidated balance sheet as of June 30, 2017.

 

During the second quarter of 2017, the note holders converted $18,853 principal, including $3,000 processing cost reimbursement, and $12,317 accrued interest into 1,039,000 shares of common stock at a conversion price of $0.03 per share.

 

During the first quarter of 2016, the Company issued 50,000 shares of Common Stock to an investor for total cash payment of $5,000 or $.10 per share, pursuant to an executed subscription agreements.

 

During the first quarter of 2016, the Company issued 25,599 shares of common stock to a Consultant for services rendered. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.0475 per share. Accordingly, the Company calculated the stock based compensation of $1,216 at its fair value and included it in the consolidated statements of operations for the six months ended June 30, 2016.

 

During the first quarter of 2016, the Company issued 387,990 shares of common stock to a Consultant for services rendered. The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.09 per share. Accordingly, the Company calculated the stock based compensation of $34,919 at its fair value and included it in the consolidated statements of operations for the six months ended June 30, 2016.

 

During the first quarter of 2016, the Company issued 65,000 shares of Common Stock to two investors for total cash payment of $4,000, or $0.05 per share, pursuant to the executed subscription agreements. And the Company issued 10,000 shares of Common Stock to be issued to one investor for total cash payment of $500 or $.05 per share, pursuant to the executed subscription agreements.

 

During the second quarter of 2016, the Company issued total 300,000 shares of Common Stock to investors for total cash payment of $15,000, or $0.05 per share, pursuant to the executed subscription agreements.

 

During the second quarter of 2016, the Company issued 2,920,000 shares of common stock for the conversion of $14,600 of unpaid convertible notes principal and accrued interest payable at a price of $0.005 per share.

 

14. WARRANTS

 

Pursuant to the same consulting agreement, dated February 10, 2017, in addition to the 800,000 shares of common stock, the Company agreed to grant total 800,000 warrants to the consultant for consulting services related to marketing and business development. The initial allotment of 200,000 warrants were granted during the first quarter of 2017. The second allotment of 200,000 warrants were granted during the second quarter of 2017. The fair value of these warrants was measured using the Black-Scholes valuation model at the grant date. The table below sets forth the assumptions for Black-Scholes valuation model on February 10, 2017 and May 10, 2017, respectively.

 

 

 

 

 

Reporting Date	Fair Value	Term (Years)	Exercise Price	Market Price on Grant Date	Volatility Percentage	Risk-free Rate
2/10/2017	$47,000	3	$0.50	$0.235	535%	0.0147
5/10/2017	20,799	3	$0.50	$0.104	506%	0.0156

 

Accordingly, the Company recorded warrant expenses of $67,799 during the six months ended June 30, 2017

 

The following tables summarize all warrant outstanding as of June 30, 2017, and the related changes during this period.

 

		Number of Warrants				Weighted Average Exercise Price
Stock Warrants
Balance at January 1, 2017			0			$	0
Granted			6,214,287				0.191
Exercised			0				0
Expired			0			$	0
Balance at June 30, 2017			6,214,287				0.191
Warrants Exercisable at June 30, 2017			6,214,287			$	0.191

 

 

15. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company had operating leases of $24,548 and $72,120 for the three months ended June 30, 2017 and 2016, respectively, consisting of the followings.

 

		For the three months ended
		June 30, 2017				June 30, 2016
Restaurants		$	284			$	36,732
Lot			16,313				18,657
Office			7,951				16,731
Equipment Rentals			0				0
Total		$	24,548			$	72,170

 

 

The Company had operating leases of $83,256 and $148,620 for the six months ended June 30, 2017 and 2016, respectively, consisting of the followings. 

 

		For the six months ended
		June 30, 2017				June 30, 2016
Restaurants		$	34,084			$	72,268
Lot			33,694				29,981
Office			15,478				46,039
Equipment Rentals			0				332
Total		$	83,256			$	148,620

 

 

 

 

16. SEGMENT REPORTING

 

The Company has four 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) Mobile home lease (We Three), (2) Company-owned Pizza Restaurants (Romeo’s NY Pizza), (3) “Repicci’s Italian Ice” franchised stores, and (4) Financial services income (ACF). 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 mobile home lease segment establishes mobile home business as an option for a homeowner wishing to avoid large down payments, expensive maintenance costs, monthly mortgage payments and high property taxes. If bad credit is an issue preventing people from purchasing a traditional house, the Company will provide a financial leasing option with "0" interest on the lease providing a "lease to own" option for their family home.

