Notes to Unaudited Consolidated Condensed
Financial Statements
March 31, 2020
NOTE 1 – SUMMARY OF BUSINESS AND
BASIS OF PRESENTATION
Organization and Business
Cruzani, Inc. (“Cruzani” or
the “Company”) is a franchise development company that builds and represents popular franchise concepts, and other
related businesses, throughout the United States as well as international markets. The Company was originally formed as a limited
liability company on February 5, 1999 under the name The Powerhouse, L.L.C. pursuant to the laws of the State of Oklahoma. On November
9, 2006, Powerhouse Productions, L.L.C. filed Articles of Conversion changing the entity from a limited liability company to a
corporation under the name Harcom Productions, Inc. On January 25, 2010, Articles of Merger were filed with the State of Oklahoma
merging U.S. Highland, Inc., an Oklahoma corporation into Harcom Productions, Inc. and the name of the corporation was changed
to US Highland, Inc. US Highland, Inc. was a recreational power sports Original Equipment Manufacturer (“OEM”), developing
motorcycles, quads, single cylinder engines, and v-twin engines under its own brand and for other OEMs. During 2017, the Company
exited the recreational power sports OEM and leisure activity vehicles markets.
On June 29, 2018, the Company filed Amended
and Restated Articles of Incorporation with the State of Nevada to change its name to Cruzani, Inc.
On June 30, 2018, Supreme Sweets
Acquisition Corp. (n/k/a Oventa, Inc.), a subsidiary of the Company, and the Company (collectively, the “Company”)
entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Supreme Sweets Inc. and 2498411 Ontario,
Inc., as sellers (collectively, the “Seller”), pursuant to which in exchange for CAD $200,000 and a twenty percent
(20%) interest in Oventa, Inc., the Company agreed to acquire the trade secret assets of Seller upon the terms and subject to the
conditions set forth in the Asset Purchase Agreement. A second closing occurred on July 31, 2018, pursuant to which the
Company acquired the furniture, fixtures and equipment of Seller in exchange for CAD $100,000. Seller is engaged in the business
of preparing delicious snacks, pastries and baked goods with high quality ingredients for exceptional taste, including low calorie
and gluten-free alternatives. The Asset Purchase Agreement included a provision, pursuant to which the Company could unwind the
transaction if certain milestones were not achieved. The milestones contemplated in the Asset Purchase Agreement were not met,
and accordingly, on February 7, 2019, effective as of December 31, 2018, the Company terminated
the Asset Purchase Agreement with Supreme Sweets Inc. and 2498411 Ontario, Inc, by written notice to the Seller, and the
Company unwound the transaction. The $339,813 of capital injected into Oventa, Inc was written off as uncollectable as of March
31, 2020.
On September 27, 2018, the Company
entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Sandrea Gibson, as seller (the “Seller”),
and Recipe Food Co., as the target (the “Target”), pursuant to which in exchange for up to CAD $237,000, the Company
agreed to acquire 80% of the issued and outstanding stock of the Target from the Seller upon the terms and subject to the conditions
set forth in the Stock Purchase Agreement. There were difficulties integrating the Target into the Company group, which forced
the Company to cease injecting additional capital into the Target and recognize a loss of $102,552 for amounts that had already
been loaned to the Target.
On July 8, 2019, Mr. Dickson entered into
a Securities Purchase Agreement (“Purchase Agreement”) with Conrad Huss to sell 5,000,000 shares of Series C Preferred
and 5,000 shares of Series B preferred Stock held by Mr. Dickson. As a result, Mr. Huss acquired the right to vote 99.06 % of the
voting control of the Company. The Series B Preferred Stock is also convertible into common stock which, in the aggregate, would
represent up to .01% of the outstanding common stock after the conversion. The Series B Preferred Stock is also convertible into
common stock which, in the aggregate, would represent up to 99.05% of the outstanding common stock after the conversion.
On July 8, 2019, Everett Dickson, who had
been the sole officer of the Company, resigned as an officer of the Company, and Conrad Huss was appointed the Interim President
and Chief Executive Officer of the Company. Mr. Huss is the sole beneficial owner of 5,000,000 and 5,000 shares of Series B and
C Preferred Stocks, respectively. Mr. Dickson also resigned as a director of the Company, effective on July 8th, 2019. Mr. Dickson’s
resignation was not the result of any disagreement with the management of the Company.
