Notes
to Consolidated Condensed Financial Statements
September
30, 2018
(Unaudited)
NOTE
1 – SUMMARY OF BUSINESS AND BASIS OF PRESENTATION
Organization
and Business
Cruzani,
Inc. is a franchise development company that builds and represents popular franchise concepts, and other related businesses, throughout
the United States as well as international markets. Cruzani, Inc. was originally formed as a limited liability company on February
5, 1999 under the name The Powerhouse, L.L.C. pursuant to the laws of the State of Oklahoma. On November 9, 2006, Powerhouse Productions,
L.L.C. filed Articles of Conversion changing the entity from a limited liability company to a corporation under the name Harcom
Productions, Inc. On January 25, 2010, Articles of Merger were filed with the State of Oklahoma merging U.S. Highland, Inc., an
Oklahoma corporation into Harcom Productions, Inc. and the name of the corporation was changed to US Highland, Inc. US Highland,
Inc. was a recreational power sports Original Equipment Manufacturer (“OEM”), developing motorcycles, quads, single
cylinder engines, and v-twin engines under its own brand and for other OEMs. During 2017, the Company exited the recreational
power sports OEM and leisure activity vehicles markets.
On June 29, 2018, the Company filed Amended
and Restated Articles of Incorporation with the State of Nevada to change its name to Cruzani, Inc. Consistent with the Company’s
new name, the Company changed the composition of its business direction. Supreme Sweets Acquisition Corp., a subsidiary of the
Company, was renamed Oventa, Inc. (“Oventa”). Oventa operates in a 39,000 sq. foot, commercial bakery located in Toronto,
Ontario, Canada, which was established in March 2015 by Mario Parravano and Barbara Parravano (collectively, the “Founders”).
Oventa operates in west-end Toronto at the junction of two major Toronto highways, fronting the Q.E.W. corridor, 10 minutes from
downtown Toronto, and only 10 minutes from Pearson International Airport. Oventa’s high speed bread, pastry and donut lines,
spiral and walk-in coolers and freezers, tunnel, revolving, and deck ovens, and equipment to produce virtually any bakery or snack
product are in place and operational. There is considerable room to expand on the property. Oventa services local coffee shops
and manufactures private label products for customers in Canada and the U.S.
Ovanta
will be the second, major operational focus of the Company. The acquisition of Oventa is in addition to the acquisition of TruFood
Provisions Co., which is being rebranded and will launch in 2019.
On
September 27, 2017, the Company entered into a stock purchase agreement, for the acquisition of
a majority interest in Recipe Food Co. of Toronto (“Recipe Food Co.”). The Company believes that this arrangement
will provide a stronger basis for growth and innovation. Recipe Food Co. will operate as a majority owned subsidiary of Cruzani,
and Recipe Food Co. will continue to be led by its founder, Dee Gibson. The Company formally completed the closing of the asset purchase agreement on October 2, 2018, completing
its acquisition of a majority interest in Recipe Food.
Basis
of Presentation
The
Company’s unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted
in the United States of America. These consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries, USH Distribution Corp., Powersports Brand Alliance, Inc., and Supreme Sweets Acquisition Corp. All significant intercompany
transactions and balances have been eliminated.
The
unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”) and reflect all adjustments (consisting of normal recurring adjustments unless
otherwise indicated) which, in the opinion of management, are necessary for a fair presentation of the results for the interim
periods presented. Certain prior year amounts have been reclassified to conform to current year presentation.
Certain
information in footnote disclosures normally included in the financial statements were prepared in conformity with accounting
principles generally accepted in the United States of America and have been condensed or omitted pursuant to such principles and
the financial results for the periods presented may not be indicative of the full year’s results. The Company believes the
disclosures are adequate to make the information presented not misleading.
These
financial statements should be read in conjunction with the Company’s audited financial statements and the notes
thereto for the fiscal year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the
SEC on April 4, 2018 and as amended on October 17, 2018 (the “2017 Annual Report”).
