Legacy Card Company (“Legacy”)
was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, Legacy converted from a California Limited Liability
Company to a Nevada Corporation. On November 10, 2005, Legacy merged with Cardiff International, Inc. (“Cardiff”, the
“Company”), a publicly held corporation. In the first quarter of 2013, it was decided to restructure Cardiff into a
holding company that adopted a new business model 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, income-producing commercial real estate properties, and high return investments, 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 profitable small- to minimum-sized businesses with little to no debt, seeking support with both financing and management
that had the ability to offer a return to investors. The plan is to establish new classes of preferred stock to streamline voting
rights, negate debt, and acquire new businesses. By December of 2013, the Company had negated more than 90% of all its debt; by
December 31, 2016, the Company had completed the acquisition of six businesses: We Three, LLC; Romeo’s NY Pizza; Edge View
Properties, Inc.; FDR Enterprises, Inc.; Refreshment Concepts, LLC; and Repicci’s Franchise Group, LLC.
To date, the Company is not aware of any other domestic holding
company using the same business philosophy or governing policies. The Company’s business footprint is to acquire strong
companies that meet the following criteria: (1) in business for a minimum of two years; (2) profitable; (3) good management team;
(4) little to no debt; and (5) assets of a minimum of $1,000,000. Cardiff continues to practice all business ethics under the
Securities Exchange Act of 1934 (“1934 Act”) and acknowledges that there are more than 43 successful Business Development
Companies subject to the Investment Company Act of 1940 (“1940 Act”), all of which may be considered competition to
Cardiff and that are established and available to the public for investment. These companies offer experienced management, dividends
and financial security.
Edge View Properties, Inc. acquired on July 16, 2014;
FDR Enterprises,
Inc. acquired on August 10, 2016;
The consolidated financial statements include
the accounts of Cardiff International, Inc., and its wholly-owned subsidiaries: We Three, LLC; Romeo’s NY Pizza; Edge View
Properties, Inc.; FDR Enterprises, Inc.; Refreshment Concepts, LLC and Repicci’s Franchise Group, LLC. 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.
The preparation of financial statements
in conformity with 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.
In general, the Company recognizes revenue on an accrual basis.
Revenue is generally realized or realizable and earned when all of the following criteria are met:
The Company’s rental income is derived
from the mobile home leases. The expired leases are considered month-to-month leases. In accordance with section 605- 10-S99-1
of the FASB Accounting Standards Codification for revenue recognition, the cost of property held for leasing by major classes
of property according to nature or function, and the amount of accumulated depreciation in total, is presented in the accompanying
consolidated balance sheets as of December 31, 2017 and 2016. There are no contingent rentals included in income in the accompanying
statements of operations. With the exception of the month-to-month leases, revenue is recognized on a straight-line basis and amortized
into income on a monthly basis, over the lease term.
Revenue from restaurant sales is recognized when food and beverage
products are sold. The Company reports revenue net of sales taxes collected from customers and remitted to governmental taxing
authorities.
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Accounts receivable is reported on the
balance sheet at gross 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 December 31, 2017 and 2016, the Company had accounts receivable
of $63,115 and $32,008, respectively. Accounts receivables are primarily generated from our subsidiaries We Three and Repicci’s
in their normal course of business.
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.
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:
During the years ended December 31, 2017 and 2016, depreciation
and amortization expense was $246,325 and $174,859, respectively.
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 believe such assumptions are also comparable to those
that would be used by other marketplace participants. During year-ended December 31, 2017, the company had Goodwill impairment
of $932,529, related to its acquisitions of FDR Enterprises, Inc.; Refreshment Concepts, LLC; and Repicci’s Franchise Group,
LLC. (collectively referred to as “Repicci’s Group”). The Company based this decision on impairment testing off the underlying assets, expected cash flows,
decreased asset value and other factors.
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. During year-ended December 31, 2017,
the company had Goodwill impairment of $932,529, related to its acquisitions of FDR Enterprises, Inc.; Refreshment Concepts, LLC;
and Repicci’s Franchise Group, LLC. (collectively referred to as “Repicci’s Group”). The Company based this decision on impairment testing off the underlying assets, expected cash flows,
decreased asset value and other factors.
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.
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 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:
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 December 31, 2017 and 2016.
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.
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.
If the Company is a newly formed corporation
or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement
memorandum (based on sales to third parties), or weekly or monthly price observations would generally be more appropriate than
the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked
quotes and lack of consistent trading in the market.
The fair value of share options and similar
instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for
inputs are as follows:
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.
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”).
Pursuant to ASC Section 505-50-30, 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. 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. If the Company is a newly formed
corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private
placement memorandum, or weekly or monthly price observations would generally be more appropriate than the use of daily price observations
as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading
in the market.
The fair value of share options and similar
instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for
inputs are as follows:
Pursuant to ASC paragraph 505-50-25-7,
if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for
goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the
elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached.
A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether
the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity
under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1,
a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable
equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific
performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity
by the grantor of the equity instruments.
The transferability (or lack thereof) of
the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which
equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance
on the determination of the measurement date for transactions that are within the scope of this Subtopic.
Pursuant to Paragraphs 505-50-25-8 and
505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after
a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance
conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity
had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments.
A recognized asset, expense, or sales discount shall not be reversed if a share option and similar instrument that the counterparty
has the right to exercise expires unexercised.
Pursuant to ASC paragraph 505-50-30-S99-1,
if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity
instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are
not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should
be recorded.
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 years ended December 31, 2017 and
2016, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2017 and 2016, the
Company did not have any significant unrecognized uncertain tax positions.
The following table sets forth the computation
of basic and diluted earnings per common share for the years ended December 31, 2017 and 2016. During a period of net loss, all
potentially dilutive securities are anti-dilutive. Accordingly, for the years ended December 31, 2017 and 2016, 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:
The accompanying consolidated financial
statements have been prepared using the going concern basis of accounting, which contemplates continuity of operations, realization
of assets and liabilities and commitments in the normal course of business. The Company has sustained operating losses since its
inception and has negative working capital and an accumulated deficit. These factors raise substantial doubts about the Company’s
ability to continue as a going concern. As of December 31, 2017, the Company had shareholders’ deficit of $3,591,279. The
accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company is unable to continue
as a going concern. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s
December 31, 2017 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue
as a going concern.
The ability of the Company to continue
as a going concern and the appropriateness of using the going concern basis is dependent upon, among other things, additional cash
infusions. Management has prospective investors and believes the raising of capital will allow the Company to pursue new acquisitions.
There can be no assurance that the Company will be able to obtain sufficient capital from debt or equity transactions or from operations
in the necessary time frame or on terms acceptable to it. Should the Company be unable to raise sufficient funds, it may be required
to curtail its operating plans. In addition, increases in expenses may require cost reductions. No assurance can be given that
the Company will be able to operate profitably on a consistent basis, or at all, in the future. Should the Company not be able
to raise sufficient funds, it may cause cessation of operations.
In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers (Topic 606),” on revenue recognition. This guidance provides that an entity
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed disclosures
to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. The original effective date of this guidance was for interim and annual reporting periods beginning
after December 15, 2016, early adoption is not permitted, and the guidance must be applied retrospectively or modified retrospectively.
In July 2015, the FASB approved an optional one-year deferral of the effective date. As a result, we expect to adopt this guidance
on January 1, 2018.
The adoption has had an immaterial impact
to our comparative net income and as such comparative information has not been restated and continues to be reported under the
accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to
our net income on an ongoing basis.
A majority of our sales revenue continues
to be recognized when products sold to customers or service has been rendered.
In February 2016, the FASB issued an accounting
standards update which modifies the accounting for leasing arrangements, particularly those arrangements classified as operating
leases. This update will require entities to recognize the assets and liabilities arising from operating leases on the balance
sheet. This guidance is effective for fiscal and interim periods beginning after December 15, 2018 and is required to be applied
retrospectively to all leasing arrangements. We are currently assessing the effects this guidance may have on our financial statements.
Other pronouncements issued by the FASB or other authoritative
accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the
Company’s financial position, results of operations or cash flows.
On August 10, 2016, the Company completed
the acquisitions of FDR Enterprises, Inc.; Refreshment Concepts, LLC; and Repicci’s Franchise Group, LLC. (collectively
referred to as “Repicci’s Group”). Pursuant to the acquisition agreement, the Company agreed to issue 4,859,379
shares of Series H Preferred Stock as consideration for the acquisition of Repicci’s Group. The combined book value of Repicci’s
Group was $(203,622) as set forth below. Based on the price of $.15 per share for the Series H Preferred Stock, which was determined
by the market price of common stock at $.12 per share on the acquisition date multiplied by the conversion ratio of 1:1.25, the
fair value of the stock issuance of Series H Preferred Stock was $728,907, resulting in the goodwill of $932,529. The 4,859,379
shares of Series H Preferred Stock were issued subsequently to the date of this report. Accordingly, the Company recorded Series
H Preferred Stock to be issued of $728,907 in the consolidated balance sheet as of December 31, 2016. During year-ended December
31, 2017, the company had Goodwill impairment of $932,529, related to its acquisitions of FDR Enterprises, Inc.; Refreshment Concepts,
LLC; and Repicci’s Franchise Group, LLC. (collectively referred to as “Repicci’s Group”). The Company based this decision on impairment testing off the underlying assets, expected cash flows,
decreased asset value and other factors.
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 results of the operations for Repicci’s Group have been included in the consolidated financial
statements since the date of the acquisitions (August 10, 2016). The following table presents the unaudited pro forma results of
continuing operations for December 31, 2016, as if the acquisitions had been consummated at the beginning of the
period presented. The pro forma results of continuing operations are prepared for comparative purposes only and do not necessarily
reflect the results that would have occurred had the acquisitions occurred at the beginning of the period presented or the results
which may occur in the future. The Pro forma adjustments are to eliminate all significant intercompany accounts and transactions
within Repicci’s Group.
CARDIFF
INTERNATIONAL, INC.
