The accompanying notes are an integral part
of these condensed consolidated financial statements
The accompanying notes are an integral part
of these condensed consolidated financial statements
The accompanying notes are an integral part
of these condensed consolidated financial statements
The accompanying notes are an integral
part of these condensed consolidated financial statements
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Organization and Nature of Operations
Legacy Card Company (“Legacy”)
was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, Legacy converted from a California Limited Liability
Company to a Nevada Corporation. On November 10, 2005, Legacy merged with Cardiff Lexington Corp. (“Cardiff”, the “Company”),
a publicly held corporation.
In the first quarter of 2013, it was decided
to restructure Cardiff into a holding company that adopted a new business model known as "Collaborative Governance,"
a form of governance enabling businesses to take advantage of the power of a public company. Cardiff began targeting the acquisition
of, niche companies with high growth potential. The reason for this strategy was to protect the Company’s shareholders by
acquiring businesses with little to no debt, seeking support with both financing and management that had the ability to offer a
return to investors.
Description of Business
To date, Cardiff consists of the following wholly-owned subsidiaries:
We Three, LLC dba Affordable Housing Initiative (“AHI”),
acquired May 15, 2014
Romeo’s Alpharetta, LLC dba Romeo’s NY
Pizza (“Romeo’s Pizza”), acquired June 30, 2014
Edge View Properties, Inc., (“Edge View”)
acquired July 16, 2014
Repicci’s Franchise Group, LLC (“Repicci’s
Group”), acquired August 10, 2016
Platinum Tax Defenders, LLC (“Platinum Tax”),
acquired July 31, 2018
JM Enterprises 1, Inc. dba Key Tax Group (“Key
Tax”), acquired May 2019
Red Rock Travel Group,
LLC (“Red Rock”), acquired July 31, 2018, discontinued May 31, 2019
Basis of Presentation and Principles
of Consolidation
The accompanying March 31, 2020 interim
condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in the annual financial statements prepared in accordance
with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules
and regulations, but we believe the disclosures made are adequate to make the information presented not misleading. In the opinion
of management, all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation have been included
in the condensed consolidated financial statements included herein. These statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31,
2019. The results of operations for the periods presented are not necessarily indicative of results to be expected for the full
fiscal year or any other periods.
The unaudited condensed consolidated financial
statements include the accounts of Cardiff, and its wholly-owned subsidiaries: We Three, LLC; Romeo’s NY Pizza; Edge View
Properties, Inc.; Repicci’s Franchise Group, LLC, Platinum Tax Defenders LLC JM Enterprises 1, Inc. and Red Rock Travel Group,
LLC which is shown as Discontinued Operations. 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.
Use of Estimates
The preparation of the unaudited condensed
financial statements in conformity with generally accepted accounting principles in the United States (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.
Change in Capital Structure
In January 2020, the Company announced
a reverse split of several of its Preferred Stock Classes which has been given retrospective treatment in the consolidated financial
statements unaudited condensed.
In May 2020, the Company affected a reverse split of Common
Stock which has been given retrospective treatment in the condensed consolidated financial statements affected 1:10,000.
COVID-19 Pandemic
The outbreak of a novel coronavirus throughout the world, including
the United States, during early calendar year 2020 has caused widespread business and economic disruption through mandated and
voluntary business closings and restrictions on the movement and activities of people (“COVID-19 Pandemic”). We are
subject to risks and uncertainties as a result of the COVID-19 Pandemic. The extent of the impact of the COVID19 Pandemic on the
Company's business is highly uncertain and difficult to predict, as the response to the COVID-19 Pandemic is rapidly evolving in
many countries, including the United States and other markets where the Company operates. It is expected that many of the Company's
customers and suppliers could be impacted by these closings and restrictions which could materially and adversely affect demand
for our products, our ability to obtain or deliver inventory or services, and our ability to collect accounts receivables as customers
face higher liquidity and solvency risk. Furthermore, capital markets and economies worldwide have also been negatively impacted
by the COVID-19 Pandemic, and it is possible that it could cause an economic downturn, recession, or depression. Such economic
disruption could have a material adverse effect on our business. Policymakers around the world have responded with fiscal and monetary
policy actions to support the economy. The magnitude and overall effectiveness of these actions remains uncertain.
Revenue Recognition
On January 1, 2018, we adopted ASC 606,
Revenue from contracts with customers (“Topic 606”) using the modified retrospective approach for all contracts as
of the adoption date. As the adoption of this guidance did not have a significant impact on our consolidated financial adjustment,
no adjusted were made to the prior periods to be in complaicne with Topic 606.
