Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

Commission File Number 000-49709

 

CARDIFF LEXINGTON CORP.

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices)

 

(844) 628-2100

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
N/A N/A N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x          No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)

Yes x          No o

 

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

 

  Large accelerated filer  o Accelerated filer  o
  Non-accelerated filer  o Smaller reporting company  x
  Emerging growth company  o  

 

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

 

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

Yes o          No x

 

Common Stock outstanding at November 18, 2019 is 549,955,831 shares of $0.001 par value Common Stock.

 

 

 

  

     

 

 

FORM 10-Q

 

CONSOLIDATED FINANCIAL

STATEMENTS AND SCHEDULES

CARDIFF LEXINGTON CORP.

 

For the Quarter ending September 30, 2019

 

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

 

    Page
PART I - FINANCIAL INFORMATION
 
Item 1. Unaudited Condensed Consolidated Financial Statements: 3
  Condensed Consolidated Balance Sheets 3
  Condensed Consolidated Statements of Operations 4
  Condensed Consolidated Statement of Deficiency in Shareholders’ Equity 5
  Condensed Consolidated Statements of Cash Flows 7
  Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27
Item 3 Quantitative and Qualitative Disclosures about Market Risk 33
Item 4. Controls and Procedures, Evaluation of Disclosure Controls and Procedures 34
     
PART II - OTHER INFORMATION
     
Item 1. Legal Proceedings 35
Item 1A. Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 3. Defaults Upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits 35

 

 

 

 

 

  2  

 

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

 

CARDIFF LEXINGTON CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF September 30, 2019 AND DECEMBER 31, 2018

 

    September 30,     December 31,  
    2019     2018  
    (Unaudited)     (Audited)  
ASSETS            
Current assets                
Cash   $ 144,971     $ 118,307  
Accounts receivable-net     226,039       64,345  
Inventory     3,079       3,079  
Prepaid and other     46,393       46,596  
Total current assets     420,482       232,327  
                 
Property and equipment, net of accumulated depreciation of $400,993 and $495,331, respectively     279,854       381,301  
Land     603,000       603,000  
Goodwill     3,749,963       2,092,048  
Deposits     19,600       24,600  
Right of use - assets     357,650       –  
Other assets     30,494       7,790  
Total assets     5,461,043       3,341,066  
                 
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS EQUITY                
                 
Current liabilities                
Accounts payable and accrued expense     710,708       1,094,521  
Accrued expenses - related parties     1,137,000       747,000  
Interest payable     513,213       366,297  
Right of use - liability     357,650       –  
Due to officers and shareholders     175,266       137,816  
Deferred Income     153,226       1,036,039  
Line of credit     –       1,999  
Common stock to be issued     500       500  
Notes payable, unrelated party     597,629       676,477  
Notes payable - related party     296,916       265,242  
Convertible notes payable, net of debt discounts of $269,866 and $201,024, respectively     648,866       950,776  
Net, liabilities of discontinued operations     2,152,199       –  
Derivative Liability     7,351,185       1,870,625  
Total current liabilities     14,094,358       7,147,292  
                 
Other Liabilities                
Convertible notes payable, net of current portion and net of debt discounts of $465,828 and $0, respectively     374,172       1,040,000  
                 
Total liabilities     14,468,530       8,187,292  
                 

Deficiency in Stockholders’ Equity

               
Preferred stock                
Preferred Stock all classes     –          
Preferred Stock Series A - 4 Shares authorized, with par value of $0.0001, 1 and 1 share issued and outstanding at September 30, 2019 and December 31, 2018     –       –  
Preferred Stock Series B - 10,000,000 shares authorized, with par value of $.001, 2,773,206 and 2,773,206 shares issued and outstanding at September 30, 2019 and December 31, 2018     2,773       2,773  
Preferred Stock Series C - 10,000 shares authorized, with par value of $.0.00001, 119 and 119 shares issued and outstanding at September 30, 2019 and December 31, 2018     –       –  
Preferred Stock Series D - 1,000,000 shares authorized, with par value of $.001, 400,000 shares issued and outstanding at September 30, 2019 and December 31, 2018     400       400  
Preferred Stock Series E - 2,000,000 shares authorized, with par value of $.001, 241,199 shares issued and outstanding at September 30, 2019 and December 31, 2018     241       241  
Preferred Stock Series F - 500,000 shares authorized, with par value of $.001, 280,069 shares issued and outstanding at September 30, 2019 and December 31, 2018     280       280  
Preferred Stock Series F -1- 500,000 shares authorized, with par value of $.001, 57,193 shares issued and outstanding at September 30, 2019 and December 31, 2018     57       57  
Preferred Stock Series G - 2,000,000 shares authorized, with par value of $.001, 18,571,428 and -0- shares issued and outstanding at September 30, 2019 and December 31, 2018     18,571       –  
Preferred Stock Series H - 4,859,379 shares authorized, with par value of $.001, -0- and -0- shares issued and outstanding at September 30, 2019 and December 31, 2018     –       –  
Preferred Stock Series H -1- 3,000,000 shares authorized, with par value of $.001, -0- shares issued and outstanding at September 30, 2019 and December 31, 2018     –       –  
Preferred Stock Series I- 20,000,000 shares authorized, with par value of $.001, 195,000,000 and -0- shares issued and outstanding at September 30, 2019 and December 31, 2018     195,000       –  
Preferred I Shares to be issued     –       200,000  
Preferred Stock Series J - 10,000,000 shares authorized, with par value of $.001, -0- shares issued and outstanding at September 30, 2019 and December 31, 2018     –       –  
Preferred Stock Series J1- 7,500,000 shares authorized, with par value of $.001, -0- shares issued and outstanding at September 30, 2019 and December 31, 2018     –       –  
Preferred Stock Series K - 10,937,500 shares authorized, with par value of $.001, 8,200,562 shares issued and outstanding at September 30, 2019 and December 31, 2018     8,200       8,200  
Preferred Stock Series K1 - 35,000,000 shares authorized, with par value of $.001, 1,447,157 shares issued and outstanding at September 30, 2019 and December 31, 2018     1,447       1,447  
Preferred Stock Series L - 100,000,000 shares authorized, with par value of $.001, 98,307,692 shares issued and outstanding at September 30, 2019 and December 31, 2018     98,308       98,308  
Common stock; 7,500,000,000 shares authorized with $0.001 par value;524,346,331 and 602,826 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively (reflects post reverse stock split of 1500:1)     524,347       603  
Additional paid-in capital     54,654,595       50,220,067  
Accumulated deficit     (64,511,706 )     (55,378,603 )
Total deficiency in stockholders’ equity     (9,007,487 )     (4,846,227 )
                 
Total liabilities and deficiency in stockholders’ equity   $ 5,461,043     $ 3,341,065  

 

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

 

 

 

  3  

 

 

CARDIFF LEXINGTON CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND SEPTEMBER 30, 2018

(UNAUDITED)

 

    THREE MONTHS ENDED
SEPTEMBER 30, 		    NINE MONTHS ENDED
SEPTEMBER 30, 		 
    2019     2018     2019     2018  
REVENUE                        
Rental income   $ 39,199     $ 44,740     $ 135,577     $ 143,403  
Food and beverage     157,091       148,540       472,237       452,555  
Sales of ice cream     –       68,079       –       275,468  
Ice cream     42,959       76,475       137,802       169,550  
Franchise fees     2,044       –       11,422       120,000  
Royalty fees     11,198       7,350       28,737       13,650  
Tax Services     1,288,116       229,124       2,816,644       229,124  
Other     –       123,576       –       123,576  
Total revenue     1,540,608       697,884       3,602,420       1,527,326  
                                 
COST OF SALES                                
Rental business     32,254       43,305       153,873       145,650  
Food and beverage     175,357       111,814       524,717       324,661  
Ice cream stores     –       154,572       –       435,302  
Tax Services     372,642       155,475       958,641       155,475  
Other     –       125,900       –       125,900  
Total cost of sales     580,253       591,066       1,637,231       1,186,988  
                                 
GROSS MARGIN     960,356       106,818       1,965,189       340,338  
                                 
OPERATING EXPENSES                                
Depreciation and amortization expense     (1,945 )     (9,279 )     9,373       15,992  
Selling, general and administrative     817,978       1,032,113       2,421,624       2,008,405  
Total operating expenses     816,033       1,022,834       2,430,997       2,024,397  
                                 
LOSS FROM OPERATIONS     144,322       (916,016 )     (465,808 )     (1,684,059 )
                                 
OTHER INCOME (EXPENSE)                                
Other income     33,644       84       136,460       1,664  
Bad debt expense     –       (23,607 )     –       (23,607 )
Change in value of derivative liability     (2,340,167 )     (1,898,704 )     (6,635,549 )     (1,317,018 )
Gain/(loss) on sale of assets     –       (14,196 )     –       874  
Interest expense     (49,352 )     (72,355 )     (220,179 )     (164,277 )
Conversion cost reimbursement     –       –       (13,520 )     –  
Conversion cost penalty     (136,401 )     –       (668,897 )     –  
Impairment of asset     –       (300,000 )     –       (300,000 )
Impairment on acquisition     –       (1,459,725 )     –       (1,459,725 )
Amortization of debt discounts     (302,846 )     (330,941 )     (825,206 )     (765,901 )
Total other income (expenses)     (2,795,122 )     (4,099,444 )     (8,226,891 )     (4,027,990 )
                                 
Loss from Discontinued Operations     (339,659 )     –       (440,407 )     –  
                                 
NET (LOSS) FOR THE PERIOD   $ (2,990,459 )   $ (5,015,460 )   $ (9,133,106 )   $ (5,712,049 )
                                 
(LOSS) PER COMMON SHARE - BASIC AND DILUTED FOR CONTINUED OPERATIONS   $ (0.01 )   $ (43.46 )   $ (0.06 )   $ (78.42 )
                                 
(LOSS) PER COMMON SHARE - BASIC AND DILUTED FOR DISCONTINUED OPERATIONS   $ (0.00 )*   $ –   $ (0.00 )*   $ –
                                 
WEIGHTED AVERAGE NUMBER OF COMMONS HARES - BASIC AND DILUTED     275,203,293       115,404       144,871,780       72,839  

 

 

* Less than $0.01

 

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

 

 

 

  4  

 

 

CARDIFF LEXINGTON CORP. (FORMERLY CARDIFF INTERNATIONAL, INC.)

CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS EQUITY

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND SEPTEMBER 30, 2018

(UNAUDITED)

 

Preferred Stock
Series A 		  Preferred Stock
Series B, D, E, F, F-1, H, I 		  Preferred Shares
to be issued 		  Preferred Stock,
Series C 		  Common Stock   Additional Paid-in   Accumulated      
Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Total  
Balance December 31, 2017   –   $ –     8,839,303   $ 8,849     –   $ –     117   $ –     44,808   $ 45   $ 45,674,137   $ (49,113,352 ) $ (3,430,321 )
Conversion of Series B Preferred Stock   –     –     (10,000 )   (10 )   –     –     –     –     33     0     10     –     –  
                                                                               
Conversion of Series H Preferred Stock   –     –     (2,546,259 )   (2,546 )   –     –     –     –     2,122     2     2,544     –     –  
                                                                               
Common stock issued for services - Eurasian consulting agreement   –     –     –     –     –     –     –     –     247     0     11,074     –     11,074  
                                                                               
Conversion of convertible notes payable   –     –     –     –     –     –     –     –     5,533     6     103,616     –     103,622  
                                                                               
Reclassified Derivative liabilities from Additional Paid in Capital   –     –     –     –     –     –     –     –     –     –     95,456     –     95,456  
                                                                               
Net loss   –     –     –     –     –     –     –     –     –     –     –     (92,720 )   (92,720 )
                                                                               
Balance March 31, 2018   –   $ –     6,283,044   $ 6,292     –   $ –     117   $ –     52,744   $ 53   $ 45,886,835   $ (49,206,072 ) $ (3,312,890 )
Conversion of Series I Preferred Stock   –     –     (112,746 )   (113 )   –     –     –     –     113     0     113     –     –  
                                                                               
Conversion of Series I Preferred Stock   –     –     (90,909 )   (91 )   –     –     –     –     91     0     91     –     –  
                                                                               
Conversion of Series H Preferred Stock   –     –     (2,313,210 )   (2,313 )   –     –     –     –     1,928     2     2,311     –     –  
                                                                               
Common stock issued for services - Eurasian consulting agreement   –     –     –     –     –     –     –     –     247     0     9,148     –     9,148  
                                                                               
Common stock issued for services - Eurasian consulting agreement   –     –     –     –     –     –     –     –     317     0     8,857     –     8,857  
                                                                               
Common stock issued for services - Greentree consulting agreement   –     –     –     –     –     –     –     –     1,780     2     57,670     –     57,672  
                                                                               
Conversion of convertible notes payable   –     –     –     –     –     –     –     –     2,739     3     33,563     –     33,565  
                                                                               
Reclassified Derivative liabilities from Additional Paid in Capital   –     –     –     –     –     –     –     –     –     –     60,796     –     60,796  
                                                                               
Net loss   –     –     –     –     –     –     –     –     –     –     –     (603,869 )   (603,869 )
                                                                               
Balance June 30, 2018   –   $ –     3,776,179   $ 3,776     –   $ –     117   $ –     59,958   $ 60   $ 46,059,384   $ (49,809,941 ) $ (3,746,721 )
Conversion of Series B Preferred Stock   –     –     (23,999 )   (24 )   –     –     –     –     80     0     24     –     –  
                                                                               
Issuance of Series C Preferred Stock related to Edgeview services 2018   –     –     –     –     –     –     2     –     –     –     720     –     720  
                                                                               
Issuance of Series K Preferred Stock for acquisition of Red Rock   –     –     8,200,562     8,201      –     –     –     –     –     –     166,799     –     175,000
                                                                               
Issuance of Series K-1 Preferred Stock for investment in Red Rock   –     –     1,447,157     1,447     –     –     –     –     –     –     98,553     –     100,000  
                                                                               
Issuance of Series L Preferred Stock for investment in Platinum Tax Defender   –     –     98,307,692     98,308     –     –     –     –     –     –     1,179,692     –     1,278,000  
                                                                               
Cancelation of previously issued cert to Jason Levy   –     –     –     –     –     –     –     –     (667 )   (1 )   1     –     –  
                                                                               
Shares issued to Jason Levy per agreement to resolve accrued payroll   –     –     –     –     –     –     –     –     2,286     2     239,998     –     240,000  
                                                                               
Conversion of convertible notes payable   –     –     –     –     –     –     –     –     122,295     123     438,360     –     438,483  
                                                                               
Reclassified to Derivative liabilities from Additional Paid in Capital   –     –     –     –     –     –     –     –     –     –     1,139,232     –     1,139,232  
                                                                               
Correction to balance reverse split partial rounding shares   –     –     –     –     –     –     –     –     (789 )   (1 )   1     –     –  
                                                                               
Capital contribution   –     –     –     –     –     –     –     –     –     –     50,000     –     50,000  
                                                                               
Net loss   –     –     –     –     –     –     –     –     –     –     –     (5,015,460 )   (5,015,460 )
                                                                               
Balance September 30, 2018   –   $ –     111,697,592   $ 111,708     –   $ –     119   $ –     183,163   $ 184   $ 46,372,769   $ (54,825,401 ) $ (5,340,742 )

 

 

 

  5  

 

 

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2019

 

 

Preferred Stock
Series A 		  Preferred Stock
Series B, D, E, F, F-1, H, I 		  Preferred Shares
to be issued 		  Preferred Stock,
Series C 		  Common Stock   Additional Paid-in   Accumulated      
Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Total  
Balance December 31, 2018   –   $ –     111,697,591   $ 111,707     –   $ 200,000     119   $ 0     602,826   $ 603   $ 50,220,067   $ (55,378,603 ) $ (4,846,226 )
Issuance to balance reverse split partial rounding shares   –     –     –     –     –     –     –     –     (826 )   –     –     –     –  
                                                                           
Issuance of PF I shares as Bonus to Cunningham and Thompson   –     –     250,000,000     250,000     –     (200,000 )   –     –     –     –     (50,000 )   –     –  
                                                                               
Conversion of convertible notes payable   –     –     –     –     –     –     –     –     825,122     825     694,667     –     695,492  
                                                                               
Net loss   –     –     –     –     –     –     –     –     –     –     –     (4,871,846 )   (4,871,846 )
                                                                               
Balance. March 31, 2019   –   $ –     361,697,591   $ 361,707     –   $ –     119   $ 0     1,427,122   $ 1,428   $ 50,864,734   $ (60,250,449 ) $ (9,022,580 )
Issuance for Key Tax acquisition   –     –     18,571,428     18,571     –     –     –     –     500,000     500     1,280,929     –     1,300,000  
                                                                               
Conversion of PF1 to CS shares Cunningham and Thompson   –     –     (55,000,000 )   (55,000)     –     –     –     –     82,500,000     82,500     (27,500 )   –     –  
                                                                               
Conversion of convertible notes payable   –     –     –     –     –     –     –     –     15,913,565     15,914     76,761     –     92,675  
                                                                               
Reclassified Derivative liabilities to Additional Paid in Capital   –     –     –     –     –     –     –     –     –     –     694,956     –     694,956  
                                                                               
Net loss   –     –     –     –     –     –     –     –     –     –     –     (1,270,801 )   (1,270,801 )
                                                                               
Balance. June 30,2019   –   $ –     325,269,019   $ 325,277     –   $ –     119   $ 0     100,340,687   $ 100,342   $ 52,889,881   $ (61,521,250 ) $ (8,205,750 )
Conversion of convertible notes payable   –     –     –     –     –     –     –     –     424,005,644     424,005     (261,935 )   –     162,070  
                                                                               
Reclassified Derivative liabilities to Additional Paid in Capital   –     –     –     –     –     –     –     –     –     –     2,026,650     –     2,026,650  
                                                                               
Net loss   –     –     –     –     –     –     –     –     –     –     –     (2,990,459 )   (2,990,459 )
                                                                               
Balance. September 30, 2019   –   $ –     325,269,019   $ 325,278     –   $ –     119   $ 0     524,346,331   $ 524,348   $ 54,656,595   $ (64,511,708 ) $ (9,007,488 )