Pro Forma
Combined Statement of Operations
For the year
ended December 31, 2016
|
|
CDIF and subsidiaries
|
|
|
F.D.R
Enterprises
|
|
|
Refreshment Concept LLC
|
|
|
Repicci’s Franchise Group
|
|
|
Pro forma adjustment
|
|
|
Pro forma
combined total
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
152,120
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
152,120
|
|
Sales of pizza
|
|
|
603,787
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
603,787
|
|
Sales of ice cream
|
|
|
–
|
|
|
|
342,123
|
|
|
|
489,022
|
|
|
|
278,098
|
|
|
|
(95,974
|
)
|
|
|
1,013,269
|
|
Other
|
|
|
24,928
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
24,928
|
|
Total revenue
|
|
|
780,835
|
|
|
|
342,123
|
|
|
|
489,022
|
|
|
|
278,098
|
|
|
|
–
|
|
|
|
1,794,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental business
|
|
|
145,795
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
145,795
|
|
Pizza restaurants
|
|
|
404,481
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
404,481
|
|
Ice cream stores
|
|
|
–
|
|
|
|
225,514
|
|
|
|
419,550
|
|
|
|
172,681
|
|
|
|
(62,127
|
)
|
|
|
755,618
|
|
Other
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total cost of sales
|
|
|
550,276
|
|
|
|
225,514
|
|
|
|
419,550
|
|
|
|
172,681
|
|
|
|
–
|
|
|
|
1,305,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
230,559
|
|
|
|
116,609
|
|
|
|
69,472
|
|
|
|
105,417
|
|
|
|
–
|
|
|
|
488,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
2,180,974
|
|
|
|
120,342
|
|
|
|
137,833
|
|
|
|
175,663
|
|
|
|
–
|
|
|
|
2,614,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAIN (LOSS) FROM OPERATIONS
|
|
|
(1,950,415
|
)
|
|
|
(3,733
|
)
|
|
|
(68,361
|
)
|
|
|
(70,246
|
)
|
|
|
–
|
|
|
|
(2,126,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on settlement of debt
|
|
|
3,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,000
|
|
(Loss) gain on disposal of fixed asset
|
|
|
(5,151
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(5,151
|
)
|
Amortization of debt discounts
|
|
|
(45,667
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(45,667
|
)
|
Change in value of derivative liability
|
|
|
1,731
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,731
|
|
Interest expense
|
|
|
(44,533
|
)
|
|
|
(1,987
|
)
|
|
|
(4,736
|
)
|
|
|
(1,005
|
)
|
|
|
–
|
|
|
|
(52,261
|
)
|
Total other income (expenses)
|
|
|
(90,620
|
)
|
|
|
(1,987
|
)
|
|
|
(4,736
|
)
|
|
|
(1,005
|
)
|
|
|
–
|
|
|
|
(98,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FOR THE PERIOD
|
|
|
(2,041,035
|
)
|
|
|
(5,720
|
)
|
|
|
(73,097
|
)
|
|
|
(71,251
|
)
|
|
|
(33,847
|
)
|
|
|
(2,224,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
$
|
(0.15
|
)
|
|
|
**
|
|
|
|
**
|
|
|
|
**
|
|
|
$
|
–
|
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,600,570
|
|
** Less than $.01
3.
|
PLANT AND EQUIPMENT, NET
|
Plant and equipment, net as of December 31, 2017 and 2016 was
$736,672 and $736,672, respectively, consisting of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Furniture, fixture and equipment
|
|
|
953,404
|
|
|
|
903,249
|
|
Leasehold improvements
|
|
|
290,929
|
|
|
|
672,159
|
|
|
|
|
1,243,671
|
|
|
|
1,575,408
|
|
Less: accumulated depreciation
|
|
|
(717,260
|
)
|
|
|
(838,736
|
)
|
Plant and equipment, net
|
|
|
491,473
|
|
|
|
736,672
|
|
During the years ended December 31, 2017 and 2016 depreciation
expense was $246,325 and $174,859, respectively.
During
the December 31 December 31, 2017, the Company disposed fixed assets for discontinued operations of $101,434, resulting accelerated
depreciation expense of $101,434 from disposal of fixed assets.
During the December 31 December 31, 2016,
the Company disposed fixed asset for cash payment of $31,637, resulting in loss of $5,151 from disposal of fixed assets. And the
Company purchased a vehicle for $3,974 and other fixed assets for $14,691.
As of December 31, 2017 and 2016, 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 be depreciated.
As
of December 31, 2017 and 2016, the Company had accrued expenses of $764,576 and $1,717,725, respectively, consisted of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Accrued salaries
|
|
|
–
|
|
|
|
670,381
|
|
Accrued salaries – related party
|
|
|
447,500
|
|
|
|
742,500
|
|
Lease payable – related party
|
|
|
25,250
|
|
|
|
25,250
|
|
Accrued expenses - other
|
|
|
291,826
|
|
|
|
279,594
|
|
Total
|
|
|
764,576
|
|
|
|
1,717,725
|
|
6.
|
RELATED PARTY TRANSACTIONS
|
Due to Officers and Officer Compensation
Refreshment Concepts, LLC leases its premises
from its prior owner under a month-to-month lease at the rate of $1,500 per month. As of December 31, 2017 and December 31, 2016,
the Company had lease payable of $25,250 to the related party.
On January 24, 2017, the Company issued
2,010,490 shares of Common Stock to settle $402,098 due to the prior owner of Refreshment Concepts LLC, pursuant to the Acquisition
Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s
Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt in amount
of $80,420. As of December 31, 2017 and December 31, 2016, in addition to the lease payable of $25,250, the outstanding balance
due (included in notes payable to related parties on the financial statements) to the same prior owner was $44,189 and $57,695,
respectively.
On January 24, 2017, the Company issued
173,585 shares of Common Stock to settle $34,717 due to the prior owner of Repicci’s Franchise Group LLC, pursuant to the
Acquisition Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s
Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt
in amount of $6,943. As of December 31, 2017 and December 31, 2017, the outstanding balance due (included in notes payable to related
parties on the financial statements) to the same prior owner was $2,074 and $40,550, respectively.
During the second quarter of 2017, the
prior owner of Repicci’s Franchise Group LLC submitted a subscription agreement to the Company regarding the purchase of
90,909 shares of the Company’s Series I Preferred Stock by cash payment of $10,000, which was collected during the second
quarter of 2017. The transaction was independently negotiated between the Company and the related party. The proceeds from the
subscription agreement mitigated the Company’s cash pressure in short term. The 90,909 shares of Series I Preferred Stock
were issued as of December 31, 2017.
During the second quarter of 2017, the
Company issued 906,907 shares of Common Stock to a related party for services rendered. The fair value of this stock issuance was
determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.0799 per
share. Accordingly, the Company recognized stock based compensation of $72,462 to the consolidated statements of operations for
the December 31 December 31, 2017.
The Company borrows funds from Daniel Thompson,
who is a Shareholder and Officer of the Company. The terms of repayment stipulate the loans are due 24 months after the launch
of the Legacy Tuition Card (or prior to such date) at an annual interest rate of six percent. As of December 31, 2017 and December
31, 2016, the Company had $88,953 and $84,540 due (included in notes payable to related parties on the financial statements) to
Daniel Thompson, respectively.
In addition, the Board of Directors of
the Company approved to increase Daniel Thompson’s compensation to $25,000 per month from $20,000 effective January 1, 2017.
Accordingly, a total salary of $300,00 and $180,000 were accrued and reflected as an expense to Daniel Thompson during the year
ended December 31, 2017 and 2016, respectively. The Company issued 10,000,000 shares of Common Stock for forgiveness of $800,000
in accrued salaries. The accrued salaries payable to Daniel Thompson was $112,500 and $742,500 as of December 31, 2017 and December
31, 2016, respectively.
The Company had an employment agreement
with a former Chief Operating Officer, Mr. Levy, whereby the Company provided for compensation of $15,000 per month in 2015 and
$10,000 per month in 2016. Mr. Levy resigned on June 7, 2016. A total salary of $0 and $90,000 were accrued and reflected as an
expense during the year ended December 31, 2017 and 2016, respectively. The Company issued 1,000,000 shares of Common Stock for
forgiveness of $80,000 in accrued salaries. The total balance due to Mr. Levy for accrued salaries at December 31, 2017 and December
31, 2016 were $160,000 and $240,000, respectively.
The Company had an employment agreement
with the Chief Operating Officer, Mr. Roberts, whereby the Company provided for compensation of $10,000 per month effective in
June 2016. A total salary of $60,000 and $0 were accrued and reflected as an expense during the year ended December 31, 2017 and
2016, respectively. The total balance due to Mr. Roberts for accrued salaries at December 31, 2017 and December 31, 2016 were $-0-
and $60,000, respectively. In addition, the Company agreed to grant Mr. Roberts stock options for a minimum of 300,000 shares of
the Company's common stock at an exercise price of 50% of the current last ten (10) day stock average per share, and 600,000 shares
of common stock as a key officer employment incentive to be earned and vested on a pro rata basis at 25,000 shares per month for
twenty-four (24) months. The fair value of both 300,000 options and 600,000 shares were determined by the fair value of the Company’s
Common Stock on the grant date, at a price of approximately $0.226 per share. Accordingly, the accrued expense was $135,600
as of December 31, 2017. On August 8, 2017, Mr. Roberts accepted the offer from the Company to issue 1,000,000 common shares to
supersede all his options and warrants in the employment agreement. Additionally, the Company issued 1,000,000 shares of Common
Stock as a bonus to Mr. Roberts for his past service to the Company. The fair value of this stock issuance was determined by the
fair value of the Company’s Common Stock on the grant date, at a price of approximately $.07 per share. Accordingly,
the Company recognized stock based compensation of $70,000 to the consolidated statements of operations for the year ended December
31, 2017.
The Board of Directors of the Company approved
to increase Chief Executive Officer, Mr. Cunningham’s compensation to $25,000 per month from $15,000 effective January 1,
2017. A total salary of $300,000 and $135,000 were accrued and reflected as an expense during the year ended December 31, 2017
and 2016, respectively. The Company issued 5,000,000 shares of Common Stock for forgiveness of $400,000 in accrued salaries. The
total balance due to Mr. Cunningham for accrued salaries at December 31, 2017 and December 31, 2016 were $335,000 and $360,000,
respectively.
Notes Payable – Related Party
The Company has entered into several
unsecured loan agreements with related parties (see below; Footnote 7, Notes Payable – Related Party; and Footnote 7,
Convertible Notes Payable – Related Party).