 

The Company-owned Pizza Restaurant segment includes sales and operating results for all Company-owned restaurants. Assets for this segment include equipment, furniture and fixtures for the Company-owned restaurants.

 

Repicci’s Group offers franchisees for the operation of “Repicci’s Italian Ice” franchises. These franchised stores specialize in the distribution of nonfat frozen confections.

 

The number of franchise agreements in force as of December 31, 2016 was 48, five of which are “mobile” unites.

 

The Company obligates itself to each franchisee to perform the following services:

 

1.

Designate an exclusive territory;

2.

Provide guidance and approval for selection and location of site;

3.

Provide initial training of franchisee and employees;

4.

Provide a company manual and other training aids.

 

The Company has developed a new “Mobile Franchise Opportunity”. The total investment for the new opportunity ranges from $155,600 to $165,000, as follows: $125,000 for a new Mercedes Sprinter Van, customized for the franchisee, $25,000 for the franchise fee, the balance for product. The Company’s obligation is as above, except for Item #3, training is specific to the new opportunity.

 

American Cycle capitalizes on a unique and profitable financing opportunity in the U.S. sub-prime motorcycle financing market. American Cycle has spent the last two years building a financial infrastructure and expanding its dealer footprint. As of January 1st, 2017, American Cycle has 204 dealers nationwide. Unlike the subprime auto industry, American Cycle provides customers two major advantages over a subprime auto loan: 1.) favorable payment terms; 2.) assets with a slower depreciation rate.

 

		For the three months ended
		June 30, 2017				June 30, 2016
Revenues:
We Three		$	48,687			$	40,613
Romeo’s NY Pizza			150,640				168,923
Repicci’s Group			361,159				–
ACF			594,612				–
Others			–				–
Consolidated revenues		$	1,155,098			$	209,283
Cost of Sales:
We Three		$	45,566			$	51,000
Romeo’s NY Pizza			106,253				96,254
Repicci’s Group			420,956				–
ACF			325,033				–
Others			–				–
Consolidated cost of sales		$	897,808			$	147,254
Income (Loss) before taxes
We Three		$	27,260			$	(50,695	)
Romeo’s NY Pizza			11,480				40,371
Repicci’s Group			(155,027	)			–
ACF			68,499				–
Others			(797,725	)			(232,027	)
Consolidated loss before taxes		$	(845,513	)		$	(242,351	)

 

 

 

		For the six months ended
		June 30, 2017				June 30, 2016
Revenues:
We Three		$	94,697			$	80,973
Romeo’s NY Pizza			284,877				383,516
Repicci’s Group			621,812				–
ACF			594,612				–
Others			3,745				18,090
Consolidated revenues		$	1,599,743			$	482,579
Cost of Sales:
We Three		$	79,187			$	80,970
Romeo’s NY Pizza			200,556				203,157
Repicci’s Group			572,261				–
ACF			325,033				–
Others			–				–
Consolidated cost of sales		$	1,177,037			$	284,127
Income (Loss) before taxes
We Three		$	42,303			$	(18,312	))
Romeo’s NY Pizza			(27,474	)			42,720
Repicci’s Group			(117,429	)			–
ACF			68,499				–
Others			(1,337,791	)			(470,621	)
Consolidated loss before taxes		$	(1,371,892	)		$	(446,213	)

 

 

		As of				As of
		June 30, 2017				December 31, 2016
Assets:
We Three		$	258,736			$	216,433
Romeo’s NY Pizza			5,870				19,241
Repicci’s Group			446,595				411,606
ACF			7,024,951
Others			4,802,562				1,824,729
Combined assets		$	12,538,714			$	2,472,009

 

 

17. SUBSEQUENT EVENTS

 

In accordance with ASC Topic 855-10, the Company has analyzed its operations subsequent to June 30, 2017 to the date these consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements other than those specified below.

 

On August 8, 2017, Mr. Roberts, the Company’s Chief Operating Officer, accepted the offer from the Company to issue 1,000,000 common shares to supersede all his options and warrants in the employment agreement.

