The accompanying notes are an integral part
of these unaudited financial statements
The accompanying notes are an integral part
of these unaudited financial statements
The accompanying notes are an integral part
of these unaudited financial statements
Notes to Unaudited Condensed Consolidated
Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial
information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited
condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the
opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results
are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial
statements and related disclosures have been prepared with the presumption that users of the interim financial information have
read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year. Accordingly,
these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial
statements and the related notes for the years ended December 31, 2016 and 2015 thereto contained in the Annual Report on Form
10-K for the year ended December 31, 2016.
Organization and Nature of Operations
Legacy Card Company (“Legacy”)
was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, Legacy converted from a California Limited Liability
Company to a Nevada Corporation. On November 10, 2005, Legacy merged with Cardiff International, Inc. (“Cardiff”, the
“Company”), a publicly held corporation. In the first quarter of 2013, it was decided to restructure Cardiff into a
holding company that adopted a new business model known as "Collaborative Governance," a form of governance enabling
businesses to take advantage of the power of a public company. Cardiff began targeting the acquisition of undervalued, niche companies
with high growth potential, 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. The plan is
to establish new classes of preferred stock to streamline voting rights, negate debt, and acquire new businesses. By December of
2013, the Company had negated more than 90% of all its debt; by June 30, 2017, the Company had completed the acquisition of six
businesses: We Three, LLC; Romeo’s NY Pizza; Edge View Properties, Inc.; FDR Enterprises, Inc.; Refreshment Concepts, LLC;
and Repicci’s Franchise Group, LLC. In addition, there are two acquisitions: Titancare, LLC and York County In Home Care,
Inc. pending as of the date of this report.
Description of Business
Cardiff is a holding company that adopted
a new business model known as "Collaborative Governance.” To date, the Company is not aware of any other domestic holding
company using the same business philosophy or governing policies.
To date, Cardiff consists of the following whole-owned subsidiaries:
We Three, LLC (Affordable Housing Initiative) acquired
on May 15, 2014;
Romeo’s NY Pizza acquired on June 30, 2014;
Edge View Properties, Inc acquired on July 16, 2014;
FDR Enterprises, Inc. acquired on August 10, 2016;
Refreshment Concepts, LLC acquired on August 10, 2016;
Repicci’s Franchise Group, LLC acquired on August
10, 2016.
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, 2017, the Company had shareholders’ deficit of $1,550,746. The
accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company is unable to continue
as a going concern. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s
December 31, 2016 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue
as a going concern.
The ability of the Company to continue
as a going concern and the appropriateness of using the going concern basis is dependent upon, among other things, additional cash
infusions. Management has prospective investors and believes the raising of capital will allow the Company to pursue new acquisitions.
There can be no assurance that the Company will be able to obtain sufficient capital from debt or equity transactions or from operations
in the necessary time frame or on terms acceptable to it. Should the Company be unable to raise sufficient funds, it may be required
to curtail its operating plans. In addition, increases in expenses may require cost reductions. No assurance can be given that
the Company will be able to operate profitably on a consistent basis, or at all, in the future. Should the Company not be able
to raise sufficient funds, it may cause cessation of operations.
Recently Issued Accounting Pronouncements
Recent Accounting Pronouncements Issued but Not Adopted as
of September 30, 2017
In May 2014, the FASB issued ASU 2014-09, “Revenue from
Contracts with Customers (Topic 606),” on revenue recognition. This guidance provides that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. This guidance also requires more detailed disclosures to enable
users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The original effective date of this guidance was for interim and annual reporting periods beginning after
December 15, 2016, early adoption is not permitted, and the guidance must be applied retrospectively or modified retrospectively.
In July 2015, the FASB approved an optional one-year deferral of the effective date. As a result, we expect to adopt this
guidance on January 1, 2018. We have not yet determined our approach to adoption or the impact the adoption of this guidance
will have on our financial position, results of operations or cash flows, if any.
In February 2016, the FASB issued
an accounting standards update which modifies the accounting for leasing arrangements, particularly those arrangements classified
as operating leases. This update will require entities to recognize the assets and liabilities arising from operating leases on
the balance sheet. This guidance is effective for fiscal and interim periods beginning after December 15, 2018 and is required
to be applied retrospectively to all leasing arrangements. We are currently assessing the effects this guidance may have on our
financial statements.
Other pronouncements issued by the FASB or other authoritative
accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the
Company’s financial position, results of operations or cash flows.
2. FIXED ASSETS
Plant and equipment, net as of September
30, 2017 and December 31, 2016 was $631,895 and $748,109, respectively, consisting of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Furniture, fixture and equipment
|
|
$
|
952,742
|
|
|
$
|
903,249
|
|
Leasehold improvements
|
|
|
632,134
|
|
|
|
672,159
|
|
|
|
|
1,584,876
|
|
|
|
1,575,408
|
|
Less: accumulated depreciation
|
|
|
(952,981
|
)
|
|
|
(827,299
|
)
|
Plant and equipment, net
|
|
$
|
631,895
|
|
|
$
|
748,109
|
|
During the nine months ended September
30, 2017 and 2016, depreciation and amortization expense was $127,637 and $85,513, respectively. See Note 3 for additional information
regarding amortization. There was additional equipment of $2,427 purchased by Repicci’s Group and a reclass from equipment
to prepaid of $(257), during the period ended September 30, 2017.
3. INTANGIBLE ASSETS
As of September 30, 2017 and December 31,
2016, net intangible assets was $15,713 and $12,668, respectively, due to the franchise fee and territory investment paid by Repicci’s
Group. There was additional territory fee of $7,298 purchased by Repicci’s Group, during the period ended September 30, 2017.
4. ACCRUED EXPENSES
As of September 30, 2017 and December 31,
2016, the Company had accrued expenses of $762,410 and $1,717,725, respectively, consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Accrued salaries
|
|
$
|
–
|
|
|
$
|
250,381
|
|
Accrued salaries – related party
|
|
|
372,500
|
|
|
|
1,162,500
|
|
Lease payable – related party
|
|
|
25,250
|
|
|
|
25,250
|
|
Accrued expenses - other
|
|
|
364,660
|
|
|
|
279,594
|
|
Total
|
|
$
|
762,410
|
|
|
$
|
1,717,725
|
|
5. LINE OF CREDIT
On December 28, 2016, the Company entered
into an unsecured Business Line of Credit Agreement with Fundation Group LLC (“Fundation”), pursuant to which the Company
was allowed to take a draw from Fundation up to $20,000 from time to time. The Line of Credit bears interest at a rate of 11.49%
per annum, subject to increase or decrease with 90 days notice. There was an initial closing fee of $500 and a 2% draw fee on subsequent
draws. Monthly principal and interest payments are due and the line is due in full in 18 months from the latest draw. The outstanding
principal and interest will be amortized over 18 months. As of September 30, 2017 and December 31, 2016, The Company had balance
of $19,838 and $10,000, respectively.
6. RELATED PARTY TRANSACTIONS
Due to Officers and Officer Compensation
Refreshment Concepts, LLC leases its premises
from its prior owner under a month-to-month lease at the rate of $1,500 per month. As of September 30, 2017 and December 31, 2016,
the Company had lease payable of $25,250 to the related party.
On January 24, 2017, the Company issued
2,010,490 shares of Common Stock to settle $402,098 due to the prior owner of Refreshment Concepts LLC, pursuant to the Acquisition
Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s
Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt in amount
of $80,420. As of September 30, 2017 and December 31, 2016, in addition to the lease payable of $25,250, the outstanding balance
due (included in notes payable to related parties on the financial statements) to the same prior owner was $44,189 and $57,695,
respectively.
On January 24, 2017, the Company issued
173,585 shares of Common Stock to settle $34,717 due to the prior owner of Repicci’s Franchise Group LLC, pursuant to the
Acquisition Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s
Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt
in amount of $6,943. As of September 30, 2017 and December 31, 2017, the outstanding balance due (included in notes payable to
related parties on the financial statements) to the same prior owner was $9,000 and $40,550, respectively.
During the second quarter of 2017, the
prior owner of Repicci’s Franchise Group LLC submitted a subscription agreement to the Company regarding the purchase of
90,909 shares of the Company’s Series I Preferred Stock by cash payment of $10,000, which was collected during the second
quarter of 2017. The transaction was independently negotiated between the Company and the related party. The proceeds from the
subscription agreement mitigated the Company’s cash pressure in short term. The 90,909 shares of Series I Preferred Stock
were issued as of September 30, 2017.
During the second quarter of 2017, the
Company issued 906,907 shares of Common Stock to a related party for services rendered. The fair value of this stock issuance was
determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.0799 per
share. Accordingly, the Company recognized stock based compensation of $72,462 to the consolidated statements of operations for
the nine months ended September 30, 2017.