Notes payable at December 31, 2017 and
December 31, 2016 are summarized as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Notes Payable – Unrelated Party
|
|
$
|
215,979
|
|
|
$
|
259,320
|
|
Notes Payable – Related Party
|
|
|
120,128
|
|
|
|
166,695
|
|
Total
|
|
|
336,107
|
|
|
|
426,015
|
|
Current portion
|
|
|
(336,107
|
)
|
|
|
(426,015
|
)
|
Long-term portion
|
|
$
|
–
|
|
|
$
|
–
|
|
Notes Payable – Unrelated Party
On March 12, 2009, the Company entered
into a preferred debenture agreement (Note 5) 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 December
31, 2017, the Company was in default on this debenture. The balance of the note was $10,989 and $10,989 at December 31, 2017 and
December 31, 2016, respectively.
As of December 31, 2017, the Company had
lease payable of $126,381 in connection with 2 capital leases on 2 Mercedes Sprinter Vans for the ice cream section. There are
purchase options at the end of all lease terms that are based on the fair market value of the vans at the time.
The balance of $120,128 in notes payable
to unrelated party was due to the auto loan for the vehicles used in the Pizza restaurants and Repicci’s Group and for daily
operations.
Notes Payable – Related Party
On September 7, 2011, the Company entered
into an unsecured Promissory Note agreement (“Note 1”) with a related party for $50,000. Note 1 bears interest at 8%
per year and matures on September 7, 2016. Interest is payable annually on the anniversary of Note 1, and the principal and any
unpaid interest will be due upon maturity. In conjunction with Note 1, the Company issued 2,500,000 shares of its Common Stock
to the lender. As a result of the shares issued in conjunction with Note 1, the Company recorded a $50,000 debt discount during
2011. The balance of Note 1, net of debt discount, was $50,000 and $50,000 at December 31, 2017 and December 31, 2016, respectively.
Note 1 is currently in default.
On November 17, 2011, the Company entered
into an unsecured Promissory Note agreement (“Note 2”) with a related party for $50,000. Note 2 bears interest at 8%
per year and matures on November 17, 2016. Interest is payable annually on the anniversary of Note 2, and the principal and any
unpaid interest will be due upon maturity. In conjunction with Note 2, the Company issued 2,500,000 shares of its Common Stock
to the lender. As a result of the shares issued in conjunction with Note 2, the Company recorded a $50,000 debt discount during
2011. The balance of Note 2, net of debt discount, was $50,000 and $50,000 at December 31, 2017 and December 31, 2016, respectively.
Note 2 is currently in default.
On August 4, 2015, the Company entered
into a an unsecured Promissory Note agreement (“Note 3”) with a related party for $19,500. Note 3 bears interest at
6% per year and matures on December 31, 2016. Interest is payable annually on the anniversary of Note 3, and the principal and
any unpaid interest will be due upon maturity. The Company repaid $10,500 to the related party in 2016; therefore, the balance
of Note 3 was $-0- as of December 31, 2017 and December 31, 2016, respectively.
As of December 31, 2017 and December 31,
2016, the Company also had an unsecured note payable of $120,128 and $57,695, respectively, to the prior owner of Repicci’s
Group.
The following is a schedule showing the
future minimum loan payments in the future 5 years.
Year ending December,
|
|
|
|
2017
|
|
$
|
0
|
|
2018
|
|
|
336,107
|
|
2019
|
|
|
0
|
|
2020
|
|
|
0
|
|
2021
|
|
|
0
|
|
Total
|
|
$
|
336,107
|
|
8.
|
CONVERTIBLE NOTES PAYABLE
|
Some of the Convertible Notes issued as
described below included an anti-dilution provision that allowed for the adjustment of the conversion price. The Company considered
the guidance provided by the FASB in “Determining Whether an Instrument Indexed to an Entity’s Own Stock,” the
result of which indicates that the instrument is not indexed to the issuer’s own stock. Accordingly, the Company determined
that, as the conversion price of the Notes issued in connection therewith could fluctuate based future events, such prices were
not fixed amounts. As a result, the Company determined that the conversion features of the Notes issued in connection therewith
are not considered indexed to the Company’s stock and characterized the value of the conversion feature of such notes as
derivative liabilities upon issuance.
Convertible notes at December 31, 2017 and December 31, 2016
are summarized as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Convertible Notes Payable – Unrelated Party
|
|
$
|
861,875
|
|
|
$
|
179,285
|
|
Convertible Notes Payable – Related Party
|
|
|
165,000
|
|
|
|
165,000
|
|
Discount on notes
|
|
|
(263,536
|
)
|
|
|
(21,833
|
)
|
Total - Current
|
|
$
|
763,339
|
|
|
$
|
322,452
|
|
Convertible Notes Payable – Unrelated Party
On April 17, 2014, the Company entered
into an unsecured Convertible Note (“Note 4”) in the amount of $9,000. Note 4 was convertible into Common Shares of
the Company at $0.005 per share at the option of the holder. Note 4 bore interest at eight percent per year, matured on June 17,
2014, and was unsecured. All principal and unpaid accrued interest was due at maturity. The Company is currently in default on
Note 4. During the year end December 31, 2016, the note holder converted $3,715 principal and $1,310 accrued interest payable into
1,005,000 shares of common stock at a conversion price of $0.005 per share. And $3,000 of principal is forgiven by the note holder.
In addition, the Company agreed to reimburse the holder’s certificate processing cost by adding $1,000 to the principal for
each note conversion pursuant to an addendum, dated February 3, 2016. During the first quarter of 2017, the note holder converted
$2,785 principal, $1,000 processing cost reimbursement and $102 accrued interest into 777,400 shares of common stock at a conversion
price of $0.005 per share. The balance of Note 4 was $2,785 as of December 31, 2016, which was paid in full as of December 31,
2017.
On July 29, 2015, the Company entered
into an 8% convertible promissory note (“Note 6”) with an unrelated entity in the amount of $10,000. Note 6 bears
interest at eight percent per year, matured on November 26, 2015. The derivative liabilities were reclassified as additional
paid in capital due to the conversion price become fixed price as of January 1, 2016.
Note 6 and accrued interest totaled $11,666
was paid in full by cash on May 1, 2017. The principal balance on Note 6 at December 31, 2016 and 2017 was $10,000 and zero, respectively.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
5/1/2017
|
$ 95,001
|
0.50
|
$0.01
|
$0.1050
|
111%
|
0.0098
|
On February 9, 2016, the Company entered
into a 15% convertible line of credit (“Note 7”) with an unrelated entity in the amount up to $50,000. On February
9, 2016, the Company received $17,500 cash for the line of credit, matured on February 9, 2017, and unsecured. Note 7 is convertible
into common shares of the Company at the conversion ratio of $0.03 or 50% discount of the lowest closing price on the primary trading
market on which Company's common stock is quoted for the last five trading days prior to the conversion date, whichever is lower.
The Company determined that the conversion features contained in Note 7 carrying value represents a freestanding derivative instrument
that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial
instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial
instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and
will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are
recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified
into additional paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2016 and December 31, 2017, respectively.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2016
|
$ 74,750
|
0.11
|
$0.03
|
$0.2250
|
221%
|
0.0062
|
12/31/2017
|
$ 32,467
|
0.09
|
$0.03
|
$0.0595
|
174%
|
0.0153
|
Note 7 is currently in default and principal
of $6,000 was converted into 200,000 shares of common stock at the end of 2016. During the year ended December 31, 2017, the Company
recorded interest expense, late fee and default interest related to Note 7 in total amount of $9,258 and amortization of debt discounts
in amount of $-0-. The balance of Note 7 was $11,500 with unamortized debt discount of $3,500 as of December 31, 2016, and $-0-
without unamortized debt discount as of December 31, 2017.
On October 28, 2016, the Company received
$25,000 cash pursuant to the terms of Note 7, matures on October 28, 2017 (“Note 7-1”). Note 7-1 was entitled to conversion
after April 28, 2017 which met the requirements for liability classification under ASC 815.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 26,614
|
0.08
|
$0.03
|
$0.0594
|
126%
|
0.012
|
During the year ended December 31, 2017,
the Company recorded interest expense related to Note 7-1 in amount of $11,454and amortization of debt discount in amount of $0-0.
This resulted in an unamortized debt discount of $-0- as of December 31, 2017. The balance of Note 7-1 was $25,000 as of December
31, 2017 and December 31, 2016, respectively.
On March 8, 2016, the Company entered into
a 15% convertible promissory note in the principal of $50,000 (“Note 8”) with an unrelated entity for services rendered.
Note 8 is matured on March 8, 2017, and unsecured. This Note is convertible into common shares of the Company at the conversion
ratio of $0.03 or 50% discount of the lowest closing price on the primary trading market on which Company's common stock is quoted
for the last five trading days prior to the conversion date, whichever is lower. The Company determined that the conversion features
contained in Note 8 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification
under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s
balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using
the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date.
Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense
at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
On February 16, 2017, a portion of principal
of $6,000 was converted into 200,000 shares of common stock at a conversion price of $0.03 per share.
On April 13, 2017, a portion of principal
of $12,853, including $1,000 conversion cost reimbursement, plus accrued interest of $12,247 were converted into 836,667 shares
of common stock at a conversion price of $0.03 per share.
On May 4, 2017, a portion of principal
of $6,000, including $2,000 conversion cost reimbursement, plus accrued interest of $70 were converted into 202,333 shares of common
stock at a conversion price of $0.03 per share.
On July 6, 2017, a portion of principal
of $119,147, including $1,000 conversion cost reimbursement, were converted into 704,733 shares of common stock at a conversion
price of $0.03 per share.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2016, February 16, 2017, April 13, 2017, May 4, 2017, July 6, 2017 and December
31, 2017, respectively.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2016
|
$ 325,001
|
0.18
|
$0.03
|
$0.2250
|
221%
|
0.0062
|
2/16/2017
|
$ 62,000
|
0.05
|
$0.03
|
$0.3400
|
173%
|
0.0051
|
4/13/2017
|
$ 53,554
|
0.10
|
$0.03
|
$0.1550
|
111%
|
0.0076
|
5/4/2017
|
$ 18,000
|
0.16
|
$0.03
|
$0.1200
|
111%
|
0.0071
|
7/6/2017
|
$ 31,913
|
0.33
|
$0.03
|
$0.0800
|
126%
|
0.0114
|
12/31/2017
|
$ 28,232
|
0.09
|
$0.03
|
$0.0595
|
126%
|
0.0153
|
Note 8 was in default with principal balance
of $12,294 as of December 31, 2017. During the year ended December 31, 2017, the Company recorded late fee and default interest
related to Note 8 in total amount of $8,748 and amortization of debt discounts in amount of $0-. The balance of Note 8 was $50,000
with unamortized debt discount of $18,333 as of December 31, 2016, and without unamortized debt discount as of December 31, 2017.
