Cardiff Lexington Corp - FORM 10-Q

Attached files

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EX-31.1 - CERTIFICATION - Cardiff Lexington Corp	cardiff_10q-ex3101.htm
EX-32.2 - CERTIFICATION - Cardiff Lexington Corp	cardiff_10q-ex3202.htm
EX-32.1 - CERTIFICATION - Cardiff Lexington Corp	cardiff_10q-ex3201.htm
EX-31.2 - CERTIFICATION - Cardiff Lexington Corp	cardiff_10q-ex3102.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

Commission File Number 000-49709

_______________________

CARDIFF INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

_______________________

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

16255 Ventura Boulevard, Suite 525, Encino, CA 91436

(Address of principal executive offices)

(818) 879-9722 (Registrant's telephone no., including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: No Par Value Common Stock

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

Yes o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No x

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

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

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

Yes o No x

Common Stock outstanding at March 31, 2011, 59,354,408 shares of no par value Common Stock.

FORM 10-Q

CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

CARDIFF INTERNATIONAL, INC.

For the Quarter March 31, 2011

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

PART I - FINANCIAL INFORMATION

Page of

Form 10-Q

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5 – 6
	Condensed Consolidated Statements of Shareholders’ Equity (Deficit)	7
	Notes to Condensed Consolidated Financial Statements	8 – 19

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20

Item 4.	Controls and Procedures, Evaluation of Disclosure Controls and Procedures	24

PART II - OTHER INFORMATION

Page

Item 1.	Legal Proceedings	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
Item 5.	Other Information	25
Item 6.	Exhibits	25

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2011 (UNAUDITED) AND DECEMBER 31, 2010

ASSETS
	March 31, 2011			December 31, 2010
CURRENT ASSETS
Cash and cash equivalents	$	62,974		$	1,822
Advances to employees		1,659			1,659

TOTAL CURRENT ASSETS		64,633			3,481

PROPERTY AND EQUIPMENT
Computer equipment		4,124			4,124
Website Design		7,500			-
Accumulated depreciation		(2,190	)		(1,220	)

PROPERTY AND EQUIPMENT, NET		9,434			2,904

OTHER ASSETS
Patents and trademarks, net accumulated amortization of $11 and $0, respectively		639			650
Deposits		600			600

TOTAL ASSETS	$	75,306		$	7,635

LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	763,724		$	683,859
Accounts payable, related party		165,235			183,896
Interest payable		690,197			646,102
Accrued officer's salaries		225,000			180,000
Accrued payroll taxes		301,423			291,863
Current portion of settlement payable, shareholder		22,500			30,000
Derivative liability		1,223,342			1,886,224
Due to officer		351,485			324,669
Advance from International Card Establishment, Inc.		50,000			50,000
Note payable - Legacy Investors		518,000			518,000
Note payable - Maricopa Equity Management Corporation		100,000			100,000
Note payable, unrelated party		50,000			50,000
Note payable, convertible, unrelated party, net of discount of $41,667 and $104,167		208,333			145,833
Current portion of notes payable, related-party, convertible		185,000			150,000
Current portion of notes payable, related-party		39,990			39,990

TOTAL CURRENT LIABILITIES		4,894,229			5,280,436

LONG-TERM LIABILITIES
Settlement payable, shareholder		50,000			50,000
Notes payable, unrelated party, net of discount of $194,400 and $0, respectively		5,600			-
Notes payable, related-party, convertible		15,000			50,000
Notes payable, related-party, net of discount of $112,200 and $93,750, respectively		123,390			131,841

TOTAL LIABILITIES		5,088,219			5,512,277

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 60,000,000 shares authorized; 59,354,408 and 58,104,408 shares issued and outstanding		7,415,783			7,415,783
Additional paid-in capital		13,961			(11,039	)
Deficit accumulated during the development stage		(12,442,657	)		(12,909,386	)

TOTAL SHAREHOLDERS' DEFICIT		(5,012,913	)		(5,504,642	)

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	75,306		$	7,635

Prepared without audit.