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain
reclassifications have been made to the prior year financial information to conform to the presentation used in the financial
statements for the year ended September 30, 2018.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Oventa,
Inc. and TruFood Provisions Co. All financial information has been prepared in conformity with accounting principles generally
accepted in the United States of America. All significant intercompany transactions and balances have been eliminated.
Revenue
Recognition
Revenue
is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration
that an entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the
nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue
that is recorded reflects the consideration that the Company expects to receive in exchange for those goods. The Company applies
the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract;
(ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context
of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation
of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each
performance obligation.
The Company only applies the five-step model to contracts
when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it
transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company
reviews the contract to determine which performance obligations the Company must deliver and which of these performance obligations
are distinct. The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance
obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations
are transferred to customers at a point in time, typically upon delivery.
Recently
issued accounting pronouncements
The
Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact
on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting
pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE
2 – GOING CONCERN
The
accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles
which contemplate continuation of the Company on a going-concern basis. The going concern basis assumes that assets are realized,
and liabilities are extinguished in the ordinary course of business at amounts disclosed in the consolidated financial statements.
The Company has incurred recurring losses from operations, and has an accumulated deficit of $78,055,519. The Company’s
ability to continue as a going concern depends upon its ability to obtain adequate funding to support its operations through continuing
investments of debt and/or equity by qualified investors/creditors, internally generated working capital and monetization of intellectual
property assets. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These
consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue
as a going concern. Management is currently pursuing a business strategy which includes raising the necessary funds to finance
the Company’s development and marketing efforts.
The
Company is pursuing additional debt and equity financing in order to fund its operations. In addition, revenue and cash from operating
activities continue to increase as operations increase for both Oventa and TruFoods.
NOTE
3 – DEPOSITS ON ACQUISITION
On
September 27, 2018, the Company entered into a stock purchase agreement with 2603088 Ontario Inc. o/a Recipe
Food Co., (“Recipe Food”), a corporation organized under the laws of the Province of Ontario, Canada. The Company
will purchase stock of Recipe Food resulting in an 80% ownership. As of September 30, 2018, the Company has paid $35,500
related to this acquisition. The Company believes that this arrangement will provide a stronger basis for growth and
innovation. Recipe Food will operate as a majority owned subsidiary of Cruzani, and Recipe Food will continue to be
led by its founder, Dee Gibson. The Company formally completed the closing of the asset purchase agreement on October 2, 2018.
NOTE
4 – ASSET ACQUISITIONS
On
March 8, 2018, the Company entered into a share exchange agreement with TruFood Provisions Co (“TruFood”). Pursuant
to an amendment to the share exchange agreement dated March 8, 2018, the Company will exchange 1 billion shares of the Company,
and cash, for 100% of the equity of TruFood. It is expected that all other debt related to the operation of TruFood will be retired
at or prior to the closing date. As of September 30, 2018, the Company has paid $124,000 related to this acquisition.
On
June 30, 2018, Supreme Sweets Acquisition Corp. (n/k/a Oventa, Inc.), a subsidiary of the Company, and the Company (collectively,
the “Company”) entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Supreme
Sweets Inc. and 2498411 Ontario, Inc., as sellers (collectively, the “Seller”), pursuant to which in exchange for
CAD $200,000 and a twenty percent (20%) interest in Oventa, Inc., the Company agreed to acquire the trade secret assets of
Seller upon the terms and subject to the conditions set forth in the Asset Purchase Agreement. The value of the assets recorded
of $6,367,227 is currently an estimate based upon the estimated fair value of the assets acquired under ASC 805-50-25-1. There
has been no goodwill or a loss recorded related to the acquisition. The compensation amount to be paid to Supreme Sweets Inc.
is currently recorded as other liabilities. A second closing occurred on July 31, 2018, pursuant to which the Company
acquired the furniture, fixtures and equipment of Seller in exchange for CAD $100,000. Seller is engaged in the business
of preparing delicious snacks, pastries and baked goods with high quality ingredients for exceptional taste, including low calorie
and gluten-free alternatives.