The fair value of total $165,467 was credited to additional paid in capital on the conversion dates.
On September 12, 2016, the Company entered
into a 10% convertible promissory note in the principal of $80,000 (“Note 9”) with an unrelated entity for services
rendered. Note 9 is matured on September 12, 2017, and unsecured. This Note is convertible into common shares of the Company at
the conversion ratio of $0.03 or 50% discount of the lowest closing bid price on the primary trading market on which Company's
common stock is quoted for the last five trading days prior to the conversion date, whichever is lower. The Company determined
that the conversion features contained in Note 9 carrying value represents a freestanding derivative instrument that meets the
requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in
the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument
of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional
paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 225,855
|
0.09
|
$0.03
|
$0.0595
|
174%
|
0.0153
|
As a result, Note 9 was discounted in the
amount of $80,000 and amortized over the remaining life of this Note. As of September 12, 2017, the note was in default. During
the year ended December 31, 2017, the Company recorded late fee and default interest related to Note 9 in total amount of $15,655
and amortization of debt discounts in amount of $80,000. The balance of Note 9 was $80,000 without unamortized debt discount as
of December 31, 2016, and $80,000 with unamortized debt discount of $0 as of December 31, 2017.
On January 24, 2017, the Company entered
into a 10% convertible promissory note in the principal of $80,000 (“Note 10”) with an unrelated entity for services
rendered. Note 10 is matured on January 24, 2018, and unsecured. This Note is convertible into common shares of the Company at
the conversion ratio of $0.25 or 50% discount of the lowest closing bid price on the primary trading market on which Company's
common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower. As of July 24, 2017 this
Note is convertible into common shares of the Company as described above. The Company determined that the conversion features contained
in Note 10 carrying value represents a freestanding derivative instrument that meets the requirements for liability classification
under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s
balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using
the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date.
Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense
at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
On October 25, 2017, a portion of principal
of $15,000, plus $1,500 conversion cost reimbursement, were converted into 1,434,782 shares of common stock at a conversion price
of $0.0115 per share.
On November 6, 2017, a portion of principal
of $10,000, plus $1,500 conversion cost reimbursement, were converted into 1,212,121 shares of common stock at a conversion price
of $0.0825 per share.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 155,275
|
0.07
|
$0.03
|
$0.0595
|
174%
|
0.0153
|
As a result, Note 10 was discounted in
the amount of $80,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company
recorded amortization of debt discounts in amount of $35,555.56. The balance of Note 10 was $80,000 without debt discount as of
December 31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 10 in amount
of $5,494. The balance of Note 10 was $55,000 with unamortized debt discount of $20,444 as of December 31, 2017.
On January 24, 2017, the Company entered
into a 15% convertible line of credit (“Note 11”) with an unrelated entity in the amount up to $250,000. On January
24, 2017, the Company received $50,000 cash for the line of credit, is matured on January 24, 2018, and unsecured. Note 11 is convertible
into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary trading
market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower.
However, Note 11 is convertible after 6 months of the effective date of this Note, which is July 27, 2017. The Company determined
that the conversion features contained in Note 10 carrying value represents a freestanding derivative instrument that meets the
requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in
the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument
of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional
paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 141,159
|
0.07
|
$0.03
|
$0.0595
|
174%
|
0.0153
|
As a result, Note 11 was discounted in
the amount of $50,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company
recorded amortization of debt discounts in amount of $21,806. The balance of Note 11 was $0 without debt discount as of December
31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 11 in amount of $7,042.
The balance of Note 11 was $50,000 with unamortized debt discount of $20,444 as of December 31, 2017.
On February 21, 2017, the Company received
$25,000 cash pursuant to the terms of Note 11, is matured on February 21, 2018 (“Note 11-1”). Note 11 is convertible
into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary trading
market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower.
However, Note 11-1 is convertible after 6 months of the effective date of this Note, which is August 21, 2017. The Company determined
that the conversion features contained in Note 11-1 carrying value represents a freestanding derivative instrument that meets the
requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in
the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument
of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional
paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 70,580
|
0.14
|
$0.03
|
$0.0595
|
174%
|
0.0153
|
As a result, Note 11-1 was discounted in
the amount of $25,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company
recorded amortization of debt discounts in amount of $9,167. The balance of Note 11-1 was $0 without debt discount as of December
31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 11 in amount of $3,260.
The balance of Note 11-1 was $25,000 with unamortized debt discount of $6,389 as of December 31, 2017.
On March 16, 2017, the Company received
$40,000 cash pursuant to the terms of Note 11, is matured on March 16, 2018 (“Note 11-2”). Note 11-2 is convertible
into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary trading
market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower.
However, Note 11-2 is convertible after 6 months of the effective date of this Note, which is September 16, 2017. The Company determined
that the conversion features contained in Note 11-2 carrying value represents a freestanding derivative instrument that meets the
requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in
the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument
of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional
paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 112,929
|
0.21
|
$0.03
|
$0.0595
|
174%
|
0.0153
|
As a result, Note 11-2 was discounted in
the amount of $40,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company
recorded amortization of debt discounts in amount of $11,778. The balance of Note 11-2 was $0 without debt discount as of December
31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 11-2 in amount of $3,260.
The balance of Note 11-2 was $40,000 with unamortized debt discount of $10,222 as of December 31, 2017.
On April 6, 2017, the Company entered into
a 15% convertible promissory note with an unrelated entity in the amount $50,000 (“Note 12”). Note 12 is matured on
April 6, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of $0.25 or 50%
of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last ten trading days
prior to the conversion date, whichever is lower. However, Note 12 is convertible after 6 months of the effective date of this
Note, which is October 6, 2017. The Company determined that the conversion features contained in Note 12 carrying value represents
a freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair
value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The
fair value of the derivative financial instrument of the convertible note was measured using the Binomial-Lattice valuation model
at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of
the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The
derivative liabilities will be reclassified into additional paid in capital upon conversion.
On November 8, 2017, a portion of principal
of $6,503, plus $1,500 conversion cost reimbursement and $1,036 in interest, were converted into 1,095,636 shares of common stock
at a conversion price of $0.0825 per share.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 122,803
|
0.26
|
$0.03
|
$0.0595
|
174%
|
0.0153
|
As a result, Note 12 was discounted in
the amount of $50,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company
recorded amortization of debt discounts in amount of $11,944. The balance of Note 12 was $0 without debt discount as of December
31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 12 in amount of $5,043.
The balance of Note 12 was $43,478 with unamortized debt discount of $31,553 as of December 31, 2017.
On April 21, 2017, the Company entered
into a Securities Purchase Agreement with an unrelated entity, pursuant to which the purchasers agreed to pay the Company an aggregate
of up to $600,000 for an aggregate of up to 660,000 in Principal Amount of Notes. The first tranche of $330,000 was closed simultaneously
(“Note 13-1”). The proceeds of $300,000, net of $30,000 Original Issuance Discount, was received by the Company. Note
13-1 is convertible into common shares of the Company at the conversion ratio of 60% of the lowest trading price on the primary
trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date. The Company
determined that the conversion features contained in Note 13-1 carrying value represents a freestanding derivative instrument that
meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument
in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument
of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional
paid in capital upon conversion.
On October 23 2017, a portion of principal
of $5,000, plus $250 in interest, were converted into 383,772 shares of common stock at a conversion price of $0.013680 per share.
On November 14, 2017, a portion of principal
of $7,500, plus $375 in interest, were converted into 795,455 shares of common stock at a conversion price of $0.00990 per share.
On December 7, 2017, a portion of principal
of $10,000, plus $500 in interest, were converted into 714,286 shares of common stock at a conversion price of $0.01470 per share.
On December 27, 2017, a portion of principal
of $20,000, plus $1,000 in interest, were converted into 1,125,402 shares of common stock at a conversion price of $0.013680 per
share.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 628,650
|
0..30
|
$0.030
|
$0.0595
|
174%
|
0.0153
|
In addition, in connection with this Securities
Purchase Agreement, the Company granted purchasers 2,357,143 warrants with exercise price of $0.14 per share (“Warrants A”),
1,885,715 warrants with exercise price of $0.175 per share (“Warrants B”) and 1,571,429 warrants with exercise price
of $0.21 per share (“Warrants C”). Warrants A, B and C are exercisable on the grant date and expire in three years,
each of which represents 100% of the Principal Amount at the Closing divided by the respective exercise price.
The fair value of these warrants was measured
using the Black-Scholes valuation model at the grant date. The table below sets forth the assumptions for Black-Scholes valuation
model on April 21, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Exercise
Price
|
Market
Price on
Grant Date
|
Volatility
Percentage
|
Risk-free
Rate
|
4/21/2017
|
$814,000
|
3
|
$0.14 - $0.21
|
$0.14
|
676%
|
0.0177
|
As a result, Note 13-1 was discounted in
the amount of $330,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company
recorded interest expenses related to Note 13-1 in amount of $10,142 and amortization of debt discounts in amount of $232,833.
The balance of Note 13-1 was $287,500 with unamortized debt discount of $54,667 as of December 31, 2017.
On October 6, 2017, the Company entered
into a 12% convertible promissory note with an unrelated entity in the amount $82,500, which included an original issue discount
of $6,600, for net cash to the company of $75,900 (“Note 14”). Note 14 is matured on July 6, 2018, and unsecured. This
Note is convertible into common shares of the Company at the conversion ratio of 40% of the lowest trading price on the primary
trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date. Note 12 is
convertible after 9 months of the effective date of this Note, which is October 6, 2018. Neither derivative liability accounting
nor beneficial conversion feature will be considered before Note 14 is entitled for conversion. During the year ended December
31, 2017, the Company recorded interest expense related to Note 14 in amount of $2,365. The balance of Note 14 was $82,500 without
unamortized debt discount as of December 31, 2017.
On November 2, 2017, the Company entered
into a 8% convertible promissory note with an unrelated entity in the amount $54,600, with original issue discount of $2,100 for
net cash to the company of $52,500 (“Note 15”). Note 15 is matured on November 2, 2018, and unsecured. This Note is
convertible into common shares of the Company at the conversion rate of 60% of the lowest trading price on the primary trading
market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower.