 

 

 

  6  

 

 

 

CARDIFF INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30 , 2019 AND SEPTEMBER 30, 2018

(UNAUDITED)

 

    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net (loss) from continuing operations   $ (9,133,106 )   $ (5,712,049 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:               
Depreciation     53,549       59,730  
Loss (gain) from disposal of fixed assets     –       (874 )
Loss (gain) from impairment of goodwill     –       1,459,725  
Amortization of loan discount     825,206       765,901  
Change in value of derivative liability     6,635,549       1,317,018  
Stock based compensation     –       87,472  
Convertible note issued for conversion cost reimbursement     13,520       18,880  
Conversion cost penalty     668,897       –  
Other Income     –       16,338  
(Increase) decrease in:                
Accounts receivable     (161,694 )     61,898  
Inventory     –       43,849  
Deposits     5,000       –  
Prepaids and other     203       (35,288 )
Other assets     (22,704 )     345,274  
Intangible assets     –       15,561  
Increase(decrease) in:                
Accounts payable     (344,156 )     (74,993 )
Accrued expenses     390,000      

135,910

 
Interest payable     146,917       169,896  
Taxes payable     –       (4,500 )
Accrued payroll taxes     –       39,149  
Accrued officers' salaries     37,450       290,000  
Net, liabilities of discontinued operations     1,459,052       –  
Other liabilities - deferred revenue     (882,813 )     112,893  
Net cash provided by (used in) operating activities - Continuing     (309,130 )     (888,210 )
                 
Net cash from Discontinued Operations - Operating     –       –  
                 
INVESTING ACTIVITIES                
Purchase of fixed assets     –       (852,000 )
Disposal (Purchase) of fixed assets     –       91,847  
                 
Net cash provided by (used in) investing activities - Continuing     –       (760,153 )
                 
Net cash from Discontinued Operations - Investing     –       –  
                 
FINANCING ACTIVITIES                
Due to related party     37,450       100,806  
Proceeds from convertible notes payable     193,500       890,605  
Proceeds from notes payable -related party     –       27,393  
Proceeds from notes payable     410,000       –  
Repayments of convertible notes payable     (235,763 )     –  
Repayments of convertible notes payables interest     (67,394 )     607,329  
Repayments to line of credit     (1,999 )     (9,343 )
Net cash provided by financing activities - Continuing     335,794       1,616,790  
                 
Net cash from Discontinued Operations - Financing     –       –  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     26,664       (31,573 )
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     118,307       230,407  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 144,971     $ 198,834  
                 
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION                
Cash paid during the period for:                
Interest   $ 67,394     $ 73,858  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Common stock issued upon conversion of notes payable   $ 950,237     $ 575,672  
Common stock issued for settlement of accrued expense   $ –     $ 240,000  
Issuance of Preferred I and Common shares for acquisition   $ 1,300,000     $ –  
Conversion of preferred stock to common stock   $ –     $ 5,097  
Derivative resolution upon conversion   $ 2,721,606     $ 1,295,485  
Goodwill   $ 1,407,915     $ 2,092,048  
Debt discount from derivative liabilities   $ 258,000     $ 675,792  

 

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

 

 

 

  7  

 

  

CARDIFF LEXINGTON CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of Operations

 

Legacy Card Company (“Legacy”) was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, Legacy converted from a California Limited Liability Company to a Nevada Corporation. On November 10, 2005, Legacy merged with Cardiff Lexington Corp (formerly Cardiff International, Inc.) (“Cardiff”, the “Company”), a publicly held corporation.

 

Organization and Nature of Operations

 

In the first quarter of 2013, management decided to restructure Cardiff into a holding company that adopted a new business model known as "Collaborative Governance," a form of governance enabling businesses to take advantage of the power of a public company. Cardiff began targeting the acquisition of undervalued, niche companies with high growth potential, and income-producing commercial real estate properties, all designed to pay a dividend to the Company’s shareholders. The reason for this strategy was to protect the Company’s shareholders by acquiring businesses with little to no debt, seeking support with both financing and management that had the ability to offer a return to investors. 

 

Description of Business

 

Cardiff is a holding company that adopted a new business model known as "Collaborative Governance.” To date, the Company is not aware of any other domestic holding company using the same business philosophy or governing policies.

 

At September 30, 2019, Cardiff consists of the following wholly-owned subsidiaries:

 

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

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

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

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

Platinum Tax Defenders, LLC was acquired July 31, 2018

JM Enterprises 1, Inc. (dba – Key Tax Group) was acquired May 8, 2019

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Cardiff, and its wholly-owned subsidiaries: We Three, LLC; Romeo’s NY Pizza; Edge View Properties, Inc.; Repicci’s Franchise Group: Platinum Tax Defenders LLC; and JM Enterprises 1, Inc. (dba – Key Tax Group). Red Rock Travel was discontinued effective June 30th, 2019.All significant intercompany accounts and transactions are eliminated in consolidation. Certain prior period amounts may have been reclassified for consistency with the current period presentation. These reclassifications would have no material effect on the reported financial results.

 

 

  8  

 

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (US GAAP) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management uses its historical records and knowledge of its business in making estimates. Accordingly, actual results could differ from those estimates.

 

Revenue Recognition

 

On January 1, 2018, we adopted ASC 606, Revenue from contracts with customers (“Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606.

 

There was no impact to the opening balance of accumulated deficit or revenues for the year ended December 31, 2018, as a result of applying Topic 606.

 

The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer.

 

The Company generates revenue from our subsidiaries primarily from the sale of food items and monthly rentals of mobile homes. As allowed by a practical expedient in Topic 606, the entity recognizes revenue in the amount to which the entity has a right to invoice. The term between invoicing and when payment is due is not significant.

 

Our subsidiary Repicci, generates revenues through franchise fees. Revenues from franchise fees are recognized in accordance with guidance Topic 606, as the fees are earned. One-third of the revenues are recognized within 60 days and the balance are recognized over the life of the franchise agreement, which can be up to 15 years.

 

Our tax resolution subsidiaries, generates revenues through fees billed for efforts to resolve tax related issues that clients have with state and federal taxes. Revenues from these fees are recognized in accordance with guidance Topic 606, as the fees are earned. Fees are typically earned within 60 days.

 

Our segmented revenue is disclosed more fully in our financial statements, see Footnote 15 for further details.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable is reported on the balance sheet at net amounts due to the Company. Management closely monitors outstanding accounts receivable and charges off to expense any balances that are determined to be uncollectible. As of September 30, 2019 and December 31, 2018, the Company had accounts receivable of $226,039 and $64,345, respectively. Accounts receivables are primarily generated from our subsidiaries in their normal course of business. The Company had an allowance as of September 30, 2019 and December 31, 2018 of $36,079 and $30,876, respectively.

 

Inventory

 

Inventory consists of finished goods purchased, which are valued at the lower of cost or market value, with cost being determined on the first-in, first-out (FIFO) method. The Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.

 

 

 

  9  

 

 

Property and Equipment

 

Property and equipment are carried at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization of property and equipment is provided using the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:

 

Classification Useful Life
Equipment, furniture and fixtures 5 - 7 years
Leasehold improvements 10 years or lease term, if shorter

 

During the nine months ended September 30, 2019 and the year ended December 31, 2018, depreciation and amortization expense was $53,549 ($44,177 is included in Cost of Goods Sold) and $80,165 ($57,468 is included in Cost of Goods Sold), respectively.

 

Goodwill and Other Intangible Assets

 

Goodwill and indefinite-lived brands are not amortized, but are evaluated for impairment annually or when indicators of a potential impairment are present. Our impairment testing of goodwill is performed separately from our impairment testing of indefinite-lived intangibles. The annual evaluation for impairment of goodwill and indefinite-lived intangibles is based on valuation models that incorporate assumptions and internal projections of expected future cash flows and operating plans. The Company believes such assumptions are also comparable to those that would be used by other marketplace participants. During the nine months ended September 31, 2019 and the year-ended December 31, 2018, the Company had goodwill impairment of $-0- and $1,459,725, respectively, related to its acquisitions of Red Rock Travel Group. The Company based this decision on impairment testing off the underlying assets, expected cash flows, decreased asset value and other factors.

 

Valuation of long-lived assets

 

In accordance with the provisions of Accounting Standards Codification (“ASC”) Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as plant and equipment and construction in progress held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets.

 

Valuation of Derivative Instruments

 

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-10, Derivatives and Hedging (“ASC 815-10”), requires that embedded derivative instruments be bifurcated and assessed, along with freestanding derivative instruments such as convertible promissory notes, on their issuance date to determine whether they would be considered a derivative liability and measured at their fair value for accounting purposes. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then revalued at each reporting date, with changes in the fair value reported as charges or credits to income.

 

For option based simple derivative financial instruments, the Company uses the Lattice Binomial option pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is reassessed at the end of each reporting period.

 

 

  10  

 

 

Beneficial Conversion Feature

 

For conventional convertible debt where the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”) and related debt discount.

 

When the Company records a BCF, the relative fair value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument (offset to additional paid in capital) and amortized to interest expense over the life of the debt.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

 

Level Input Definition

 

Level 1 Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

 

Level 2 Inputs, other than quoted prices included in Level 1, which are observable for the asset or liability through corroboration with market data at the measurement date.