The Company applies a five-step approach
in determining the amount and timing of revenue to be recognized:
|
(1)
|
identifying the contract with a customer,
|
|
(2)
|
identifying the performance obligations in the contract,
|
|
(3)
|
determining the transaction price,
|
|
(4)
|
allocating the transaction price to the performance obligations in the contract and
|
|
(5)
|
recognizing revenue when the performance obligation is satisfied.
|
Substantially all of the Company’s
revenue is recognized at the time control of the products transfers to the customer.
The Company generates revenue from our
subsidiaries primarily on a cash basis for sale of food items and monthly rentals of mobile homes. As allowed by a practical expedient
in Topic 606, the entity recognizes revenue in the amount to which the entity has a right to invoice. The term between invoicing
and when payment is due is not significant.
Franchisor Income
Our subsidiary Repicci, generates some
revenues through franchise fees. Revenues from franchise fees are recognized in accordance with guidance Topic 606, as the fees
are earned. One-third of the revenues are recognized within 60 days and the balance are recognized over the life of the franchise
agreement, which can be up to 15 years.
Tax Services
Our tax services subsidiaries receive payments
in advance of service and are recorded as deferred revenue. Revenues are recognized as services are provided.
Rental Income
The Company’s rental revenue is from
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 March 31, 2020 and December 31, 2019. There are no contingent rentals included in income in the accompanying statements
of operations. With the exception of the month-to-month leases, revenue was recognized on a straight-line basis and amortized into
income on a monthly basis, over the lease term.
Restaurant Sales
Revenue from restaurant sales were recognized
when food and beverage products are sold. We report revenue net of sales taxes collected from customers and remitted
to governmental taxing authorities.
Cash and Cash Equivalents
We consider all highly liquid investments
with an original maturity of three months or less to be cash equivalents. We had no cash equivalents at March 31, 2020 and December
31, 2019
Accounts Receivable
Accounts
receivable is reported on the condensed consolidated balance sheet at gross amounts due to us. Management closely monitors
outstanding accounts receivable and charges off to expense any balances that are determined to be uncollectible. As of March
31, 2020 and December 31, 2019, we had accounts receivable of $123,358 and $118,125,
respectively. Accounts receivables primarily are generated from our subsidiaries in their normal course of
business.
Inventory
Inventory consists of finished goods purchased,
which are valued at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (FIFO) method.
We periodically review historical sales activity to determine potentially obsolete items and also evaluates the impact of any anticipated
changes in future demand.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements
are carried at cost. Expenditures for renewals and betterments that extend the useful lives of property, equipment or leasehold
improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is calculated
using the straight-line method for financial reporting purposes based on the following estimated useful lives:
Classification
|
Useful Life
|
Equipment, furniture and fixtures
|
5 - 7 years
|
Leasehold improvements
|
10 years or lease term, if shorter
|
Leases
In accordance with FASB issued ASU No.
2016-02,” Leases” (Topic 842), the Company recognizes their operating leases on the balance sheet as an asset
and liability for leases with lease terms of more than 12 months. ASU 2016-02 became effective on January 1, 2019. Leases under
this ASU are presented on the balance sheet as right of use asset and liability. These amount are presented as right of use - asset
and right of use – liability on the balance sheet at March 31, 2020 and December 31, 2019.
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived brands are
not amortized, but are evaluated for impairment annually or when indicators of a potential impairment are present. Our impairment
testing of goodwill is performed separately from our impairment testing of indefinite-lived intangibles. The annual evaluation
for impairment of goodwill and indefinite-lived intangibles is based on valuation models that incorporate assumptions and internal
projections of expected future cash flows and operating plans. We believe such assumptions are also comparable to those
that would be used by other marketplace participants.
Valuation of long-lived assets
In accordance with the provisions of Accounting
Standards Codification (“ASC”) Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all
long-lived assets such as plant and equipment used by us are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated
by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets.
If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts
of the assets exceed the fair value of the assets.
Valuation of Derivative Instruments
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 815-10, Derivatives and Hedging (“ASC 815-10”), requires
that embedded derivative instruments be bifurcated and assessed, along with freestanding derivative instruments such as convertible
promissory notes, on their issuance date to determine whether they would be considered a derivative liability and measured at their
fair value for accounting purposes. The Company evaluates all of it financial instruments, including stock purchase warrants, to
determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then
revalued at each reporting date, with changes in the fair value reported as charges or credits to income.
For option based simple derivative financial
instruments, we use the Black-Scholes 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.
Beneficial Conversion Feature
For conventional convertible debt where
the rate of conversion is below market value, we record a “beneficial conversion feature” (“BCF”) discount
against the face amount of the respective debt instrument (offset to additional paid in capital).
When the Company records a BCF which is
not a conventional convertible, the fair value of the BCF is recorded as a derivative liability with an offset against the face
amount of the respective debt instrument which is and amortized to interest expense over the term of the debt.