See notes to condensed consolidated financial statements.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 AND THE PERIOD
AUGUST 29, 2001 (DATE OF INCEPTION) THROUGH MARCH 31, 2011


							August 29, 2001
							(Date of Inception)
	Three Months Ended March 31,						through
	2011			2010			March 31, 2011

REVENUE	$	-		$	163		$	768

COST OF SALES		-			-			-

GROSS PROFIT		-			163			768

OPERATING EXPENSES:
Consulting and outside services		8,479			71,085			2,961,624
Advertising		15,546			-			594,951
Legal services		-			-			952,073
Rent		-			-			514,936
Guaranteed payments		-			-			512,958
Officers' salaries		120,000			195,000			1,495,000
Salaries and wages		-			-			1,192,927
Other operating expenses		131,583			501,084			3,531,386

TOTAL OPERATING EXPENSES		275,608			767,169			11,755,855

LOSS FROM OPERATIONS		(275,608	)		(767,006	)		(11,755,087	)

OTHER INCOME AND (EXPENSES):
Sublease rental income		-			-			55,979
Interest income		-			-			6,768
Change in value of derivative liability		1,162,882			(560,291	)		842,825
Other miscellaneous income (expense)		-			-			106,512
Interest expense		(420,545	)		(43,163	)		(1,699,654	)

TOTAL OTHER INCOME (EXPENSE)		742,337			(603,454	)		(687,570	)

NET INCOME (LOSS)	$	466,729		$	(1,370,460	)	$	(12,442,657	)


Basic and diluted income (loss) per share	$	0.01		$	(0.02	)

Weighted average shares
outstanding (basic and diluted)		58,493,297			56,342,776

Prepared without audit.

See notes to condensed consolidated financial statements.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 AND THE PERIOD
AUGUST 29, 2001 (DATE OF INCEPTION) THROUGH MARCH 31, 2011


							August 29, 2001
							(Date of Inception)
	Three Months Ended March 31,						through
	2011			2010			March 31, 2011

CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)	$	466,729		$	(1,370,460	)	$	(12,442,657	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		980			130			239,592
Loss on disposal of property and equipment		-			-			1,404
Amortization of loan discount		374,650			6,250			767,362
Stock-based compensation		-			288,000			427,090
Change in value of derivative liability		(1,162,882	)		560,291			(842,825	)
Issuance of common stock for loan costs		-			-			110,000
Issuance of warrants for services		-			254,800			254,800
Issuance of warrants as loan costs		-			-			85,734
Issuance of common stock for services		-			-			1,441,222
Gain on settlement of accounts payable		-			-			(23,435	)
(Increase) decrease in:
Advances to Employees		-			-			(1,659	)
Deposits		-			-			(600	)
Increase (decrease) in:
Accounts payable and accrued expenses		70,764			19,320			1,353,456
Accrued officers' salaries		120,000			195,000			1,450,000
Interest payable		44,095			34,985			893,556
Settlement payable		(7,500	)		-			(17,500	)

NET CASH USED IN OPERATING ACTIVITIES		(93,164	)		(11,684	)		(6,304,460	)

CASH FLOW FROM INVESTING ACTIVITES
Acquistion of property and equipment		(7,500	)		(1,166	)		(206,071	)

NET CASH USED IN INVESTING ACTIVITIES		(7,500	)		(1,166	)		(206,071	)

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from shareholder advances		1,350			14,200			1,463,477
Repayments of shareholder advances		(49,534	)		(98,419	)		(2,164,505	)
Proceeds from ICE advance		-			-			50,000
Proceeds from note payable-Legacy Investors		-			-			451,428
Proceeds from note payable-Maricopa Equity Management		-			-			100,000
Proceeds from convertible notes payable, related-party		-			-			1,283,699
Proceeds from note payable, unrelated party		200,000			-			250,000
Proceeds from note payable, convertible, unrelated party		-			-			250,000
Proceeds from notes payable, related-party		25,000			30,000			344,990
Repayments of notes payable, related-party		(15,000	)		(14,779	)		(54,410	)
Proceeds from sale of common stock		-			79,000			4,563,115
Write-off of payable		-			-			35,711

NET CASH PROVIDED BY FINANCING ACTIVITIES		161,816			10,002			6,573,505

NET INCREASE (DECREASE) IN CASH		61,152			(2,848	)		62,974

CASH AT BEGINNING OF THE PERIOD		1,822			6,900			-

CASH AT END OF PERIOD	$	62,974		$	4,052		$	62,974

SUPPLEMENTAL DISCLOSURES
Interest paid in cash	$	1,800		$	1,928		$	53,836

Prepared without audit.