 

 

 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read in conjunction with our 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” refer to Cardiff International, Inc., and Legacy Card Company, Inc. (d/b/a: Mission Tuition) 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 International, Inc. 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 International, Inc., wherever they occur, are necessarily estimates reflecting the best judgment of the senior management of Cardiff International, Inc. 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.

 

RISK FACTORS

 

You should carefully consider the risks and uncertainties described below and the other information in this document before deciding to invest in shares of our common stock.

 

The occurrence of any of the following risks could materially and adversely affect our business, financial condition and operating result. In this case, the trading price of our common stock could decline and you might lose all or part of your investment.

 

During our startup phase we were not profitable and generated minimal revenue and no profit.

 

As of this filing, though still not profitable, Cardiff is generating revenue which helps mitigate the risk. Currently we have a small amount of consolidated stockholders’ equity. As a result, though pleased with our current results, we may never become profitable, and could go out of business.

 

Through inception until December 2014, we have restructured ourselves into a holding company and have acquired several additional businesses; We Three, Inc. d/b/a Affordable Housing Initiative, Romeo’s NY Pizza, Edge View Properties, FDR Enterprises, Inc. Repicci’s Franchise Group, Refreshment Concepts and American Cycle Finance, Inc.

 

Future sales will no longer depend on missiontuition.com, but will be derived from our new acquisitions. We cannot guarantee we will ever develop substantial revenue from our subsidiary companies and there is no assurance that we will achieve profitability.

 

Because we had incurred operating losses from our inception, we still consider ourselves a going concern.

 

For the fiscal years ended December 31, 2016 and December 31, 2015, our accountants have expressed concern about our ability to continue as a going concern due to our continued net losses and need for additional capital. However, we believe our ability to achieve and maintain profitability and positive cash flow is dependent upon:

 

•	our ability to acquire profitable businesses within CDIF; and

 

•	our ability to generate substantial revenues; and

 

•	our ability to obtain additional financing

 

 

 

 

Based upon current plans, we may incur operating losses in future periods. Also, we expect approximately $600,000 in operating costs to be incurred over the next twelve months. We cannot guarantee that we will be successful in generating sufficient revenues or obtaining other financing in the future to cover these operating costs. Additionally, financing may not be available on terms favorable to the Company. Failure to generate sufficient revenues may cause us to go out of business.

 

Since we are an early stage company that has generated minimal revenue, an investment in our shares is highly risky and could result in a complete loss of your investment if we are unsuccessful in our business plans.

 

We were incorporated in August 2001 and have focused all of our efforts on the development of our product and we have generated minimal amounts revenue. Further, there is no guarantee that we will be successful in realizing revenues or in achieving or sustaining positive cash flow at any time in the future. Any such failure could result in the possible closure of our business or force us to seek additional capital through loans or additional sales of our equity securities to continue business operations, which would dilute the value of any shares you hold, and could result in the loss of your entire investment.

 

Future acquisitions are important to our success. We may not be able to successfully integrate our acquisitions into our operations

 

The acquisition of new companies is central to our business model and critically important to our success. Although we generally seek companies that have positive cash flows, we cannot be certain that the company’s acquired will remain cash flow positive and could possibly lose revenues. In addition, there are no assurances that the acquisitions acquired will continue as profitable businesses and could adversely affect our business and any possible revenues.

 

Successful implementation of our business strategy depends on factors specific to acquiring successful businesses. Adverse changes in our acquisition process could undermine our business strategy and have a material adverse effect on our business, financial condition, and results of operations and cash flow:

 

•	The competitive environment in the specific field of business acquired; and

 

•	Our ability to acquire the right businesses that meet customers’ needs; and

 

•	Our ability to establish, maintain and eventually grow market share in a competitive environment.

 

There are no substantial barriers to acquire established businesses and because we can acquire businesses in all types of industries, there is no guarantee the Company will acquire additional businesses, which could severely limit our proposed sales and revenues. If we cannot acquire established businesses, it could result in the loss of your investment.

 

Since we have no copyright protection, unauthorized persons may attempt to copy aspects of our business, including our governance design or functionality, services or marketing materials. Any encroachment upon our corporate information, including the unauthorized use of our brand name, the use of a similar name by a competing company or a lawsuit initiated against us for infringement upon another company's proprietary information or improper use of their copyright, may affect our ability to create brand name recognition, cause customer confusion and/or have a detrimental effect on our business. Litigation or proceedings before the U.S. or International Patent and Trademark Offices may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and domain name and/or to determine the validity and scope of the proprietary rights of others. Any such infringement, litigation or adverse proceeding could result in substantial costs and diversion of resources and could seriously harm our business operations and/or results of operations. As a result, an investor could lose his or her entire investment.

