Notes
to Unaudited Consolidated Condensed Financial Statements
June
30, 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 June 30, 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, 2019
included on the Company’s Form 10-K. The results of the six months ended June 30, 2020 are not necessarily indicative of
the results to be expected for the full year ending December 31, 2020.
In
the opinion of management, all adjustments necessary to present fairly the financial position as of June 30, 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 six months ended June 30, 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 June 30, 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 $80,038,298.
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
|
|
June 30,
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 six months ended June 30,2020, the Company issued $86,100 of convertible debt as detailed in the table below:
The
following table summarizes the convertible notes as of June 30, 2020:
Note Holder
|
|
Date
|
|
Maturity
Date
|
|
Interest
|
|
|
Balance
June 30,
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
|
|
|
|
25,000
|
|
Oasis Capital, LLC
|
|
Various
|
|
Various
|
|
|
10
|
%
|
|
|
875,641
|
|
|
|
875,641
|
|
Livingston Asset Management, LLC
|
|
4/1/20
|
|
12/31/20
|
|
|
10
|
%
|
|
|
25,000
|
|
|
|
-
|
|
Livingston Asset Management, LLC
|
|
5/1/20
|
|
1/31/21
|
|
|
10
|
%
|
|
|
25,000
|
|
|
|
-
|
|
Livingston Asset Management, LLC
|
|
5/20/20
|
|
2/20/21
|
|
|
10
|
%
|
|
|
10,000
|
|
|
|
-
|
|
Livingston Asset Management, LLC
|
|
6/1/20
|
|
2/1/21
|
|
|
10
|
%
|
|
|
25,000
|
|
|
|
-
|
|
Livingston Asset Management, LLC
|
|
6/11/20
|
|
3/10/21
|
|
|
10
|
%
|
|
|
1,100
|
|
|
|
-
|
|
Total convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before discount
|
|
|
|
|
|
|
|
|
|
|
1,815,495
|
|
|
|
1,729,395
|
|
Less: debt discount
|
|
|
|
|
|
|
|
|
|
|
(44,784
|
)
|
|
|
(35,547
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
1,770,711
|
|
|
$
|
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, LLC (“Livingston”). During the six months ended June 30, 2020, Livingston converted $28,732 of accrued
interest plus related expenses into approximately 73 million shares
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
is 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
|
|
Derivative liability incurred on new issuances
|
|
|
56,101
|
|
Change in fair value of derivative liability
|
|
|
95,169
|
|
Balance at June 30, 2020
|
|
$
|
623,875
|
|
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 June 30, 2020
|
|
330.14
|
%
|
|
.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 June 30,, 2020, 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
6/30/2020
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
$0.001 – 0.0071
|
|
|
22,669,092
|
|
|
3.44 years
|
|
$
|
0.0011
|
|
NOTE
7 – COMMON STOCK
During
the six months ended June 30, 2020, the Company issued 73,343,869 shares of common stock as follows:
Date
|
|
Recipient
|
|
Shares
issued
|
|
|
|
|
|
|
|
5-27-20
|
|
Livingston Asset Management, LLC
|
|
|
29,288,000
|
|
6-12-20
|
|
Trillium Partners, LP
|
|
|
11,936,286
|
|
6-29-20
|
|
Trillium Partners, LP
|
|
|
16,059,792
|
|
6-29-20
|
|
Livingston Asset Management, LLC
|
|
|
16,059,792
|
|
|
|
Total
|
|
|
73,343,869
|
|
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 June 30, 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 June 30, 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 June 30, 2020,
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 June 30, 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.
The Company has the following balances
in regards to the Series E Preferred stock (“Series E”) as of:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Device Corp.
|
|
$
|
166,331
|
|
|
$
|
166,331
|
|
Geneva Roth Remark Holdings, Inc.
|
|
|
34,985
|
|
|
|
34,985
|
|
Total
|
|
$
|
201,316
|
|
|
$
|
201,316
|
|
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 for $1
per share. As of June 30, , 2020, the Company has received $166,331 for the purchase of the Series E. 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 June 30, 2020, and December 31, 2019, there are 34,985 and 34,985 shares
of Series E preferred stock outstanding, respectively. For purposes of consistency, these securities are also recorded as
Mezzanine Equity.
NOTE
9 – RELATED PARTY TRANSACTIONS
On
July 8, 2019, the Company executed an employment agreement with Conrad Huss, the new CEO. The agreement provides for a salary
of $10,000 per month. As of June 30, 2020,
$232,000 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 June
30, 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 June 30, 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 June 30, 2020, the Company issued 47,932,476 shares for the conversion of $1,300 of debt principal, $18,131 of
accrued interest and $2,000 in fees as follows below:
Creditor
|
|
Date
|
|
Shares
|
|
|
Principal
|
|
|
Accrued
interest
|
|
|
Fees
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
47,932,476
|
|
|
$
|
1,300
|
|
|
$
|
18,131
|
|
|
$
|
2,000
|
|
|
$
|
20,131
|
|
Issuance
of Convertible debt
Subsequent
to June 30, 2020, the Company issued $50,000 in notes for consulting services and $4,400 in notes for general corporate
purposes.