CARDIFF INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
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 are unaudited and 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 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, 2017 and 2016 thereto contained in the Annual Report
on Form 10-K for the year ended December 31, 2017.
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 Lexington Corp. (“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, and income-producing commercial real estate properties, 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 businesses with little to no debt, seeking support with both financing and management that had the ability to offer
a return to investors.
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.
To date, Cardiff consists of the following wholly-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;
Red Rock Travel Group, acquired July31, 2018
Platinum Tax Defenders, acquired July 31, 2018
2.
BASIS OF PRESENTATION,
AND GOING CONCERN
Basis of Presentation
The accompanying condensed consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States of America, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures have been omitted pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated
financial statements include normal recurring adjustments that are necessary for a fair presentation of the results for the interim
periods presented. These financial statements should be read in conjunction with our audited consolidated financial statements
and notes thereto for the fiscal year ended December 31, 2017 included in our Annual Report on Form 10-K. The results of operations
for the three and nine months ended September 30, 2018 are not necessarily indicative of results to be expected for the full fiscal
year or any other periods.
The preparation of the consolidated financial
statements in conformity with U.S. generally accepted accounting principles requires management to make a number of estimates and
judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures. Actual results may differ
from these estimates.
Revenue Recognition
Adoption of ASC Topic 606, "Revenue
from Contracts with Customers"
On January 1, 2018, we adopted Topic 606
using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for
reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and
continue to be reported in accordance with our historic accounting under Topic 605.
There was no impact to the opening
balance of accumulated deficit or revenues for the nine months ended September 30, 2018, as a result of applying Topic 606.
The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying
the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction
price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when
the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control
of the products transfers to the customer.
The Company generates revenue from our
subsidiaries primarily on a cash basis for sale of food items and monthly rentals of mobile homes. As allowed by a practical expedient
in Topic 606, the entity recognizes revenue in the amount to which the entity has a right to invoice. The term between invoicing
and when payment is due is not significant.
Our segmented revenue is disclosed more
fully in our financial statements, see
footnote 10
for further details.
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 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 September 30, 2018, the Company had a working capital deficit of $7,440,414 and a
shareholders’ deficit of $5,340,742. As further described in Notes 5 and 6, the Company is in default with various Notes
and Convertible Notes Payable. 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 previous independent registered public
accounting firm, in its report on the Company’s December 31, 2017 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 a significant reduction in or cessation of operations.
Property and Equipment
Property and equipment are carried at cost.
Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures
for maintenance and repairs are charged to expense as incurred. Depreciation and amortization of property and equipment is provided
using the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:
Classification
|
|
|
Useful Life
|
|
Equipment, furniture and fixtures
|
|
|
5 - 7 years
|
|
Leasehold improvements
|
|
|
10 years or lease term, if shorter
|
|
During the nine months ended September
30, 2018, the Company disposed of $104,886 fixed asset and related liabilities related to a company-owned franchise, resulting
in net cash flow of $91,847 and a gain on sale of $874 from disposal.
Fair Value
ASC 820 Fair Value Measurements and Disclosures
(“ASC 820”) defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair
value measurements. It defines fair value as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels
of inputs that may be used to measure fair value:
Level 1: Observable inputs such as quoted
prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices
that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and model-driven
valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be obtained from, or corroborated
by, third-party pricing services.
Level 3: Unobservable inputs to measure
fair value of assets and liabilities for which there is little, if any market activity at the measurement date, using reasonable
inputs and assumptions based upon the best information at the time, to the extent that inputs are available without undue cost
and effort.
The following table sets forth a reconciliation
of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Fair Value of Derivative Liability – December 31, 2017
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,236,656
|
|
|
$
|
2,236,656
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Fair Value of Derivative Liability – September 30, 2018
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,933,981
|
|
|
$
|
2,933,981
|
|
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No.