 

Level 3 Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.

 

The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2019 and December 31, 2018.

 

      Level 1     Level 2     Level 3     Total  

Fair Value of Derivative Liability –

September 30, 2019

    $ –     $ –     $ 7,351,185     $ 7,351,185  
                                   

 

      Level 1     Level 2     Level 3     Total  

Fair Value of Derivative Liability –

December 31, 2018

    $ –     $ –     $ 1,870,625     $ 1,870,625  
                                   

  

Stock-Based Compensation – Employees

 

The Company accounts for its stock based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

 

 

 

  11  

 

 

The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.

 

Generally, all forms of share-based payments, including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.

 

The expense resulting from share-based payments is recorded in general and administrative expense in the statements of operations.

 

Stock-Based Compensation – Non Employees

 

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

 

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).

 

Income Taxes

 

Income taxes are determined in accordance with ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.

 

For the nine month period ended September 30, 2019 and year ended December 31, 2018 the Company did record any interest and penalties associated with uncertain tax positions. As of December 31, 2018, the Company did not have any significant unrecognized uncertain tax positions.

 

Earnings (Loss) per Share

 

FASB ASC Subtopic 260, Earnings Per Share (“ASC 260”), provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, warrants, and debts convertible into common shares. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s Common Stock can result in a greater dilutive effect from potentially dilutive securities.

 

 

 

  12  

 

 

The following table sets forth the computation of basic and diluted earnings per common share for the nine months ended September 30, 2019 and the year ended December 31, 2018. During a period of net loss, all potentially dilutive securities are anti-dilutive. Accordingly, for the three and nine months ended September 31, 2019 and December 31, 2018 potentially dilutive securities have been excluded from the computations since they would be anti-dilutive. However, these dilutive securities could potentially dilute earnings per share in the future (weighted average reflected post 1500:1 reverse stock split for the December 31, 2018 period):

 

    For the Nine months and year ended  
    September 30, 2019    

September 30, 2018

 
             
Numerator:                
Net (loss)   $ (9,133,106 )   $ (6,265,251 )
                 
Denominator:                
Weighted-average shares outstanding     109,228,404       602,038  
                 
Basic (loss) per share   $ (0.08 )   $ (0.01 )

 

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 as of September 30, 2019:

  

Principal and Interest conversion     613,794,780  
Warrants     8,749,287  
Preferred Stock conversion     179,106,727  
Total     801,650,794  

 

Going Concern

 

The accompanying condensed 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, 2019, the Company had shareholders’ deficit of $9,007,488. The accompanying condensed 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, 2018 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

 

Adoption of ASU 2016-02, Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). Under ASU No. 2016-2, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, The Company adopted this standard on January 1, 2019 using the modified retrospective method. The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs; and all of the new standard’s available transition practical expedients.

 

 

 

  13  

 

 

The new standard also provides practical expedients for a company’s ongoing accounting. The Company elected the short-term lease recognition exemption for its leases. For those leases with a lease term of 12 months or less, the Company will not recognize ROU assets or lease liabilities.

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”, to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments are effective for fiscal years beginning after December 15, 2017 and should be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in an interim period. The Company adopted the standard on January 1, 2018, which did not have a material impact on the financial statements.

 

We expect the adoption will have an immaterial impact to our comparative net income or loss and as such comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We also expect the impact of the adoption of the new standard to be immaterial to our net income or loss on an ongoing basis, due to the nature of our revenues.

 

Recent accounting pronouncements not yet adopted

In June 2016, the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which will be effective January 1, 2020. The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a Group recognizes an allowance based on the estimate of expected credit loss. The Company does not expect that the adoption of the standard to have an impact on the Company’s 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. DISCONTINUED OPERATIONS

 

In June 2019, the Company closed Red Rock Travel Group due to continuing losses in operations. Refer to Note 13 for contingency matters related to discontinued operations.

 

3. ACQUISITIONS

 

JM Enterprise 1 (dba) Key Tax Group 

 

JM Enterprise 1, Inc. (d.b.a. Key Tax Group) and Cardiff Lexington Corporation as previously announced in May 2019 signed a definitive merger agreement under which Key Tax Group became a wholly owned subsidiary effective May 8, 2019. In connection with the closing of the acquisition, on May 8, 2019 a Preferred “G” Class of stock with a par value of $0.001 was issued. The Preferred “G” Class of stock rights and privileges include voting rights, a conversion ratio of 1:1.25 and were distributed at the adjusted rate of $0.07 per share for a total of 18,571,428 representing a value of $1,300,000. Additionally, Cardiff issued 500,000 Common Shares with a par value of $0.001 to novate a convertible debt of $30,912.32. These Preferred “G” shares have a lock-up/leak-out limiting the sale of stock for 12 months after which conversions and sales are limited to 20% of their portfolio per year, pursuant to the terms of the Acquisition Agreement.

 

The preliminary purchase price allocation of the net assets acquired are as follows:

 

      Key Tax Fair Value    
Cash   $ 9,484  
Accounts receivable     90,766  
Other assets     250,000  
Property and equipment     6,044  
Goodwill     1,407,915  
Liabilities     (464,209 )
Total   $ 1,300,000  

  

Additionally, Cardiff has allocated a Preferred “G1” Class Series for potential investors – 10,000,000 shares authorized, par value $0.001 per share with the following rights and privileges no - voting rights, converts to common stock at a ratio of 1 share preferred to 1.25 shares common. Series G1 stock cannot be diluted due to actions taken by the Company, BOD and/or its shareholders.

 

4. ACCRUED EXPENSES

 

As of September 30, 2019, and December 31, 2018, the Company had accrued expenses of $1,992,672 and $1,310,074, respectively, consisted of the following:

 

    September 30,     December 31,  
    2019     2018  
Accrued salaries – related party   $ 1,132,909     $ 747,000  
Accrued expenses – other     859,763       563,074  
Total   $ 1,992,672     $ 1,310,074.0  

 

5. PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net as of September 30, 2019 and December 31, 2018 was $333,356 and $381,301, respectively, consisting of the following:

 

    September 30,     December 31,  
    2019     2018  
Furniture, fixture and equipment   $ 560,380     $ 715,466  
Leasehold improvements     136,069       161,166  
Total     696,449       876,632  
Less: accumulated depreciation     (416,595 )     (495,331 )
Plant and equipment, net   $ 279,854     $ 381,301  

 

  14  

 

 

During the nine months ended September 30, 2019 and 2018, depreciation expense was $53,549 and $22,463, respectively. The Company accounts for depreciation as a separate item in the operational expense of $9,373 and $8,335, respectively and included $44,177 and $14,128, respectively in depreciation in cost of goods sold.

 

6. LAND

 

As of September 30, 2019 and December 31, 2018, the Company had land of $603,000 located in Salmon, Idaho with area of approximately 30 acres, which was in connection with the acquisition of Edge View Properties, Inc. in July 2014. The Company issued 241,199 shares of Series E Preferred Stock as consideration for this acquisition. Based on the price of $2.50 per share, the acquisition consideration represents a $603,000 valuation. The land is currently vacant and is expected to be developed into residential community. The value of the land is not subject to depreciation.

 

7. 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 due in payments over 18 months.

 

As of September 30, 2019 and December 31, 2018, The Company had balance of $-0- and $1,999, respectively. During the nine months ended September 30, 2019, total cash advanced amounted to $-0- and cash payment made was $1,999.

 

8. RELATED PARTY TRANSACTIONS

 

Due to Officers and Officer Compensation

 

The Company borrows funds from Daniel Thompson, who is a Shareholder and Officer of the Company. The terms of repayment stipulate the unsecured loans are due 24 months from issuance or on demand, at an annual interest rate of six percent. As of September 30, 2019 and December 31, 2018, the Company had $137,816 and $77,640 due (included in due to officers and shareholders on the financial statements) to Daniel Thompson, respectively.

  

The accrued salaries payable to Daniel Thompson was $477,500 and $317,500 as of September 30, 2019 and December 31, 2018, respectively.

 

The Company had an employment agreement with the Chief Operating Officer, Mr. Roberts. The total balance due to Mr. Roberts for accrued salaries at September 30, 2019 and December 31, 2018 were $192,000 and $107,000, respectively.

 

The accrued salaries payable to Daniel Mr. Cunningham the Company’s chief executive officer was $467,500 and $322,500 as of September 30, 2019 and December 31, 2018, respectively.

 

 

 

 

  15  

 

 

Notes Payable – Related Party

 

The Company has entered into several unsecured loan agreements with related parties (see below; Footnote 9, Notes Payable – Related Party; and Footnote 10 Convertible Notes Payable – Related Party).

 

Preferred Stock

 

During the year ended December 31, 2018, the Company agreed to issue 125,000,000 preferred I shares each to Mr. Thompson and Mr. Cunningham, which were reflected as preferred shares to be issued on the financial statements at a total cost of stock compensation of $200,000. During the nine months ended September 30, 2019, the shares were issued

 

9. NOTES PAYABLE

 

For the nine months ended September 30, 2019, the Company received $410,000 cash proceeds, from notes payable and repaid $-0- in cash.