See notes to condensed consolidated financial statements.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

(A DEVELOPMENT STAGE COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010 AND THE PERIOD

AUGUST 29, 2001 (DATE OF INCEPTION) THROUGH MARCH 31, 2011

NON-CASH ACTIVITIES

During the year ended December 31, 2010, the Company entered into a separation agreement with an officer and shareholder of the Company whereby the Company agreed to pay the shareholder $90,000 and the shareholder agreed to forgive the balance due to him, including accrued salaries, of $387,664.

During the year ended December 31, 2009, the Company converted $35,711 owed to an officer into equity.

During the year ended December 31, 2008, the Company issued 1,154,380 shares of common stock for the settlement of $139,945 payable to a related party. As a result the company recorded a gain on settlement of accounts payable of $23,435.

Accrued interest in the amounts of $0, $0 and $158,261 were capitalized to amounts due to officers for the periods ended March 31, 2011 and 2010, and for the period from August 29, 2001 (inception) through March 31, 2011, respectively. Repayments of amounts due to officers includes payments of capitalized interest.

During the year ended December 31, 2005, convertible debt in the amount of $1,098,699 plus the related accrued interest of $39,330 was converted into 998,635 shares of common stock.

Out of the $1,000,000 debentures from Legacy Investors, $106,572 was used to pay loan related fees, and $442,000 remained in an escrow account at December 31, 2004. During the year ended December 31, 2005, the escrow funds were returned to Legacy Investors.

Prepared without audit.

See notes to condensed consolidated financial statements.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE PERIOD AUGUST 29, 2001 (DATE OF INCEPTION) THROUGH MARCH 31, 2011

					Additional
	Common Stock				Paid in			Accumulated
	Shares		Amount		Capital			Deficit			Total
BALANCE, AUGUST 29, 2001
(Date of Inception)		-	$	-	$	-		$	-		$	-
Issuance for cash, 2001		2,066,717		200,833		-			-			200,833
Issuance for cash, 2002		10,703,678		1,040,129		-			-			1,040,129
Net loss		-		-		-			(1,182,273	)		(1,182,273	)

BALANCE, DECEMBER 31, 2002		12,770,395		1,240,962		-			(1,182,273	)		58,689
Issuance for cash, 2003		4,846,930		471,000		-			-			471,000
Net loss		-		-		-			(1,608,882	)		(1,608,882	)

BALANCE, DECEMBER 31, 2003		17,617,325		1,711,962		-			(2,791,155	)		(1,079,193	)
Net loss		-		-		-			(1,058,911	)		(1,058,911	)

BALANCE, DECEMBER 31, 2004		17,617,325		1,711,962		-			(3,850,066	)		(2,138,104	)
Issuance for cash, 2005		561,764		277,000		-			-			277,000
Stock based compensation, 2005		-		-		106,839			-			106,839
Issuance for consideration of loan, 2005		100,000		110,000		-			-			110,000
Conversion of notes payable, 2005		998,635		1,138,029		-			-			1,138,029
Warrants issued in connection with notes payable , 2005		-		-		85,734			-			85,734
Recapitalization of common equity, note 5		1,615,000		-		-			-			-
Net loss		-		-		-			(1,668,498	)		(1,668,498	)

BALANCE, DECEMBER 31, 2005		20,892,724		3,236,991		192,573			(5,518,564	)		(2,089,000	)
Issuance for cash, 2006		803,179		855,600		-			-			855,600
Stock based compensation, 2006		-		-		16,401			-			16,401
Issuance of common stock, 2006		550,000		-		-			-			-
Payment on subscription receivable, 2006		-		428,000		-			-			428,000
Issuance for services, 2006		120,000		-		-			-			-
Net loss		-		-		-			(1,280,821	)		(1,280,821	)