NOTE
5 – LOANS PAYABLE
The
loan payable balances are as follows:
|
|
Rate
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Loan 1
|
|
|
1
|
%
|
|
$
|
27,000
|
|
|
$
|
27,000
|
(1)
|
Loan 2
|
|
|
1
|
%
|
|
|
3,000
|
|
|
|
3,000
|
(1)
|
Loan 4
|
|
|
8
|
%
|
|
|
35,000
|
|
|
|
111,000
|
(1)
|
Loan 5
|
|
|
8
|
%
|
|
|
164,400
|
|
|
|
190,000
|
|
Loan 6
|
|
|
5
|
%
|
|
|
-
|
|
|
|
100,000
|
|
Loan 7
|
|
|
5
|
%
|
|
|
135,475
|
|
|
|
-
|
(1)
|
Total
|
|
|
|
|
|
$
|
364,875
|
|
|
$
|
431,000
|
|
(1) These notes are currently past due.
NOTE
6 – CONVERTIBLE NOTES
A
summary of the Company’s convertible notes payable is as follows:
|
|
Rate
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
Loan 1
|
|
12%
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
This note is currently past due.
|
Loan 2
|
|
10%
|
|
|
150,000
|
|
|
|
75,000
|
|
|
Various maturity dates. No amounts are past due.
|
Loan 3
|
|
1%
|
|
|
52,832
|
|
|
|
-
|
|
|
Various maturity dates. No amounts are past due.
|
Loan 4
|
|
8%
|
|
|
68,004
|
|
|
|
71,996
|
|
|
This note is currently past due.
|
Loan 5
|
|
8%
|
|
|
60,750
|
|
|
|
55,000
|
|
|
$24,000 of this balance is past due.
|
Loan 6
|
|
8%
|
|
|
-
|
|
|
|
72,100
|
|
|
|
Loan 7
|
|
8%
|
|
|
-
|
|
|
|
40,657
|
|
|
|
Loan 8
|
|
5%
|
|
|
677,013
|
|
|
|
-
|
|
|
Various maturity dates. No amounts are past due.
|
Total Notes
|
|
|
|
|
1,508,599
|
|
|
|
-
|
|
|
|
Less Debt Discount
|
|
|
|
|
(434,143
|
)
|
|
|
-
|
|
|
|
Total
|
|
|
|
$
|
1,074,456
|
|
|
$
|
814,753
|
|
|
|
NOTE
7 – DERIVATIVE LIABILITIES
The
embedded conversion options of the Company’s convertible debentures summarized in Note 6 contain conversion features that
qualify for embedded derivative classification. The fair value of these liabilities are re-measured at the end of every reporting
period and the change in fair value is reported in the statement of operations as a gain or loss on derivative financial instruments.
The
table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Balance at the beginning of the period
|
|
$
|
409,948
|
|
|
$
|
402,881
|
|
Addition of new derivative liabilities
|
|
|
1,127,281
|
|
|
|
-
|
|
Change in fair value of embedded conversion option
|
|
|
305,886
|
|
|
|
44,084
|
|
Derecognition of derivatives upon settlement of convertible notes
|
|
|
(462,324
|
)
|
|
|
(37,017
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
1,380,791
|
|
|
$
|
409,948
|
|
The Company uses Level 3 inputs for its valuation methodology for its conversion option liabilities as
their fair values were determined by using the Binomial option pricing model based on various assumptions. The model incorporates
the price of a share of the Company’s common stock (as quoted on the Over the Counter Bulletin Board), volatility, risk free
rate, dividend rate and estimated life. Significant changes in any of these inputs in isolation would result in a significant change
in the fair value measurement. As, required, these are classified based on the lowest level of input that is significant to the
fair value measurement. The following table shows the assumptions used in the calculations:
|
|
Expected Volatility
|
|
Risk-free Interest Rate
|
|
Expected Dividend Yield
|
|
Expected Life
(in years)
|
At December 31, 2017
|
|
335%
|
|
1.39%
|
|
0%
|
|
0.25 – 2.50
|
At September 30, 2018
|
|
209.47%- 261.9%
|
|
2.14%-2.36%
|
|
0%
|
|
0.25 – .50
|
NOTE
8 – WARRANTS
In
connection with the issuance of the convertible note (the “Note”) with L2 Capital, LLC (“L2”)
and funding of the initial tranche of $50,000 on the Note, the Company also issued a common stock purchase warrant to
purchase up to 7,638,092 shares of the Company’s common stock pursuant to the terms therein as a commitment fee. At the
time that each subsequent tranche under the Note is funded by L2 in cash, then on such funding date, the warrant shares
shall immediately and automatically be increased by the quotient of 100% of the face value of the respective tranche and 110%
of the VWAP of the common stock on the Trading Day (as defined in the Note) immediately prior to the funding date of the
respective tranche. As of September 30, 2018, the Company had received multiple tranches for which it issued
warrants to purchase shares of the Company’s common stock.