 

Notes payable at September 30, 2019 and December 31, 2018 are summarized as follows:

  

    September 30,     December 31,  
    2019     2018  
             
Notes Payable – Unrelated Party   $ 1,050,777     $ 676,477  
Notes Payable – Related Party     296,916       265,242  
Total     1,347,693       941,719  
Less Discontinued operations Notes Payable – Unrelated Party     (453,147 )     –  
Current portion   $ 894,546     $ (941,719 )

 

Notes Payable

 

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, 2019, the Company is in default on this debenture. The principal balance of the note was $10,949 and $10,989 at September 30, 2019 and December 31, 2018, respectively.

 

 

 

 

 

  16  

 

 

On September 7, 2011, the Company entered into a Promissory Note agreement (“Note 3”) 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 3, and the principal and any unpaid interest will be due upon maturity. In conjunction with Note 3, 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 principal balance of Note 3, net of debt discount, was $50,000 and $50,000 at September 30, 2019 and December 31, 2018, respectively. Note 3 is currently in default.

 

On November 17, 2011, the Company entered into a Promissory Note agreement (“Note 3-1”) 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 3-1, and the principal and any unpaid interest will be due upon maturity. In conjunction with Note 3-1, 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 3-1, the Company recorded a $50,000 debt discount during 2011. The principal balance of Note 3-1, net of debt discount, was $50,000 and $50,000 at September 30, 2019 and December 31, 2018, respectively. Note 3-1 is currently in default.

 

As of September 30, 2019, the Company had lease payables of $64,898 in connection with two capital leases on two Mercedes Sprinter Vans for the ice cream section and eight auto loans related to our pizza business. There are purchase options at the end of all lease terms that are based on the fair market value of the vans at the time. The company is in compliance with the lease terms.

 

Loans payable to unrelated party principal of $11,783 was due to the auto loans for the vehicles used in the Pizza restaurants and Repicci’s Group and for daily operations. The loans carry interest from 0% to 6% interest and the Company is in compliance.

 

The balance in notes payable principal to unrelated parties of $453,147, were assumed in connection the acquisition of Red Rock Travel and a new one year notes payable at 10% interest which are included in discontinued operations as of September 30, 2019.

 

The Company borrows funds from Officers of our subsidiaries from time to time. The terms of repayment stipulate the unsecured loans are due demand, at no interest. As of September 30, 2019 and December 31, 2018, the Company had $296,916 and $215,989 due respectively.

 

In September 2019 the Company entered into a promissory note agreement for $410,000 that is due in 12 months at a rate of 10%. The principal balance of the note was $410,000 at September 30, 2019.

 

10. CONVERTIBLE NOTES PAYABLE

 

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

  

As of September 30, 2019, the Company received $400,116 net cash proceeds, from convertible notes. The Company recorded amortization of debt discount of $509,586 and $201,440 related to convertible notes, during the nine months ended September 30, 2019 and the year ended December 31, 2018, respectively.

 

Convertible notes at September 30, 2019 and December 31, 2018 are summarized below:

  

    September 30,
2019 		    December 31,
2018 		 
Convertible Notes Payable – Unrelated Party   $ 1,991,607     $ 2,191,800  
                 
Discount on Convertible Notes Payable - Unrelated Party     (735,694 )     (201,024 )
Total   $ 1,255,913     $ 1,990,775  
                 
Current Portion     881,741       950,775  
Long-Term Portion   $ 374,172     $ 1,040,000  

 

  17  

 

 

Note # Issuance Maturity Rate   Default 12/31/2018    Principal Balance   2019 Add Principal   2019 Principal Conversions   2019 Interest Converted   Shares issued upon conversion 2019   2019 Principal Paid with Cash   2019 interest paid in Cash   9/30/19 Principal Balance   Total Interest expense for Nine Months Ended 9/30/2019   Accrued Interest as of 9/30/2019   Conversion price    
1 8/21/2008 8/21/2009   12%   Y   150,000     –     –                             150,000     13,650     200,258    Short Term      
2 3/11/2009 4/29/2014   12%   Y   15,000     –     –                             15,000     1,365     19,030    Short Term      
7 2/9/2016 2/9/2017   20%   Y   8,485     –     –                             8,485     1,287     7,069   $.03 per share or 50% of market      
7-1 10/28/2016 10/28/2017   20%   Y   25,000     –     –                             25,000     3,792     14,668   $.03 per share or 50% of market      
8 3/8/2016 3/8/2017   20%   Y   1,500     –     –                             1,500     227     2,915   $.03 per share or 50% of market      
9 9/12/2016 9/12/2017   20%   Y   80,000     –     –                             80,000     12,133     48,955   $.03 per share or 50% of market      
10 1/24/2017 1/24/2018   20%   Y   55,000     –     –                             55,000     8,342     29,618   $.25 per share or 50% of market      
11 1/27/2017 1/27/2018   20%   Y   2,698     1,500     (4,198 )   (9,225 )   1,250,000                 –     135     1,060   $.25 per share or 50% of market      
11-1 2/21/2017 2/21/2018   20%   Y   25,000     6,856     (31,856 )   (2,504 )   48,749,769                 –     1,641     8,425   $.25 per share or 50% of market      
11-2 3/16/2017 3/16/2018   20%   Y   40,000     –     (7,537 )                           32,463     5,681     20,038   $.25 per share or 50% of market      
12 4/6/2017 4/6/2018   20%   Y   31,997     –     (31,997 )   (2,908 )   1,695,400                 –     1,600     11,805   $.25 per share or 50% of market      
13-1 4/21/2017 4/21/2018   18%   Y   172,000           (129,371 )   (3,861 )   3,969,066                 42,629     6,833     23,847   $.30 per share or 60% of the lowest trading price for 10 days      
16 11/27/2017 11/27/2018   12%   Y   –                 (119 )   26,630                 –     –     –   60% of the lowest trading or bid (whichever is lower) price for 20 days      
18 1/19/2018 1/19/2019   24%   Y   83,500           (35,428 )   –     358,333     (48,072 )   (13,857 )   –     4,359     0   60% of the lowest trading price for 20 days      
20 3/29/2018 3/29/2019   24%   Y   25,100           (25,100 )   –     112,844                 –     –     –   60% of the lowest trading price for 15 days      

 

 

 

  18  

 

 

21 4/9/2018 4/9/2019   10%   Y   130,206           (2,515 )   –     72,901     (127,691 )   (22,326 )   –     10,939     0   40% discount on the lowest trading price for previous 25 days      
22 7/10/2018 1/10/2021   12%   N   1,040,000           –     –     114,013,576   $ (200,000 ) $ (83,232 )   800,000     80,633     4,337   $0.04/ share or 40% of the lowest bid price for prior 21 days      
22.1 2/21/2019 1/10/2021   12%   N   –     56,616           –                       56,616     5,152     5,152          
23 7/19/2018 12/31/2018   8%   Y   –                 (1,653 )                     –     –     –   60% of the lowest trading price for 10 days      
24 7/19/2018 12/31/2018   8%   Y   –                 –                       –     –     –   60% of the lowest trading price for 10 days      
25 8/13/2018 2/13/2019   12%   Y   78,314                 (3,367 )                     78,314     9,515     12,218   $0.004/ share or 60% of the lowest trading  price for prior 21 days      
26 8/10/2017 1/27/2018   15%   Y   20,000                 –                       20,000     2,783     4,871   $.25 per share or 50% of market      
27-1-4 12/10/2018 12/10/2019   8%   N   108,000           (53,711 )   (3,076 )   141,439,120                 –     4,344     1,517   60% of the lowest trading price for 10 days      
28 12/5/2018 12/5/2019   8%    N   100,000           (56,900 )   (2,852 )   125,027,981     –     –     43,100     4,544     1,977   55% of the lowest trading price for 15 days      
29 5/10/2019 5/10/2020   8%    N   –     150,000     –     –     –     –     –     150,000     6,100     6,100   55% of the lowest trading price for 15 days      
30 7/26/2019 7/26/2020   6%    N         73,500     –     –     –     –     –     73,500     797     797   62% of the lowest trading price for 15 days      
31 8/28/2019 8/28/2020   8%    N         120,000                                   120,000     868     868   60% of the lowest trading price for 12 days      
RR 1 5/22/2018 5/22/2019   20%   Y   40,000                                         40,000     6,067     10,222   75% of the lowest closing ask price for the three prior trading days      
RR 3.0 and 3.1 8/9/2018 8/9/2019   30%    N   100,000                                         100,000     22,750     34,750   70% of the lowest closing ask price for the three prior trading days      
RR 4 9/13/2018 9/13/2019   30%   N   50,000                                         50,000     11,375     15,917   70% of the lowest closing ask price for the three prior trading days      

 

 

  19  

 

 

RR 5 9/13/2018 9/13/2019   30%    N   50,000                                         50,000     11,375     15,917   70% of the lowest closing ask price for the three prior trading days      
                                                                                 
                                                                                 
    Convertible Notes Payable         $ 2,431,800   $ 408,472   $ (378,613 ) $ (29,565 ) $ 436,715,620   $ (375,763 ) $ (119,414 ) $ 1,991,607   $ 238,287   $ 502,331          
  Summary Convertible Notes Payable - Related Party         $ –   $ –   $ –   $ –     –   $ –   $ –   $ –   $ –   $ –          
     Total         $ 2,431,800   $ 408,472   $ (378,613 ) $ (29,565 )   436,715,620   $ (375,763 ) $ (119,414 ) $ 1,991,607   $ 238,287   $ 502,331          

 

11. FAIR VALUE MEASUREMENT

 

The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial statements.