BALANCE, DECEMBER 31, 2006		22,365,903		4,520,591		208,974			(6,799,385	)		(2,069,820	)
Issuance for cash, 2007		5,704,583		714,100		-			-			714,100
Issuance for services, 2007		40,000		10,000		-			-			10,000
Payment on subscription receivable, 2007		-		23,000		-			-			23,000
Issuance of common stock, 2007		166,667		-		-			-			-
Net loss		-		-		-			(788,596	)		(788,596	)

BALANCE, DECEMBER 31, 2007		28,277,153		5,267,691		208,974			(7,587,981	)		(2,111,316	)
Payment on subscriptions receivable, 2008		-		25,000		-			-			25,000
Issuance for cash, 2008		4,387,500		176,000		-			-			176,000
Issuance for services, 2008		15,654,650		1,453,222		-			-			1,453,222
Issuance for settlement of liability, 2008		1,154,380		130,945		-			-			130,945
Loan discount on convertible debt, 2008		-		-		150,000			-			150,000
Derivative liability, 2008		-		-		(222,575	)		-			(222,575	)
Net loss		-		-		-			(1,896,782	)		(1,896,782	)

BALANCE, DECEMBER 31, 2008		49,473,683		7,052,858		136,399			(9,484,763	)		(2,295,506	)
Issuance for cash, 2009		2,325,834		34,925		-			-			34,925
Issuance in conjunction with debt, 2009		4,000,000		137,000		-			-			137,000
Capital contribution from officer, non-cash, 2009		-		-		35,711			-			35,711
Derivative liability, 2009		-		-		(134,110	)		-			(134,110	)
Loan discount on debt, 2009		-		-		53,629			-			53,629
Net loss		-		-		-			(1,135,283	)		(1,135,283	)

BALANCE, DECEMBER 31, 2009		55,799,517		7,224,783		91,629			(10,620,046	)		(3,303,634	)

Issuance for cash, 2010		2,244,891		188,000		-			-			188,000
Issuance for services, 2010		60,000		3,000		-			-			3,000
Derivative liability, 2010		-		-		(1,209,482	)		-			(1,209,482	)
Loan discount on debt, 2010		-		-		250,000			-			250,000
Settlement of liability, 2010		-		-		297,664			-			297,664
Stock-based compensation, 2010		-		-		304,350			-			304,350
Warrants issued for services, 2010		-		-		254,800			-			254,800
Net loss		-		-		-			(2,289,340	)		(2,289,340	)

BALANCE, DECEMBER 31, 2010		58,104,408		7,415,783		(11,039	)		(12,909,386	)		(5,504,642	)

Issuance in conjunction with debt, 2011		1,250,000		-		-			-			-
Loan discount on debt, 2011		-		-		25,000			-			25,000
Net income		-		-		-			466,729			466,729

BALANCE, MARCH 31, 2011		59,354,408	$	7,415,783	$	13,961		$	(12,442,657	)	$	(5,012,913	)

Prepared without audit.

See notes to condensed consolidated financial statements.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

Legacy Card Company was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, the Company converted from a California Limited Liability Company to a Nevada Corporation. On November 10, 2005, the Company merged with Cardiff International, Inc. (“Cardiff”), a publicly held corporation. The purpose of the Company is to develop a co-marketing agreement with a premier national bank to offer an integrated financial program to consumers. Cardiff International, Inc., is a tech company who has developed a proprietary software system to track and manage consumer purchases from unlimited businesses: service companies, retailers, merchants, health industry, insurance industry, most consumer orientated businesses. Our software infrastructure tracks all commissions, rebates, discounts providing the public the ability to track all savings regardless of what program they participate in as long as the program utilizes the Cardiff technology.

The Company will derive its revenues from merchant commissions, interest earned on member’s savings accounts as well as credit card activation fees, commission earned on all transactions, renewal fee and interest earned on revolving credit balances. The Company expects to commence the launch of Mission Tuition in the third quarter 2011.

Interim Financial Statements

The unaudited condensed consolidated financial statements of Cardiff, a development stage company, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim condensed consolidated financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and the results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The balance sheet information as of December 31, 2010 was derived from the audited financial statements included in Form 10K filed July 8, 2011. These interim financial statements should be read in conjunction with that report.