 

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 stock has limited liquidity.

 

Our common stock trades on the OTCQB market. Trading volume in our shares may be sporadic and the price could experience volatility. If adverse market conditions exist, you may have difficulty selling your shares.

 

 

 

 

The market price of our common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, including the following:

 

•	actual or anticipated fluctuations in our operating results;

 

•	changes in financial estimates by securities analysts or our failure to perform in line with such estimates;

 

•	changes in market valuations of other companies, particularly those that market services such as ours;

 

•	announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

•	introduction of product enhancements that reduce the need for our products;

 

•	departure of key personnel.

 

In general, buying low-priced penny stocks is very risky and speculative. Our shares are defined as a penny stock under the Securities and Exchange Act of 1934, and rules of the Commission. You may not able to sell your shares when you want to do so, if at all.

 

Our shares are defined as a penny stock under the Securities and Exchange Act of 1934, and rules of the Commission. The Exchange Act and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our securities to persons other than certain accredited investors who are, generally, institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with spouse, or in transactions not recommended by the broker-dealer. For transactions covered by the penny stock rules, a broker-dealer must make a suitability determination for each purchaser and receive the purchaser's written agreement prior to such sale. In addition, the broker-dealer must make certain mandated disclosures in penny stock transactions, including the actual sale or purchase price and actual bid and offer quotations, the compensation to be received by the broker-dealer and certain associated persons, and deliver certain disclosures required by the Commission. Consequently, the penny stock rules may affect the ability of broker-dealers to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in the public markets.

 

Because of our size and limited resources, we may have difficulty establishing adequate management, legal and financial controls, which we are required to do in order to comply with U.S. GAAP and securities laws, and which could cause a materially adverse impact on our financial statements, the trading of our common stock and our business.

 

We are a small holding company that lacks the financial resources and qualified personnel to implement and sustain adequate internal controls As a result, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet proper internal control standards. Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of our financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002. Any such deficiencies, material weaknesses or lack of compliance could result in restatements of our historical financial information, cause investors to lose confidence in our reported financial information, have an adverse impact on the trading price of our common stock, adversely affect our ability to access the capital markets and our ability to recruit personnel, lead to the delisting of our securities from the stock exchange on which they are traded, lead to litigation claims, thereby diverting management’s attention and resources, and which may lead to the payment of damages to the extent such claims are not resolved in our favor, lead to regulatory proceedings, which may result in sanctions, monetary or otherwise, and have a materially adverse effect on our reputation and business.

 

We do not expect to pay dividends on common stock in the foreseeable future.

 

We have not paid any cash dividends with respect to our common stock, and it is unlikely that we will pay any dividends on our common stock for the year. Earnings, if any, that we may realize will be retained in the business for further development and expansion.

 

 

 

 

Overview

 

Cardiff International, Inc., is currently structured as a company with holdings of various companies.

 

CARDIFF INTERNATIONAL, INC., is a public Holding company utilizing a new form of Collaborative Governance™*. Cardiff targets acquisitions of undervalued, niche companies with high growth potential, income-producing businesses, including commercial real estate properties all of which offer high returns for our investors. Our goal is to provide a form of governance enabling businesses to take advantage of the power of a public company without losing management control. Cardiff provides companies the ability to raise money and investors a low risk environment that protects their investment.

 

 

MISSION TUITION (www.missiontuition.com): Cardiff through Mission Tuition has built one of the largest merchant shopping networks in America consisting of all the top name merchants; offering in-store savings and coupon savings with local, regional and national merchants throughout America. With each purchase members earn rebates which goes directly into their educational savings account. Our Tax-Free educational savings program provides a platform for families to start an "educational savings" program that encourages regular and daily use of the program. The Mission Tuition program helps families save for college. Mission Tuition encourages members to contribute to their educational savings with contribution from work, family members or just rebates generated by online and in- store purchases. The Mission Tuition program leverages the two biggest economic forces in society –– consumer spent and the cost of education –– to create the most unique value-added rewards program in decades. Cardiff’s missiontuition.com helps solve a real need for America's families – saving for your child's college education.