Basis of Presentation
The accompanying unaudited interim consolidated
condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”). These unaudited consolidated condensed financial statements should be read in conjunction
with the audited financial statements and footnotes for the year ended December 31, 2018 included on the Company’s Form 10-K.
The results of the nine months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year
ending December 31, 2019.
In the opinion of management, all adjustments
necessary to present fairly the financial position as of March 31, 2020 and the results of operations and cash flows presented
herein have been included in the financial statements. All such adjustments are of a normal and recurring nature. Interim results
are not necessarily indicative of results of operations for the full year.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
We maintain our cash in bank deposit accounts,
the balances of which at times may exceed federally insured limits. We continually monitor our banking relationships and consequently
have not experienced any losses in our accounts. We believe we are not exposed to any significant credit risk on cash.
Reclassifications
Certain reclassifications have been made
to the prior year financial information to conform to the presentation used in the financial statements for the three months ended
March 31, 2020. There is no effect on the accumulated deficit as the result of these reclassifications.
Principles of Consolidation
The accompanying unaudited interim consolidated
condensed financial statements include the accounts of the Company. All financial information has been prepared in conformity with
accounting principles generally accepted in the United States of America. All significant intercompany transactions and balances
have been eliminated.
Fair value of financial instruments
The Company follows paragraph 825-10-50-10
of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37
of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial
instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted
in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and
comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which
prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy
gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority
to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
|
Level 1:
|
Quoted market prices available in active markets for identical
assets or liabilities as of the reporting date.
|
|
Level 2:
|
Pricing inputs other than quoted prices in active markets
included in Level 1, which are either directly or indirectly observable as of the reporting date.
|
|
Level 3:
|
Pricing inputs that are generally unobservable inputs and
not corroborated by market data.
|
The carrying amount of the Company’s
financial assets and liabilities, such as cash, prepaid expenses and accrued expenses approximate their fair value because of the
short maturity of those instruments. The Company’s notes payable approximates the fair value of such instruments based upon
management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at
March 31, 2020 and December 31, 2019.
Recently issued accounting pronouncements
The Company has implemented all new accounting
pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise
disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might
have a material impact on its financial position or results of operations.
NOTE 2 – GOING CONCERN
The accompanying unaudited interim consolidated
condensed financial statements have been prepared in conformity with generally accepted accounting principles which contemplate
continuation of the Company on a going-concern basis. The going concern basis assumes that assets are realized, and liabilities
are extinguished in the ordinary course of business at amounts disclosed in the consolidated financial statements. The Company
has incurred recurring losses from operations and has an accumulated deficit of $79,705,851. The Company’s ability to continue
as a going concern depends upon its ability to obtain adequate funding to support its operations through continuing investments
of debt and/or equity by qualified investors/creditors, internally generated working capital and monetization of intellectual property
assets. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company’s
development and marketing efforts.
NOTE 3 – LOANS PAYABLE
The loan payable balances are as follows:
|
|
Rate
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Loan 1
|
|
1%
|
|
$
|
27,000
|
|
|
$
|
27,000
|
|
Loan 2
|
|
1%
|
|
|
3,000
|
|
|
|
3,000
|
|
Loan 3
|
|
8%
|
|
|
64,000
|
|
|
|
64,000
|
|
Loan 4
|
|
8%
|
|
|
160,500
|
|
|
|
160,500
|
|
Total
|
|
|
|
$
|
254,500
|
|
|
$
|
254,500
|
|
Above notes are past due
as of the issuance of these financial statements.