Development Stage Activities

As of March 2011 the Company is testing all development stages of technology to assure it is working properly. Our national initiative is expected to start in third quarter 2011. The Company has been working to develop relationships with several union groups and nine States who are interested in offering the rewards program to their members and residents and Union Mailers are expected to be released in October 2011. All interested States have been notified we were not ready to launch a co-op program with them until sometime after the first of the year. Our Social Media agency was selected and will launch the first week of October to help create awareness at the same time the Union campaign will be launched.

Going Concern

The accompanying financial statements have been prepared on a 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 is in the development stage and as such 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. The accompanying 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. The ability of the Company to continue as a going concern and 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 the development of its credit card business. Should the Company not be able to raise sufficient funds, they may cease their operation.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three (3) months or less to be cash equivalents.

Advertising

Advertising costs are charged to expense when incurred. During the three months ended March 31, 2011 and 2010, the amount charged to expense was $15,546 and $0, respectively. From inception through March 31, 2011, advertising costs was $594,951.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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.

Valuation of Derivative Instruments

FASB ASC 815-10, Derivatives and Hedging, requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date and in accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” to determine whether they would be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes pricing model. At March 31, 2011 and 2010, the Company adjusted its derivative liability to its fair value and reflected the increase (decrease) in fair value of ($1,162,882) and $560,291, respectively, as other income on the Condensed Consolidated Statement of Operations.

Fair Value Measurements

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

Level Input:		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 I, that 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.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table summarizes fair value measurements by level at March 31, 2011 and December 31, 2010 for assets and liabilities measured at fair value on a recurring basis:

	March 31, 2011
	Level 1		Level 2		Level 3		Total
Derivative liability	$	-	$	-	$	1,223,342	$	1,223,342

	December 31, 2010
	Level 1		Level 2		Level 3		Total
Derivative liability	$	-	$	-	$	1,886,224	$	1,886,224

The carrying amounts reported on the balance sheet of cash, accounts payable and other accrued expenses approximate fair value due to their relatively short maturity. The carrying amount of notes payable and amounts due to officer approximate fair value based on prevailing interest rates.

Derivative liability was valued under the Black-Scholes model using the following assumptions at March 31, 2011 and December 31, 2010:

	March 31, 2011	December 31, 2011
Risk free interest rate	0.10% - 2.25%	0.145% - 2.215%
Volatility	100%	100%
Term	0.01 - 4.62 Years	0.01 - 4.58 Years
Dividend yield	0.00%	0.00%

The following is a reconciliation of the value of the derivative liability:

Value at December 31, 2009	$	135,705
Reclassification of financial instrument from equity to liabilities		1,209,482
Increase in value of derivative liability		541,037
Value at December 31, 2010		1,886,224
Reclassification of financial instrument from equity to liabilities		500,000
Decrease in value of derivative liability		(1,162,882	)
Value at March 31, 2011	$	1,223,342

Stock Based Compensation

The Company accounts for stock options in accordance with guidance issued by the FASB using the modified prospective method. Under this method, compensation cost recognized during the periods include: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with guidance issued by the FASB amortized over the options' vesting period, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with guidance issued by the FASB amortized on a straight-line basis over the options' vesting period.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Property and Equipment

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

Classification		Useful Life
Computer equipment		3 Years
Website design		3 Years
Patents and trademarks		15 Years

During the three months ended March 31, 2011and 2010, depreciation and amortization expense was $980 and $130, respectively.

Income Taxes

The Company was treated as a partnership for federal income tax purposes up to April 18, 2005, when it converted to a Nevada Corporation. Consequently, federal income taxes were not payable by, or provided for, the Company. Members were taxed individually on their shares of the Company’s earnings. The Company’s net income or loss was allocated among the members in accordance with the regulations of the Company since April 18, 2005, when the Company was incorporated, the Company accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

Earnings (Loss) per Share

The Company reports its earnings (loss) per share in accordance with guidance issued by the FASB. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.