2016-02
,” Leases” (Topic 842)
which includes a lessee accounting model that recognizes two types of leases -
finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities
for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising
from a lease by a lessee will depend on its classification as a finance or an operating lease. New disclosures to help investors
and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases are
also required. These disclosures include qualitative and quantitative requirements, providing information about the amounts recorded
in the financial statements. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. The Company is currently evaluating the effect its adoption of this standard, if any, on our
consolidated financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU No. 2017-09,
“Compensation—Stock
Compensation (Topic 718): Scope of Modification Accounting”,
to provide clarity and reduce both (1) diversity in
practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change
to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions
of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments are effective for
fiscal years beginning after December 15, 2017 and should be applied prospectively to an award modified on or after the adoption
date. Early adoption is permitted, including adoption in an interim period. The Company adopted the standard on January 1, 2018,
which did not have a material impact on the financial statements.
3. ACQUISITIONS
Platinum Tax Defenders
On July 31, 2018, the Company
completed the acquisition of Platinum Tax Defenders. In connection with the closing of the acquisition, a Preferred
“L” Class of stock with a par value of $0.001 was established and issued. The Preferred “L” Class of
stock rights and privileges include voting rights, a conversion ratio of 1:1.25 and were distributed at the adjusted rate of
$0.013 per share for a total of 98.307,692 representing a value of $1,278,000. These Preferred “L” shares have a
lock-up/leak-out limiting the sale of stock for 12 months after which conversions and sales are limited to 20% of their
portfolio per year, pursuant to the terms of the Acquisition Agreement. The preliminary purchase allocation of the net assets
acquired is as follows:
|
|
Platinum Fair Value
|
|
Cash
|
|
$
|
138,906
|
|
Accounts receivable
|
|
|
105,669
|
|
Other assets
|
|
|
60,041
|
|
Property and equipment
|
|
|
6,010
|
|
Goodwill
|
|
|
2,092,048
|
|
Liabilities
|
|
|
(272,674
|
)
|
Total
|
|
$
|
2,130,000
|
|
Red Rock Travel Group
On July 31, 2018, the Company
completed the acquisition of Red Rock Travel Group. In connection with the closing of the acquisition, on July
30
th
, 2018 a Preferred “K” Class of stock with a par value of $0.001 was established and issued. The
Preferred “K” Class of stock rights and privileges include voting rights, a conversion ratio of 1:1.25 and were
distributed at the adjusted rate of $0.021 per share for a total of 8,200,562 representing a value of $175,000. These
Preferred “K” shares have a lock-up/leak-out limiting the sale of stock for 12 months after which conversions and
sales are limited to 20% of their portfolio per year, pursuant to the terms of the Forward Acquisition Agreement. The
preliminary purchase allocation of the net assets acquired is as follows:
|
Red Rock Fair Value
|
|
Cash
|
|
$
|
22,515
|
|
Intangible assets*
|
|
|
300,000
|
|
Property and equipment
|
|
|
55,286
|
|
Goodwill*
|
|
|
1,459,725
|
|
Liabilities
|
|
|
(1,662,526
|
)
|
Total
|
|
$
|
175,000
|
|
* Subsequent to the acquisition, the Company
determined that the intangible assets and goodwill should be fully impaired and written off.
The results of the operations for Platinum
and Red Rock have been included in the consolidated financial statements since the date of the acquisitions (July 31, 2018). The
following table presents the unaudited pro forma results of continuing operations for the three and nine months ended September
30, 2018 and 2017, 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 LEXINGTON CORP. AND SUBSIDIARIES
PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS
THREE
MONTHS ENDED SEPTEMBER 30,2018
|
|
Cardiff Lexington
|
|
|
Platinum
|
|
|
Red Rock
|
|
|
Pro Forma adjustment
|
|
|
Pro forma total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
697,884
|
|
|
|
570,597
|
|
|
|
210,245
|
|
|
|
(352,700
|
)
|
|
|
1,126,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FOR THE PERIOD