The Company borrows funds from Daniel Thompson,
who is a Shareholder and Officer of the Company. The terms of repayment stipulate the loans are due 24 months after the launch
of the Legacy Tuition Card (or prior to such date) at an annual interest rate of six percent. As of September 30, 2017 and December
31, 2016, the Company had $88,953 and $84,540 due (included in notes payable to related parties on the financial statements) to
Daniel Thompson, respectively.
In addition, the Board of Directors of
the Company approved to increase Daniel Thompson’s compensation to $25,000 per month from $20,000 effective January 1, 2017.
Accordingly, a total salary of $225,000 and $180,000 were accrued and reflected as an expense to Daniel Thompson during the nine
months ended September 30, 2017 and 2016, respectively. The Company issued 10,000,000 shares of Common Stock for forgiveness of
$800,000 in accrued salaries. The accrued salaries payable to Daniel Thompson was $75,000 and $742,500 as of September 30, 2017
and December 31, 2016, respectively.
The Company had an employment agreement
with a former Chief Operating Officer, Mr. Levy, whereby the Company provided for compensation of $15,000 per month in 2015 and
$10,000 per month in 2016. Mr. Levy resigned on June 7, 2016. A total salary of $0 and $90,000 were accrued and reflected as an
expense during the nine months ended September 30, 2017 and 2016, respectively. The Company issued 1,000,000 shares of Common Stock
for forgiveness of $80,000 in accrued salaries. The total balance due to Mr. Levy for accrued salaries at September 30, 2017 and
December 31, 2016 were $160,000 and $240,000, respectively.
The Company had an employment agreement
with the Chief Operating Officer, Mr. Roberts, whereby the Company provided for compensation of $10,000 per month effective in
June 2016. A total salary of $60,000 and $0 were accrued and reflected as an expense during the nine months ended September 30,
2017 and 2016, respectively. The total balance due to Mr. Roberts for accrued salaries at September 30, 2017 and December 31, 2016
were $80,000 and $60,000, respectively. In addition, the Company agreed to grant Mr. Roberts stock options for a minimum of 300,000
shares of the Company's common stock at an exercise price of 50% of the current last ten (10) day stock average per share, and
600,000 shares of common stock as a key officer employment incentive to be earned and vested on a pro rata basis at 25,000 shares
per month for twenty-four (24) months. The fair value of both 300,000 options and 600,000 shares were determined by the fair value
of the Company’s Common Stock on the grant date, at a price of approximately $0.226 per share. Accordingly, the accrued
expense was $135,600 as of June 30, 2017. On August 8, 2017, Mr. Roberts accepted the offer from the Company to issue 1,000,000
common shares to supersede all his options and warrants in the employment agreement. Additionally, the Company issued 1,000,000
shares of Common Stock as a bonus to Mr. Roberts for his past service to the Company. The fair value of this stock issuance was
determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.07 per share.
Accordingly, the Company recognized stock based compensation of $70,000 to the consolidated statements of operations for the nine
months ended September 30, 2017.
The Board of Directors of the Company approved
to increase Chief Executive Officer, Mr. Cunningham’s compensation to $25,000 per month from $15,000 effective January 1,
2017. A total salary of $225,000 and $135,000 were accrued and reflected as an expense during the nine months ended September 30,
2017 and 2016, respectively. The Company issued 5,000,000 shares of Common Stock for forgiveness of $400,000 in accrued salaries.
The total balance due to Mr. Cunningham for accrued salaries at September 30, 2017 and December 31, 2016 were $57,500 and $360,000,
respectively.
Notes Payable – Related Party
The Company has entered into several loan
agreements with related parties (see below; Footnote 7, Notes Payable – Related Party; and Footnote 7, Convertible Notes
Payable – Related Party).
7. NOTES PAYABLE
Notes payable at September 30, 2017 and
December 31, 2016 are summarized as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Notes Payable – Unrelated Party
|
|
$
|
225,346
|
|
|
$
|
259,320
|
|
Notes Payable – Related Party
|
|
|
153,189
|
|
|
|
166,695
|
|
Total
|
|
|
378,535
|
|
|
|
426,015
|
|
Current portion
|
|
|
(378,535
|
)
|
|
|
(426,015
|
)
|
Long-term portion
|
|
$
|
–
|
|
|
$
|
–
|
|
Notes Payable – Unrelated Party
On March 12, 2009, the Company entered
into a preferred debenture agreement with a shareholder for $20,000. The note bore interest at 12% per year and matured on September
12, 2009. In conjunction with the preferred debenture, the Company issued 2,000,000 warrants to purchase its Common Stock, exercisable
at $0.10 per share and expired on March 12, 2014. As a result of the warrants issued, the Company recorded a $20,000 debt discount
during 2009 which has been fully amortized. The Company assigned all of its receivables from consumer activations of the rewards
program as collateral on this debenture. On March 24, 2011, the Company amended the note and the principal balance was reduced
to $15,000. The Company was due to pay annual principal payments of $5,000 plus accrued interest beginning March 12, 2012. On July
20, 2011, the Company repaid $5,000 of the note. No warrants had been exercised before the expiration. As of September 30, 2017,
the Company was in default on this debenture. The balance of the note was $10,989 and $10,989 at September 30, 2017 and December
31, 2016, respectively.
As of September 30, 2017, the Company had
lease payable of $149,582 in connection with 2 capital leases on 2 Mercedes Sprinter Vans for the ice cream section. There are
purchase options at the end of all lease terms that are based on the fair market value of the vans at the time.
The balance of $64,775 in notes payable
to unrelated party was due to the auto loan for the vehicles used in the Pizza restaurants and Repicci’s Group and for daily
operations.
Notes Payable – Related Party
On September 7, 2011, the Company entered
into a Promissory Note agreement (“Note 1”) with a related party for $50,000. Note 1 bears interest at 8% per year
and matures on September 7, 2016. Interest is payable annually on the anniversary of Note 1, and the principal and any unpaid interest
will be due upon maturity. In conjunction with Note 1, the Company issued 2,500,000 shares of its Common Stock to the lender. As
a result of the shares issued in conjunction with Note 1, the Company recorded a $50,000 debt discount during 2011. The balance
of Note 1, net of debt discount, was $50,000 and $50,000 at September 30, 2017 and December 31, 2016, respectively. Note 1 is currently
in default.
On November 17, 2011, the Company entered
into a Promissory Note agreement (“Note 2”) with a related party for $50,000. Note 2 bears interest at 8% per year
and matures on November 17, 2016. Interest is payable annually on the anniversary of Note 2, and the principal and any unpaid interest
will be due upon maturity. In conjunction with Note 2, the Company issued 2,500,000 shares of its Common Stock to the lender. As
a result of the shares issued in conjunction with Note 2, the Company recorded a $50,000 debt discount during 2011. The balance
of Note 2, net of debt discount, was $50,000 and $50,000 at September 30, 2017 and December 31, 2016, respectively. Note 2 is currently
in default.
On August 4, 2015, the Company entered
into a Promissory Note agreement (“Note 3”) with a related party for $19,500. Note 3 bears interest at 6% per year
and matures on December 31, 2016. Interest is payable annually on the anniversary of Note 3, and the principal and any unpaid interest
will be due upon maturity. The Company repaid $10,500 to the related party in 2016; therefore, the balance of Note 3 was $9,000
as of September 30, 2017 and December 31, 2016, respectively. Note 3 is currently in default.
As of September 30, 2017 and December 31,
2016, the Company also had note payable of $44,189 and $57,695, respectively, to the prior owner of Repicci’s Group.
The following is a schedule showing the
future minimum loan payments in the future 5 years.
Year ending September,
|
|
|
|
2017
|
|
$
|
0
|
|
2018
|
|
|
153,189
|
|
2019
|
|
|
0
|
|
2020
|
|
|
0
|
|
2021
|
|
|
0
|
|
Total
|
|
$
|
153,189
|
|
8. CONVERTIBLE NOTES PAYABLE
Some of the Convertible Notes issued as
described below included an anti-dilution provision that allowed for the adjustment of the conversion price. The Company considered
the guidance provided by the FASB in “
Determining Whether an Instrument Indexed to an Entity’s Own Stock
,”
the result of which indicates that the instrument is not indexed to the issuer’s own stock. Accordingly, the Company determined
that, as the conversion price of the Notes issued in connection therewith could fluctuate based future events, such prices were
not fixed amounts. As a result, the Company determined that the conversion features of the Notes issued in connection therewith
are not considered indexed to the Company’s stock and characterized the value of the conversion feature of such notes as
derivative liabilities upon issuance.