 

The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.

 

As of September 30, 2019 and December 31, 2018, the Company did not have any items that would be classified as level 1 or 2 disclosures.

 

The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are that of volatility and market price of the underlying common stock of the Company.

 

 

 

  20  

 

 

As of September 30, 2019 and December 31, 2018, the Company did not have any derivative instruments that were designated as hedges.

 

The derivative liability as of September 30, 2019, in the amount of $7,351,185 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 31, 2019:

 

Derivative Liability, December 31,2018   $ 1,870,625  
Day 1 Loss     25,245,171  
Derivatives Issued     1,566,616  
Derivatives Settled     (2,721,605 )
Mark to market adjustments     (18,609,622 )
Derivative Liability, September 30, 2019   $ 7,351,185  

 

Net loss for the period included mark-to-market adjustments relating to the liabilities held during the nine-month periods ended September 30, 2019 and 2018 in the amounts of $(6,635,549) and a gain of $(1,317,018), respectively.

 

Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. During the nine months ended September 30, 2019, the Company’s stock price decreased from initial valuation. As the stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases. Stock price is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments.

 

The valuation of the derivative liabilities attached to the convertible debt was arrived at through the use of the Lattice Bi-nominal Option Pricing Model and the following assumptions:

 

      For the period ended  
     

September 30,

2019

     

December 31,

2018

 
Volatility     441.14%-884.42%       182.91%-636.13%  
Risk-free interest rate     1.73%-2.14%       2.13% -2.72%  
Expected term     .18 – 1.67       .04 - 5.14  

 

12. CAPITAL STOCK

 

Series I Preferred Stock

 

During the three months ended September 30, 2019, the Company issued 250,000,000 shares of Series I Preferred Stock to officers of the Company, which were granted during year ended December 31, 2018. See Note 8, for more details.

 

Common Stock

 

During the three months ended September 30, 2019, the Company issued 424,005,644 shares for conversion of convertible notes payable (see Footnote 10).

 

13. COMMITMENTS AND CONTINGENCIES

 

The Company has committed to continue negotiations with Acela Biomedical once certain conditions have been met.

 

The Company has an employment agreement, renewed May 15, 2014, with the Chairman, Mr. Thompson amended on January 1, 2017 through December 31, 2021, whereby we provide for compensation of $25,000 per month.

 

The Company has an employment agreement with the Chief Executive Officer, Mr. Cunningham, amended on January 1, 2017 through December 31, 2021, whereby we provide for compensation of $25,000 per month.

 

 

 

  21  

 

 

The Company has an employment agreement with the Chief Operating Officer, Mr. Roberts, effective June 2016 through December 31, 2019, whereby we provide for compensation of $10,000 per month.

 

The Company has employment agreements for Chief Executives of its subsidiaries Key Tax Group, and Platinum Tax Defenders.

 

The agreement for Key Tax Group Management is a combined base salary of $208,000 annually, with additional annual bonuses and stock awards based on performance. Each agreement has a 5 year term.

 

Platinum Tax Defenders Management has a base salary of $20,000 per month, with additional annual bonuses and stock awards based on performance. The agreement has a 5 year term.

 

The Company discontinued its operation of Red Rock Travel Group in June 2019. The Company may be liable for any commitments and contingencies in connection with its operation.

 

There are no other stock option plans, retirement, pension, or profit-sharing plans for the benefit of our sole officers and directors other than as described above.

 

Leases

 

The Company’s subsidiary Key Tax Group has an operating lease for an office leased in Jacksonville Florida on a month to month agreement. Base monthly rent is approximately $1,708 per month plus net operating expenses. A deposit equal to one-month rent was paid and the commencement of the lease.

 

In addition, the Company’s subsidiary Platinum Tax Defenders has an operating lease for an office sub-lease in Simi Valley, California with an initial term of 38 months. Base monthly rent is approximately $4,000 per month plus net operating expenses. A deposit equal to one-month rent was paid and the commencement of the lease. The lease can be extended for a two-year period at same amount of increase in the original lease (3%), at the option of the original lessee. The lease contains variable lease payments for non-rental occupancy expenses. These non-lease components were not included in the determination of the right of use asset and lease liability as part of the transition to ASC 842 due to the practical expedients elected by the Company.

 

Additionally, the Company’s subsidiary Romeo Pizza has an operating lease for its restaurant at Johns Creek, Georgia with an initial term of 65 months and renewed on January 1, 2019 for an additional 120 months. Base monthly rent is approximately $4,629 per month plus net operating expenses. A deposit of $6,000 was paid and the commencement of the lease. The current lease renewal does not currently contain an extension provision. The lease contains variable lease payments for non-rental occupancy expenses. These non-lease components were not included in the determination of the right of use asset and lease liability as part of the transition to ASC 842 due to the practical expedients elected by the Company.

 

The Company utilizes the incremental borrowing rate in determining the present value of lease payments unless the implicit rate is readily determinable. The Company used an estimated incremental borrowing rate of 15% to estimate the present value of the right of use liability.

 

The Company has right-of-use assets of $430,640, operating lease liabilities of $430,640 as of September 30, 2019. Operating lease expense for the nine months ended September 30, 2019 was $153,429. 

 

The following table provides the maturities of lease liabilities at September 30, 2019:

 

 

Maturity of Lease Liabilities at September 30, 2019

     
2019   $ 25,886,  
2020     106,096  
2021     108,705  
2022     67,431  
2023     60,124  
2024 and thereafter     319,144  
Total future undiscounted lease payments     687,386  
Less: Interest     (287,428 )
Present value of lease liabilities   $ 399,957  

 

 

 

  22  

 

 

The Company’s other subsidiaries also maintain short-term lease agreements for office space. Total rent expense for these rentals was $8,224 for the nine months ended September 30, 2019. Total rent expense for the nine months ended September 30, 2018 was $71,274.

  

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 and are exercisable on the grant date and expire in three years. 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 2017. The fourth allotment of 200,000 warrants were granted during the fourth quarter of 2017.

 

The Company determined that the warrants were tainted due to the variability of exercise price and therefore the 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 warrants were measured using the Black-Scholes valuation model at the grant dates of the agreement (February 10, 2017, May 10, 2017, August 10, 2017 and December 10, 2017.) 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.

 

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.

 

During the year ended December 31, 2018, the Company entered into a note agreement for $1,040,000, as part of the note agreement the Company agreed to issue the noteholder warrants exercisable for 4,000,000 shares of common stock with a term of eight years, at an exercise price of $0.04. The terms also include a full-ratchet anti-dilution protection provision and therefore the Company has deemed them to be a derivative liability.

 

    Year Ended
December 31, 2018 		 
Initial Valuation   $ 3,795  
Ending Value September 30, 2019   $ 15,243  

  

The table below sets forth the assumptions for Black-Scholes valuation model on each initial date and December 31, 2018

 

    Nine Months Ended September 30, 2019  
Volatility     213% - 13.26%  
Risk-free interest rate     0.162 - 0.269  
Expected term     0.36-6.78  

  

Accordingly, the Company recorded warrant expenses of $11,447during the nine months ended September 30, 2019.

 

The following tables summarize all warrant outstanding as of September 30, 2019 and the related changes during this period. The warrants expire three years from grant date, which as of September 30, 2019 is 3.06 years. The intrinsic value of the warrants as of September 30, 2019 was $-0-.

 

    Number of
Warrants 		    Weighted
Average
Exercise
Price 		 
Stock Warrants                
Balance at January 1, 2019     6,614,287     $ 0.21  
Granted     –       –  
Exercised     –       –  
Expired     –       –  
Balance at September 30, 2019     6,614,287       0.21  
Warrants Exercisable at September 30, 2019     6,614,287     $ 0.21  

 

 

 

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15. SEGMENT REPORTING

 

The Company has five reportable operating segments as determined by management using the “management approach” as defined by the authoritative guidance on Disclosures about Segments of an Enterprise and Related Information: (1) Mobile home lease (We Three), (2) Company-owned Pizza Restaurants (Romeo’s NY Pizza), (3) “Repicci’s Italian Ice” franchised stores. (4) Tax resolution services (Platinum Tax Defenders) and Key Tax Group. 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 September 30, 2019 was forty-five (45), seven (7) new state of the art “mobile” units.

 

Platinum Tax Defenders and Key Tax Group provides tax resolution services to individuals and companies that have federal and state tax liabilities. These companies collect fees based on efforts to negotiate and assist in the settlement of outstanding tax debts.

 

Key Tax Group provides tax resolution services to individuals and companies that have federal and state tax liabilities. The Company collects fees based on efforts to negotiate and assist in the settlement of outstanding tax debts.

 

The Company discontinued its operation of Red Rock Travel Group in June 2019. The Company may be liable for any commitments and contingencies in connection with its operation.