|
|
$
|
(4,141,655
|
)
|
|
$
|
362,033
|
|
|
$
|
(496,394
|
)
|
|
$
|
–
|
|
|
$
|
(4,276,016
|
)
|
CARDIFF LEXINGTON CORP. AND SUBSIDIARIES
PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30,2018
|
|
|
Cardiff Lexington
|
|
|
|
Platinum
|
|
|
|
Red Rock
|
|
|
|
Pro Forma adjustment
|
|
|
|
Pro forma total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
1,419,006
|
|
|
|
1,553,597
|
|
|
|
483,286
|
|
|
|
–
|
|
|
|
3,211,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FOR THE PERIOD
|
|
$
|
(2,709,500
|
)
|
|
$
|
(44,986
|
)
|
|
$
|
(1,409,948
|
)
|
|
$
|
–
|
|
|
$
|
(6,293,178
|
)
|
CARDIFF LEXINGTON CORP. AND SUBSIDIARIES
PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS
ENDED SEPTEMBER 30,2017
|
|
|
Cardiff Lexington
|
|
|
|
Platinum
|
|
|
|
Red Rock
|
|
|
|
Pro Forma adjustment
|
|
|
|
Pro forma total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
413,875
|
|
|
|
2,187,237
|
|
|
|
–
|
|
|
|
–
|
|
|
|
2,601,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FOR THE PERIOD
|
|
$
|
(1,365,598
|
)
|
|
$
|
267,071
|
|
|
$
|
(12,328
|
)
|
|
$
|
–
|
|
|
$
|
(1,110,855
|
)
|
CARDIFF LEXINGTON CORP. AND SUBSIDIARIES
PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30,2017
|
|
Cardiff Lexington
|
|
|
Platinum
|
|
|
Red Rock
|
|
|
Pro Forma adjustment
|
|
|
Pro forma total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
|
|
1,415,261
|
|
|
|
1,882,087
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,297,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FOR THE PERIOD
|
|
$
|
(2,784,733
|
)
|
|
$
|
362,033
|
|
|
$
|
(51,553
|
)
|
|
$
|
–
|
|
|
$
|
(2,474,254
|
)
|
4. ACCRUED EXPENSES
As of September 30, 2018, and December
31, 2017, the Company had accrued expenses of $1,052,974 and $740,696, respectively, consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Accrued salaries – related party
|
|
$
|
520,263
|
|
|
|
470,000
|
|
Lease payable – related party
|
|
|
25,250
|
|
|
|
25,250
|
|
Accrued expenses – other
|
|
|
507,461
|
|
|
|
245,446
|
|
Total
|
|
$
|
1,052,974
|
|
|
|
740,696
|
|
5. NOTES PAYABLE
For the nine months ended September 30,
2018, the company received $0 cash proceeds, from a line of credit and repaid $9,343 in cash.
Notes payable at September 30, 2018 and
December 31, 2017 are summarized as follows:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Notes Payable – Unrelated Party
|
|
$
|
823,308
|
|
|
$
|
215,979
|
|
Notes Payable – Related Party
|
|
|
171,582
|
|
|
|
144,189
|
|
Total
|
|
|
994,890
|
|
|
|
360,168
|
|
Current portion
|
|
|
(994890
|
)
|
|
|
(360,168
|
)
|
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 September 30, 2018,
the Company is in default on this debenture. The balance of the note was $10,989 at September 30, 2018 and December 31, 2017.
As of September 30, 2018, the Company had
lease payable of $48,059 in connection with two capital leases on two Mercedes Sprinter Vans for the ice cream section and two
auto loans related to our pizza business. 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. The leases are not in default at the current time.
Notes payable to unrelated party of $31,820
was due to the auto loans for the vehicles used in the Pizza restaurants and Repicci’s Group and for daily operations. The
loans carry interest from 0% to 6% interest and are not currently in default.
The balance in notes payable to unrelated
parties of $732,440, were assumed in connection the acquisition of Red Rock Travel.
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 September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December
31, 2017, respectively. Note 2 is currently in default.
As of September 30, 2018 and December 31,
2017, the Company also had note payable of $53,902 and $44,189, respectively, to the prior owner of Repicci’s Group. During
the nine months ended September 30, 2018, a related party advanced $9,713 to the Company, which is due on demand at no interest.
As of September 30, 2018, the Company also
had note payable of $17,680, respectively, to related party management of Romeo. During the nine months ended September 30, 2018,
a related party advanced $17,680 to the Company, which is due on demand at no interest.
6. CONVERTIBLE NOTES PAYABLE
Certain of the Company’s issued Convertible
Notes include anti-dilution provisions that allow 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. The Company has recorded derivative liabilities associated with convertible debt instruments.