Convertible notes at September 30, 2017 and December 31, 2016
are summarized as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Convertible Notes Payable – Unrelated Party
|
|
$
|
701,500
|
|
|
$
|
179,285
|
|
Convertible Notes Payable – Related Party
|
|
|
165,000
|
|
|
|
165,000
|
|
Discount on notes
|
|
|
(351,500
|
)
|
|
|
(21,833
|
)
|
Total - Current
|
|
$
|
515,000
|
|
|
$
|
322,452
|
|
Convertible Notes Payable – Unrelated Party
On April 17, 2014, the Company entered
into an unsecured Convertible Note (“Note 4”) in the amount of $9,000. Note 4 was convertible into Common Shares of
the Company at $0.005 per share at the option of the holder. Note 4 bore interest at eight percent per year, matured on June 17,
2014, and was unsecured. All principal and unpaid accrued interest was due at maturity. The Company is currently in default on
Note 4. On August 17, 2015, a portion of principal of $1,500 was converted into 300,000 shares of Common Stock of the Company
upon the request of the holder. During the year ended December 31, 2016, the note holder converted $3,715 principal and $1,310
accrued interest payable into 1,005,000 shares of common stock at a conversion price of $0.005 per share. And $3,000 of principal
is forgiven by the note holder. In addition, the Company agreed to reimburse the holder’s certificate processing cost by
adding $1,000 to the principal for each note conversion pursuant to an addendum, dated February 3, 2016. During the first quarter
of 2017, the note holder converted $2,785 principal, $1,000 processing cost reimbursement and $102 accrued interest into 777,400
shares of common stock at a conversion price of $0.005 per share. The balance of Note 4 was $2,785 as of December 31, 2016, which
was paid in full as of September 30, 2017.
On July 29, 2015, the Company entered into
an 8% convertible promissory note (“Note 6”) with an unrelated entity in the amount of $10,000. Note 6 bore interest
at eight percent per year, matured on November 26, 2015, and was unsecured. Note 6 was convertible into Common Shares of the Company
at the conversion ratio of 50% discount to market at the conversion date. However, if the closing bid price of the Company’s
Common Shares falls below $0.10 per share, the conversion price will be changed to $0.01 per share and remain intact from that
point forward. Since the Company’s common stock was $0.075 per share at December 31, 2015, the conversion feature contained
in Note 6 no longer meets the requirements for liability classification under ASC 815. As a result, the embedded derivative liability
of $10,008 at December 31, 2015 was reclassified as additional paid-in capital.
The table below sets forth the assumptions
for Black-Scholes valuation model on July 29, 2015 (inception) and December 31, 2015, respectively. For the period ended December
31, 2015, the Company had initial loss of $8,041 due to derivative liabilities, and decreased the derivative liability of $18,041
by $8,033, resulting in a derivative liability of $10,008 at December 31, 2015. The derivative liabilities is reclassified as additional
paid in capital due to the conversion price become fixed price as of January 1, 2016.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
7/29/2015
|
$18,041
|
0.33
|
$0.30
|
$0.60
|
513%
|
0.0006
|
12/31/2015
|
$10,008
|
0.003
|
$0.038
|
$0.075
|
533%
|
0.0014
|
Note 6 and accrued interest totaled $11,666
was paid in full by cash on May 1, 2017. Resulting from the tainted issue by the derivative financial instrument of the convertible
notes, the Company determined that the conversion features contained in Note 6 carrying value represents a freestanding derivative
instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative
financial instrument in the note is reflected in the Company’s balance sheet as a liability, which will be reclassified into
additional paid in capital upon conversion. The fair value of the derivative financial instrument of the convertible note was measured
using the Binomial-Lattice valuation model with assumptions set forth in the table below and the fair value of $95,001 was credited
to additional paid in capital on the conversion date.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
5/1/2017
|
$ 95,001
|
0.50
|
$0.01
|
$0.1050
|
111%
|
0.0098
|
On February 9, 2016, the Company entered
into a 15% convertible line of credit (“Note 7”) with an unrelated entity in the amount up to $50,000. On February
9, 2016, the Company received $17,500 cash for the line of credit, matured on February 9, 2017, and unsecured. Note 7 is convertible
into common shares of the Company at the conversion ratio of $0.03 or 50% discount of the lowest closing price on the primary trading
market on which Company's common stock is quoted for the last five trading days prior to the conversion date, whichever is lower.
The Company determined that the conversion features contained in Note 7 carrying value represents a freestanding derivative instrument
that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial
instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial
instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and
will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are
recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified
into additional paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2016 and September 30, 2017, respectively.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2016
|
$ 74,750
|
0.11
|
$0.03
|
$0.2250
|
221%
|
0.0062
|
9/30/2017
|
$ 12,242
|
0.09
|
$0.03
|
$0.0594
|
126%
|
0.012
|
Note 7 is currently in default and principal
of $6,000 was converted into 200,000 shares of common stock at the end of 2016. During the nine months ended September 30, 2017,
the Company recorded interest expense, late fee and default interest related to Note 7 in total amount of $2,029 and amortization
of debt discounts in amount of $3,500. The balance of Note 7 was $11,500 with unamortized debt discount of $3,500 as of December
31, 2016, and $11,500 without unamortized debt discount as of September 30, 2017.
On October 28, 2016, the Company received
$25,000 cash pursuant to the terms of Note 7, matures on October 28, 2017 (“Note 7-1”). Note 7-1 was entitled to conversion
after April 28, 2017 which met the requirements for liability classification under ASC 815.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on September 30, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
9/30/2017
|
$ 26,614
|
0.08
|
$0.03
|
$0.0594
|
126%
|
0.012
|
During the nine months ended September
30, 2017, the Company recorded interest expense related to Note 7-1 in amount of $2,812 and amortization of debt discount in amount
of $21,527. This resulted in an unamortized debt discount of $3,472 as of September 30, 2017. The balance of Note 7-1 was $25,000
as of September 30, 2017 and December 31, 2016, respectively.
On March 8, 2016, the Company entered into
a 15% convertible promissory note in the principal of $50,000 (“Note 8”) with an unrelated entity for services rendered.
Note 8 is matured on March 8, 2017, and unsecured. This Note is convertible into common shares of the Company at the conversion
ratio of $0.03 or 50% discount of the lowest closing price on the primary trading market on which Company's common stock is quoted
for the last five trading days prior to the conversion date, whichever is lower. The Company determined that the conversion features
contained in Note 8 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification
under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s
balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using
the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date.
Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense
at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
On February 16, 2017, a portion of principal
of $6,000 was converted into 200,000 shares of common stock at a conversion price of $0.03 per share.
On April 13, 2017, a portion of principal
of $12,853, including $1,000 conversion cost reimbursement, plus accrued interest of $12,247 were converted into 836,667 shares
of common stock at a conversion price of $0.03 per share.
On May 4, 2017, a portion of principal
of $6,000, including $2,000 conversion cost reimbursement, plus accrued interest of $70 were converted into 202,333 shares of common
stock at a conversion price of $0.03 per share.
On July 6, 2017, a portion of principal
of $119,147, including $1,000 conversion cost reimbursement, were converted into 704,733 shares of common stock at a conversion
price of $0.03 per share.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2016, February 16, 2017, April 13, 2017, May 4, 2017, June 30, 2017 and September
30, 2017, respectively.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2016
|
$ 325,001
|
0.18
|
$0.03
|
$0.2250
|
221%
|
0.0062
|
2/16/2017
|
$ 62,000
|
0.05
|
$0.03
|
$0.3400
|
173%
|
0.0051
|
4/13/2017
|
$ 53,554
|
0.10
|
$0.03
|
$0.1550
|
111%
|
0.0076
|
5/4/2017
|
$ 18,000
|
0.16
|
$0.03
|
$0.1200
|
111%
|
0.0071
|
6/30/2017
|
$ 46,819
|
0.10
|
$0.03
|
$0.0799
|
111%
|
0.0114
|
9/30/2017
|
$ 10,645
|
0.09
|
$0.03
|
$0.0594
|
126%
|
0.0120
|
Note 8 was in default with principal balance
of $12,294 as of September 30, 2017. During the nine months ended September 30, 2017, the Company recorded late fee and default
interest related to Note 8 in total amount of $8,748 and amortization of debt discounts in amount of $18,333. The balance of Note
8 was $50,000 with unamortized debt discount of $18,333 as of December 31, 2016, and $12,294 without unamortized debt discount
as of September 30, 2017. The fair value of total $165,467 was credited to additional paid in capital on the conversion dates.