 

WE THREE, LLC (D/B/A AFFORDABLE HOUSING INITIATIVE) (“AHI”): AHI is located in Maryville, Tennessee. AHI acquires both mobile homes and mobile home parks offering an alternative to traditional housing. Their mobile home business is a popular option for a homeowner wishing to avoid large down payments, expensive maintenance costs, monthly mortgage payments and high property taxes. If bad credit is an issue preventing people from purchasing a traditional house, AHI will provide a financial leasing option with "O" interest on the lease providing a "lease to own" option for their family home. Most homes are 3 bedroom/2bath homes making the dream of owning a home possible.

 

ROMEO'S NY PIZZA, INC.: Romeo's NY Pizza - Established in Paterson, New Jersey in 1945. Romeo's NY Pizza makes authentic NY pizza, making their dough in-house, using the finest cheese and ingredients available. No soggy crust or watered down pizza sauce, only the best. They also serve Chicken Wings, Philly Steak Subs, Calzones and Salads. Romeo's NY Pizza is currently in negotiations to open a "quick serve" Romeo's location in the Hartfield International Airport in Atlanta.

 

EDGE VIEW PROPERTIES LLC: Edge View Properties consists of 30 prime 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 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).

 

REPICCI’S GROUP: Repicci’s Group offers franchisees for the operation of “Repicci’s Italian Ice” franchises. These franchised stores specialize in the distribution of nonfat frozen confections.

 

The number of franchise agreements in force as of December 31, 2016 was 48, five of which are “mobile” unites.

 

The Company obligates itself to each franchisee to perform the following services:

 

1.       Designate an exclusive territory;

2.       Provide guidance and approval for selection and location of site;

3.       Provide initial training of franchisee and employees;

4.       Provide a company manual and other training aids.

 

The Company has developed a new “Mobile Franchise Opportunity”. The total investment for the new opportunity ranges from $155,600 to $165,000, as follows: $125,000 for a new Mercedes Sprinter Van, customized for the franchisee, $25,000 for the franchise fee, the balance for product. The Company’s obligation is as above, except for Item #3, training is specific to the new opportunity.

 

 

 

 

AMERICAN CYCLE FINANCE, INC.: American Cycle Finance, Inc. (ACF) was formed in 2015 to take advantage of a unique financing opportunity in the U.S. sub-prime motorcycle finance market. ACF believed a lack of sub-prime financing options, the flat slope of collateral deprecation curves and overall flat sales in the motorcycle market since the 2008 recession presented a market void that ACF could fill. The U.S. new motorcycle market is a $350 million annual market and the used motorcycle market is estimated to be $1.3 billion annually, representing approximately 3% of the size of the U.S. auto market. There are approximately 10,000 dealers in the U.S., of which 2,500 are franchise dealers. ACF focuses on providing motorcycle financing for these franchise dealers. ACF is able to finance customers with lower FICO scores than the larger competitors. Currently, the majority of ACF’s sales comes from approximately 40 dealers. ACF hopes to double its dealer base during 2017.

 

Critical Accounting Estimates

 

The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. Our actual results may differ from these estimates.

 

We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different results when using different assumptions. We have discussed these critical accounting estimates, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein with the audit committee of our Board of Directors. We believe our accounting policies specific to share-based compensation expense and estimation of the fair value of derivative liability involve our most significant judgments and estimates that are material to our consolidated financial statements. They are discussed further below.

 

Derivative Liability

 

Under Financial Accounting Standard Board (“FASB”), U.S. GAAP, Accounting Standards Codification, “Derivatives and Hedging”, ASC Topic 815 (“ASC 815”) requires that all derivative financial instruments be recorded on the balance sheet at fair value. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates. 

 

The Company’s convertible notes have been evaluated with respect to the terms and conditions of the conversion features contained in the notes to determine whether they represent embedded or freestanding derivative instruments under the provisions of ASC 815. When the Company determined that the conversion features contained in the notes’ carrying value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.

 

Share-based compensation expense

 

We account for the issuance of stock, stock options and warrants for services from employees and non-employees based on an estimate of the fair value of options and warrants issued using the Black-Scholes pricing model. This model’s calculations include the exercise price, the market price of shares on grant date, weighted average assumptions for risk-free interest rates, expected life of the option or warrant, expected volatility of our stock and expected dividend yield.