Fair Value Measurements
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Assets and liabilities recorded at fair value in the condensed consolidated balance sheets are categorized based
upon the level of judgment associated with the inputs used to measure their fair value. The fair value hierarchy distinguishes
between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs),
and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available
in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable
inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level Input Definition
Level 1
|
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
|
Level 2
|
Inputs, other than quoted prices included in Level 1, which are observable for the asset or liability through corroboration with market data at the measurement date.
|
Level 3
|
Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.
|
The following table presents certain investments
and liabilities of our financial assets measured and recorded at fair value on the Company’s condensed consolidated balance
sheets on a recurring basis and their level within the fair value hierarchy as of March 31, 2020 and December 31, 2019.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Fair Value of BCF Derivative Liability – March 31, 2020
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
8,059,024
|
|
|
$
|
8,059,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Fair Value of BCF Derivative Liability – December 31, 2019
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
3,204,636
|
|
|
$
|
3,204,636
|
|
Stock-Based Compensation
We account account for stock based compensation
in which we obtain employee services in share-based payment transactions under the recognition and measurement principles of the
fair value recognition provisions of ASC 718-10-30. Pursuant to ASC 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.
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 consolidated statements of operations.
Equity Instruments Issued to Parties Other Than Employees
for Acquiring Goods or Services
We previously adopted ASU No 2018-07
for equity instruments issued to parties other than employees.
Income Taxes
Income taxes are determined in accordance
with ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted
income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
ASC 740 prescribes a comprehensive model
for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken
or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements
when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must
initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
For the periods ending March 31, 2020 and
December 31, 2019 we did not have any interest and penalties associated with tax positions. As of March 31, 2020 and December 31,
2019, we did not have any significant unrecognized uncertain tax positions.
Earnings (Loss) per Share
FASB ASC Subtopic 260, Earnings Per
Share (“ASC 260”), provides for the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available
to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include
the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been
issued. Potentially dilutive securities include outstanding stock options, warrants, and debts convertible into common shares.
The dilutive effect of potentially dilutive securities is not reflected in diluted earnings per common share, as their impact would
be anti-dilutive.
Going Concern
The accompanying condensed
consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates
continuity of operations, realization of assets and liabilities and commitments in the normal course of business. We have
sustained operating losses since its inception and have negative working capital and an accumulated deficit. These factors
raise substantial doubts about our ability to continue as a going concern. 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, our
independent registered public accounting firm, in its report on our December 31, 2019 consolidated financial statements, has
raised substantial doubt about our ability to continue as a going concern.
Our ability 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 us to fund its cashflow shortfalls and pursue new acquisitions.
There can be no assurance we will be able to obtain sufficient capital from debt or equity transactions or from operations in the
necessary time frame or on terms acceptable to it. Should we 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 we will be
able to operate profitably on a consistent basis, or at all, in the future. Should we not be able to raise sufficient funds, it
may cause cessation our operations.
Accounting Pronouncements
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 our financial position, results of operations or cash flows.
2.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Accounts payable
|
|
$
|
199,709
|
|
|
$
|
236,874
|
|
Accrued credit cards
|
|
|
78,253
|
|
|
|
86,077
|
|
Accrued income, payroll and other taxes
|
|
|
367,927
|
|
|
|
299,786
|
|
Accrued advertising
|
|
|
68,508
|
|
|
|
53,189
|
|
Accrued payroll
|
|
|
50,021
|
|
|
|
58,760
|
|
Accrue expense - other
|
|
|
95,505
|
|
|
|
143,694
|
|
Total
|
|
$
|
859,923
|
|
|
$
|
878,380
|
|
The Company is delinquent paying income,
payroll and other taxes. As of March 31, 2020 and December 31, 2019, the balance due for these taxes is $367,927 and $299,786,
respectively, as shown in the table above.
3.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment, net as of March
31, 2020 and December 31, 2019 was $257,797 and $273,399, respectively, consisting of the following:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Residential housing
|
|
$
|
341,205
|
|
|
$
|
341,205
|
|
Furniture, fixture and equipment
|
|
|
427,233
|
|
|
|
427,492
|
|
Leasehold improvements
|
|
|
71,819
|
|
|
|
71,819
|
|
Total
|
|
|
840,257
|
|
|
|
840,516
|
|
Less: accumulated depreciation
|
|
|
(582,461
|
)
|
|
|
(566,858
|
)
|
Property and equipment, net
|
|
$
|
257,797
|
|
|
$
|
273,658
|
|
During the three months ended March 31,
2020 and 2019, total depreciation expense was $15,602 and $17,693, respectively. The recorded depreciation expense of $319 and
$4,737, is in operations expense and $18,283 and $12,956, is in cost of goods sold, respectively.