Principles of Consolidation

The consolidated financial statements include the accounts of Cardiff International, Inc. and its wholly owned subsidiary, Legacy Card Company. All significant intercompany accounts and transactions are eliminated in consolidation.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements” which is intended to enhance the usefulness of fair value measurements by requiring both the disaggregation of the information in certain existing disclosures, as well as the inclusion of more robust disclosures about valuation techniques and inputs to recurring and non-recurring fair value measurements. The amended guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disaggregation requirement for the reconciliation disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 31, 2010 and for interim periods within those years. This ASU did not have a material impact on our consolidated financial statements.

2.	RELATED PARTY TRANSACTIONS

Separation and Release Agreement with Officer

On September 1, 2010, the Company entered into a Separation and Release Agreement with the Gary Teel, the Company’s former CFO. As part of the severance agreement, the Company will pay Mr. Teel $90,000 in 36 monthly installments of $2,500, commencing on September 1, 2010 and the amount due to him of $387,664, including the balance of unpaid accrued salaries at September 1, 2010, which are no longer due. At March 31, 2011 and December 31, 2010, the Company had settlement payable to Gary Teel of $72,500 and $80,000, respectively.

Due to Officer

The Company borrows funds from Daniel Thompson and Gary Teel; both of whom are Shareholders and Officers of the Company. The terms of repayment stipulate the loans are due twenty-four (24) months after the launch of the Legacy Tuition Card (or prior to such date) at an annual interest rate of six (6) percent. However, during 2010, the Company entered into a Separation and Release agreement with Gary Teel, and no amounts were due to him in connection with accrued salaries, advances, and accrued interest beginning September 1, 2010 (see Separation and Release Agreement with Officer). In addition, the Company has an employment agreement with Daniel Thompson (see Employment Agreements). The total balance due to Daniel Thompson for accrued salaries, advances, and accrued interest, at March 31, 2011 and December 31, 2010, was $351,485 and $324,669, respectively.

Employment Agreements

The employment agreements that both Daniel Thompson and Gary Teel have with the Company provides for their compensation to be $25,000 each, per month. Both Daniel Thompson and Gary Teel have waived their right to receive any unpaid balances through September 30, 2008. Effective October 1, 2008, both Daniel Thompson and Gary Teel have cancelled their waiver and the Company has accrued these salaries in accordance with the terms of the employment agreements. Beginning April 2010, Mr. Teel no longer served as the Company’s CFO, and on September 1, 2010, the Company entered into a Separation and Release Agreement with Mr. Teel (see Separation and Release Agreement with Officer). As a result, the Company stopped accruing for his salaries in April 2010. At March 31, 2011 and December 31, 2010, $750,000 and $675,000, has been accrued in connection with Danny Thompson’s employment agreement, respectively. These amounts are included as amounts Due to Officer on the balance sheet.

Accounts Payable- Related Party

At March 31, 2011 and December 31, 2010 the Company had amounts payable to a related party of $165,235 and $183,896, respectively, for professional services rendered.

Notes Payable – Related Party

The Company has entered into several loan agreements with related parties (see note 3).

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

3. NOTES PAYABLE, ESCROW DEPOSIT & LOAN FEES

Legacy Investors, LLC

On August 5, 2004, the Company entered into a loan agreement with Legacy Investors, LLC, a Florida limited liability company. The initial loan amount of $1,000,000 (the “Initial Loan Amount”) was made by Legacy Investors, LLC upon the satisfaction of the post-closing covenant, comprised of a convertible debenture in the amount of $500,000 and an initial debenture for the amount of $500,000. Legacy Investors, LLC required funds to be deposited into an escrow account. Disbursements were required to be from an escrow agent. The convertible debenture and initial debentures bear interest at 10.00% per year and matured in August 2006. The indebtedness was convertible into Series A Preferred Membership interests of the Company. This loan is secured by all assets of the Company.

During 2004, Legacy Card Company received $451,428, assumed $106,572 of fees, and the balance of $442,000 was deposited in an escrow account. In May 2005, $382,000 was paid back to Legacy Investors, LLC and $60,000 of fees was left with the escrow agent. During 2008, an additional $100,000 was repaid by an officer on behalf of the Company. The balance on the note payable was $518,000 at March 31, 2011 and December 31, 2010, of which a portion is convertible into shares of the Company’s common stock.