As of September 30, 2018, the company received
$1,124,200 net cash proceeds, from convertible notes. The Company recorded amortization of debt discount of $330,941 and $765,901
related to convertible notes, during the three and nine-months ended September 30, 2018, respectively.
Convertible notes at September 30, 2018 and December 31, 2017
are summarized below:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Convertible Notes Payable – Unrelated Party
|
|
$
|
2,062,362
|
|
|
$
|
861,875
|
|
Convertible Notes Payable – Related Party
|
|
|
165,000
|
|
|
|
165,000
|
|
Discount on Convertible Notes Payable - Unrelated Party
|
|
|
(285,860
|
)
|
|
|
(245,494
|
)
|
Total
|
|
$
|
1,941,502
|
|
|
$
|
781,381
|
|
Current Portion
|
|
|
901,502
|
|
|
|
781,381
|
|
Long-Term Portion
|
|
$
|
1,040,000
|
|
|
$
|
–
|
|
Convertible Notes Payable – Unrelated Party
During the nine months ended September
30, 2018, the Company borrowed an aggregate of $1,680,766, net of original issue discounts and fees of $130,476, under convertible
notes payable. As of September 30, 2018, and December 31, 2017, the Company had outstanding convertible notes payable of $1,941,502
and $781,381, net of unamortized discounts of $285,860 and $245,494, respectively. The outstanding convertible notes of the Company
are unsecured, bear interest between 8% and 20% per annum and mature through January, 2021.
Four of the above referenced convertible
notes payable are convertible at $0.03 per share or 50% of market. Five of the above referenced convertible notes payable are convertible
at $0.25 per share or 50% of market. One of the above referenced convertible notes payable are convertible at $0.30 per share or
50% of market. One of the above referenced notes is convertible at 40% of the lowest sale price of the common stock during the
10 consecutive trading days prior to the date of conversion. Four of the above referenced notes is convertible at 60% of the lowest
sale price of the common stock during the 10 consecutive trading days prior to the date of conversion. One of the above referenced
notes is convertible at 60% of the lowest sale price or bid (whichever is lower) of the common stock during the 20 consecutive
trading days prior to the date of conversion. One of the above referenced notes is convertible at 60% of the lowest sale price
of the common stock during the 20 consecutive trading days prior to the date of conversion. Two of the above referenced notes is
convertible at 60% of the lowest sale price of the common stock during the 15 consecutive trading days prior to the date of conversion.
One of the above referenced notes is convertible at 60% of the lowest trading price of the common stock during the 25 consecutive
trading days prior to the date of conversion. One note is convertible at $0.04 per share or 40% of the lowest bid price for prior
21 days and one note is convertible at $0.004 per share or 60% of the lowest trading price for prior 21 days.
The Company determined that the conversion
features contained in the convertible note payable with the unrelated party carrying value represents an 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 initially measured using the Binomial-Lattice valuation model at note issuance and is remeasured
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 are reclassified into additional paid in capital
upon conversion or expiration. See Footnote 7 for more information on derivative liabilities.
As of September 30, 2018, twelve of these
convertible notes are in default and have default fees and default interest ranging from 5% to 20%.
During the three and nine months ended
September 30, 2018, the Company received conversion notices for $392,149 and $487,434 of convertible debt and $46,336 and $88,238
in interest and fees, respectively, which were converted into 183,442,261 and 195,850,3246 shares, respectively.
Convertible Notes Payable – Related Party
The Company determined that the conversion
features contained in convertible note payable with related party meet the requirements for liability classification as derivatives
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 note issuance and is remeasured 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. See Footnote 7 for
more information on derivative liabilities.
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 is
convertible into Common Shares of the Company at $0.03 per and interest of 12% per year, matured in August 2009, and is unsecured.
The Company is currently in default on Debenture 1. The balance of Debenture 1 was $150,000 at September 30, 2018 and December
31, 2017.
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 is
convertible into Common Shares of the Company at $0.03 per and interest of 12% per year, matured in August 2009, and is unsecured.
The Company is currently in default on Debenture 1. The balance of Debenture 2 was $15,000 at September 30, 2018 and December 31,
2017.
7. FAIR VALUE MEASUREMENT
The Company adopted the provisions of Accounting
Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines
fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required
or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact
and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels
of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active
markets for identical assets or liabilities.