As of March 31, 2020 and December 31, 2019,
we 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. We issued 241,199 shares of Series E Preferred Stock as consideration for this acquisition.
The land is currently vacant and is expected to be developed into residential community.
We are party to an unsecured Business Line
of Credit Agreement with Foundation Group LLC (“Foundation”), pursuant to which we were allowed to take a draw from
Foundation up to $20,000 from time to time. The Line of Credit bears interest at a rate of 11.49% per annum, subject to increase
or decrease with 90 days’ notice. There was an initial closing fee of $500 and a 2% draw fee on subsequent draws. Monthly
principal and interest payments are due and the line is due in full in 18 months from the latest draw. The outstanding principal
and interest will be due in payments over 18 months.
At March 31, 2020 and December 31, 2019,
we had outstanding balance of $92,393 and $91,099, respectively. During the three months ended March 31, 2020, total cash advanced
was $1,294 and with zero cash repaid.
6.
|
RELATED PARTY TRANSACTIONS
|
During the three months ended March 31,
2020 and 2019, we borrowed $24,312 and $30,000 from related parties and repaid $4,500 and $-0-, to related parties, respectively.
From time to time, we borrow funds from
our Chairman of the Board (“Chairman”). The terms of repayment stipulate the unsecured loans are due 24 months from
issuance or on demand, at an annual interest rate of 6% per year. During the three months ended March 31, 2020 and 2019, we borrowed
$-0- and $30,000 from the Chairman and repaid $4,500 and $-0-, to the Chairman, respectively.
7.
|
DUE TO DIRECTOR AND OFFICER
|
The Company borrows funds from the Chairman
of the Board (“Chairman”) of the Company. The terms of repayment stipulate the unsecured loans are due 24 months from
issuance or on demand, at an annual interest rate of 6% per year. During the three months ended March 31, 2020 and 2019, the Company
borrowed $-0- and $30,000 from the Chairman.
For the three months ended March 31, 2020,
we received $24,312 in cash proceeds and repaid $4,535 in cash. In addition, notes payable increased by $15,000 due to a change
in debtness classification to notes payable from convertible debt.
Notes payable at March 31, 2020 and December
31, 2019 are summarized as follows:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Notes Payable - Unrelated Party
|
|
$
|
705,857
|
|
|
$
|
694,891
|
|
Notes Payable - Related Party
|
|
|
109,058
|
|
|
|
84,746
|
|
Total
|
|
|
814,915
|
|
|
|
779,637
|
|
Current portion
|
|
|
814,915
|
|
|
|
369,637
|
|
Long-term portion
|
|
$
|
–
|
|
|
$
|
410,000
|
|
On March 12, 2009, we entered into a
preferred debenture agreement with a shareholder for $20,000. The note bore interest at 12% per year and matured on September
12, 2009. In conjunction with the preferred debenture, we issued warrants to purchase its Common Stock, recorded a
$20,000 debt discount which has been fully amortized. We assigned all of our receivables from consumer activations of the
rewards program as collateral on this debenture. On March 24, 2011, we 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, we repaid $5,000 of the note. No warrants had been exercised before the expiration. As of March 31, 2020, we
are in default on this debenture.
Notes Payable – Unrelated
Party
As of March 31, 2020, we had lease payables
of $42,647 in connection with three capital leases on two Mercedes Sprinter Vans and a generator for the franchise group. There
are purchase options at the end of the three leases that are based on the fair market value at the time..
Notes payable of $31,819 were due to the
auto loans for the vehicles used in the Pizza restaurants for daily operations. The loans carry interest from 0% to 6% interest
and are currently in default.
On September 7, 2011, we entered into a
Promissory Note agreement (“Note 3”) for $50,000. Note bears interest at 8% per year and matures on September 7, 2016.
Interest was payable annually on the anniversary of Note 3, and the principal and any unpaid interest will be due upon maturity.
Note 3was $50,000 at March 31, 2020 and December 31, 2019. Note 3 is currently in default.
On November 17, 2011, we entered into a
Promissory Note agreement (“Note 3-1”) for $50,000. Note 2 bears interest at 8% per year and matures on November 17,
2016. Interest was payable annually on the anniversary of Note 3-1, and the principal and any unpaid interest will be due upon
maturity. Note 3-1, was $50,000 at March 31, 2020 and December 31, 2019. respectively. Note 3-1 is currently in default.
On September 9, 2019, we entered into a
Senior Secured Promissory Note with an unrelated entity in the amount $410,000. The note bears interest at the rate of 10% per
annum and matures September 9, 2020. The Company has agreed to use the proceeds to repay amounts owed to existing lender of the
Company as identified in the agreement. The note is secured and is current as of March 31, 2020. The balance of the note at March
31, 2020 is $410,000 and accrued interest is $22,915.