Under an event of default, the interest rate on both debentures increases to 18% and the terms of repayment and the maturity dates are subject to change. The Company is in default under the terms of the loan agreement as of March 31, 2011 and continues to accrue interest on the outstanding principal balance.

Maricopa Equity Management Corporation

On October 27, 2005, the Company entered into a loan agreement in the amount of $100,000 with Maricopa Equity Management Corporation. The loan bears interest at 8% per annum and became due at the closing of the merger with Cardiff International, Inc. In connection with the loan, the Company issued 100,000 shares of common stock in 2005. The balance on the loan was $100,000 at March 31, 2011 and December 31, 2010. At March 31, 2010, the Company was in default on this loan agreement.

International Card Establishment, Inc.

The Company entered into an agreement with International Card Establishment, Inc. (“ICE”) on April 19, 2007 whereby ICE will be the exclusive provider for the rewards and loyalty programs related to merchant contributions to a 529 College Savings Plan.

In connection with the agreement, the Company received a $50,000 advance from ICE during the second quarter of 2008. This advance is to be repaid within 120 days of written notice by ICE if the Company launches the card in a test market and the results of that test launch prove to be unsuccessful. If the Company fails to make the required payment within 120 days, the Company will be granted an additional 30 day period to remedy the default. If the Company does not remedy the default within this 30 day period, ICE may, at its discretion, convert the $50,000 debt to equity equaling 10% of the outstanding stock of the Company on a fully diluted basis.

Also, if ICE determines that the test launch was successful, ICE shall obtain up to three (3) $500,000 loan facilities for the Company within five (5) business days of the successful completion of the test launch. The Company will be required to repay the $50,000 advance directly from the loan proceeds. Upon receipt of each of the $500,000 loan facilities, the Company shall issue ICE a warrant to purchase three and one-third percent (3 1/3%) of the Company’s outstanding common stock on a fully diluted basis as of the date of issuance. Each warrant shall have an exercise price equal to $200,000 and shall have a five (5) year term from the issuance date.

All warrants will have a cashless exercise provision and shall entitle ICE to one (1) demand registration right for each warrant, at the Company’s expense.

The balance outstanding on the advance from ICE at March 31, 2011 and December 31, 2010 was $50,000.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note Payable – Unrelated Party

On June 2, 2009, the Company entered into a Loan Agreement with an unrelated party for $50,000. The note is non-interest bearing and matured on September 2, 2009. In conjunction with the Loan, the Company issued 1,500,000 warrants to purchase its common stock, exercisable at $0.20 per share and expire June 2, 2014. As a result of the warrants issued, the Company recorded $13,639 debt discount during 2009. The Company is in default on this Preferred Debenture and as of October 28, 2011, the warrants have not been exercised.

On February 8, 2011, the Company entered into an unsecured Promissory Note agreement with an unrelated party for $200,000. The Note bears interest at 8% per year and matures on February 8, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 10,000,000 shares of its common stock to the lender. As a result of the shares issued with the Note, the Company recorded a $200,000 debt discount during 2011. As of October 27, 2011, the Company has not distributed these shares to the lender due to the fact that the Company does not have enough authorized shares to fulfill this issuance, therefore these shares are not in equity and have been included in the calculation of the derivative liability at March 31, 2011.

Convertible Note Payable – Unrelated Party

On June 3, 2010, the Company entered into an unsecured Convertible Promissory Note agreement with an unrelated party for $250,000. The Note bears interest at 8% per year and matures on June 3, 2011. The Note is convertible into the Company’s common shares at $0.08 per share. In conjunction with this loan, the Company issued warrants to purchase 5,000,000 shares of its common stock, exercisable at $0.08 per share, which expires on June 3, 2015. As a result of issued warrants, the Company recorded a $250,000 debt discount during 2009. Subsequent to the quarter-ended March 31, 2011, the Company is in default on this Note, and as of October 28, 2011, the warrants have not been exercised.