NOTE 4 – CONVERTIBLE NOTES
During the quarter ended March 31,2020, the Company did not
issue any convertible debt
The following table summarizes the convertible
notes as of March 31, 2020:
Note Holder
|
|
Date
|
|
Maturity
Date
|
|
Interest
|
|
|
Balance
March 31,
2020
|
|
|
Balance
December 31,
2019
|
|
Third party individual
|
|
7/25/13
|
|
12/31/16
|
|
|
12
|
%
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Livingston Asset Management, LLC (See Note
One)
|
|
2/11/16
|
|
2/11/17
|
|
|
24
|
%
|
|
|
68,004
|
|
|
|
68,004
|
|
GW Holdings Group, LLC
|
|
5/17/16
|
|
5/17/17
|
|
|
24
|
%
|
|
|
24,000
|
|
|
|
24,000
|
|
Travel Data Solutions
|
|
11/18/17
|
|
11/30/19
|
|
|
10
|
%
|
|
|
100,000
|
|
|
|
100,000
|
|
GW Holdings Group, LLC
|
|
3/16/18
|
|
3/15/19
|
|
|
24
|
%
|
|
|
36,750
|
|
|
|
36,750
|
|
Livingston Asset Management,LLC
|
|
7/19/19
|
|
3/31/20
|
|
|
10
|
%
|
|
|
100,000
|
|
|
|
100,000
|
|
Travel Data Solutions
|
|
1/18/2019
|
|
1/31/20
|
|
|
10
|
%
|
|
|
|
|
|
|
25,000
|
|
Oasis Capital, LLC
|
|
various
|
|
various
|
|
|
24
|
%
|
|
|
875,641
|
|
|
|
875,641
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
1,729,395
|
|
|
$
|
1,729,395
|
|
|
|
|
|
Less debt discount
|
|
|
|
|
(-
|
)
|
|
|
(35,547
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,729,395
|
|
|
$
|
1,693,848
|
|
Note One: On February 24, 2020, Adar Bays, Inc. the prior holder
of this note sold its entire interest in the Note to Livingston Asset Management, Inc.
NOTE 5 – DERIVATIVE LIABILITIES
The embedded conversion options of the
Company’s convertible debentures summarized in Note 4, and its convertible preferred Series E stock. contain conversion features
that qualify for embedded derivative classification. The fair value of these liabilities are re-measured at the end of every reporting
period and the change in fair value is reported in the statement of operations as a gain or loss on derivative financial instruments.
The table below sets forth a summary of
changes in the fair value of the Company’s Level 3 financial liabilities:
Balance at December 31, 2019
|
|
$
|
472,605
|
|
Change in fair value of derivative liability
|
|
|
(19,938
|
)
|
Balance at March 31, 2020
|
|
$
|
452,667
|
|
The Company uses Level 3 inputs for its
valuation methodology for its conversion option liabilities as their fair values were determined by using the Binomial option pricing
model based on various assumptions. The model incorporates the price of a share of the Company’s common stock (as quoted
on the Over the Counter Bulletin Board), volatility, risk free rate, dividend rate and estimated life. Significant changes in any
of these inputs in isolation would result in a significant change in the fair value measurement. As, required, these are classified
based on the lowest level of input that is significant to the fair value measurement.
The following table shows the assumptions
used in the calculations of its derivatives:
|
|
Expected
Volatility
|
|
Risk-free
Interest Rate
|
|
|
Expected
Dividend Yield
|
|
|
Expected Life
(in years)
|
At December 31, 2019
|
|
291.74%
|
|
|
2.45
|
%
|
|
|
0
|
%
|
|
0.25 – 0.50
|
At March 31, 2020
|
|
262.34%
|
|
|
.62
|
%
|
|
|
0
|
%
|
|
0.25 – 0.50
|
NOTE 6 – WARRANTS
In connection with the issuance of the
convertible note (the “Note”) with L2 Capital, LLC (“L2”) and funding of the initial tranche of $50,000
on the Note, the Company also issued a common stock purchase warrant to purchase up to 381,905 shares of the Company’s common
stock pursuant to the terms therein as a commitment fee. At the time that each subsequent tranche under the Note is funded by L2
in cash, then on such funding date, the warrant shares shall immediately and automatically be increased by the quotient of 100%
of the face value of the respective tranche and 110% of the VWAP of the common stock on the Trading Day (as defined in the Note)
immediately prior to the funding date of the respective tranche. As of December 31, 2018, the Company had received multiple tranches
for which it issued warrants to purchase shares of the Company’s common stock.
These warrants have a variable exercise
price per the above and expire in five years. The aggregate fair value of the warrants, which was allocated against the debt
proceeds totaled $280,438 based on the Black Scholes Merton pricing model using the following estimates: exercise price ranging
from $0.001 – 0.0071, 2.80% – 2.94% risk free rate, 252.42 – 258.24% volatility and expected life of the warrants
of 5 years. The fair value was credited to additional paid in capital and debited to debt discount to be amortized over the term
of the loan.