These
warrants have a variable exercise price per the above and expire in five years. The aggregate fair value of the warrants,
which was allocated against the debt proceeds totaled $280,437 based on the Black Scholes Merton pricing model. The fair value
was credited to additional paid in capital and debited to debt discount to be amortized over the term of the loan.
A
summary of the status of the Company’s outstanding stock warrants and changes during the periods is presented below:
|
|
Shares
available to
purchase
with
warrants
|
|
|
Weighted
Average
Price
|
|
|
Weighted
Average
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
453,381,835
|
|
|
$
|
0.0011
|
|
|
$
|
0.0014
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Outstanding, September 30, 2018
|
|
|
453,381,835
|
|
|
$
|
0.0011
|
|
|
$
|
0.0014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2018
|
|
|
453,381,835
|
|
|
$
|
0.0011
|
|
|
$
|
0.0014
|
|
Range of Exercise Prices
|
|
Number Outstanding 9/30/2018
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average
Exercise Price
|
$0.001 – 0.0071
|
|
453,381,835
|
|
4.94 years
|
|
$0.0011
|
The Company uses Level 3 inputs for its
valuation methodology for its conversion option liabilities as their fair values were determined by using the Binomial option pricing
model based on various assumptions. The model incorporates the price of a share of the Company’s common stock (as quoted
on the Over the Counter Bulletin Board), volatility, risk free rate, dividend rate and estimated life. Significant changes in any
of these inputs in isolation would result in a significant change in the fair value measurement. As, required, these are classified
based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions
used in the calculations:
|
|
Expected Volatility
|
|
Risk-free Interest Rate
|
|
Expected Dividend Yield
|
|
|
Expected Life (in years)
|
|
At September 30, 2018
|
|
252.42% – 258.24%
|
|
2.80%-2.94%
|
|
|
0
|
%
|
|
|
5
|
|
NOTE
9 – COMMON STOCK
During
the nine months ended September 30, 2018, the Company issued 704,188,067 shares of common stock to settle $250,547 of principal
and $18,870 of accrued interest on its convertible notes.
NOTE
10 – PREFERRED STOCK
Series
A Convertible Preferred Stock
, has a par value of $0.01, may be converted at the holder’s election into shares of
common stock at the conversion rate of ten shares of common stock for one share of Series A Preferred Stock. Each share is
entitled to 10 votes, voting with the common stock as a single class, has liquidation rights of $2.00 per share and is not entitled
to receive dividends.
Series
B Convertible Preferred Stock
, has a par value of $0.01, may be converted at the holder’s election into shares of
common stock at the conversion rate of 4,000 shares of common stock for one share of Series B Preferred Stock. Each share
is entitled to 4,000 votes, voting with the common stock as a single class, has liquidation rights of $0.01 per share and is not
entitled to receive dividends.
Series C Convertible Preferred Stock
,
has a par value of $0.01, may be converted at the holder’s election into shares of common stock at the conversion rate of
400 shares of common stock for one share of Series C Preferred Stock. Each share is entitled to 400 votes, voting with the
common stock as a single class, has liquidation rights of $0.01 per share and is entitled to receive four hundred times the dividends
declared and paid with respect to each share of Common Stock. See Note 11 for related party preferred stock issuance.