 

 

 

  24  

 

 

For the three month period ended
    September 30, 2019         September 30, 2018  
Revenues:         Revenues:      
We Three   $ 82,699     We Three   $ 44,740  
Romeo’s NY Pizza     324,440     Romeo’s NY Pizza     148,540  
Repicci's Group     145,335     Repicci's Group     151,904  
Platinum Tax     1,599,601     Platinum Tax     229,124  
Key Tax     589,816     Key Tax     –  
Other     –     Other     123,576  
Consolidated revenues   $ 2,741,891     Consolidated revenues   $ 697,884  
                     
Cost of Sales:           Cost of Sales:        
We Three   $ 86,710     We Three   $ 43,305  
Romeo’s NY Pizza     238,363     Romeo’s NY Pizza     111,814  
Repicci's Group     136,711     Repicci's Group     154,572  
Platinum Tax     500,676     Platinum Tax     155,475  
Key Tax     254,832     Key Tax     –  
Other     –     Other     125,900  
Consolidated cost of sales   $ 1,217,292     Consolidated cost of sales   $ 591,066  
                     
Income (Loss) before taxes           Income (Loss) before taxes        
We Three   $ (5,017 )   We Three   $ (23,281 )
Romeo’s NY Pizza     17,929     Romeo’s NY Pizza     3,325  
Repicci’s Group     (19,253 )   Repicci’s Group     (213,683 )
Platinum Tax     107,947     Platinum Tax     (249,134 )
Key Tax     290,137     Key Tax     –  
Others     (3,382,202 )   Others     (4,533,087 )
Consolidated gain/(loss) before taxes   $ (2,990,459 )   Consolidated gain/(loss) before taxes   $ (5,015,460 )

 

 

For the nine month period ended
    September 30, 2019         September 30, 2018  
Revenues:         Revenues:      
We Three   $ 135,577     We Three   $ 143,403  
Romeo’s NY Pizza     472,237     Romeo’s NY Pizza     452,555  
Repicci's Group     177,962     Repicci's Group     578,668  
Platinum Tax     2,226,828     Platinum Tax     229,124  
Key Tax     589,816     Key Tax     –  
Other     (0 )   Other     123,576  
Consolidated revenues   $ 3,602,420     Consolidated revenues   $ 1,527,326  
                     
Cost of Sales:           Cost of Sales:        
We Three   $ 153,873     We Three   $ 145,650  
Romeo’s NY Pizza     348,386     Romeo’s NY Pizza     324,661  
Repicci's Group     176,331     Repicci's Group     435,302  
Platinum Tax     703,809     Platinum Tax     155,475  
Key Tax     254,832     Key Tax     –  
Other     1     Other     125,900  
Consolidated cost of sales   $ 1,637,231     Consolidated cost of sales   $ 1,186,988  
                     
Income (Loss) before taxes           Income (Loss) before taxes        
We Three   $ (25,123 )   We Three   $ (29,357 )
Romeo’s NY Pizza     22,727     Romeo’s NY Pizza     29,048  
Repicci’s Group     (35,380 )   Repicci’s Group     (83,816 )
Platinum Tax     137,574     Platinum Tax     (249,134 )
Key Tax     290,137     Key Tax     –  
Others     (9,523,041 )   Others     (5,378,790 )
Consolidated gain/(loss)
before taxes 		  $ (9,133,106 )   Consolidated gain/(loss) before taxes   $ (5,712,049 )

 

 

 

 

  25  

 

 

    As of         As of  
    September 30, 2019         December 31, 2018  
Assets:           Assets:        
We Three   $ 293,162     We Three   $ 314,003  
Romeo’s NY Pizza     52,590     Romeo’s NY Pizza     121,339  
Repicci’s Group     64,256     Repicci’s Group     258,649  
Platinum Tax     94,461     Platinum Tax     108,569  
Key Tax     167,502     Key Tax     –  
Others     4,789,072     Others     2,676,437  
Combined assets   $ 5,461,043     Combined assets   $ 3,478,997  

 

16. SUBSEQUENT EVENTS

 

Stock Issuances:

 

Subsequent to September 30, 2019, the Company issued 25,609,500 Common Shares for conversion of convertible notes payable.

 

 

 

 

 

 

  26  

 

 

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

 

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements including the related notes, and the other financial information included in this report. For ease of reference, “the Company”, “we,” “us” or “our” refer to Cardiff Lexington Corp., and Legacy Card Company, Inc. (d/b/a: Mission Tuition) unless otherwise stated.

 

Cautionary Statement Concerning Forward-Looking Information

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for stock of Cardiff Lexington Corp. and other matters. Statements in this report that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Such forward-looking statements, including, without limitation, those relating to the future business prospects, revenue and income of Cardiff Lexington Corp., wherever they occur, are necessarily estimates reflecting the best judgment of the senior management of Cardiff Lexington Corp. on the date on which they were made, or if no date is stated, as of the date of this report. These forward-looking statements are subject to risks, uncertainties and assumptions, including those described in the “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”), that may affect the operations, performance, development and results of our business. Because the factors discussed in this report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The Company assumes no obligation and does not intend to update these forward looking statements, except as required by law.

 

RISK FACTORS

 

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

 

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

 

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

 

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

 

Through inception until December 2014, we have restructured ourselves into a holding company and have acquired several additional businesses; We Three, Inc. d/b/a Affordable Housing Initiative, Romeo’s NY Pizza, Edge View Properties, Repicci’s Franchise Group, Platinum Tax Defenders and Key Tax Group.

 

Future revenue growth will be derived from our new acquisitions. We cannot guarantee we will ever develop substantial revenue from our subsidiary companies and there is no assurance that we will achieve profitability.

 

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

 

For the fiscal years ended December 31, 2018 and December 31, 2017, our accountants have expressed concern about our ability to continue as a going concern due to our continued net losses and need for additional capital. However, we believe our ability to achieve and maintain profitability and positive cash flow is dependent upon:

 

· our ability to acquire profitable businesses within Cardiff; and

 

· our ability to generate substantial revenues; and

 

· our ability to obtain additional financing

 

 

  27  

 

 

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

 

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

 

We were incorporated in August 2001. In 2014 the Company developed into a Holding Company focusing on acquiring small to medium size Companies that meet the following criteria: 1, Profitable; 2. Good Management; 3. little to no debt. Our efforts are focused on development and growth of our existing subsidiaries and acquiring new acquisitions that meet our requirements. Further, there is no guarantee that we will be successful in realizing revenues or in achieving or sustaining a positive cash flow at any time in the future. Any such failure could result in the possible closure of our business or force us to seek additional capital through loans or additional sales of our equity securities to continue business operations, which would dilute the value of any shares you hold, and could result in the loss of your entire investment.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The loss of the services of the current officers and directors could severely impact our business operations and future development, which could result in a loss of revenues and one’s ability to ever sell any shares.

 

Our performance is substantially dependent upon the professional expertise of the current officers and board of directors. Each has extensive expertise in business development and acquisitions and we are dependent on their abilities. If they are unable to perform their duties, this could have an adverse effect on business operations, financial condition and operating results if we are unable to replace them with other individuals qualified to develop and market our business. The loss of their services could result in a loss of revenues, which could result in a reduction of the value of any shares you hold as well as the complete loss of your investment.

 

 

 

  28  

 

 

Our stock has limited liquidity.

 

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

 

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

 

· actual or anticipated fluctuations in our operating results;
   
· changes in financial estimates by securities analysts or our failure to perform in line with such estimates;
   
· changes in market valuations of other companies, particularly those that market services such as ours;
   
· announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
   
· introduction of product enhancements that reduce the need for our products;
   
· departure of key personnel.

 

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

 

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

 

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

 

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

 

 

 

  29  

 

 

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

 

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

 

Overview

 

Cardiff Lexington Corp., is currently structured as a company with holdings of various companies.

 

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

 

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

 

We have currently placed Mission Tuition on hold until the Company can hire the appropriate management team.

 

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

 

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

 

EDGE VIEW PROPERTIES LLC: Edge View Properties consists of 30 prime acres of land; 23.5 acres zoned MDR (Medium Density Residential) with 12 lots already platted and 48 lots zoned HDR (High Density Residential), 4 acres of dedicated river front property zoned for recreation on the Salmon River, Idaho's premier whitewater river and 2.5 acres zoned for commercial use. All land is in the city limits of Salmon and adjacent to the Frank church Wilderness Park (the largest wilderness park in the lower 48 states).

 

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

 

The number of franchise agreements in force as of September 30, 2019 was forty five (45), seven (7) new state of the art “mobile” units.

 

 

 

  30  

 

 

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

 

1. Designate an exclusive territory;

 

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

 

3. Provide initial training of franchisee and employees;

 

4. Provide a company manual and other training aids.

 

The Company has developed a new “Mobile Franchise Opportunity”. The total investment for the new opportunity ranges from $185,000 to $165,000, as follows: $195,000 for a new Mercedes Sprinter Van, customized for the franchisee, $36,000 for the franchise fee, the balance for product. The Company’s obligation is as above, except for Item #3, training is specific to the new opportunity.