Notes Payable – Related Party
We assumed notes payable from the previous
owners of which are currently Manager of Key Tax related to the acquisition of Key Tax on May 8, 2019. From time to time, the previous
owner which is currently Manager of Platinum Tax Defenders loans funds to the Company to cover short term operating needs. Amounts
owed as of March 31, 2020 and December 31, 2019 were $111,706 and $84,746, respectively.
Notes Payable – Discontinued Operations
The discontinued operation entered
several notes with no interested for a total of $453,147 before the subsidiary was deemed discontinued in 2019. These amounts remained
unpaid through March 31, 2020 and December 31, 2019.
9.
|
CONVERTIBLE NOTES PAYABLE
|
Some of the Convertible Notes issued as
described below included an anti-dilution provisions that allowed for the adjustment of the conversion price. We 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, we 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, we determined that the conversion features of the Notes issued in connection therewith are not considered indexed
to the our stock and characterized the value of the conversion feature of such notes as derivative liabilities.
The balances of convertible notes at March
31, 2020 and December 31, 2019 are $1,939,958 and $1,893,293, respectively. During the period January 31, 2020 to March 31, 2020,
received had proceeds of $150,000, cash paydown of $10,632, and a reclassified of one note from convertible note to conventional
note payable. We had debt discount of $813,283 and $201,024 as of March 31, 2020 and December 31, 2019 respectively. During the
three months ending March 31, 2020 December 31, 2019, we recorded amortization of debt discounts of $246,185 and $84,369, respectively.
During the three months ended March 31,
2020, we converted $100,203 of convertible debt, and $25,319 in accrued interest and $4,000 in penalties and fees into 65,324 shares
(post reverse split of 10,000:1) of our Common Stock.
Convertible notes at March 31, 2020 and December 31, 2018 are
summarized as follows:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Convertible notes payable
|
|
$
|
1,939,957
|
|
|
$
|
1,893,293
|
|
Discounts on convertible notes payable
|
|
|
(813,283
|
)
|
|
|
(828,468
|
|
Total convertible debt less debt discount
|
|
|
1,126,674
|
|
|
|
1,064,825
|
|
Current portion
|
|
|
1,126,674
|
|
|
|
580,257
|
|
Long-term portion
|
|
$
|
–
|
|
|
$
|
484,568
|
|
The following is a schedule of convertible notes payable from
December 31, 2019 to March 31, 2020.
Note #
|
Issuance
|
Maturity
|
Principal Balance
12/31/19
|
|
New Loans and Reclasses
|
|
Cash Paydown
|
|
Principal Conversions
|
|
Default
|
|
Principal Balance
3-31-20
|
|
Interest Expense
On Convertible Debt For Three Months Ended 3-31-20
|
|
Accrued Interest
on Convertible Debt at 3-31-20
|
|
1
|
8/21/08
|
8/21/2009
|
$
|
150,000
|
|
$
|
–
|
|
$
|
–
|
|
$
|
–
|
|
|
Yes
|
|
$
|
150,000
|
|
|
$4,550
|
|
|
|
|
7
|
2/9/16
|
On demand
|
|
8,485
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Yes
|
|
|
8,485
|
|
|
429
|
|
|
2,841
|
|
7-1
|
10/28/16
|
10/28/2017
|
|
25,000
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Yes
|
|
|
25,000
|
|
|
1,264
|
|
|
11,585
|
|
8
|
3/8/16
|
3/8/2017
|
|
1,500
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Yes
|
|
|
1,500
|
|
|
76
|
|
|
9,939
|
|
9
|
9/12/16
|
9/12/2017
|
|
80,000
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Yes
|
|
|
80,000
|
|
|
4,044
|
|
|
51,920
|
|
10
|
1/24/17
|
1/24/2018
|
|
32,621
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Yes
|
|
|
32,621
|
|
|
1,649
|
|
|
24,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11-1
|
2/21/17
|
2/21/2018
|
|
9,733
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Yes
|
|
|
9,733
|
|
|
492
|
|
|
3,025
|
|
11-2
|
3/16/17
|
3/16/2018
|
|
20,032
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Yes
|
|
|
20,032
|
|
|
1,013
|
|
|
3,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-2
|
7/24/18
|
1/24/2019
|
|
92,205
|
|
|
(48,246
|
)
|
|
–
|
|
|
–
|
|
|
Yes
|
|
|
43,959
|
|
|
2,000
|
|
|
26,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
7/10/18
|
1/10/2021
|
|
953,414
|
|
|
(117,799
|
)
|
|
(10,632
|
)
|
|
–
|
|
|
–
|
|
|
824,983
|
|
|
20,580
|
|
|
86,918
|
|
22-1
|
2/20/19
|
1/10/2021
|
|
–
|
|
|
61,704
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
61,704
|
|
|
1,872
|
|
|
8,221
|
|
22-3
|
4/10/19
|