On September 12, 2016, the Company entered
into a 10% convertible promissory note in the principal of $80,000 (“Note 9”) with an unrelated entity for services
rendered. Note 9 is matured on September 12, 2017, and unsecured. This Note is convertible into common shares of the Company at
the conversion ratio of $0.03 or 50% discount of the lowest closing bid price on the primary trading market on which Company's
common stock is quoted for the last five trading days prior to the conversion date, whichever is lower. The Company determined
that the conversion features contained in Note 9 carrying value represents a freestanding derivative instrument that meets the
requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in
the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument
of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional
paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on September 30, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
9/30/2017
|
$ 85,164
|
0.09
|
$0.03
|
$0.0594
|
126%
|
0.0120
|
As a result, Note 9 was discounted in the
amount of $80,000 and amortized over the remaining life of this Note. As of September 12, 2017, the note was in default. During
the nine months ended September 30, 2017, the Company recorded late fee and default interest related to Note 9 in total amount
of $11,146 and amortization of debt discounts in amount of $80,000. The balance of Note 9 was $80,000 without unamortized debt
discount as of December 31, 2016, and $80,000 with unamortized debt discount of $0 as of September 30, 2017.
On January 24, 2017, the Company entered
into a 10% convertible promissory note in the principal of $80,000 (“Note 10”) with an unrelated entity for services
rendered. Note 10 is matured on January 24, 2018, and unsecured. This Note is convertible into common shares of the Company at
the conversion ratio of $0.25 or 50% discount of the lowest closing bid price on the primary trading market on which Company's
common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. As of July 24, 2017 this
Note is convertible into common shares of the Company as described above. The Company determined that the conversion features contained
in Note 10 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification
under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s
balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using
the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date.
Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense
at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on September 30, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
9/30/2017
|
$ 90,330
|
0.32
|
$0.03
|
$0.0594
|
126%
|
0.0120
|
As a result, Note 10 was discounted
in the amount of $80,000 and amortized over the remaining life of this Note. During the nine months ended September 30, 2017,
the Company recorded amortization of debt discounts in amount of $15,111. The balance of Note 10 was $80,000 without debt
discount as of December 31, 2016. During the nine months ended September 30, 2017, the Company recorded interest expense
related to Note 10 in amount of $5,533. The balance of Note 10 was $80,000 with unamortized debt discount of $64,889 as of
September 30, 2017.
On January 24, 2017, the Company entered
into a 15% convertible line of credit (“Note 11”) with an unrelated entity in the amount up to $250,000. On January
24, 2017, the Company received $50,000 cash for the line of credit, is matured on January 24, 2018, and unsecured. Note 11 is convertible
into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary trading
market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower.
However, Note 11 is convertible after 6 months of the effective date of this Note, which is July 27, 2017. The Company determined
that the conversion features contained in Note 10 carrying value represents a freestanding derivative instrument that meets the
requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in
the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument
of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional
paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on September 30, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
9/30/2017
|
$ 56,457
|
0.33
|
$0.03
|
$0.0594
|
126%
|
0.0120
|
As a result, Note 11 was discounted in
the amount of $50,000 and amortized over the remaining life of this Note. During the nine months ended September 30, 2017, the
Company recorded amortization of debt discounts in amount of $9,028. The balance of Note 11 was $0 without debt discount as of
December 31, 2016. During the nine months ended September 30, 2017, the Company recorded interest expense related to Note 11 in
amount of $5,125. The balance of Note 11 was $50,000 with unamortized debt discount of $40,972 as of September 30, 2017.
On February 21, 2017, the Company received
$25,000 cash pursuant to the terms of Note 11, is matured on February 21, 2018 (“Note 11-1”). Note 11 is convertible
into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary trading
market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower.
However, Note 11-1 is convertible after 6 months of the effective date of this Note, which is August 21, 2017. The Company determined
that the conversion features contained in Note 11-1 carrying value represents a freestanding derivative instrument that meets the
requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in
the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument
of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional
paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on September 30, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
9/30/2017
|
$ 28,229
|
0.39
|
$0.03
|
$0.0594
|
126%
|
0.0120
|
As a result, Note 11-1 was discounted in
the amount of $25,000 and amortized over the remaining life of this Note. During the nine months ended September 30, 2017, the
Company recorded amortization of debt discounts in amount of $2,778. The balance of Note 11-1 was $0 without debt discount as of
December 31, 2016. During the nine months ended September 30, 2017, the Company recorded interest expense related to Note 11 in
amount of $2,302. The balance of Note 11-1 was $25,000 with unamortized debt discount of $22,222 as of September 30, 2017.
On March 16, 2017, the Company received
$40,000 cash pursuant to the terms of Note 11, is matured on March 16, 2018 (“Note 11-2”). Note 11-2 is convertible
into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary trading
market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower.
However, Note 11-2 is convertible after 6 months of the effective date of this Note, which is September 16, 2017. The Company determined
that the conversion features contained in Note 11-2 carrying value represents a freestanding derivative instrument that meets the
requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in
the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument
of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional
paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on September 30, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
9/30/2017
|
$ 45,166
|
0.46
|
$0.03
|
$0.0594
|
126%
|
0.0120
|
As a result, Note 11-2 was discounted in
the amount of $40,000 and amortized over the remaining life of this Note. During the nine months ended September 30, 2017, the
Company recorded amortization of debt discounts in amount of $1,557. The balance of Note 11-2 was $0 without debt discount as of
December 31, 2016. During the nine months ended September 30, 2017, the Company recorded interest expense related to Note 11-2
in amount of $3,300. The balance of Note 11-2 was $40,000 with unamortized debt discount of $38,444 as of September 30, 2017.
On April 6, 2017, the Company entered into
a 15% convertible promissory note with an unrelated entity in the amount $50,000 (“Note 12”). Note 12 is matured on
April 6, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of $0.25 or 50%
of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last ten trading days
prior to the conversion date, whichever is lower. However, Note 12 is not convertible after 6 months of the effective date of this
Note, which is October 6, 2017. Neither derivative liability accounting nor beneficial conversion feature will be considered before
Note 12 is entitled for conversion. During the nine months ended September 30, 2017, the Company recorded interest expense related
to Note 12 in amount of $3,688. The balance of Note 12 was $50,000 without unamortized debt discount as of September 30, 2017.
On April 21, 2017, the Company entered
into a Securities Purchase Agreement with an unrelated entity, pursuant to which the purchasers agreed to pay the Company an aggregate
of up to $600,000 for an aggregate of up to 660,000 in Principal Amount of Notes. The first tranche of $330,000 was closed simultaneously
(“Note 13-1”). The proceeds of $300,000, net of $30,000 Original Issuance Discount, was received by the Company. Note
13-1 is convertible into common shares of the Company at the conversion ratio of 60% of the lowest trading price on the primary
trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date. The Company
determined that the conversion features contained in Note 13-1 carrying value represents a freestanding derivative instrument that
meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument
in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument
of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional
paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on September 30, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
6/30/2017
|
$ 299,852
|
0.81
|
$0.042
|
$0.0799
|
247%
|
0.0124
|
9/30/2017
|
$ 312,335
|
0.56
|
$0.031
|
$0.0594
|
126%
|
0.0120
|
In addition, in connection with this Securities
Purchase Agreement, the Company granted purchasers 2,357,143 warrants with exercise price of $0.14 per share (“Warrants A”),
1,885,715 warrants with exercise price of $0.175 per share (“Warrants B”) and 1,571,429 warrants with exercise price
of $0.21 per share (“Warrants C”). Warrants A, B and C are exercisable on the grant date and expire in three years,
each of which represents 100% of the Principal Amount at the Closing divided by the respective exercise price.
The fair value of these warrants was measured
using the Black-Scholes valuation model at the grant date. The table below sets forth the assumptions for Black-Scholes valuation
model on April 21, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Exercise
Price
|
Market
Price on
Grant Date
|
Volatility
Percentage
|
Risk-free
Rate
|
4/21/2017
|
$814,000
|
3
|
$0.14 - $0.21
|
$0.14
|
676%
|
0.0177
|
As a result, Note 13-1 was discounted in
the amount of $330,000 and amortized over the remaining life of this Note. During the nine months ended September 30, 2017, the
Company recorded interest expenses related to Note 13-1 in amount of $7,425 and amortization of debt discounts in amount of $148,500.
The balance of Note 13-1 was $330,000 with unamortized debt discount of $181,500 as of September 30, 2017.