 

PLATINUM TAX DEFENDERS: Cardiff Lexington Corporation (OTCQB:CDIX) and Platinum Tax Defenders (Private: “Platinum Tax Defenders”) as previously announced on July 18th, 2018 signed a definitive merger agreement under which Platinum Tax Defenders will merge into Cardiff Lexington as its wholly owned subsidiary has been completed effected July 30th, 2018. Audited financials will follow in an upcoming 8-K within the required 75-day period following the closing. In connection with the closing of the acquisition, on July 30th, 2018 a Preferred “L” Class of stock with a par value of $0.001 was established and issued. The Preferred “L” Class of stock rights and privileges include voting rights, a conversion ratio of 1:1.25 and were distributed at the adjusted rate of $0.013 per share for a total of 98.307,692 representing a value of $1,278,000. These Preferred “L” shares have a lock-up/leak-out limiting the sale of stock for 12 months after which conversions and sales are limited to 20% of their portfolio per year, pursuant to the terms of the Acquisition Agreement.

 

JM Enterprises 1, Inc. (dba – Key Tax Group): Cardiff Lexington Corporation (OTCQB:CDIX) and Key Tax Group (Private: “JM Enterprises 1, Inc.”) as previously announced on May 8, 2019 signed a definitive merger agreement under which Key Tax Group will merge into Cardiff Lexington as its wholly owned subsidiary has been completed effected May 8, 2019. Audited financials will follow in an upcoming 8-K within the required 75-day period following the closing. In connection with the closing of the acquisition, on May 8, 2019 a Preferred “G” Class of stock with a par value of $0.001 was established and issued. The Preferred “G” Class of stock rights and privileges include voting rights, a conversion ratio of 1:1.25 and were distributed at the adjusted rate of $0.07 per share for a total of 18,571,428 representing a value of $1,300,000. These Preferred “G” shares have a lock-up/leak-out limiting the sale of stock for 12 months after which conversions and sales are limited to 20% of their portfolio per year, pursuant to the terms of the Acquisition Agreement.

 

Results of Operations

 

We had revenues of $1,540,608 and $3,602,420 for the three and nine months ended September 30, 2019, respectively, compared to revenues of $697,884 and $1,527,326 for the same periods in 2018 an increase of 121% and 136%, respectively. Since we had various acquisitions over the past two years, the increase in revenues is primarily attributable to full revenue quarter cycles for those acquisitions. A revenue breakdown by segment is as follows. We have had various acquisitions over the past two years, and during the current period we have had one additional acquisition, which is reflected in the changes in revenues. A revenue breakdown by segment is as follows:

 

For the three month period ended
    September 30, 2019         September 30, 2018  
Revenues:         Revenues:      
We Three   $ 82,699     We Three   $ 44,740  
Romeo’s NY Pizza     324,440     Romeo’s NY Pizza     148,540  
Repicci's Group     145,335     Repicci's Group     151,904  
Platinum Tax     1,599,601     Platinum Tax     229,124  
Key Tax     589,816     Key Tax     –  
Other     –     Other     123,576  
Consolidated revenues   $ 2,741,891     Consolidated revenues   $ 697,884  

 

 

 

 

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For the nine month period ended

    September 30, 2019         September 30, 2018  
Revenues:         Revenues:      
We Three   $ 135,577     We Three   $ 143,403  
Romeo’s NY Pizza     472,237     Romeo’s NY Pizza     452,555  
Repicci's Group     177,962     Repicci's Group     578,668  
Platinum Tax     2,226,828     Platinum Tax     229,124  
Key Tax     589,816     Key Tax     –  
Other     (0 )   Other     123,576  
Consolidated revenues   $ 3,602,420     Consolidated revenues   $ 1,527,326  
                     

 

We had costs of sales of $960,356 and $1,965,189 for the three and nine months ended September 30, 2019 compared to costs of sales of $591,066 and $1,189,988 for the same periods September 30, 2018. The costs of sales for the periods related to each segment are as follows: The increase in cost of sales for the three-month period was primarily attributable to the acquisitions of Platinum Tax Defenders, Red Rock Travel Group (closed operations in May 2019) and JME I, Inc. (dba Key Tax ) and a one-time write-off of inventory. The decrease in the nine months period were related to the one-time charges in the prior year related to Repicci’s, offset by the acquisitions of Platinum Tax Defenders, Red Rock Travel Group (closed operations in May 2019) and JME I, Inc. (dba Key Tax) and a one-time write-off of inventory.

 

    For the three months ended  
   

September 30,

2019

   

September 30,

2018

 
Cost of Sales:            
We Three   $ 86,710     $ 43,305  
Romeo’s NY Pizza     238,363       1111,814  
Repicci's Group     136,711       154,572  
Platinum Tax     500,676       155475  
Key Tax     254,832       –  
Other     –       125,900  
Consolidated cost of sales   $ 1,217,292     $ 591,066  

 

    For the nine months ended  
   

September 30,

2019

   

September 30,

2018

 
Cost of Sales:            
We Three   $ 153,873     $ 145,650  
Romeo’s NY Pizza     348,386       324,661  
Repicci’s Group     176,331       435,302  
Platinum Tax     703,809       155,475  
Key Tax     254,833       –  
Others     –       125,900  
Consolidated cost of sales   $ 1,637,231     $ 1,186,988  

 

 

 

  32  

 

 

We had operating expenses of $816,033 and $2,430,997 for the three and nine months ended September 30, 2019 compared to operating expenses of $1,022,834 and $2,024,397 for the three and nine months ended September 30, 2018 The decrease in operating expenses during the three month period was primarily due to our improved level of operations, offset by our acquisitions. Additionally, stock based compensation decreased to $-0- for the nine month period compared to $87,471 for the same period in 2018.

 

Inflation

 

We do not believe that inflation will negatively impact our business plans.

 

Liquidity and Capital Resources

 

Since inception, the principal sources of cash have been funds raised from the sale of common stock, advances from shareholders, and loans in the form of debentures and convertible notes. At September 30, 2019, we had $144,971 in cash and cash equivalents total assets of $5,461,043 and total liabilities of $14,094,359.

  

Net cash used in operating activities was $309,130 and $888,210 for the nine months ended September 30, 2019 and 2018, respectively. The negative cash flows from operating activities during the periods were primarily attributable to the net losses of $9,133,106 and $5,712,049 respectively. These amounts were partially offset by non-cash expenses related to depreciation, amortization of debt discount, stock based compensation and change in derivative liability related to convertible notes which were $53,549, $825,206, $-0- and $6,635,549 additionally, we had a loss due to conversion cost penalty of $668,897, respectively. We also had decreases in accounts payable and offset by an increase of accrued officers’ salaries of $344,156, and $390,000, respectively. In the 2018 period, the negative cash flows from operating activities was attributable to the net loss of $5,712,049, partially offset by non-cash expenses related to depreciation, amortization of debt discount and stock based compensation which were $59,730, $765,901 and $87,472 additionally, we had a loss due to impairment of goodwill of $1,459,725.

 

Net cash used in investing activities was $-0- for the nine months ended September 30, 2019, compared to Net cash used in investing activities was $760,153 for the same period in 2018. During the nine months ended September 30, 2018, we purchased Platinum Tax Defenders of $852,000, offset by disposal of fixed assets of $91.847.

 

Net cash provided by financing activities was $335,794 during September 30, 2019 were primarily attributable to proceeds of convertible notes payable in the amounts of $196,500 and notes payable of $410,000. For 2018, net cash provided by financing activities was $1,616,790, primarily attributable to proceeds of convertible notes payable in the amounts of $890,605. There can be no assurance that we will be able to obtain sufficient capital from debt or equity transactions or from operations in the necessary time frame or on terms acceptable to us. Should we be unable to raise sufficient funds, we may be required to curtail our operating plans and possibly relinquish rights to portions of our technology or products. In addition, increases in expenses or delays in product development may adversely impact our cash position and may require cost reductions. No assurance can be given that we will be able to operate profitably on a consistent basis, or at all, in the future.

 

Following conditions consisting of reorganizing the Preferred classes of stock, the Company’s ongoing capital structure plans will continue with Acela Biomedical.

 

Off Balance Sheet Arrangements

 

As of September 30, 2019, we had no off balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable

 

 

 

  33  

 

 

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

 

  (a) Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,+ summarized, and reported within the required time periods, and that such information is accumulated and communicated to our management, including our Chairman, Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure. Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer has concluded that these disclosure controls and procedures are ineffective. There have been no changes to our disclosure controls and procedures during the nine months ended September 30, 2019.

 

There has been no change in our internal control over financial reporting during the three and nine months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Since the most recent evaluation date, there have been no significant changes in our internal control structure, policies, and procedures or in other areas that could significantly affect our internal control over financial reporting.

 

  (b) Changes in Internal Controls

 

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

 

 

 

 

 

 

 

 

 

 

  34  

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no events under any bankruptcy act, any criminal proceedings nor any judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the last five years.

 

Item 1A. Risk Factors

 

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

 

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

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Submission of Matters to Vote of Security Holders

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

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

* To be filed by amendment

 

 

 

  35  

 

 

SIGNATURE

 

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

  

Dated: November 19, 2019 CARDIFF LEXINGTON CORP.
   
  By: /s/ Alex Cunningham
    Alex Cunningham
Chief Executive Officer and Principal Accounting Officer
     
     
  By:   /s/ Daniel Thompson
    Daniel Thompson
    Chairman

 

 

 

 

 

 

  36  

 

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