Level 2 – Observable inputs other
than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume
or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or
can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs to
the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on
models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases,
for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined
based on the lowest level input that is significant to the fair value measurement.
Upon adoption of ASC 825-10, there was
no cumulative effect adjustment to beginning retained earnings and no impact on the financial statements.
The carrying value of the Company’s
cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable),
and other current assets and liabilities approximate fair value because of their short-term maturity.
As of September 30, 2018 and December 31,
2017, the Company did not have any items that would be classified as level 1 or 2 disclosures.
The Company recognizes its derivative liabilities
as level 3 and values its derivatives using the methods discussed. While the Company believes that its valuation methods are appropriate
and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine
the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary
assumptions that would significantly affect the fair values using the methods discussed are that of volatility and market price
of the underlying common stock of the Company.
As of September 30, 2018 and December 31,
2017, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of September
30, 2018, in the amount of $2,933,981 has a level 3 classification.
The following table provides a summary
of changes in fair value of the Company’s Level 3 financial liabilities for the three and nine months ended September 30,
2018:
Derivative Liability, June 30, 2018
|
|
|
1,983,308
|
|
Day 1 Loss
|
|
|
508,393
|
|
Discount from derivatives
|
|
|
191,200
|
|
Resolution of derivative liability upon conversion
|
|
|
(1,139,232
|
)
|
Mark to market adjustment
|
|
|
1,390,313
|
|
Derivative Liability, September 30, 2018
|
|
|
2,933,981
|
|
Derivative Liability, December 31,2017
|
|
|
2,236,656
|
|
Day 1 Loss
|
|
|
905,202
|
|
Discount from derivatives
|
|
|
675,790
|
|
Resolution of derivative liability upon conversion
|
|
|
(1,295,485
|
)
|
Mark to market adjustment
|
|
|
411,818
|
|
Derivative Liability, September 30, 2018
|
|
|
2,933,981
|
|
The above tables also include derivative
liabilities related to warrants to purchase common stock of $14,657 at September 30, 2018. Net loss for the period included mark-to-market
adjustments relating to the liabilities held during the three and nine month periods ended September 30, 2018 in the amounts of
$1,898,704 and $1,317,018, respectively.
Fluctuations in the Company’s stock
price are a primary driver for the changes in the derivative valuations during each reporting period. During the period ended September
30, 2018, the Company’s stock price decreased from initial valuation. As the stock price decreases for each of the related
derivative instruments, the value to the holder of the instrument generally decreases. Stock price is one of the significant unobservable
inputs used in the fair value measurement of each of the Company’s derivative instruments.
The valuation of the derivative liabilities
attached to the convertible debt was arrived at through the use of the Lattice Bi-nominal Option Pricing Model and the following
assumptions:
|
|
|
For the period ended
|
|
|
|
|
September 30,
2018
|
|
|
|
December 31,
2017
|
|
Volatility
|
|
|
612.68%-636.13%
|
|
|
|
111.09% - 220.65%
|
|
Risk-free interest rate
|
|
|
2.13%-2.78%
|
|
|
|
0.51% - 1.76%
|
|
Expected term
|
|
|
.09-5.14
|
|
|
|
.02-1.00
|
|
Warrants
The table below sets forth the assumptions
for Black-Scholes valuation model for warrants on September 30, 2018.
|
|
|
Nine Month
Period Ended
September 30,
2018
|
|
Volatility
|
|
|
617.68%- 636.13%
|
|
Risk-free interest rate
|
|
|
2.13%-2.78%
|
|
Expected term
|
|
|
0.09-5.14
|
|
8. CAPITAL STOCK
Series B Preferred Stock
During the nine months ended September
30, 2018, the holder of 33,999 shares of Series B Preferred Stock exercised the option to convert into 169,995 shares of Common
Stock of the Company.
Series C Preferred Stock
During the nine months ended September
30, 2018, the Company issued 2 shares of Series C Preferred stock to the prior owners of Edgeview Properties for services provided
to the Company. The fair market value of the shares on the date of issuances was $0.0036 per share, at a total cost of $720.