The Company determined that the conversion features contained in Note 15 carrying value represents a freestanding derivative instrument
that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial
instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial
instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and
will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are
recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified
into additional paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 119,403
|
0.95
|
$0.03
|
$0.0595
|
207%
|
0.0176
|
As a result, Note 15 was discounted in
the amount of $54,600 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company
recorded amortization of debt discounts in amount of $8,948. The balance of Note 15 was $0 without debt discount as of December
31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 15 in amount of $716.
The balance of Note 15 was $45,719 with unamortized debt discount of $31,553 as of December 31, 2017.
On November 27, 2017, the Company entered
into a 12% convertible promissory note with an unrelated entity in the amount $53,800 (“Note 16”). Note 16 is matured
on November 27, 2018, and unsecured. This Note is convertible into common shares of the Company at the conversion ratio of 60%
of the lowest trading price on the primary trading market on which Company's common stock is quoted for the last 20 trading days
prior to the conversion date. Note 14 is convertible after 12 months of the effective date of this Note, which is November 27,
2018. Neither derivative liability accounting nor beneficial conversion feature will be considered before Note 16 is entitled for
conversion. During the year ended December 31, 2017, the Company recorded interest expense related to Note 16 in amount of $610.
The balance of Note 16 was $53,800 without unamortized debt discount as of December 31, 2017.
On December 14, 2017, the Company entered
into a 8% convertible promissory note with an unrelated entity in the amount $43,478, with original issue discount of $4,378 for
net cash to the company of $40,000 (“Note 17”). Note 17 is matured on December 14, 2018, and unsecured. This Note is
convertible into common shares of the Company at the conversion rate of 60% of the lowest trading price on the primary trading
market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower.
The Company determined that the conversion features contained in Note 17 carrying value represents a freestanding derivative instrument
that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial
instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial
instrument of the convertible note was measured using the Binomial-Lattice valuation model at the inception date of the note and
will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are
recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified
into additional paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 95,083
|
0.95
|
$0.03
|
$0.0595
|
207%
|
0.0176
|
As a result, Note 17 was discounted in
the amount of $43,478 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company
recorded amortization of debt discounts in amount of $2,053. The balance of Note 17 was $0 without debt discount as of December
31, 2016. During the year ended December 31, 2017, the Company recorded interest expense related to Note 17 in amount of $164.
The balance of Note 15 was $43,378 with unamortized debt discount of $41,425 as of December 31, 2017.
Convertible Notes Payable – Related Party
On April 21, 2008, the Company
entered into an unsecured Convertible Debenture (“Debenture 1”) with a shareholder in the amount of $150,000.
Debenture 1 was convertible into Common Shares of the Company at $0.03 per share at the option of the holder no earlier than
August 21, 2008. Debenture 1 bore interest at 12% per year, matured in August 2009, and was unsecured. All principal and
unpaid accrued interest was due at maturity. In conjunction with the Debenture 1, the Company also issued warrants to
purchase 5,000,000 shares of the Company’s Common Stock at $0.03 per share. The warrants expired on April 20, 2013. As
a result, of issued warrants, the Company recorded a $150,000 debt discount during 2008 which has been fully amortized. The
Company was in default on Debenture 1, and no warrants had been exercised before expiration. The balance of Debenture 1 was
$150,000 and $150,000 at December 31, 2017 and December 31, 2016, respectively. The Company recorded interest expense related
to Debenture 1 in amount of $18,000 and $13,500 during the year ended December 31, 2017 and 2016, respectively.
On March 11, 2009, the Company entered
into an unsecured Convertible Debenture (“Debenture 2”) with a shareholder in the amount of $15,000. Debenture 2 was
convertible into Common Shares of the Company at $0.03 per share at the option of the holder. Debenture 2 bore interest at 12%
per year, matured on March 11, 2014, and was unsecured. All principal and unpaid accrued interest was due at maturity. The Company
was in default on Debenture 2. The balance of Debenture 2 was $15,000 and $15,000 at December 31, 2017 and December 31, 2016, respectively.
The Company recorded interest expense related to Debenture 2 in amount of $1,800 and $1,350 during the years ended December 31,
2017 and 2016, respectively.
Resulting from the tainted issue by the
derivative financial instrument of the convertible notes, The Company determined that the conversion features contained in Debenture
1 and Debenture 2 carrying value represents an embedded derivative instrument that meets the requirements for liability classification
under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s
balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was measured using
the Binomial-Lattice valuation model at the inception date of the note and will do so again on each subsequent balance sheet date.
Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or expense
at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
The table below sets forth the assumptions
for Binomial-Lattice valuation model on December 31, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Assumed
Conversion
Price
|
Market
Price on
Issuance
Date
|
Volatility
Percentage
|
Risk-free
Rate
|
12/31/2017
|
$ 465,826
|
0.09
|
$0.03
|
$0.0595
|
174%
|
0.0153
|
The following is a schedule showing the
future minimum convertible loan payments in the future 5 years.
Year ending December,
|
|
|
|
|
2017
|
|
$
|
0
|
|
2018
|
|
|
1,026,875
|
|
2019
|
|
|
0
|
|
2020
|
|
|
0
|
|
2021
|
|
|
0
|
|
Total
|
|
$
|
1,026,875
|
|
As of December 31, 2017, the Company’s
derivative liabilities are embedded derivatives associated with the Company’s convertible notes payable (see Note 8). Due
to the Notes’ conversion feature, the actual number of shares of common stock that would be required if a conversion of the
note as described in Note 8 was made through the issuance of the Company’s common stock cannot be predicted. As a result,
the conversion feature requires derivative accounting treatment and will be bifurcated from the note and “marked to market”
each reporting period through the statement of operations.
The Company used the Binomial-Lattice valuation
model to measure the fair value of the derivative liabilities as $2,419,337 on December 31, 2017 and will subsequently remeasure
the fair value at the end of each period and record the change of fair value in the consolidated statement of operation during
the corresponding period.
10.
|
FAIR VALUE MEASUREMENT
|
The Company measures assets and liabilities
at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents
the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction
between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset
or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value
on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels
of inputs to measure fair value:
|
•
|
Level 1 – Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2 Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level 3 – Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The carrying amounts of the Company’s
financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses,
certain notes payable and notes payable – related party, approximate their fair values because of the short maturity of these
instruments.
The Company recognizes its derivative liabilities
as level 3 and values its derivatives using the methods discussed in note 8. While the Company believes that its valuation methods
are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions
to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting
date. The primary assumptions that would significantly affect the fair values using the methods discussed in Note 8 are that of
volatility and market price of the underlying common stock of the Company.
As of December 31, 2017 and December 31,
2016, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of December
31, 2017, in the amount of $2,419,337 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 year ended December 31, 2017:
|
|
Debt
Derivative
|
|
Balance, December 31, 2016
|
|
$
|
–
|
|
Total (gains) losses
|
|
|
|
|
Initial fair value of debt derivative at note issuance
|
|
|
2,441,029
|
|
Mark-to-market at December 31, 2017:
|
|
|
59,988
|
|
Transfers out of Level 3 upon conversion or payoff of notes payable
|
|
|
(81,680
|
)
|
Balance, December 31, 2017
|
|
$
|
2,419,337
|
|
Net loss for the year included in earnings relating to the liabilities held during the year ended December 31, 2017
|
|
$
|
1,386,055
|
|
Fluctuations in the Company’s stock
price are a primary driver for the changes in the derivative valuations during each reporting period. During the year ended December
31, 2017, the Company’s stock price decreased from initial valuation. As the stock price decreases for each of the related
derivative instruments, the value to the holder of the instrument generally decreases. Stock price is one of the significant unobservable
inputs used in the fair value measurement of each of the Company’s derivative instruments.
The Company used the Binomial-Lattice valuation
model to measure the fair value of the derivative liabilities as $2,419,337 on December 31, 2017, and will subsequently remeasure
the fair value at the end of each period, and record the change of fair value in the consolidated statement of operation during
the corresponding period. The Company recorded a gain in change of derivative liability of $1,380,476 for the year ended December
31, 2017.
The Company previously reported that it
has failed to remit payroll tax payments since 2006, as required by various taxing authorities. Payroll taxes and estimated penalties
were accrued in recognition of accrued salaries subsequently settled via stock issue and other agreements that did not result in
reportable or taxable payroll transactions. These accruals were reversed for prior years, and a similar estimated accrual established
for 2017 and 2016. As of December 31, 2017 and December 31, 2016, the Company estimated the amount of taxes, interest, and penalties
that the Company could incur as a result of payroll related taxes and penalties to be $2,047 and $41,783, respectively.
Basic net loss per share is computed using
the weighted average number of common shares outstanding during the years. There were no dilutive earnings per share for the year
ended December 31, 2017 and 2016 due to net loss during the periods.
The following table sets forth the computation
of basic net loss per share for the periods indicated:
|
|
For the year ended
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(5,000,319
|
)
|
|
$
|
(2,254,492
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding – Basic and diluted
|
|
|
43,405,712
|
|
|
|
13,600,570
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share – Basic and diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.17
|
)
|
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 December 31, 2017:
Principal conversion
|
|
|
24,8331,819
|
|
Interest conversion
|
|
|
16,571,047
|
|
Warrants
|
|
|
800,000
|
|
Preferred Stock conversion
|
|
|
202,150,993
|
|
Total
|
|
|
244,585,312
|
|
During the first quarter of 2017, the Company
filed Amended Articles of Incorporation with the Secretary of State of Florida to amend the rights and privileges for series of
Preferred Stock, and to authorize the issuance of Series I, F1, G1, H1, J1 and K1 Preferred Stock, which was effective on April
26, 2017.
Series A Preferred Stock
The Company has designated four shares
of preferred stock as Series A Preferred Stock (“Series A”), with a par value of $.0001 per share, of which one share
of preferred stock was issued and outstanding as of December 31, 2017. Series A is authorized to have four shares which do not
bear dividends and converts to common shares at four times the sum of: all shares of Common Stock issued and outstanding at time
of conversion plus all shares of Series B Preferred Stock issued and outstanding at time of conversion divided by the number of
issued Class A shares at the time of conversion, and have voting rights four times the sum of: all shares of Common Stock issued
and outstanding at time of voting plus all shares of Series B Preferred Stocks issued and outstanding at time of voting divided
by the number of Class A shares issued at the time of voting.