 

The amounts recorded in the financial statements for share-based expense could vary significantly if we were to use different assumptions. For example, the assumptions we have made for the expected volatility of our stock price have been based on the historical volatility of our stock, measured over a period generally commensurate with the expected term. If we were to use a different volatility than the actual volatility of our stock price, there may be a significant variance in the amounts of share-based compensation expense from the amounts reported.

 

 

 

 

Recent Accounting Pronouncements

 

In July 2015, FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments in this ASU should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

In August 2015, FASB issued ASU No.2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” defers the effective date ASU No. 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU No. 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU No. 2014-09. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

We do not expect the adoption of any recently issued accounting pronouncements to have a significant impact on our net results of operations, financial position, or cash flows.

 

Results of Operations

  

We had revenues of $1,155,098 and $1,599,743 for the three and six months ended June 30, 2017, respectively, compared to revenues of $209,283 and $482,579 for the same periods in 2016, an increase of 452% and 232%, respectively. Since we had various acquisitions over the past year, the increase in revenues is primarily attributable experience full revenue quarter cycles for those acquisitions. A revenue breakdown by segment is as follows:

 

		For the three months ended
		June 30, 2017				June 30, 2016
Revenues:
We Three		$	48,687			$	40,360
Romeo’s NY Pizza			150,640				168,923
Repicci’s Group			361,159				–
American Cycle Finance			594,612				–
Others			–				–
Consolidated revenues		$	1,155,098			$	209,283

 

 

		For the six months ended
		June 30, 2017				June 30, 2016
Revenues:
We Three		$	94,697			$	80,973
Romeo’s NY Pizza			284,877				383,516
Repicci’s Group			621,812				–
ACF			594,612				–
Others			3,745				18,090
Consolidated revenues		$	1,599,743			$	482,579

 

 

 

The decrease in revenues from sales of pizza during this reporting period were attributable to the decrease in number of stores. We currently have one pizza store open in 2017. The impact from such decrease was offset by the revenues from Repicci’s Group, which was acquired on August 10, 2016. The results of the operations for Repicci’s Group have been included in the consolidated financial statements since the dates of the acquisitions.

 

We had costs of sales of $897,808 and $1,177,037 for the three and six months ended June 30, 2017 compared to costs of sales of $147,254 and $284,127 for the same periods June 30, 2016. The costs of sales for the periods related to each segment are as follows:

 

		For the three months ended
		June 30, 2017				June 30, 2016
Cost of Sales:
We Three		$	45,566			$	51,000
Romeo’s NY Pizza			106,253				96,254
Repicci’s Group			420,956				–
ACF			325,033				–
Others			–				–
Consolidated cost of sales		$	897,808			$	147,254

 

		For the six months ended
		June 30, 2017				June 30, 2016
Cost of Sales:
We Three		$	79,187			$	80,970
Romeo’s NY Pizza			200,556				203,157
Repicci’s Group			572,261				–
ACF			325,033				–
Others			–				–
Consolidated cost of sales		$	1,177,037			$	284,127

 

The increase in cost of sales was primarily attributable to the acquisitions of Repicci’s Group. The results of the operations for Repicci’s Group have been included in the consolidated financial statements since the dates of the acquisitions.

 

We had operating expenses of $667,929 and $1,278,670 for the three and six months ended June 30, 2017 compared to operating expenses of $292,794 and $623,627 for the three and six months ended June 30, 2016. The increase in operating expenses during the period was primarily due to our increased level of operations due to our acquisitions and also due to an increase in professional fees associated with auditing our acquisitions. Additionally, stock based compensation increased to $300,216 for the six month period compared to $0 for the same period in 2016.

 

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 debentures and convertible notes. At June 30, 2017, we had $254,865 in cash and cash equivalents and total assets amounted to $12,538,714. At December 31, 2016 we had $62,948 of cash and cash equivalents, and total assets amounted to $2,472,009.