Convertible Notes Payable – Related Party
On April 21, 2008, the Company entered
into an unsecured Convertible Debenture (“Debenture 1”) with a shareholder in the amount of $150,000. Debenture 1 was
convertible into Common Shares of the Company at $0.03 per share at the option of the holder no earlier than August 21, 2008. Debenture
1 bore interest at 12% per year, matured in August 2009, and was unsecured. All principal and unpaid accrued interest was due at
maturity. In conjunction with the Debenture 1, the Company also issued warrants to purchase 5,000,000 shares of the Company’s
Common Stock at $0.03 per share. The warrants expired on April 20, 2013. As a result of issued warrants, the Company recorded a
$150,000 debt discount during 2008 which has been fully amortized. The Company was in default on Debenture 1, and no warrants had
been exercised before expiration. The balance of Debenture 1 was $150,000 and $150,000 at September 30, 2017 and December 31, 2016,
respectively. The Company recorded interest expense related to Debenture 1 in amount of $13,500 and $13,500 during the nine months
ended September 30, 2017 and 2016, respectively.
On March 11, 2009, the Company entered
into an unsecured Convertible Debenture (“Debenture 2”) with a shareholder in the amount of $15,000. Debenture 2 was
convertible into Common Shares of the Company at $0.03 per share at the option of the holder. Debenture 2 bore interest at 12%
per year, matured on March 11, 2014, and was unsecured. All principal and unpaid accrued interest was due at maturity. The Company
was in default on Debenture 2. The balance of Debenture 2 was $15,000 and $15,000 at September 30, 2017 and December 31, 2016,
respectively. The Company recorded interest expense related to Debenture 2 in amount of $1,350 and $1,350 during the nine months
ended September 30, 2017 and 2016, respectively.
Resulting from the tainted issue by the
derivative financial instrument of the convertible notes, The Company determined that the conversion features contained in Debenture
1 and Debenture 2 carrying value represents 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 measured using
the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date.
Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense
at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2016, June 30, 2017 and September 30, 2017, respectively.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2016
|
$ 1,072,513
|
0.50
|
$0.03
|
$0.2250
|
221%
|
0.0062
|
6/30/2017
|
$ 274,454
|
0.10
|
$0.03
|
$0.0799
|
111%
|
0.0114
|
9/30/2017
|
$ 175,650
|
0.09
|
$0.03
|
$0.0594
|
126%
|
0.0120
|
The following is a schedule showing the
future minimum loan payments in the future 5 years.
Year ending December 31,
|
|
|
|
2017
|
|
$
|
293,794
|
|
2018
|
|
$
|
575,000
|
|
9. DERIVATIVE LIABILITIES
As of September 30, 2017, the Company’s
derivative liabilities are embedded derivatives associated with the Company’s convertible notes payable (see Note 8). Due
to the Notes’ conversion feature, the actual number of shares of common stock that would be required if a conversion of
the note as described in Note 8 was made through the issuance of the Company’s common stock cannot be predicted. As a result,
the conversion feature requires derivative accounting treatment and will be bifurcated from the note and “marked to market”
each reporting period through the statement of operations.
The Company used the Binomial-Lattice valuation
model to measure the fair value of the derivative liabilities as $842,831 on September 30, 2017, and will subsequently remeasure
the fair value at the end of each period, and record the change of fair value in the consolidated statement of operation during
the corresponding period.
10. 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.
All items required to be recorded or measured
on a recurring basis are based upon level 3 inputs.
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, 2017 and December 31,
2016, 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 in note 8. 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 in Note 8 are that of
volatility and market price of the underlying common stock of the Company.
As of September 30, 2017 and December 31,
2016, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of September
30, 2017, in the amount of $842,831 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 nine months ended September 30, 2017:
|
|
Debt Derivative
|
|
Balance, December 31, 2016
|
|
$
|
–
|
|
Total (gains) losses
|
|
|
|
|
Initial fair value of debt derivative at note issuance
|
|
|
1,797,264
|
|
Mark-to-market at September 30, 2017:
|
|
|
(154,963
|
)
|
Transfers out of Level 3 upon conversion or payoff of notes payable
|
|
|
(799,470
|
)
|
Balance, September 30, 2017
|
|
$
|
842,831
|
|
Net gain for the three month period included in earnings relating to the liabilities held during the period ended September 30, 2017
|
|
$
|
135,166
|
|
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, 2017, 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 Company used the Binomial-Lattice valuation
model to measure the fair value of the derivative liabilities as $842,831 on September 30, 2017, and will subsequently remeasure
the fair value at the end of each period, and record the change of fair value in the consolidated statement of operation during
the corresponding period. The Company recorded a gain in change of derivative liability of $135,166 and $154,963 for the three
and nine months ended September 30, 2017.
11. PAYROLL TAXES
The Company previously reported that it
has failed to remit payroll tax payments since 2006, as required by various taxing authorities. Payroll taxes and estimated penalties
were accrued in recognition of accrued salaries subsequently settled via stock issue and other agreements that did not result in
reportable or taxable payroll transactions. These accruals were reversed for prior years, and a similar estimated accrual established
for 2016 and 2015. As of September 30, 2017 and December 31, 2016, the Company estimated the amount of taxes, interest, and penalties
that the Company could incur as a result of payroll related taxes and penalties to be $42,923 and $41,783, respectively.
12. NET LOSS PER SHARE
Basic net loss per share is computed using
the weighted average number of common shares outstanding during the years. There were no dilutive earnings per share
for the three and nine months ended September 30, 2017 and 2016 due to net loss during the periods.
The following table sets forth the computation
of basic net loss per share for the periods indicated:
|
|
For the three months ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(1,365,598
|
)
|
|
$
|
(587,073
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding – Basic and diluted
|
|
|
40,359,954
|
|
|
|
14,414,566
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – Basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
|
For the nine months ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(2,665,651
|
)
|
|
$
|
(1,033,286
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding – Basic and diluted
|
|
|
36,979,427
|
|
|
|
12,080,973
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – Basic and diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.09
|
)
|
This does not include the potential dilutive
effect if all exercisable warrants were exercised or conversions of convertible notes and convertible preferred stock as described
below:
Principal conversion
|
|
$
|
22,098,048
|
|
Interest conversion
|
|
|
8,488,924
|
|
Warrants
|
|
|
400,000
|
|
Preferred Stock conversion
|
|
|
202,150,993
|
|
Total
|
|
$
|
233,137,965
|
|
13. CAPITAL STOCK
During the first quarter of 2017, the Company
filed Amended Articles of Incorporation with the Secretary of State of Florida to amend the rights and privileges for series of
Preferred Stock, and to authorize the issuance of Series I, F1, G1, H1, J1 and K1 Preferred Stock, which was effective on April
26, 2017.
Series A Preferred Stock
The Company has designated four shares
of preferred stock as Series A Preferred Stock (“Series A”), with a par value of $.0001 per share, of which one share
of preferred stock was issued and outstanding as of September 30, 2017. Series A is authorized to have four shares which do not
bear dividends and converts to common shares at four times the sum of: all shares of Common Stock issued and outstanding at time
of conversion plus all shares of Series B Preferred Stock issued and outstanding at time of conversion divided by the number of
issued Class A shares at the time of conversion, and have voting rights four times the sum of: all shares of Common Stock issued
and outstanding at time of voting plus all shares of Series B Preferred Stocks issued and outstanding at time of voting divided
by the number of Class A shares issued at the time of voting.
Series B Preferred Stock
The Company has designated 10,000,000 shares
of preferred stock as Series B Preferred Stock (“Series B”), with a par value $0.001 and $2.50 price per share, of
which 2,804,205 shares of Series B preferred stock were issued and outstanding as of September 30, 2017. Shares of Series B are
anti-dilutive to reverse splits. The conversion rate of shares of Series B, however, would increase proportionately in the case
of forward splits, and may not be diluted by a reverse split following a forward split. Series B is awarded “Voting Right”
at the ratio of 1 vote per share owned. Each one share of Series B converts to 5 shares of Common Stock. The price of each share
of Series B may be changed either through a majority vote of the Board of Directors through a resolution at a meeting of the Board
of Directors, or through a resolution passed at an Action Without Meeting of the unanimous Board of Directors, until such time
as a listed secondary and/or listed public market develops for the shares.
During the first quarter of 2017, 1,406,829
shares of Series B Preferred Stock were converted into 7,034,145 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
On March 30, 2017, the Company issued 24,000
shares of Series B Preferred Stock to settle legal expenses of $60,000. Based on the price of $.9075 per share for the Series B
Preferred Stock, which was determined by the market price of common stock at $.1815 per share on the issuance date multiplied by
the conversion ratio of 1:5, the fair value of the stock issuance of Series B Preferred Stock was $21,780, resulting in gain from
extinguishment of debt in amount of $38,220.
During the second quarter of 2017, 193,904
shares of Series B Preferred Stock were converted into 969,520 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
On June 27, 2017, the Company issued 15,906
shares of Series B Preferred Stock to 2 different consultants for services rendered. Based on the price of $.3995 per share for
the Series B Preferred Stock, which was determined by the market price of common stock at $.0799 per share on the issuance date
multiplied by the conversion ratio of 1:5, the fair value of the stock issuance of Series B Preferred Stock was $6,354, which was
recorded as stock based compensation during the six months ended June 30, 2017.