Series B Preferred Stock
The Company has designated 10,000,000 shares
of preferred stock as Series B Preferred Stock (“Series B”), with a par value $0.001 and $2.50 price per share, of
which 2,804,205 shares of Series B preferred stock were issued and outstanding as of December 31, 2017. Shares of Series B are
anti-dilutive to reverse splits. The conversion rate of shares of Series B, however, would increase proportionately in the case
of forward splits, and may not be diluted by a reverse split following a forward split. Series B is awarded “Voting Right”
at the ratio of 1 vote per share owned. Each one share of Series B converts to 5 shares of Common Stock. The price of each share
of Series B may be changed either through a majority vote of the Board of Directors through a resolution at a meeting of the Board
of Directors, or through a resolution passed at an Action Without Meeting of the unanimous Board of Directors, until such time
as a listed secondary and/or listed public market develops for the shares.
During the year ended December 31, 2016,
1,621,732 shares of Series B Preferred Stock were converted into 8,108,660 shares of Common Stock of the Company per the preferred
shareholder’s instruction.
During the first quarter of 2017, 1,406,829
shares of Series B Preferred Stock were converted into 7,034,145 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
On March 30, 2017, the Company issued 24,000
shares of Series B Preferred Stock to settle legal expenses of $60,000. Based on the price of $.9075 per share for the Series B
Preferred Stock, which was determined by the market price of common stock at $.1815 per share on the issuance date multiplied by
the conversion ratio of 1:5, the fair value of the stock issuance of Series B Preferred Stock was $21,780, resulting in gain from
extinguishment of debt in amount of $38,220.
During the second quarter of 2017, 193,904
shares of Series B Preferred Stock were converted into 969,520 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
On June 27, 2017, the Company issued 15,906
shares of Series B Preferred Stock to 2 different consultants for services rendered. Based on the price of $.3995 per share for
the Series B Preferred Stock, which was determined by the market price of common stock at $.0799 per share on the issuance date
multiplied by the conversion ratio of 1:5, the fair value of the stock issuance of Series B Preferred Stock was $6,354, which was
recorded as stock based compensation during the six months ended June 30, 2017.
During the third quarter of 2017, 20,999
shares of Series B Preferred Stock were converted into 104,995 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
During the fourth quarter of 2017, 6,000
shares of Series B Preferred Stock were converted into 30,000 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
Series C Preferred Stock
The Company has designated 500 shares of
preferred stock as Series C Preferred Stock (“Series C”), with a par value of $.001 per share, of which 117 shares
were issued and outstanding as of December 31, 2017. Shares of Series C are non-dilutive to reverse splits. The conversion rate
of shares of Series C, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse
split following a forward split. Each one share of Series C converts to 100,000 shares of Common Stock. Each share of Series C
shall have one vote for any election or other vote placed before the shareholders of the Company. The price of each share of Series
C may be changed either through a majority vote of the Board of Directors through a resolution at a meeting of the Board of Directors,
or through a resolution passed at an Action Without Meeting of the unanimous Board of Directors, until such time as a listed secondary
and/or listed public market develops for the shares. Shares of Series C may not be converted into shares of Common Stock for a
period of: a) six months after purchase, if the Company voluntarily or involuntarily files public reports pursuant to Section 12
or 15 of the Securities Exchange Act of 1934; or b) 12 months if the Company does not file such public reports.
During the first quarter of 2017, 1 share
of Series C Preferred Stock were converted into 100,000 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
Blank Check Preferred Stock
As of December 31, 2017, the Company has
designated 100,000,000 shares of Blank Check Preferred Stock, of which 5,991,507 shares have been issued with Designations, Rights
& Privileges. The following Series have been assigned from the inventory of Blank Check Preferred Shares. The amount of Blank
Check Preferred Stock is 94,008,493 as of December 31, 2017.
Series D Preferred Stock
The Company has designated 800,000 shares
of preferred stock as Series D Preferred Stock (“Series D”), with a par value of $.001 per share, of which 400,000
shares were issued and outstanding as of December 31, 2017. Series D is awarded “Voting Right” at the ratio of 1 vote
per share owned. Each one share of Series D converts to 5 shares of Common Stock.
On June 30, 2014, the Company completed
the acquisition of Romeo’s NY Pizza. The Company issued 400,000 shares of Series D Preferred Stock (“Series D”)
as consideration for this acquisition. Based on the price of $2.50 per share, the acquisition consideration represents a $1,000,000
valuation. Shares of Series D are anti-dilutive to reverse splits. The conversion rate of shares of Series D, however, would increase
proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share
of Series D shall have voting rights equal to one vote of Common Stock. With respect to all matters upon which stockholders are
entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series D shall
vote together with the holders of Common Stock, without regard to class, except as to those matters on which separate class voting
is required by applicable law or the Corporation’s Certificate of Incorporation or Bylaws. The initial price of each share
of Series D shall be $2.50.
There was no change in Series D Preferred
Stock during the year ended December 31, 2017 and 2016.
Series E Preferred Stock
The Company has designated 1,000,000 shares
of preferred stock as Series E Preferred Stock (“Series E”), with a par value of $.001 per share, of which 241,199
shares were issued and outstanding as of June 30, 2017. Series E is awarded “Voting Right” at the ratio of 1 vote per
share owned. Each one share of Series E converts to 5 shares of Common Stock.
On July 11, 2014, the Company completed
the acquisition of Edge View Properties, Inc. The Company issued 241,199 shares of Series E Preferred Stock (“Series E”)
as consideration for this acquisition. Based on the price of $2.50 per share, the acquisition consideration represents a $603,000
valuation. Shares of Series E are anti-dilutive to reverse splits. The conversion rate of shares of Series E, however, would increase
proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share
of Series E shall have voting rights equal to one vote of Common Stock. With respect to all matters upon which stockholders are
entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series E shall
vote together with the holders of Common Stock, without regard to class, except as to those matters on which separate class voting
is required by applicable law or the Corporation’s Certificate of Incorporation or Bylaws. The initial price of each share
of Series E shall be $2.50.
There was no change in Series E Preferred
Stock during the year ended December 31, 2017 and 2016.
Series F Preferred Stock
The Company has designated 800,000 shares
of preferred stock as Series F Preferred Stock (“Series F”), with a par value of $.001 per share, of which 280,069
shares were issued and outstanding as of December 31, 2017. Series F is awarded “Voting Right” at the ratio of 1 vote
per share owned. Each one share of Series F converts to 5 shares of Common Stock.
There was no change in Series F Preferred
Stock during the year ended December 31, 2017 and 2016.
The Company has designated 800,000 shares
of preferred stock as Series F1 Preferred Stock (“Series F1”), with a par value of $.001 per share, of which 57,194
shares were issued and outstanding as of December 31, 2017. Series F1 is “non-Voting stock”. Each one share of Series
F1 converts to 5 shares of Common Stock.
On May 15, 2014, the Company completed
the acquisition of We Three, LLC (d/b/a Affordable Housing Initiative) (“AHI”). The Company issued 280,069 shares of
Series F Preferred Stock (“Series F”) as consideration for this acquisition. The fair value of We Three LLC was $1,000,000.
Based on the price of $2.50 per share for the Series F Preferred Stock, the fair value of the stock issuance of Series F Preferred
Stock was $700,174, resulting in the gain of $299,826 on investment in We Three, which was offset the goodwill impairment at the
end of 2014. In addition, the Company sold 156,503 shares of Series F-1 Preferred Stock (Series F-1”), to various investors
at a price of $2.50 per share, or totaled $391,248 in cash. Shares of Series F are anti-dilutive to reverse splits. The conversion
rate of shares of Series F, however, would increase proportionately in the case of forward splits, and may not be diluted by a
reverse split following a forward split. Each one share of Series F shall have voting rights equal to five votes of Common Stock.
With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent,
the holders of the outstanding shares of Series F shall vote together with the holders of Common Stock, without regard to class,
except as to those matters on which separate class voting is required by applicable law or the Corporation’s Certificate
of Incorporation or Bylaws. The initial price of each share of Series F shall be $2.50.
During the first quarter of 2017, 31,997
shares of Series F1 Preferred Stock were converted into 159,985 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
During the second quarter of 2017, 42,640
shares of Series F1 Preferred Stock were converted into 213,200 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
During the third quarter of 2017, 41,318
shares of Series F1 Preferred Stock were converted into 206,600 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
Series G Preferred Stock
The Company has designated 20,000,000 shares
of preferred stock as Series G Preferred Stock (“Series G”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of December 31, 2017. Series G is awarded “Voting Right” at the ratio of 1 vote per share
owned. Each one share of Series G converts to 1.25 shares of Common Stock.
The Company has designated 10,000,000 shares
of preferred stock as Series G1 Preferred Stock (“Series G1”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of December 31, 2017. Series G1 is “non-Voting stock”. Each one share of Series G1 converts
to 1.25 shares of Common Stock.
There was no change in Series G and G1
Preferred Stock during the year ended December 31, 2017 and 2016.
Series H Preferred Stock
The Company has designated 4,859,379 shares
of preferred stock as Series H Preferred Stock (“Series H”), with a par value of $.001 per share, of which 4,859,379
shares were issued and outstanding as of December 31, 2017. Series H is awarded “Voting Right” at the ratio of 1 vote
per share owned. Each one share of Series H converts to 1.25 shares of Common Stock.
The Company has designated 3,000,000 shares
of preferred stock as Series H1 Preferred Stock (“Series H1”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of December 31, 2017. Series H1 is “non-Voting stock”. Each one share of Series H1 converts
to 1.25 shares of Common Stock.
On August 10, 2016, the Company completed
the acquisitions of FDR Enterprises, Inc.; Refreshment Concepts, LLC; and Repicci’s Franchise Group, LLC. (collectively referred
to as “Repicci’s Group”). Pursuant to the acquisition agreement, the Company agreed to issue 4,859,379 shares
of Series H Preferred Stock as consideration for the acquisition of Repicci’s Group. The combined book value of Repicci’s
Group was $(203,622). Based on the price of $.15 per share for the Series H Preferred Stock, which was determined by the market
price of common stock at $.12 per share on the acquisition date multiplied by the conversion ratio of 1:1.25, the fair value of
the stock issuance of Series H Preferred Stock was $728,907, resulting in the goodwill of $932,529 which was offset with loss on
goodwill impairment during the quarter ended December 31, 2017. The 4,859,379 shares of Series H Preferred Stock were issued during
the first quarter of 2017.