Series H Preferred Stock
During the nine months ended September
30, 2018, the holder of 4,859,469 shares of Series H Preferred Stock exercised the option to convert into 6,074,223 shares of Common
Stock of the Company.
Series I Preferred Stock
During the nine months ended September
30, 2018, the holder of 203,655 shares of Series I Preferred Stock exercised the option to convert into 305,483 shares of Common
Stock of the Company.
Series K Preferred Stock
During the nine months ended September
30, 2018, the Company issued 8,200,562 shares of series K Preferred Stock to the prior owners of Red Rock Travel Group. The fair
market value of the shares on the date of issuances was $0.0201 per share, at a total cost of $175,000.
Series K-1 Preferred Stock
During the nine months ended September
30, 2018, the Company issued 1,447,457 shares of Series K-1 Preferred Stock in settlement of a note payable. The fair market value
of the shares were valued at the face amount of the note of $100,000.
Series L Preferred Stock
During the nine months ended September
30, 2018, the Company issued 98,307,692 shares of Series L Preferred Stock to the prior owner of Platinum Tax Defenders. The fair
market value of the shares on the date of issuances was $0.013 per share, at a total cost of $1,278,000.
Common Stock
See Note 5 for further issuance information
related to conversion of indebtedness to common stock.
During the nine months ended September
30, 2018, the Company canceled 1,000,000 shares previously issued and issued 3,886,930 shares to third-party consultants. The fair
market value of the shares on the date of issuances was $0.0186 to $0.0247 per share, at a total cost of $86,751. The Company also
issued 3,428,571 shares in settlement of $240,000 in liabilities owed to a former officer of the Company.
9. COMMITMENTS AND CONTINGENCIES
The Company has an employment agreement,
renewed May 15, 2014, with the Chairman, Mr. Thompson amended on January 1, 2017, whereby we provide for compensation of $25,000
per month.
The Company has an employment agreement
with the Chief Executive Officer, Mr. Cunningham, amended on January 1, 2017, whereby we provide for compensation of $25,000 per
month.
The Company has an employment agreement
with the Chief Operating Officer, Mr. Roberts, effective June 2016, whereby we provide for compensation of $10,000 per month.
There are no other stock option plans,
retirement, pension, or profit-sharing plans for the benefit of our sole officers and directors other than as described above.
10. SEGMENT REPORTING
The Company has six 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.(4) Travel related services (Red Rock
Travel Group, and (5) Tax resolution services (Platinum Tax Defenders). 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, 20186 was forty-five (45), seven (7) new state of the art “mobile” units.
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 $185,000 to $165,000, as follows: $195,000
for a new Mercedes Sprinter Van, customized for the franchisee, $36,000 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.
Red Rock Travel Group offers travel related
services. With 28 years of experience in the industry of tourism and marketing of resorts and hotels, Redrock Travel Group has
established a company dedicated to the operation of luxury travel based in Orlando, Florida. Our services are distinguished from
other tour operators in the market by our commitment to provide our guests with personalized service, within their respective travel
packages.
Platinum Tax Defenders is a reliable tax
resolution service that offers assistance for struggling taxpayers. We will be up front and honest with you regarding your situation
and we will never make promises that we can’t keep. Our tax attorneys in Los Angeles are here to negotiate on your behalf
and bring the tax relief to our clients that they need in today’s troubled economy. You can count on Platinum Tax Defenders
to honestly guide you through the negotiation and settlement process so you can get your taxes paid off and breathe a sigh of relief
that your financial future will be a positive one.