1/10/2021
|
|
–
|
|
|
56,095
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
56,095
|
|
|
1,702
|
|
|
6,847
|
|
25
|
8/13/18
|
2/13/2019
|
|
78,314
|
|
|
48,246
|
|
|
–
|
|
|
2,875
|
|
|
Yes
|
|
|
123,685
|
|
|
5,526
|
|
|
3,252
|
|
26
|
8/10/17
|
1/27/2018
|
|
20,000
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
Yes
|
|
|
20,000
|
|
|
758
|
|
|
5,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29-1
|
11/8/19
|
11/8/2020
|
|
141,122
|
|
|
–
|
|
|
–
|
|
|
13,428
|
|
|
–
|
|
|
127,694
|
|
|
2,671
|
|
|
1,917
|
|
29-2
|
11/8/19
|
11/8/2020
|
|
62,367
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
62,367
|
|
|
1,261
|
|
|
1,261
|
|
30
|
7/26/19
|
7/26/2020
|
|
73,500
|
|
|
–
|
|
|
–
|
|
|
(73,500
|
)
|
|
–
|
|
|
-
|
|
|
511
|
|
|
-
|
|
31
|
8/28/19
|
8/28/2020
|
|
120,000
|
|
|
–
|
|
|
–
|
|
|
(10,400
|
)
|
|
–
|
|
|
109,600
|
|
|
2,328
|
|
|
5,165
|
|
32
|
5/22/19
|
5/10/2020
|
|
25,000
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
25,000
|
|
|
506
|
|
|
1,727
|
|
33
|
2/11/20
|
2/11/2021
|
|
-
|
|
|
157,500
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
157,500
|
|
|
1,286
|
|
|
1,286
|
|
|
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
|
|
$
|
1,908,293
|
|
$
|
(142,500
|
)
|
$
|
(10,632
|
)
|
$
|
(100,203
|
)
|
|
–
|
|
$
|
1,939,958
|
|
|
54,518
|
|
|
464,598
|
|
10.
|
FAIR VALUE MEASUREMENT
|
We 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 carrying amounts of our 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.
We recognize our derivative liabilities
as level 3 and value these derivatives using the methods discussed in note 12. We believe that its valuation methods are appropriate
and consistent with other market participants, we recognize 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 terms in the notes that are subject to volatility and market
price of our underlying common stock.
As of March 31, 2020, and December 31,
2019, the Company did not have any derivative instruments that were designated as hedges.
Fluctuations in the Company’s stock
price are a primary driver for the changes in the derivative valuations during each reporting period. During the 3 months ended
March 31, 2020, the Company’s stock price decreased from its initial valuation and thus, the derivative liability also decreased.
Generally, as the stock price decreases for each of the related convertible notes that have an embedded derivative liability, the
value of the derivative liability decreases. Stock price is one of the significant unobservable inputs used in the fair value measurement
of each of the Company’s convertible notes with an embedded derivative liability.
We used the Black-Scholes Model to measure
the fair value of the derivative liabilities which also include amounts related to discontinued operations of $8,059,024and $3,204,636
on March 31, 2020 and December 31, 2019, respectively, . We recorded a net increase of $4,971,499 and $2,620,389 in its derivative
liability for the three months ended March 31, 2020 and the year December 31, 2019, respectively.
The following table provides a summary
of changes in fair value of our Level 3 financial liabilities for the three months ended March 31, 2020:
Derivative Liability, December 31,2019
|
|
$
|
3,240,636
|
|
Day 1 Loss
|
|
|
566,998
|
|
Discount on derivatives
|
|
|
231,000
|
|
Derivatives settled
|
|
|
(384,111
|
)
|
Mark to market adjustment
|
|
|
4,404,500
|
|
Derivative Liability, March 31, 2020
|
|
$
|
8,059,023
|
|
The above tables also include derivative
liabilities related to warrants to purchase common stock of $1,227 at March 31, 2020. Net loss for the period included mark-to-market
adjustments relating to the liabilities held during the three months ended March 31, 2020 in the amounts of $4,435.
The valuation of the derivative liabilities
attached to the convertible debt was arrived at through the use of the Black-Scholes Option Pricing Model (“Black-Scholes
Model”) using the following assumptions:
|
|
|
For the Periods Ended
|
|
|
|
|
March 31, 2020
|
|
|
|
December 31, 2019
|
|
Volatility
|
|
|
470.0% - 600.2%
|
|
|
|
378.8% - 1,872.7%
|
|
Risk-free interest rate
|
|
|
.17% - .23%
|
|
|
|
1.55% - 1.62%
|
|
Expected term
|
|
|
.25 – 2.5
|
|
|
|
.47 – 2.8
|
|
For the three months March 31, 2020 and year-ended December
31, 2019, the Company has recorded derivative liabilities associated with convertible debt instruments, as more fully discussed
at Note 10.