During the third quarter of 2017, 20,999
shares of Series B Preferred Stock were converted into 104,995 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
During the nine months ended September
30, 2016, 1,621,732 shares of Series B Preferred Stock were converted into 8,108,660 shares of Common Stock of the Company per
the preferred shareholder’s instruction.
Series C Preferred Stock
The Company has designated 500 shares of
preferred stock as Series C Preferred Stock (“Series C”), with a par value of $.001 per share, of which 117 shares
were issued and outstanding as of September 30, 2017. Shares of Series C are non-dilutive to reverse splits. The conversion rate
of shares of Series C, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse
split following a forward split. Each one share of Series C converts to 100,000 shares of Common Stock. Each share of Series C
shall have one vote for any election or other vote placed before the shareholders of the Company. The price of each share of Series
C may be changed either through a majority vote of the Board of Directors through a resolution at a meeting of the Board of Directors,
or through a resolution passed at an Action Without Meeting of the unanimous Board of Directors, until such time as a listed secondary
and/or listed public market develops for the shares. Shares of Series C may not be converted into shares of Common Stock for a
period of: a) six months after purchase, if the Company voluntarily or involuntarily files public reports pursuant to Section 12
or 15 of the Securities Exchange Act of 1934; or b) 12 months if the Company does not file such public reports.
During the first quarter of 2017, 1 share
of Series C Preferred Stock were converted into 100,000 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
Blank Check Preferred Stock
As of September 30, 2017, the Company has
designated 100,000,000 shares of Blank Check Preferred Stock, of which 5,991,507 shares have been issued with Designations, Rights
& Privileges. The following Series have been assigned from the inventory of Blank Check Preferred Shares. The amount of Blank
Check Preferred Stock is 94,008,493 as of September 30, 2017.
Series D Preferred Stock
The Company has designated 800,000 shares
of preferred stock as Series D Preferred Stock (“Series D”), with a par value of $.001 per share, of which 400,000
shares were issued and outstanding as of September 30, 2017. Series D is awarded “Voting Right” at the ratio of 1 vote
per share owned. Each one share of Series D converts to 5 shares of Common Stock.
On June 30, 2014, the Company completed
the acquisition of Romeo’s NY Pizza. The Company issued 400,000 shares of Series D Preferred Stock (“Series D”)
as consideration for this acquisition. Based on the price of $2.50 per share, the acquisition consideration represents a $1,000,000
valuation. Shares of Series D are anti-dilutive to reverse splits. The conversion rate of shares of Series D, however, would increase
proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share
of Series D shall have voting rights equal to one vote of Common Stock. With respect to all matters upon which stockholders are
entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series D shall
vote together with the holders of Common Stock, without regard to class, except as to those matters on which separate class voting
is required by applicable law or the Corporation’s Certificate of Incorporation or Bylaws. The initial price of each share
of Series D shall be $2.50.
There was no change in Series D Preferred
Stock during the nine months ended September 30, 2017 and 2016.
Series E Preferred Stock
The Company has designated 1,000,000 shares
of preferred stock as Series E Preferred Stock (“Series E”), with a par value of $.001 per share, of which 241,199
shares were issued and outstanding as of June 30, 2017. Series E is awarded “Voting Right” at the ratio of 1 vote per
share owned. Each one share of Series E converts to 5 shares of Common Stock.
On July 11, 2014, the Company completed
the acquisition of Edge View Properties, Inc. The Company issued 241,199 shares of Series E Preferred Stock (“Series E”)
as consideration for this acquisition. Based on the price of $2.50 per share, the acquisition consideration represents a $603,000
valuation. Shares of Series E are anti-dilutive to reverse splits. The conversion rate of shares of Series E, however, would increase
proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share
of Series E shall have voting rights equal to one vote of Common Stock. With respect to all matters upon which stockholders are
entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series E shall
vote together with the holders of Common Stock, without regard to class, except as to those matters on which separate class voting
is required by applicable law or the Corporation’s Certificate of Incorporation or Bylaws. The initial price of each share
of Series E shall be $2.50.
There was no change in Series E Preferred
Stock during the nine months ended September 30, 2017 and 2016.
Series F Preferred Stock
The Company has designated 800,000 shares
of preferred stock as Series F Preferred Stock (“Series F”), with a par value of $.001 per share, of which 280,069
shares were issued and outstanding as of September 30, 2017. Series F is awarded “Voting Right” at the ratio of 1 vote
per share owned. Each one share of Series F converts to 5 shares of Common Stock.
There was no change in Series D Preferred
Stock during the nine months ended September 30, 2017 and 2016.
The Company has designated 800,000 shares
of preferred stock as Series F1 Preferred Stock (“Series F1”), with a par value of $.001 per share, of which 57,194
shares were issued and outstanding as of September 30, 2017. Series F1 is “non-Voting stock”. Each one share of Series
F1 converts to 5 shares of Common Stock.
On May 15, 2014, the Company completed
the acquisition of We Three, LLC (d/b/a Affordable Housing Initiative) (“AHI”). The Company issued 280,069 shares of
Series F Preferred Stock (“Series F”) as consideration for this acquisition. The fair value of We Three LLC was $1,000,000.
Based on the price of $2.50 per share for the Series F Preferred Stock, the fair value of the stock issuance of Series F Preferred
Stock was $700,174, resulting in the gain of $299,826 on investment in We Three, which was offset the goodwill impairment at the
end of 2014. In addition, the Company sold 156,503 shares of Series F-1 Preferred Stock (Series F-1”), to various investors
at a price of $2.50 per share, or totaled $391,248 in cash. Shares of Series F are anti-dilutive to reverse splits. The conversion
rate of shares of Series F, however, would increase proportionately in the case of forward splits, and may not be diluted by a
reverse split following a forward split. Each one share of Series F shall have voting rights equal to five votes of Common Stock.
With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent,
the holders of the outstanding shares of Series F shall vote together with the holders of Common Stock, without regard to class,
except as to those matters on which separate class voting is required by applicable law or the Corporation’s Certificate
of Incorporation or Bylaws. The initial price of each share of Series F shall be $2.50.
During the first quarter of 2017, 31,997
share of Series F1 Preferred Stock were converted into 159,985 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
During the second quarter of 2017, 42,640
share of Series F1 Preferred Stock were converted into 213,200 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
During the third quarter of 2017, 41,318
share of Series F1 Preferred Stock were converted into 206,600 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
Series G Preferred Stock
The Company has designated 20,000,000 shares
of preferred stock as Series G Preferred Stock (“Series G”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of September 30, 2017. Series G is awarded “Voting Right” at the ratio of 1 vote per
share owned. Each one share of Series G converts to 1.25 shares of Common Stock.
The Company has designated 10,000,000 shares
of preferred stock as Series G1 Preferred Stock (“Series G1”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of September 30, 2017. Series G1 is “non-Voting stock”. Each one share of Series G1 converts
to 1.25 shares of Common Stock.
There was no change in Series G and G1
Preferred Stock during the nine months ended September 30, 2017 and 2016.
Series H Preferred Stock
The Company has designated 4,859,379 shares
of preferred stock as Series H Preferred Stock (“Series H”), with a par value of $.001 per share, of which 4,859,379
shares were issued and outstanding as of September 30, 2017. Series H is awarded “Voting Right” at the ratio of 1 vote
per share owned. Each one share of Series H converts to 1.25 shares of Common Stock.
The Company has designated 3,000,000 shares
of preferred stock as Series H1 Preferred Stock (“Series H1”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of September 30, 2017. Series H1 is “non-Voting stock”. Each one share of Series H1 converts
to 1.25 shares of Common Stock.
On August 10, 2016, the Company completed
the acquisitions of FDR Enterprises, Inc.; Refreshment Concepts, LLC; and Repicci’s Franchise Group, LLC. (collectively referred
to as “Repicci’s Group”). Pursuant to the acquisition agreement, the Company agreed to issue 4,859,379 shares
of Series H Preferred Stock as consideration for the acquisition of Repicci’s Group. The combined book value of Repicci’s
Group was $(203,622). Based on the price of $.15 per share for the Series H Preferred Stock, which was determined by the market
price of common stock at $.12 per share on the acquisition date multiplied by the conversion ratio of 1:1.25, the fair value of
the stock issuance of Series H Preferred Stock was $728,907, resulting in the goodwill of $932,529 which was offset with loss on
goodwill impairment during the quarter ended September 30, 2017. The 4,859,379 shares of Series H Preferred Stock were issued during
the first quarter of 2017.