 

 

 

 

Net cash used in operating activities was $391,536 and $63,274 for the six months ended June 30, 2017 and 2016, respectively. The negative cash flows from operating activities during the periods were primarily attributable to the net losses of $1,371,892 and $446,213, respectively. These amounts were partially offset by non-cash expenses related to depreciation, amortization of debt discount and stock based compensation which were $91,286, $390,606 and $300,216, respectively. We also had increases in accounts payable and accrued expense of $77,778 and $52,701, respectively. In the 2016 period, the negative cash flows from operating activities were partially offset by depreciation and a note issued for services of $35,772 and $50,000. Additionally, we had increases of accrued expenses of $196,699 mostly related to accounting and auditing fees and increase in officer salaries accrual of $91,755 for the 2016 period.

 

Net cash used in investing activities was $525,481 for the six months ended June 30, 2017, compared to net cash provided by investing activities of $27,663 for the same period in 2016. Cash flows used in investing activities for the 2017 period included $572,101 to acquire the loan portfolio of ACF. Both the 2017 and 2016 periods included certain proceeds from sales of fixed assets which were $53,663 and $31,637, respectively. These fixed asset sales related to our mobile home leasing business.

 

Net cash provided by financing activities was $1,057,081 and $66,418 for six months ended June 30, 2017 and 2016, respectively. The cash flows from financing activities during the six months ended June 30, 2017 were primarily attributable to proceeds of convertible notes payable and notes payable in the amounts of $465,000 and $528,887, respectively. For the 2016 period we had cash proceeds of $31,197 from a related party loans, $24,000 from the sales of common stock, and $20,684 in proceeds from a convertible note.

 

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 products. In addition, increases in expenses or delays in product development 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, development of our products, and implementation of our business plan, we need additional financing. We are currently attempting to obtain additional working capital in an equity transaction.

 

Off Balance Sheet Arrangements

 

As of June 30, 2017, we had no off balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable

 

Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures

 

(a)

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,+ summarized, and reported within the required time periods, and that such information is accumulated and communicated to our management, including our Chairman, Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure. Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer has concluded that these disclosure controls and procedures are ineffective. There have been no changes to our disclosure controls and procedures during the three months ended June 30, 2017. 

 

There has been no change in our internal control over financial reporting during the three months ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Since the most recent evaluation date, there have been no significant changes in our internal control structure, policies, and procedures or in other areas that could significantly affect our internal control over financial reporting.

 

(b)

Changes in Internal Controls

 

There were no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no events under any bankruptcy act, any criminal proceedings and any judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the last five years.

 

Item 1A. Risk Factors

 

There have been no material changes in our risk factors from those disclosed in the Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Submission of Matters to Vote of Security Holders

 

None.

 

Item 5. Other Information

 

The following information relates to certain events occurring during the second quarter of 2017. All of these events have previously been reported on Forms 8-K during the second quarter.

 

Amendments to Articles of Incorporation

 

On July 11, 2017, the Board of Directors of Cardiff International, Inc., a Florida corporation (the “Corporation”) increased it authorized capital to Five Hundred Million (500,000,000) shares of Common Stock, par value of $0.001. This increase was authorized for a) upcoming acquisitions; b) increased growth; c) to maintain control (the “Control Block”); d) compensate employees. In the event shares are issued, they will be issued as “restricted shares”.

 

Change in Independent Registered Accounting Firm

 

On July 20, 2017, the Registrant engaged Malone Bailey, LLP. as its independent registered public accounting firm. During the two most recent fiscal years and the interim periods preceding the engagement, the registrant has not consulted Malone Bailey, LLP regarding any of the matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-B. The decision to change independent registered accountants was approved by the Company’s Board of Directors, as the Company has no audit committee.

 

First Quarter Restatement

 

On July 24, 2017, the Board of Directors (the “Board”) of Cardiff International, Inc. (the “Company”) concluded that the unaudited financial statements for the 1^st Quarter 2017 (the “Relevant Period”), as previously filed as part of the Company’s previously issued unaudited consolidated financial statement as of and for the quarter ended March 31, 2017 should no longer be relied upon. The Company will restate its unaudited consolidated financial statements for the Restated Period to reflect adjustments in the fair market value.

 

The Company has concluded to restate its financial statements for the Relevant Period to correct certain accounting and disclosure errors, primarily associated with accruals related to non-cash third-party service payments. The Company and its advisors are working expeditiously to complete this review and the Company intends to bring current its financial reporting obligations as soon as practicable. It is expected the amendment to the March 31, 2017 will be filed on or about August 21, 2017.