Range of Exercise Prices
|
|
Number Outstanding 3/31/2020
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted Average
Exercise Price
|
|
$0.001 – 0.0071
|
|
|
22,669,092
|
|
|
3.69 years
|
|
$
|
0.0011
|
|
NOTE 7 – COMMON STOCK
During the three months ended March 31,
2020 there were no issuances of common stock.
NOTE 8 – PREFERRED STOCK
Series A Convertible Preferred Stock,
has a par value of $0.01, may be converted at the holder’s election into shares of common stock at the conversion rate of
ten shares of common stock for one share of Series A Preferred Stock. Each share is entitled to 10 votes, voting with the
common stock as a single class, has liquidation rights of $2.00 per share and is not entitled to receive dividends. As of March
31, 2020, and December 31, 2019, there are 3,381,520 and 3,381,520 shares of Series A preferred stock outstanding, respectively.
Series B Convertible Preferred Stock,
has a par value of $0.01, may be converted at the holder’s election into shares of common stock at the conversion rate of
4,000 shares of common stock for one share of Series B Preferred Stock. Each share is entitled to 4,000 votes, voting with
the common stock as a single class, has liquidation rights of $0.01 per share and is not entitled to receive dividends. As of March
31, 2020, and December 31, 2019, there are 5,000 and 5,000 shares of Series B preferred stock outstanding, respectively.
Series C Convertible Preferred Stock,
has a par value of $0.01, may be converted at the holder’s election into shares of common stock at the conversion rate of
400 shares of common stock for one share of Series C Preferred Stock. Each share is entitled to 400 votes, voting with the
common stock as a single class, has liquidation rights of $0.01 per share and is entitled to receive four hundred times the dividends
declared and paid with respect to each share of Common Stock. As of March 31, 20120, and December 31, 2019, there are 5,000,000
and 5,000,000 shares of Series C preferred stock outstanding, respectively.
Series D Convertible Preferred Stock,
has a par value of $0.0001, may be converted at a ratio of the Stated Value plus dividends accrued but unpaid divided by the fixed
conversion price of $0.0015, which conversion price is subject to adjustment. Series D is non-voting, has liquidation rights to
be paid in cash, before any payment to common or junior stock, 140% of the Stated Value ($2.00) per share plus any dividends accrued
but unpaid thereon and is entitled to 8% cumulative dividends. As of March 31, 2020, and December 31, 2019, there are 125,000 and
125,000 shares of Series D preferred stock outstanding, respectively.
Series E Convertible Preferred Stock,
has a par value of $0.001, and a stated value of $1.00 per share, subject to adjustment. The shares of Series E Convertible Preferred
Stock can convert at a conversion price that is equal to the amount that is 61% of the lowest trading price of the Company’s
common stock during the 20 trading days immediately preceding such conversion. The shares of Series E Convertible Preferred Stock
are subject to redemption by the Company at its option from the date of issuance until the date that is 180 days therefrom, subject
to premium that ranges from 120% to 145%, increasing by 5% during each 30-day period following issuance. Series E carries a 12%
cumulative dividend, which will increase to 22% upon an event of default, is non-voting, and has liquidation rights to be paid
in cash, before any payment to common or junior stock. The Series E are mandatorily redeemable after twelve months, and therefore
have been classified as mezzanine equity.
On July 1, 2018, the Company entered into
a Stock Purchase Agreement with Device Corp. (“Device”) whereby Device will purchase up to $250,000 Series E preferred
stock for $1 per share. As of December 31, 2019, the Company has received $166,331 for the purchase of the Series E. Originally,
these purchases were recorded as debt because the Preferred shares were not issued. As of the Balance sheet date and the date of
this report, these shares have not been issued to the Purchaser. As such, the Company feels these securities should be classified
as Mezzanine equity until they are fully issued.