There was no change in Series H and H1
Preferred Stock during the nine months ended September 30, 2016.
Series I Preferred Stock
The Company has designated 20,000,000 shares
of preferred stock as Series I Preferred Stock (“Series I”), with a par value of $.001 per share, of which 112,746
shares was issued and outstanding as of September 30, 2017. Series I is awarded “Voting Right” at the ratio of 1 vote
per share owned. Each one share of Series I converts to 1.50 shares of Common Stock.
During the first quarter of 2017, one investor
submitted a subscription agreement to the Company regarding the purchase of 29,412 shares of the Company’s Series I Preferred
Stock by cash payment of $10,000, which was collected during the first quarter of 2017. During the second quarter of 2017, the
same investor submitted a subscription agreement to the Company regarding the purchase of 83,334 shares of the Company’s
Series I Preferred Stock by cash payment of $10,000. The transactions were independently negotiated between the Company and the
investor. The proceeds from the subscription agreement mitigated the Company’s cash pressure in short term. The total 112,746
shares of Series I Preferred Stock were issued during the second quarter of 2017.
During the second quarter of 2017, a related
party submitted a subscription agreement to the Company regarding the purchase of 90,909 shares of the Company’s Series I
Preferred Stock by cash payment of $10,000, which was collected during the second quarter of 2017. The transaction was independently
negotiated between the Company and the related party. The proceeds from the subscription agreement mitigated the Company’s
cash pressure in short term.
The 90,909 shares of Series I Preferred
Stock was issued as of September 30, 2017. During the third quarter of 2017, 90,909 shares of Series I Preferred Stock were converted
into 352,691 shares of Common Stock of the Company per the preferred shareholder’s instruction.
Series J Preferred Stock
The Company has designated 10,000,000 shares
of preferred stock as Series J Preferred Stock (“Series J”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of September 30, 2017. Series J is awarded “Voting Right” at the ratio of 1 vote per
share owned. Each one share of Series J converts to 1.25 shares of Common Stock.
The Company has designated 7,500,000 shares
of preferred stock as Series J1 Preferred Stock (“Series J1”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of June 30, 2017. Series J1 is “non-Voting stock”. Each one share of Series J1 converts
to 1.25 shares of Common Stock.
There was no change in Series J and J1
Preferred Stock during the nine months ended September 30, 2017 and 2016.
Series K Preferred Stock
The Company has designated 9,607,840 shares
of preferred stock as Series K Preferred Stock (“Series K”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of September 30, 2017. Series K is awarded “Voting Right” at the ratio of 1 vote per
share owned. Each one share of Series K converts to 1.25 shares of Common Stock.
The Company has designated 35,000,000 shares
of preferred stock as Series K1 Preferred Stock (“Series K1”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of September 30, 2017. Series K1 is “non-Voting stock”. Each one share of Series K1 converts
to 1.25 shares of Common Stock.
There was no change in Series K and K1
Preferred Stock during the nine months ended September 30, 2017 and 2016.
Common Stock
2017
On February 10, 2017, the Company entered
into a consulting agreement with an unrelated party, pursuant to which the Company agreed to issue total 800,000 shares to the
consultant in four allotments, or 200,000 shares each, for consulting services related to marketing and business development. During
the first quarter of 2017, 250,000 shares were issued. The fair value of this stock issuance was determined by the fair value of
the Company’s Common Stock on the grant date, at a price of approximately $.235 per share. During the second quarter of 2017,
the difference of 150,000 shares were not issued as of the date of the Report. The fair value of the 150,000 shares was $15,600,
or approximately $.104 per share. During the third quarter of 2017, the third installment of 200,000 shares were not issued as
of the date of the Report. The fair value of the 200,000 shares was $27,475, or approximately $.1099 per share. Accordingly, the
Company recognized stock based compensation of $101,825 to the consolidated statements of operations for the nine months ended
September 30, 2017 and recorded $43,075 as accrued expenses in the consolidated balance sheet as of September 30, 2017.
During the first quarter of 2017, the note
holder converted $2,785 principal, $1,000 processing cost reimbursement and $102 accrued interest into 777,400 shares of common
stock at a conversion price of $0.005 per share.
During the first quarter of 2017, the note
holder converted $6,000 principal into 200,000 shares of common stock at a conversion price of $0.03 per share.
On January 24, 2017, the Company issued
173,585 shares of Common Stock to settle $34,717 due to the prior owner of Repicci’s Franchise Group LLC, pursuant to the
Acquisition Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s
Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt
in amount of $6,943.
On January 24, 2017, the Company issued
2,010,490 shares of Common Stock to settle $402,098 due to the prior owner of Refreshment Concepts LLC, pursuant to the Acquisition
Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s
Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt
in amount of $80,420.
On March 20, 2017, the Company issued 60,000
shares of Common Stock to settle consulting fees of $15,000. The fair value of this stock issuance was determined by the fair value
of the Company’s Common Stock on the grant date, at a price of approximately $0.1965 per share, resulting in gain from
extinguishment of debt in amount of $3,210.
During the first quarter of 2017, one investor
submitted a subscription agreement to the Company regarding the purchase of 100,000 shares of Common Stock by cash payment of $10,000.
The transaction was independently negotiated between the Company and the investor. The proceeds from the subscription agreement
mitigated the Company’s cash pressure in short term.
During the second quarter of 2017, the
Company issued 100,000 shares of Common Stock to an attorney for legal services. The fair value of this stock issuance was determined
by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.1145 per share. Accordingly,
the Company recognized stock based compensation of $11,450 to the consolidated statements of operations for the six months ended
June 30, 2017.
During the second quarter of 2017, the
Company issued 906,907 shares of Common Stock to a related party for services rendered. The fair value of this stock issuance was
determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.0799 per
share. Accordingly, the Company recognized stock based compensation of $72,462 to the consolidated statements of operations for
the six months ended June 30, 2017.
During the second quarter of 2017, the
Company redeemed 500,000 shares from a shareholder for a cash payment of $2,500. The 500,000 shares were return to the treasury
for cancellation and the $2,500 was recorded as accrued liabilities in the consolidated balance sheet as of June 30, 2017.
During the second quarter of 2017, the
note holders converted $18,853 principal, including $3,000 processing cost reimbursement, and $12,317 accrued interest into 1,039,000
shares of common stock at a conversion price of $0.03 per share.
On September 15, 2017, the Company issued
19,000,000 shares of Common Stock to settle $1,415,600 in accrued salaries to current and former officers of the Company. Additionally,
the Company issued 1,000,000 shares to a former employee as a one time bonus, valued at $70,000. The fair value of this stock issuance
was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.07
per share. Accordingly, the Company reduced its accrued expenses by $1,415,600 and stock based compensation by $70,000.
During the quarter ended September 30,
2017, the Company issued 704,733 shares of common stock for the conversion of unpaid convertible notes principal and processing
cost reimbursement in the amount of $18,147 and $1,000, respectively, at a price of $0.03 per share.
During the quarter ended September 30,
2017, the Company negotiated an agreement to cancel 500,000 shares previously issued to a third party consultant for services and
to issue 25,000 shares of common stock for services rendered. The fair value of this stock issuance was determined by the fair
value of the Company’s Common Stock on the grant date, at a price of approximately $0.0699 per share. Accordingly, the
Company calculated the stock based compensation of $1,748 at its fair value and included it in the consolidated statements of operations
for the nine months ended September 30, 2017.
14. WARRANTS
Pursuant to the same consulting agreement,
dated February 10, 2017, in addition to the 800,000 shares of common stock, the Company agreed to grant total 800,000 warrants
to the consultant for consulting services related to marketing and business development. The initial allotment of 200,000 warrants
were granted during the first quarter of 2017. The second allotment of 200,000 warrants were granted during the second quarter
of 2017. The third allotment of 200,000 warrants were granted during the third quarter of 2017The fair value of these warrants
was measured using the Black-Scholes valuation model at the grant date. The table below sets forth the assumptions for Black-Scholes
valuation model on February 10, 2017, May 10, 2017 and August 10, 2017, respectively.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Exercise
Price
|
Market
Price on
Grant Date
|
Volatility
Percentage
|
Risk-free
Rate
|
2/10/2017
|
$47,000
|
3
|
$0.50
|
$0.235
|
535%
|
0.0147
|
5/10/2017
|
20,799
|
3
|
$0.50
|
$0.104
|
506%
|
0.0156
|
8/10/2017
|
21,980
|
3
|
$0.50
|
$0.1099
|
1124%
|
0.0149
|
Accordingly, the Company recorded warrant
expenses of $89,779 during the nine months ended September 30, 2017.