Series D Convertible Preferred Stock
,
has a par value of $0.0001, may be converted at a ratio of the Stated Value plus dividends accrued but unpaid divided by the fixed
conversion price of $0.0015, which conversion price is subject to adjustment. Series D is non-voting, has liquidation rights to
be paid in cash, before any payment to common or junior stock, 140% of the Stated Value ($2.00) per share plus any dividends accrued
but unpaid thereon and is entitled to 8% cumulative dividends.
Series E Convertible Preferred Stock
,
has a par value of $0.001, and a stated value of $1.00 per share, subject to adjustment. The shares of Series E Convertible Preferred
Stock at a conversion price that is equal to the amount that is 61% of the lowest trading price of the Company’s common stock
during the 20 trading days immediately preceding such conversion. The shares of Series E Convertible Preferred Stock are subject
to redemption by the Company at its option from the date of issuance until the date that is 180 days therefrom, subject to premium
that ranges from 120% to 145%, increasing by 5% during each 30-day period following issuance. Series E carries a 12% cumulative
dividend, which will increase to 22% upon an event of default, is non-voting, and has liquidation rights to be paid in cash, before
any payment to common or junior stock.
On July 23, 2018, the Company granted 125,000
shares of Series D preferred stock to L2. The stock was issued as commitment shares in connection to the Equity Purchase Agreement
dated July 23, 2018. The stock is not effective until the full commitment amount has been met or the agreement is terminated. The
shares were valued at $0.15, based upon estimated loan fees, for total non-cash expense of $18,750. The Series D has been classified
on the balance sheet as mezzanine equity.
On September 19, 2018, the Company entered
into a Stock Purchase Agreement with Geneva Roth Remark Holdings, Inc. (“Geneva”) whereby Geneva will purchase 53,000
shares of Series E preferred stock for $53,000. This transaction was completed in October when the Series E designation was completed,
and the funds were received.
As of
September 30, 2018, there was an
insufficient amount of the Company’s authorized common stock to satisfy
the potential number of shares that would be required to satisfy the outstanding convertible preferred,
convertible debt and the potential 1 billion shares to be issued to TruFoods, into common stock. In accordance with ASC 815,
derivative and hedging, the Company analyzed which contracts could be classified as equity through the following sequencing
methodology: contracts with no maturity date (convertible preferred shares) then contracts with the earliest maturity date
first. Under this methodology management determined that both the Series C and Series D convertible preferred stock, being
among the last to be issued, should be allocated to mezzanine equity. This allocation leaves sufficient common shares for our
other convertible contracts. Management believes that no further consideration is needed.
NOTE 11 – RELATED PARTY TRANSACTION
During the nine months ended September 30, 2018, the Company issued 5,000,000 shares of its Series C Preferred
stock to Everett Dickson, the Company’s CEO for services rendered. The stock was valued based on the services performed for
total non-cash expense of $120,000. The Series C has been classified on the balance sheet as mezzanine equity.
The
Series C has been classified on the balance sheet as mezzanine equity.
NOTE
12 – SUBSEQUENT EVENTS
In
accordance with ASC 855-140,
Subsequent Events,
the Company analyzed its operations subsequent to September 30, 2018, through
the date the financial statements were available to be issued and has determined that there are no material subsequent events
to disclose in these financial statements
other than the following.
On October 2, 2018, the Company announced
that it has formally completed the closing of a definitive asset purchase agreement, completing the acquisition of a majority interest
in Recipe Food.
On October 5, 2018, the Company received
$50,000 for the sale of its Series E preferred stock to Geneva (See Note 10).
On October 15, 2018, the Company
entered into a letter of intent (the “LOI”) concerning the Company’s potential acquisition of intellectual
property assets pertaining to “VitaminFIZZ.” Pursuant to the terms of the LOI, the closing of such
transaction is expected to occur no later than November 30, 2018, and the purchase price will be $60,000 payable in cash. Additionally, in
connection with such closing, the seller of such assets will enter into a confidentiality, non-competition and
non-solicitation agreement having a term of five years. Pursuant to the LOI, the definitive agreement is to contain customary
representations, warranties and conditions to closing.
Subsequent to September 30, 2018, L2 converted $21,560 into 98,000,000 shares of common stock.