Preferred Stock
During January 2020, we facilitated a reverse split of several
our Preferred Stock Classes which has been given retrospective treatment in these condensed consolidated financial statements.
In addition to the reverse stock split, management established new rights & privileges for certain classes of preferred stock.
The reverse split ratio ranges from 1.6:1 to 307.7:1 resulting in a reclassification of $98,989 from preferred stock to additional
paid in capital. The rights and privileges were changed with unanimous consent of all parties. All holders agreed to replace existing
rights and privileges with new uniform conditions and a simplified uniform preferred $4 per share stated value.
Common Stock
During the three months ended March 31,
2020, we issued the following transactions:
65,324 shares for
conversion of convertible notes payable (see Footnote 10).
On January 9, 2020, we issued 25,000 warrants and a free trading
common share certificate in the amount of 3,500 shares of common stock for settlement of a threatened lawsuit.
These transactions are reflecting
a retrospective treatment of common stock that was a reverse split effective in May 2020.
The initial and ending valuation of the
warrants as of March 31, 2020 are as follows:
|
|
Three Months
March 31,
2020
|
|
Initial Valuation
|
|
$
|
6,135
|
|
Ending Value
|
|
$
|
1,227
|
|
The table below set forth the assumptions
for the Black-Scholes Model on each initial date and December 31, 2019:
|
|
Three Months
March 31, 2020
|
Volatility
|
|
470.0% - 600.2%
|
Risk-free interest rate
|
|
.15% - 1.60%
|
Expected term
|
|
0.11 – 6.28
|
Accordingly, the $3,908 change in warrant
values in earnings during the three months ended March 31, 2020.
The following tables summarize all warrant
outstanding as of March 31, 2020, and the related changes during this period. The warrants expire three years from grant date,
which as of March 31, 2020 is 2.0 years. The intrinsic value of the warrants as of March 31, 2020 was $-0-.
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Stock Warrants
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
6,614,287
|
|
|
$
|
0.21
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
Balance at March 31, 2020
|
|
|
6,614,287
|
|
|
|
0.21
|
|
Warrants Exercisable at December 31, 2019
|
|
|
6,614,287
|
|
|
$
|
0.21
|
|
13.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
We recorded operating lease expense of
$217,090 and $242,567 for the year ended March 31, 2020 and December 31, 2019, respectively, .
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 July 27, 2017, effective January 1, 2017 to December 31, 2021 with automatic
extension for additional successive one (1) year renewals terms unless terminated as defined the agreement. We provide for compensation
of $25,000 per month along with additional incentives.
We have an employment agreement with the
Chief Executive Officer, Mr. Cunningham, amended on July 27, 2017, effective on January 1, 2017 to December 31, 2021 with automatic
extension for additional successive one (1) year renewals terms unless terminated as defined the agreement. We provide for compensation
of $25,000 per month.
We have an employment agreement with the
Chief Operating Officer, effective June 13 2016 to December 31, 2021 with automatic extension for additional successive one (1)
year renewals terms unless terminated as defined in the agreement. We provide for compensation of $10,000 per month.
We have an employment agreement with the
Chief Financial Officer, effective January 27 20120 to December 31, 2021 with automatic extension for additional successive one
(1) year renewals terms unless terminated as defined in the agreement. We provide for compensation of $10,000 per month.
We have an employment agreement with a
subsidiary manager, effective May 31, 2019 with a term of 5 years, whereby we provide for compensation of $17,333 per month along
with a bonus incentive if financial performance measures are met.
We have an employment agreement with a
subsidiary manager, effective July 1, 2018 with a term of 5 years, whereby we provide for compensation of $20,000 per month along
with a bonus incentive if financial performance measures are met.
We have an employment agreement with a
subsidiary manager, effective August 1, 2016 with a term of 5 years, whereby we provide for compensation of $12,000 per month
along with a bonus incentive if financial performance measures are met.
We have an employment agreement with a
subsidiary manager, effective August 1, 2016 with a term of 5 years, whereby we provide for compensation of $12,000 per month along
with a bonus incentive if financial performance measures are met.
We acquired Redrock Travel on May 1, 2018.
Our board of directors decided to terminate the acquisition agreement and to file for the cancelation of the Redrock Stock Class
with the State of Florida.
At March 31, 2020 the Company had
federal and state net operating loss carry forwards of approximately $20,159,987 that expire in various years through the
year 2038.