On April 21, 2017, the Company entered
into a Securities Purchase Agreement with an unrelated entity, pursuant to which the purchasers agreed to pay the Company an aggregate
of up to $600,000 for an aggregate of up to 660,000 in Principal Amount of Notes. The first tranche of $330,000 was closed simultaneously
(“Note 13-1”). The proceeds of $300,000, net of $30,000 Original Issuance Discount, was received by the Company.
In addition, in connection with this Securities
Purchase Agreement, the Company granted purchasers 2,357,143 warrants with exercise price of $0.14 per share (“Warrants A”),
1,885,715 warrants with exercise price of $0.175 per share (“Warrants B”) and 1,571,429 warrants with exercise price
of $0.21 per share (“Warrants C”). Warrants A, B and C are exercisable on the grant date and expire in three years,
each of which represents 100% of the Principal Amount at the Closing divided by the respective exercise price.
The fair value of these warrants was measured
using the Black-Scholes valuation model at the grant date. The table below sets forth the assumptions for Black-Scholes valuation
model on April 21, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Exercise
Price
|
Market
Price on
Grant Date
|
Volatility
Percentage
|
Risk-free
Rate
|
4/21/2017
|
$814,000
|
3
|
$0.14 - $0.21
|
$0.14
|
676%
|
0.0177
|
Accordingly, the Company recorded warrant
expenses of $814,000 during the nine months ended September 30, 2017.
The following tables summarize all warrant
outstanding as of September 30, 2017, and the related changes during this period.
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Stock Warrants
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
|
0
|
|
|
$
|
0
|
|
Granted
|
|
|
6,414,287
|
|
|
|
0.201
|
|
Exercised
|
|
|
0
|
|
|
|
0
|
|
Expired
|
|
|
0
|
|
|
|
0
|
|
Balance at September 30, 2017
|
|
|
6,414,287
|
|
|
|
0.201
|
|
Warrants Exercisable at September 30, 2017
|
|
|
6,414,287
|
|
|
$
|
0.201
|
|
15. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company had operating leases of $39,679
and $39,679 for the three months ended September 30, 2017 and 2016, respectively, consisting of the followings.
|
|
For the three months ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
Restaurants
|
|
$
|
18,224
|
|
|
$
|
18,224
|
|
Lot
|
|
|
18,238
|
|
|
|
18,238
|
|
Office
|
|
|
3,217
|
|
|
|
3,217
|
|
Equipment Rentals
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
$
|
39,679
|
|
|
$
|
39,679
|
|
The Company had operating leases of $115,862
and $115,862 for the nine months ended September 30, 2017 and 2016, respectively, consisting of the followings.
|
|
For the nine months ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
Restaurants
|
|
$
|
60,564
|
|
|
$
|
60,564
|
|
Lot
|
|
|
48,049
|
|
|
|
48,049
|
|
Office
|
|
|
6,917
|
|
|
|
6,917
|
|
Equipment Rentals
|
|
|
332
|
|
|
|
332
|
|
Total
|
|
$
|
115,862
|
|
|
$
|
115,862
|
|
The Company has property leases that are renewable on an annual basis, with no long term property leases.
16. SEGMENT REPORTING
The Company has four reportable operating
segments as determined by management using the “management approach” as defined by the authoritative guidance on
Disclosures
about Segments of an Enterprise and Related Information
: (1) Mobile home lease (We Three), (2) Company-owned Pizza
Restaurants (Romeo’s NY Pizza), and (3) “Repicci’s Italian Ice” franchised stores. These segments are a
result of differences in the nature of the products and services sold. Corporate administration costs, which include, but are not
limited to, general accounting, human resources, legal and credit and collections, are partially allocated to the three operating
segments. Other revenue consists of nonrecurring items.
The mobile home lease segment establishes
mobile home business as an option for a homeowner wishing to avoid large down payments, expensive maintenance costs, monthly mortgage
payments and high property taxes. If bad credit is an issue preventing people from purchasing a traditional house, the Company
will provide a financial leasing option with "0" interest on the lease providing a "lease to own" option for
their family home.
The Company-owned Pizza Restaurant segment
includes sales and operating results for all Company-owned restaurants. Assets for this segment include equipment, furniture and
fixtures for the Company-owned restaurants.
Repicci’s Group offers franchisees
for the operation of “Repicci’s Italian Ice” franchises. These franchised stores specialize in the distribution
of nonfat frozen confections.
The number of franchise agreements in force
as of December 31, 2016 was 48, five of which are “mobile” 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 $155,600 to $165,000, as follows: $125,000
for a new Mercedes Sprinter Van, customized for the franchisee, $25,000 for the franchise fee, the balance for product. The Company’s
obligation is as above, except for Item #3, training is specific to the new opportunity.
|
|
For the three months ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
51,193
|
|
|
$
|
35,770
|
|
Romeo’s NY Pizza
|
|
|
155,187
|
|
|
|
82,911
|
|
Repicci’s Group
|
|
|
207,495
|
|
|
|
185,489
|
|
Other
|
|
|
–
|
|
|
|
74,338
|
|
Consolidated revenues
|
|
$
|
413,875
|
|
|
$
|
378,508
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
39,645
|
|
|
$
|
34,880
|
|
Romeo’s NY Pizza
|
|
|
111,430
|
|
|
|
104,680
|
|
Repicci’s Group
|
|
|
306,319
|
|
|
|
141,861
|
|
Other
|
|
|
–
|
|
|
|
–
|
|
Consolidated cost of sales
|
|
$
|
457,394
|
|
|
$
|
281,421
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
10,379
|
|
|
$
|
529
|
|
Romeo’s NY Pizza
|
|
|
(7,053
|
)
|
|
|
(65,308
|
)
|
Repicci’s Group
|
|
|
(23,330
|
)
|
|
|
(54,506
|
)
|
Others
|
|
|
(1,345,594
|
)
|
|
|
(467,788
|
)
|
Consolidated loss before taxes
|
|
$
|
(1,365,598
|
)
|
|
$
|
(587,073
|
)
|
|
|
For the nine months ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
145,890
|
|
|
$
|
116,743
|
|
Romeo’s NY Pizza
|
|
|
440,064
|
|
|
|
466,427
|
|
Repicci’s Group
|
|
|
829,307
|
|
|
|
185,489
|
|
Others
|
|
|
3,745
|
|
|
|
92,428
|
|
Consolidated revenues
|
|
$
|
1,419,006
|
|
|
$
|
861,087
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
118,832
|
|
|
$
|
115,850
|
|
Romeo’s NY Pizza
|
|
|
311,986
|
|
|
|
307,837
|
|
Repicci’s Group
|
|
|
878,580
|
|
|
|
141,861
|
|
|
|
|
–
|
|
|
|
–
|
|
Consolidated cost of sales
|
|
$
|
1,309,398
|
|
|
$
|
565,548
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
52,682
|
|
|
$
|
(17,783
|
)
|
Romeo’s NY Pizza
|
|
|
(34,527
|
)
|
|
|
(22,588
|
)
|
Repicci’s Group
|
|
|
(77,696
|
)
|
|
|
(54,506
|
)
|
Others
|
|
|
2,725,192
|
)
|
|
|
(938,409
|
)
|
Consolidated loss before taxes
|
|
$
|
(2,665,651
|
)
|
|
$
|
(1,033,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Assets:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
262,115
|
|
|
$
|
216,433
|
|
Romeo’s NY Pizza
|
|
|
4,970
|
|
|
|
19,241
|
|
Repicci’s Group
|
|
|
370,989
|
|
|
|
411,606
|
|
Others
|
|
|
890,037
|
|
|
|
1,824,729
|
|
Combined assets
|
|
$
|
1,528,111
|
|
|
$
|
2,472,009
|
|
17. SUBSEQUENT EVENTS
In accordance with ASC Topic 855-10, the
Company has analyzed its operations subsequent to September 30, 2017 to the date these consolidated financial statements were issued,
and has determined that it does not have any material subsequent events to disclose in these financial statements other than those
specified below.
On October 6, 2017, the Company entered
into a 12% convertible promissory note with an unrelated entity in the principal amount $82,500, with original issue discount of
$6,600 (“Note 14”). Note 14 is matured on July 6, 2018, and unsecured. This Note is convertible into common shares
of the Company at the conversion ratio of 60% of the lowest trading price on the primary trading market on which Company's common
stock is quoted for the last ten trading days prior to the conversion date.
On November 2, 2017, the Company entered
into an 8% convertible promissory note with an unrelated entity in the principal amount $54,600, with original issue discount $2,100
(“Note 15”). Note 15 is matured on November 2, 2018, and unsecured. This Note is convertible into common shares of
the Company at the conversion ratio of 60% of the lowest trading price on the primary trading market on which Company's common
stock is quoted for the last ten trading days prior to the conversion date.