On January 15, 2019, the Company entered
into a Stock Purchase Agreement with Geneva Roth Remark Holdings, Inc. (“Geneva”) whereby Geneva will purchase 53,000
shares of Series E preferred stock for $53,000. As of March 31, 2020, and December 31, 2019, there are 34,985 and 34,985 shares
of Series E preferred stock outstanding, respectively. As of March 31, 2020, the Company fair valued its Series E preferred stock
derivative liability at $40,000.
NOTE 9 – RELATED PARTY TRANSACTIONS
On
July 8, 2019, the Company executed an employment agreement with Conrad Huss, the new CEO. The agreement is effective for three
months with a salary of $10,000 per month. As of March 31, 2020, $202,000 has been
credited to accrued compensation.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
During the normal course of business, the
Company may be exposed to litigation. When the Company becomes aware of potential litigation, it evaluates the merits of the case
in accordance with FASB ASC 450-20-50, Contingencies. The Company evaluates its exposure to the matter, possible legal or settlement
strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and
can be reasonably estimated, it establishes the necessary accruals.
On September 21, 2018, Pro Drive Outboards,
LLC (“Pro-Drive”) filed a lawsuit against the Company, in which Pro-Drive alleges that the Company breached a contract
that Pro-Drive entered into with the Company. Pro-Drive is seeking damages in excess of $500,000. The Company has filed an answer,
including the defenses of defective service of process and statute of limitations and a motion to dismiss. The judge granted a
motion to dismiss, and the plaintiff’s deadline to appeal has passed, thus concluding
the matter. contingent liabilities that should be reflected in the financial statements.
On February 13, 2017, Baum Glass &
Jayne PLLC (“Plaintiff”) obtained a default judgment against the Company in the amount of $27,083.74. Plaintiff has
not attempted enforced collection. The amount was included in accounts payable as of March 31, 2020 and December 31, 2019.
On June 20, 2018, GW Holdings Group, Inc.
(“GW”) filed a lawsuit against the Company, in which GW alleges that the Company breached two Stock Purchase Agreements
that GW entered into with the Company. On July 11, 2018, the Company filed a motion to dismiss which was granted by the court on
March 13, 2019. A notice of appeal filed by GW is pending. As of March 31, 2020, the Company has a note payable balance of $60,750
due to GW. Since GW’s original complaint has been dismissed and no further action has been taken by the court, no additional
liability has been accrued.
NOTE 11 – SUBSEQUENT EVENTS
Issuance of shares of common stock
Subsequent to March 31, 2020, the Company
issued 121,276,345 shares for thee conversion of $1,300 of principal interest on debt, 45,563 of accrued interest and $6,000 in
fees as follows below:
Creditor
|
|
Date
|
|
Shares
|
|
|
Principal
|
|
|
Accrued interest
|
|
|
Fees
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Livingston Asset Management LLC
|
|
27-May-20
|
|
|
29,288,000
|
|
|
$
|
-
|
|
|
$
|
11,301
|
|
|
$
|
1,000
|
|
|
$
|
12,301
|
|
Trillium Partners, LP
|
|
12-Jun-20
|
|
|
11,936,286
|
|
|
|
-
|
|
|
|
4,013
|
|
|
|
1,000
|
|
|
|
5,013
|
|
Trillium Partners, LP
|
|
29-Jun-20
|
|
|
16,059,792
|
|
|
|
-
|
|
|
|
6,709
|
|
|
|
1,000
|
|
|
|
7,709
|
|
Livingston Asset Management LLC
|
|
29-Jun-20
|
|
|
16,059,792
|
|
|
|
-
|
|
|
|
6,709
|
|
|
|
1,000
|
|
|
|
7,709
|
|
Trillium Partners, LP
|
|
21-Jul-20
|
|
|
17,545,881
|
|
|
|
-
|
|
|
|
6,369
|
|
|
|
1,000
|
|
|
|
7,369
|
|
Trillium Partners, LP
|
|
29-Jul-20
|
|
|
30,386,595
|
|
|
|
1,300
|
|
|
|
10,462
|
|
|
|
1,000
|
|
|
|
12,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
121,276,345
|
|
|
$
|
1,300
|
|
|
$
|
45,563
|
|
|
$
|
6,000
|
|
|
$
|
52,863
|
|
Issuance of Convertible debt
Subsequent to March 31, 2020, the Company
issued $125,000 in notes for consulting services and $15,600 in notes for general corporate purposes.