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)
|
Affordable Housing (We Three),
|
|
(2)
|
Pizza Restaurant (Romeo’s NY Pizza),
|
|
(3)
|
Italian Ice Franchised Stores and Franchisor (Repicci’s Group),
|
|
(4)
|
Tax Resolution Services (Platinum Tax and Key Tax), and
|
|
(5)
|
Travel Services (Red Rock Travel has been discontinued May 31, 2019)
|
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 What is
allocated. Other revenue consists of nonrecurring items.
The Affordable Housing segment leases and
sells mobile homes as an option for a homeowner wishing to avoid large down payments, expensive maintenance costs, large monthly
mortgage payments and high property taxes and insurance which is a common trait of brick and mortar homes. Additionally, if bad
credit is an issue preventing potential home owners from purchasing a traditional house, the Company will provide a "lease
to own" option so people secure their family home.
The 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 Italian Ice
franchises under the well-known name “Repicci’s Italian Ice”. These franchised stores specialize in the distribution
of nonfat frozen confections.
The number of franchise agreements in force
as of March 31, 2020 was forty-five (46), seven (7) new state of the art “mobile” units.
Platinum Tax Defenders and Key Tax provides
tax resolution services to individuals and companies that have federal and state tax liabilities. The company collects fees based
on efforts to negotiate and assist in the settlement of outstanding tax debts.
|
|
As of March 31,
2020
|
|
|
As of December 31,
2019
|
|
Assets:
|
|
|
|
|
|
|
|
|
Affordable Housing Rentals
|
|
$
|
300,356
|
|
|
$
|
299,565
|
|
New York Style Pizza Restaurant
|
|
|
394,188
|
|
|
|
398,253
|
|
Italian Ice Franchise Group
|
|
|
16,585
|
|
|
|
27,735
|
|
Tax Resolution Services
|
|
|
4,347,400
|
|
|
|
4,302,238
|
|
Others
|
|
|
120,876
|
|
|
|
269,401
|
|
Consolidated assets
|
|
$
|
5,179,405
|
|
|
$
|
4,907,113
|
|
|
|
For the Three Months Ended March 31, 2020
|
|
|
For the Three Months Ended March 31, 2019
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Affordable Housing Rentals
|
|
$
|
38,212
|
|
|
$
|
52,878
|
|
New York Style Pizza Restaurant
|
|
|
135,193
|
|
|
|
147,797
|
|
Italian Ice Franchise Group
|
|
|
21,190
|
|
|
|
32,627
|
|
Tax Resolution Services
|
|
|
922,514
|
|
|
|
627,227
|
|
Other
|
|
|
288
|
|
|
|
|
|
Consolidated revenues
|
|
$
|
1,117,397
|
|
|
$
|
860,529
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
Affordable Housing Rentals
|
|
$
|
36,821
|
|
|
$
|
67,163
|
|
New York Style Pizza Restaurant
|
|
|
99,260
|
|
|
|
110,023
|
|
Italian Ice Franchise Group
|
|
|
16,153
|
|
|
|
39,620
|
|
Tax Resolution Services
|
|
|
394,798
|
|
|
|
203,133
|
|
Other
|
|
|
–
|
|
|
|
|
|
Consolidated cost of sales
|
|
$
|
547,023
|
|
|
$
|
419,939
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations from subsidiaries
|
|
|
|
|
|
|
|
|
Affordable Housing Rentals
|
|
$
|
791
|
|
|
$
|
(20,106
|
)
|
New York Style Pizza Restaurant
|
|
|
2,350
|
|
|
|
4,798
|
|
Italian Ice Franchise Group
|
|
|
(25,433
|
)
|
|
|
(16,927
|
)
|
Tax Resolution Services
|
|
|
16,937
|
|
|
|
29,627
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,355
|
)
|
|
$
|
(2,608
|
)
|
|
|
|
|
|
|
|
|
|
Loss from operations from Cardiff Lexington
|
|
$
|
(250,610
|
)
|
|
$
|
(319,427
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
|
|
|
|
|
|
|
Affordable Housing Rentals
|
|
$
|
791
|
|
|
$
|
(20,106
|
)
|
New York Style Pizza Restaurant
|
|
|
1,715
|
|
|
|
4,798
|
|
Italian Ice Franchise Group
|
|
|
(26,437
|
)
|
|
|
(16,927
|
)
|
Tax Resolution Services
|
|
|
8,141
|
|
|
|
29,627
|
|
Other
|
|
|
(850,021
|
)
|
|
|
(4,918,263
|
)
|
Consolidated income (loss) before taxes
|
|
$
|
(865,811
|
)
|
|
$
|
(4,920,871
|
)
|