There was no change in Series H and H1
Preferred Stock during the year ended December 31, 2016.
Series I Preferred Stock
The Company has designated 20,000,000 shares
of preferred stock as Series I Preferred Stock (“Series I”), with a par value of $.001 per share, of which 112,746
shares was issued and outstanding as of December 31, 2017. Series I is awarded “Voting Right” at the ratio of 1 vote
per share owned. Each one share of Series I converts to 1.50 shares of Common Stock.
During the first quarter of 2017, one investor
submitted a subscription agreement to the Company regarding the purchase of 29,412 shares of the Company’s Series I Preferred
Stock by cash payment of $10,000, which was collected during the first quarter of 2017. During the second quarter of 2017, the
same investor submitted a subscription agreement to the Company regarding the purchase of 83,334 shares of the Company’s
Series I Preferred Stock by cash payment of $10,000. The transactions were independently negotiated between the Company and the
investor. The proceeds from the subscription agreement mitigated the Company’s cash pressure in short term. The total 112,746
shares of Series I Preferred Stock were issued during the second quarter of 2017.
During the second quarter of 2017, a related
party submitted a subscription agreement to the Company regarding the purchase of 90,909 shares of the Company’s Series I
Preferred Stock by cash payment of $10,000, which was collected during the second quarter of 2017. The transaction was independently
negotiated between the Company and the related party. The proceeds from the subscription agreement mitigated the Company’s
cash pressure in short term.
The 90,909 shares of Series I Preferred
Stock was issued as of December 31, 2017. During the third quarter of 2017, 90,909 shares of Series I Preferred Stock were converted
into 352,691 shares of Common Stock of the Company per the preferred shareholder’s instruction.
Series J Preferred Stock
The Company has designated 10,000,000 shares
of preferred stock as Series J Preferred Stock (“Series J”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of December 31, 2017. Series J is awarded “Voting Right” at the ratio of 1 vote per share
owned. Each one share of Series J converts to 1.25 shares of Common Stock.
The Company has designated 7,500,000 shares
of preferred stock as Series J1 Preferred Stock (“Series J1”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of June 30, 2017. Series J1 is “non-Voting stock”. Each one share of Series J1 converts
to 1.25 shares of Common Stock.
There was no change in Series J and J1
Preferred Stock during the year ended December 31, 2017 and 2016.
Series K Preferred Stock
The Company has designated 9,607,840 shares
of preferred stock as Series K Preferred Stock (“Series K”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of December 31, 2017. Series K is awarded “Voting Right” at the ratio of 1 vote per share
owned. Each one share of Series K converts to 1.25 shares of Common Stock.
The Company has designated 35,000,000 shares
of preferred stock as Series K1 Preferred Stock (“Series K1”), with a par value of $.001 per share, of which 0 share
was issued and outstanding as of December 31, 2017. Series K1 is “non-Voting stock”. Each one share of Series K1 converts
to 1.25 shares of Common Stock.
There was no change in Series K and K1
Preferred Stock during the year ended December 31, 2017 and 2016.
Common Stock
2017
On February 10, 2017, the Company entered
into a consulting agreement with an unrelated party, pursuant to which the Company agreed to issue total 800,000 shares to the
consultant in four allotments, or 200,000 shares each, for consulting services related to marketing and business development. During
the first quarter of 2017, 250,000 shares were issued. The fair value of this stock issuance was determined by the fair value of
the Company’s Common Stock on the grant date, at a price of approximately $.235 per share. During the second quarter of 2017,
the difference of 150,000 shares were not issued as of the date of the Report. The fair value of the 150,000 shares was $15,600,
or approximately $.104 per share. During the third quarter of 2017, the third installment of 200,000 shares were not issued as
of the date of the Report. The fair value of the 200,000 shares was $27,475, or approximately $.1099 per share. Accordingly, the
Company recognized stock based compensation of $101,825 to the consolidated statements of operations for the year ended December
31, 2017 and recorded $43,075 as accrued expenses in the consolidated balance sheet as of December 31, 2017.
During the first quarter of 2017, the note
holder converted $2,785 principal, $1,000 processing cost reimbursement and $102 accrued interest into 777,400 shares of common
stock at a conversion price of $0.005 per share.
During the first quarter of 2017, the note
holder converted $6,000 principal into 200,000 shares of common stock at a conversion price of $0.03 per share.
On January 24, 2017, the Company issued
173,585 shares of Common Stock to settle $34,717 due to the prior owner of Repicci’s Franchise Group LLC, pursuant to the
Acquisition Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s
Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt
in amount of $6,943.
On January 24, 2017, the Company issued
2,010,490 shares of Common Stock to settle $402,098 due to the prior owner of Refreshment Concepts LLC, pursuant to the Acquisition
Agreement, dated August 10, 2016. The fair value of this stock issuance was determined by the fair value of the Company’s
Common Stock on the grant date, at a price of approximately $0.24 per share, resulting in loss from extinguishment of debt
in amount of $80,420.
On March 20, 2017, the Company issued 60,000
shares of Common Stock to settle consulting fees of $15,000. The fair value of this stock issuance was determined by the fair value
of the Company’s Common Stock on the grant date, at a price of approximately $0.1965 per share, resulting in gain from
extinguishment of debt in amount of $3,210.
On July 11, 2017 the Company’s Board of Directors approved a resolution to increase the authorized
common share. During the first quarter of 2017, one investor
submitted a subscription agreement to the Company regarding the purchase of 100,000 shares of Common Stock by cash payment of $10,000.
The transaction was independently negotiated between the Company and the investor. The proceeds from the subscription agreement
mitigated the Company’s cash pressure in short term.
During the second quarter of 2017,
the Company issued 100,000 shares of Common Stock to an attorney for legal services. The fair value of this stock issuance
was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.1145
per share. Accordingly, the Company recognized stock based compensation of $11,450 to the consolidated statements of
operations for the six months ended June 30, 2017.
During the second quarter of 2017, the
Company issued 906,907 shares of Common Stock to a related party for services rendered. The fair value of this stock issuance was
determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $.0799 per
share. Accordingly, the Company recognized stock based compensation of $72,462 to the consolidated statements of operations for
the six months ended June 30, 2017.
During the second quarter of 2017, the
Company redeemed 500,000 shares from a shareholder for a cash payment of $2,500. The 500,000 shares were return to the treasury
for cancellation and the $2,500 was recorded as accrued liabilities in the consolidated balance sheet as of June 30, 2017.
During the second quarter of 2017, the
note holders converted $18,853 principal, including $3,000 processing cost reimbursement, and $12,317 accrued interest into 1,039,000
shares of common stock at a conversion price of $0.03 per share.
On September 15, 2017, the Company issued
19,000,000 shares of Common Stock to settle $1,415,600 in accrued salaries to current and former officers of the Company. Additionally,
the Company issued 1,000,000 shares to a former employee as a one time bonus, valued at $70,000. The fair value of this stock issuance
was determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately $0.07
per share. Accordingly, the Company reduced its accrued expenses by $1,415,600 and stock based compensation by $70,000.
During the quarter ended December 31, 2017,
the Company issued 6,761,454 shares of common stock for the conversion of unpaid convertible notes principal and processing cost
reimbursement and interest in the amount of $81,664 at a prices ranging from $0.00825 to $0.01470 per share.
During the fourth quarter of 2017, 6,000
shares of Series B Preferred Stock were converted into 30,000 shares of Common Stock of the Company per the preferred shareholder’s
instruction.
During the fourth quarter of 2017, the
company issued 1,508 shares of Common Stock for a correction of a prior period conversion of Series B Preferred Stock.
During the quarter ended December 31, 2017,
the Company negotiated an agreement to cancel 500,000 shares previously issued to a third party consultant for services and to
issue 25,000 shares of common stock for services rendered. The fair value of this stock issuance was determined by the fair value
of the Company’s Common Stock on the grant date, at a price of approximately $0.0699 per share. Accordingly, the Company
calculated the stock based compensation of $1,748 at its fair value and included it in the consolidated statements of operations
for the year ended December 31, 2017.
Pursuant to the same consulting agreement,
dated February 10, 2017, in addition to the 800,000 shares of common stock, the Company agreed to grant total 800,000 warrants
to the consultant for consulting services related to marketing and business development. The initial allotment of 200,000 warrants
were granted during the first quarter of 2017. The second allotment of 200,000 warrants were granted during the second quarter
of 2017. The third allotment of 200,000 warrants were granted during the third quarter of 2017. The fourth allotment of 200,000
warrants were granted during the fourth quarter of 2017. The fair value of these warrants was measured using the Black-Scholes
valuation model at the grant date. The table below sets forth the assumptions for Black-Scholes valuation model on February 10,
2017, May 10, 2017, August 10, 2017 and December 10, 2017, respectively.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Exercise
Price
|
Market
Price on
Grant Date
|
Volatility
Percentage
|
Risk-free
Rate
|
2/10/2017
|
$47,000
|
3
|
$0.50
|
$0.235
|
535%
|
0.0147
|
5/10/2017
|
20,799
|
3
|
$0.50
|
$0.104
|
506%
|
0.0156
|
8/10/2017
|
21,980
|
3
|
$0.50
|
$0.1099
|
1124%
|
0.0149
|
11/10/2017
|
8,794
|
2.5
|
$0.50
|
$0..0440
|
467%
|
0.0179
|
Accordingly, the Company recorded warrant
expenses of $98,573 during the year ended December 31, 2017.
On April 21, 2017, the Company entered
into a Securities Purchase Agreement with an unrelated entity, pursuant to which the purchasers agreed to pay the Company an aggregate
of up to $600,000 for an aggregate of up to 660,000 in Principal Amount of Notes. The first tranche of $330,000 was closed simultaneously
(“Note 13-1”). The proceeds of $300,000, net of $30,000 Original Issuance Discount, was received by the Company.
In addition, in connection with this Securities
Purchase Agreement, the Company granted purchasers 2,357,143 warrants with exercise price of $0.14 per share (“Warrants A”),
1,885,715 warrants with exercise price of $0.175 per share (“Warrants B”) and 1,571,429 warrants with exercise price
of $0.21 per share (“Warrants C”). Warrants A, B and C are exercisable on the grant date and expire in three years,
each of which represents 100% of the Principal Amount at the Closing divided by the respective exercise price.
The fair value of these warrants was measured
using the Black-Scholes valuation model at the grant date. The table below sets forth the assumptions for Black-Scholes valuation
model on April 21, 2017.