 

 

 

 

Termination of Consulting Service Support Corporation Acquisition

 

As previously disclosed, on March 10, 2017 Cardiff International, Inc. a company incorporated in the State of Florida ("Cardiff"), entered into an Acquisition Agreement (the “Agreement”) to purchase Consulting Services Support Corporation, Inc. (“CSSC”), a company incorporated in the State of Illinois in a Tax-Free Exchange under section 368 (a)(1)(B) of the United States Internal Revenue Code of 1986. CSSC failed to comply with the terms of the Agreement and as a result Cardiff has terminated the Agreement effective immediately.

 

The Company placed in reserve 10,000,000 shares of Convertible Preferred “J” stock of which 6,056,227 shares were to be issued pursuant to the Agreement. The Preferred “J” shares have a 1 to 1.25 conversion rate (the “Conversion”) governed by a Lock-Up/Leak-Out Agreement in exchange for 100% of shares of CSSC represented by all assets valued at $1,544,338.

 

The Company believes the termination and revocation of this Acquisition is in the best interest of our Shareholders. The Asset Acquisition Agreement was attached as Exhibit 1A to the Current Report on Form 8-K filed by Cardiff July 24, 2017 and which is incorporated herein by reference.

 

The decision to revoke the CSSC Acquisition Agreement was approved by the Company’s Board of Directors.

 

Acquisition of American Cycle Finance, Inc.

 

On or about April 1, 2017, the Company signed a definitive merger agreement under which American Cycle will merge into Cardiff International as its subsidiary. The acquisition is an all-stock transaction valued at approximately $5 million.

 

Cardiff’s total assets will increase to approximately $12 million including the $7 million in acquired American Cycle assets. This market expanding merger provides entry into attractive markets with strong demographics including 204 motorcycle dealers located throughout America. In 2016, American Cycle reported $6.5 million in original loans; a loan portfolio of $7 million in assets; loan losses of less than 1.6% and revenues of $1.3 million.

 

American Cycle (formally, “Ride Today Acceptance, LLC” ) was founded in January, 2015, in Beverly, Massachusetts.

 

American Cycle capitalizes on a unique and profitable financing opportunity in the U.S. sub-prime motorcycle financing market. American Cycle has spent the last two years building a financial infrastructure and expanding its dealer footprint. As of January 1st, 2017, American Cycle has 204 dealers nationwide. Unlike the subprime auto industry, American Cycle provides customers two major advantages over a subprime auto loan: 1.) favorable payment terms; 2.) assets with a slower depreciation rate.

 

In connection with the closing of the acquisitions, on the effective date of the signed Forward Acquisition Agreement, a Preferred “K” Class of stock was established with a value of $0.25 per share ("American Cycle’s Preferred “K” Class Stock) as consideration. The Preferred “K” Class of stock has a par value $0.001 per share. The preferred share was adjusted as a result of the authorization and declaration of a special distribution to American Cycle’s stockholders at $0.25 per share with a conversion rate of 1 to 1.25 Common Stock with a Lock-Up/Leak-Out provision limiting the sale of stock for 6 months after which conversions and sales are limited to 25% of their portfolio per year, pursuant to the terms of the Acquisition Agreement.

 

Pending the results of the independent audit, and unanimous debtholder participation, CDIF will issue 9,607,840 shares of CDIF Preferred “K” Shares to American Cycle’s shareholders as Stock Consideration as agreed to in the signed Forward Acquisition Agreement. Based on the price of CDIF’s Common stock at $0.25 per share, the acquisition consideration represents an approximate value of $2,401,960. Upon completion of the independent audit any changes will be announced in an amended 8K within the required 71 day period.

 

On April 5, 2017, CDIF’s Board of Directors approved retaining current founders to serve as senior management of American Cycle.

 

There are no family relationships of our directors or executive officers.

 

 

 

 

Item 6. Exhibits

 

31.1	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instances Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

 

* To be filed by amendment.

 

 

 

 

 

 

 

 

 

 

SIGNATURE

 

In accordance with the requirements of the Exchange Act, the Company has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

 

Dated: August 21, 2017	CARDIFF INTERNATIONAL, INC.
	By:	/s/ Alex Cunningham
		Alex Cunningham Chief Executive Officer and Principal Accounting Officer
	By:	/s/ Daniel Thompson
		Daniel Thompson
		Chairman