|
|
For the three months ended
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Revenues:
|
|
|
|
|
|
|
We Three
|
|
$
|
44,740
|
|
|
$
|
51,193
|
|
Romeo’s NY Pizza
|
|
|
148,540
|
|
|
|
155,187
|
|
Repicci's Group
|
|
|
151,904
|
|
|
|
207,495
|
|
Platinum Tax
|
|
|
229,124
|
|
|
|
–
|
|
Red Rock Travel
|
|
|
123,576
|
|
|
|
–
|
|
Other
|
|
|
–
|
|
|
|
–
|
|
Consolidated revenues
|
|
$
|
697,884
|
|
|
$
|
413,875
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
43,305
|
|
|
$
|
39,645
|
|
Romeo’s NY Pizza
|
|
|
111,814
|
|
|
|
111,430
|
|
Repicci's Group
|
|
|
154,572
|
|
|
|
306,319
|
|
Platinum Tax
|
|
|
155,475
|
|
|
|
–
|
|
Red Rock Travel
|
|
|
125,900
|
|
|
|
–
|
|
Other
|
|
|
–
|
|
|
|
–
|
|
Consolidated cost of sales
|
|
$
|
591,066
|
|
|
$
|
457,394
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
(23,281
|
)
|
|
$
|
10,379
|
|
Romeo’s NY Pizza
|
|
|
3,325
|
|
|
|
(7,053
|
)
|
Repicci’s Group
|
|
|
(213,683
|
)
|
|
|
(23,330
|
)
|
Platinum Tax
|
|
|
(249,134
|
)
|
|
|
–
|
|
Red Rock Travel
|
|
|
(601,064
|
)
|
|
|
–
|
|
Others
|
|
|
(3,932,023
|
)
|
|
|
(1,345,594
|
)
|
Consolidated income/(loss) before taxes
|
|
$
|
(5,015,460
|
)
|
|
$
|
(1,365,598
|
)
|
|
|
For the nine months ended
|
|
|
|
|
September 30,
2018
|
|
|
|
September 30,
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
143,403
|
|
|
$
|
145,890
|
|
Romeo’s NY Pizza
|
|
|
452,555
|
|
|
|
440,064
|
|
Repicci’s Group
|
|
|
578,668
|
|
|
|
829,307
|
|
Platinum Tax
|
|
|
229,124
|
|
|
|
–
|
|
Red Rock Travel
|
|
|
123,576
|
|
|
|
–
|
|
Others
|
|
|
–
|
|
|
|
3,745
|
|
Consolidated revenues
|
|
$
|
1,527,326
|
|
|
$
|
1,419,006
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
145,650
|
|
|
$
|
118,832
|
|
Romeo’s NY Pizza
|
|
|
324,661
|
|
|
|
311,986
|
|
Repicci’s Group
|
|
|
435,302
|
|
|
|
878,580
|
|
Platinum Tax
|
|
|
155,475
|
|
|
|
–
|
|
Red Rock Travel
|
|
|
125,900
|
|
|
|
–
|
|
Others
|
|
|
–
|
|
|
|
–
|
|
Consolidated cost of sales
|
|
$
|
1,186,988
|
|
|
$
|
1,309,398
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
(29,357
|
)
|
|
$
|
52,682
|
|
Romeo’s NY Pizza
|
|
|
29,048
|
|
|
|
(34,527
|
)
|
Repicci’s Group
|
|
|
(83,816
|
)
|
|
|
(77,696
|
)
|
Platinum Tax
|
|
|
(249,134
|
)
|
|
|
–
|
|
Red Rock Travel
|
|
|
(601,064
|
)
|
|
|
–
|
|
Others
|
|
|
(4777,724
|
)
|
|
|
(2,606,110
|
)
|
Consolidated income/(loss) before taxes
|
|
$
|
(5,712,049
)
|
|
|
$
|
(2,665,651
|
)
|
|
|
|
As of
September 30,
2018
|
|
|
|
As of
December 31,
2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
314,003
|
|
|
$
|
235,532
|
|
Romeo’s NY Pizza
|
|
|
121,339
|
|
|
|
158,551
|
|
Repicci’s Group
|
|
|
258,649
|
|
|
|
293,216
|
|
Platinum Tax
|
|
|
108,569
|
|
|
|
–
|
|
Red Rock Travel
|
|
|
49,808
|
|
|
|
–
|
|
Others
|
|
|
2,626,627
|
|
|
|
631,762
|
|
Combined assets
|
|
$
|
3,478,997
|
|
|
$
|
1,319,061
|
|
11. RELATED PARTY TRANSACTIONS
Due to Officers
During the nine-months ended September 30, 2018, the Company
borrowed a total of $60,176 from officers and shareholders.
12. SUBSEQUENT EVENTS
Stock Issuances:
Subsequent to September 30, 2018 the Company
issued 225,541,983 shares of common stock, in connection with debt conversion.