Reporting
Date
|
Fair
Value
|
Term
(Years)
|
Exercise
Price
|
Market
Price on
Grant Date
|
Volatility
Percentage
|
Risk-free
Rate
|
4/21/2017
|
$814,000
|
3
|
$0.14 - $0.21
|
$0.14
|
676%
|
0.0177
|
Accordingly, the Company recorded warrant
expenses of $814,000 during the year ended December 31, 2017.
The following tables summarize all warrant
outstanding as of December 31, 2017, and the related changes during this period.
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Stock Warrants
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
|
–
|
|
|
$
|
–
|
|
Granted
|
|
|
6,414,287
|
|
|
|
0.201
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
Balance at December 31, 2017
|
|
|
6,414,287
|
|
|
|
0.21
|
|
Warrants Exercisable at December 31, 2017
|
|
|
6,414,287
|
|
|
$
|
0.21
|
|
The Company agreed to grant Mr. Roberts
stock options for a minimum of 300,000 shares of the Company's common stock at an exercise price of 50% of the current last ten
(10) day stock average per share, and 600,000 shares of common stock as a key officer employment incentive to be earned and vested
on a pro rata basis at 25,000 shares per month for twenty-four (24) months. The fair value of both 300,000 options and 600,000
shares were determined by the fair value of the Company’s Common Stock on the grant date, at a price of approximately
$0.226 per share. Accordingly, the accrued expense was $135,600 as of December 31, 2017. On August 8, 2017, Mr. Roberts accepted
the offer from the Company to issue 1,000,000 common shares to supersede all his options and warrants in the employment agreement.
Additionally, the Company issued 1,000,000 shares of Common Stock as a bonus to Mr. Roberts for his past service to the Company.
The fair value of this stock issuance was determined by the fair value of the Company’s Common Stock on the grant date, at
a price of approximately $.07 per share. Accordingly, the Company recognized stock based compensation of $70,000 to the consolidated
statements of operations for the year ended December 31, 2017.
After the cancellation of the above transaction,
there were no stock options issued as of December 31, 2017.
16.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
The Company had operating leases of $115,862
and $160,840 for the year ended December 31, 2017 and 2016, respectively, consisting of the followings.
|
|
For the year ended
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Restaurants
|
|
$
|
60,564
|
|
|
$
|
83,309
|
|
Lot
|
|
|
48,049
|
|
|
|
62,364
|
|
Office
|
|
|
6,917
|
|
|
|
14,835
|
|
Equipment Rentals
|
|
|
332
|
|
|
|
332
|
|
Total
|
|
$
|
115,862
|
|
|
$
|
160,840
|
|
The Company has property leases that are
renewable on an annual basis, with no long term property leases.
We have an employment agreement, renewed
May 15, 2014, with the Chairman, Mr. Thompson amended on January 1, 2017, whereby we provide for compensation of $25,000 per month.
We have an employment agreement with the
Chief Executive Officer, Mr. Cunningham, amended on January 1, 2017, whereby we provide for compensation of $25,000 per month.
We have an employment agreement with the
Chief Operating Officer, Mr. Roberts, effective June 2016, whereby we provide for compensation of $10,000 per month.
There are no other stock option plans,
retirement, pension, or profit sharing plans for the benefit of our sole officer and director other than as described herein.
At December 31, 2017, the Company
had federal and state net operating loss carry forwards of approximately $50,300,000 that expire in various years through the
year 2037.
Due to operating losses, there is no provision
for current federal or state income taxes for the years ended December 31, 2017 and 2016.
Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amount used for federal and state income tax purposes.
The Company’s deferred tax asset
at December 31, 2017 and 2016 consists of net operating loss carry forwards calculated using federal and state effective tax rates
equating to approximately $19,680,050 and $17,745,000, respectively, less a valuation allowance in the amount of approximately
$19,680,050 and $17,745,000, respectively. Because of the Company’s lack of earnings history, the deferred tax asset has
been fully offset by a valuation allowance in both 2017 and 2016. The valuation allowance increased by approximately $1,935,050
for the year ended December 31, 2017.
The Company’s total deferred tax
asset as of December 31, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets
|
|
$
|
19,680,050
|
|
|
$
|
17,745,000
|
|
Valuation allowance
|
|
|
(19,680,050
|
)
|
|
|
(17,745,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
–
|
|
|
$
|
–
|
|
The reconciliation of income taxes computed at the federal and
state statutory income tax rate to total income taxes for the years ended December 31, 2017 and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
Income tax computed at the federal statutory rate
|
|
|
34%
|
|
|
|
34%
|
|
Income tax computed at the state statutory rate
|
|
|
5%
|
|
|
|
5%
|
|
Valuation allowance
|
|
|
(39%
|
)
|
|
|
(39%
|
)
|
Total deferred tax asset
|
|
|
0%
|
|
|
|
0%
|
|
The Company has four reportable operating
segments as determined by management using the “management approach” as defined by the authoritative guidance on
Disclosures
about Segments of an Enterprise and Related Information
: (1) Mobile home lease (We Three), (2) Company-owned Pizza Restaurants
(Romeo’s NY Pizza), and (3) “Repicci’s Italian Ice” franchised stores. These segments are a result of differences
in the nature of the products and services sold. Corporate administration costs, which include, but are not limited to, general
accounting, human resources, legal and credit and collections, are partially allocated to the three operating segments. Other revenue
consists of nonrecurring items.
The mobile home lease segment establishes
mobile home business as an option for a homeowner wishing to avoid large down payments, expensive maintenance costs, monthly mortgage
payments and high property taxes. If bad credit is an issue preventing people from purchasing a traditional house, the Company
will provide a financial leasing option with "0" interest on the lease providing a "lease to own" option for
their family home.
The Company-owned Pizza Restaurant segment
includes sales and operating results for all Company-owned restaurants. Assets for this segment include equipment, furniture and
fixtures for the Company-owned restaurants.
Repicci’s Group offers franchisees
for the operation of “Repicci’s Italian Ice” franchises. These franchised stores specialize in the distribution
of nonfat frozen confections.
The number of franchise agreements in force
as of December 31, 2017 was 48, five of which are “mobile” units.
The Company obligates itself to each franchisee
to perform the following services:
|
1.
|
Designate an exclusive territory;
|
|
2.
|
Provide guidance and approval for selection and location of site;
|
|
3.
|
Provide initial training of franchisee and employees;
|
|
4.
|
Provide a company manual and other training aids.
|
The Company has developed a new “Mobile
Franchise Opportunity”. The total investment for the new opportunity ranges from $155,600 to $165,000, as follows: $125,000
for a new Mercedes Sprinter Van, customized for the franchisee, $25,000 for the franchise fee, the balance for product. The Company’s
obligation is as above, except for Item #3, training is specific to the new opportunity.
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
We Three
|
|
$
|
193,601
|
|
|
$
|
152,120
|
|
Romeo’s NY Pizza
|
|
|
592,445
|
|
|
|
603,787
|
|
Repicci’s Group
|
|
|
954,854
|
|
|
|
369,416
|
|
Others
|
|
|
3,754
|
|
|
|
24,928
|
|
Consolidated revenues
|
|
$
|
1,744,654
|
|
|
$
|
1,150,251
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
155,416
|
|
|
$
|
145,795,
|
|
Romeo’s NY Pizza
|
|
|
429,778
|
|
|
|
404,181
|
|
Repicci’s Group
|
|
|
771,213
|
|
|
|
246,797
|
|
Others
|
|
|
–
|
|
|
|
–
|
|
Consolidated cost of sales
|
|
$
|
1,356,407
|
|
|
$
|
797,073
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
(4,494
|
)
|
|
$
|
(16,201
|
)
|
Romeo’s NY Pizza
|
|
|
(141,128
|
)
|
|
|
(32,594
|
)
|
Repicci’s Group
|
|
|
(41,652
|
)
|
|
|
(229,985
|
)
|
Others
|
|
|
(4,509,422
|
)
|
|
|
(1,975,712
|
)
|
Consolidated loss before taxes
|
|
$
|
(5,000,319
|
)
|
|
$
|
(2,254,492
|
)
|
|
|
As
of
December 31,
2017
|
|
|
As
of
December 31,
2016
|
|
Assets:
|
|
|
|
|
|
|
|
|
We Three
|
|
$
|
235,532
|
|
|
$
|
216,433
|
|
Romeo’s NY Pizza
|
|
|
58,438
|
|
|
|
19,241
|
|
Repicci’s Group
|
|
|
293,216
|
|
|
|
411,606
|
|
Others
|
|
|
721,875
|
|
|
|
1,824,729
|
|
Combined assets
|
|
$
|
1,309,061
|
|
|
$
|
2,472,009
|
|
In accordance with ASC Topic 855-10, the
Company has analyzed its operations subsequent to December 31, 2016 to the date these consolidated financial statements were issued,
and has determined that it does not have any material subsequent events to disclose in these financial statements other than those
specified below.
On April 3, 2018, the Board of Directors of Cardiff International,
Inc., increased the authorized to One Billion (1,000,000,000) shares of Common Stock, par value of $0.001.
Stock issuance:
Subsequent to December 31, 2017, 7,945,437
shares were issued for debt conversion.
Subsequent to December 31, 2017, 50,000
shares were issued for Series B Preferred Stock conversion.
Subsequent to December 31, 2017, 6,074,224
shares were issued for Series H Preferred Stock conversion.
Subsequent to December 31, 2017, 136,364
shares were issued for Series I Preferred Stock conversion.
Subsequent to December 31, 2016, 1,195,411
shares were issued for services rendered.
Notes payable:
On January 19, 2018 the Company entered into a 12% convertible
line of credit with an unrelated entity in the amount of $83,500. The Company received $83,500 cash pursuant to the terms of this
Note as of the date of this Report.
On February 20, 2018 the Company entered into a 8% convertible
line of credit with an unrelated entity in the amount of $78,500. The Company received $78,500 cash pursuant to the terms of this
Note as of the date of this Report.
On March 28, 2018 the Company entered into a 8% convertible
line of credit with an unrelated entity in the amount of $100,000. The Company received $100,000 cash pursuant to the terms of
this Note as of the date of this Report.
On April 9, 2018 the Company entered into a 10% convertible
line of credit with an unrelated entity in the amount of $145,000. The Company received $145,000 cash pursuant to the terms of
this Note as of the date of this Report.