Convertible Note Payable – Related Party

On April 21, 2008, the Company entered into a Convertible Debenture with a shareholder in the amount of $150,000. The Debenture is convertible into common shares of the Company at $0.03 per share at the option of the holder no earlier than August 21, 2008. The Debenture bears interest at 12% per year, matures in August 2009, and is unsecured. All principal and unpaid accrued interest is due at maturity. In conjunction with the Convertible Debenture, the company also issued warrants to purchase 5,000,000 shares of the Company’s common stock at $0.03 per share. The warrants expire on April 20, 2013. As a result of issued warrants, the Company recorded a $150,000 debt discount during 2008. The Company is in default on this Convertible Debenture and, as of October 28, 2011, the warrants have not been exercised.

On March 11, 2009, the Company entered into a Convertible Debenture with a shareholder in the amount of $15,000. The Debenture is convertible into common shares of the Company at $0.03 per share at the option of the holder. The Debenture bears interest at 12% per year, matures March 11, 2014, and is unsecured. All principal and unpaid accrued interest is due at maturity.

On April 29, 2009, the Company entered into an unsecured Convertible Debenture agreement with a shareholder in the amount of $35,000. The Debenture is convertible into common shares of the Company at $0.08 per share at the option of the holder no earlier than August 21, 2009. The Debenture bears interest at 12% per year, matures on April 29, 2011, and is unsecured. All principal and unpaid accrued interest is due at maturity. Subsequent to the quarter-ended March 31, 2011, the Company is in default on this Convertible Debenture.

Note Payable – Related Party

On March 12, 2009, the Company entered into a Preferred Debenture agreement with a shareholder for $20,000. The note bears interest at 12% per year and matures 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 expire March 12, 2014. As a result of the warrants issued, the Company recorded a $20,000 debt discount during 2009. 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 is due to pay annual principal payments of $5,000 plus accrued interest beginning March 12, 2012. As of October 28, 2011 the warrants have not been exercised.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

On April 27, 2009, the Company entered into a Preferred Debenture agreement with a shareholder for $20,000. The note bears interest at 12% per year and matured on October 27, 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 expire on April 27, 2014. As a result of the warrants issued, the Company recorded a $19,990 during 2009. The Company assigned all of its receivables from consumer activations of the rewards program as collateral on this debenture. The Company is in default on this Preferred Debenture and. As of October 28, 2011, the warrants have not been exercised.

On May 27, 2009, the Company entered into an unsecured Promissory Note with a shareholder for $15,000. The Note bears interest at 10% per year and matured on August 26, 2009. In conjunction with the Note, the Company issued 1,500,000 shares of its common stock to the lender. As of December 31, 2010, the Company is in default on this promissory note, however, during April 2011, the Company repaid the principal and interest balance due under this Note.

On October 8, 2009, the Company entered into a Preferred Debenture agreement with an individual who is a shareholder and employee of the Company for $250,000. The Debenture bears interest at 7% per year and matures on October 1, 2014, and is unsecured. Monthly interest-only payments are due from November 1, 2009 through October 1, 2014. The principal and interest balances are due upon maturity, however, prepayments are allowed. As of March 31, 2011 and December 31, 2010, the balance of this note was $200,590 and $210,590, respectively. In conjunction with the Debenture, the Company will issue 2,500,000 shares of its common stock to this lender, to be distributed at 500,000 shares per year for five years commencing October 1, 2009. As of October 28, 2011, the Company has distributed 500,000 shares and is due to distribute the remaining 2,000,000 shares of its common stock to the lender.

On March 10, 2011, the Company entered into a Promissory Note agreement with a shareholder for $25,000. The Note bears interest at 8% per year and matures on March 10, 2015. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 1,250,000 shares of its common stock to the lender. As a result of the issuance of these shares, the Company recorded a debt discount of $25,000 during 2011.

Future minimum payments due under these notes payable are as follows for the 12-months ending March 31,:

			Unrelated
	Related Parties		Parties		Total
2012	$	224,990	$	968,000	$	1,192,990
2013		5,000		-		5,000
2014		20,000		-		20,000
2015		200,590		-		200,590
2016		25,000		200,000		225,000
Thereafter		-		-		-
		475,580		1,168,000		1,643,580
Less loan discount		112,200		236,067		348,267
Net loan balance	$	363,380	$	931,933	$	1,295,313

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

4. COMMITMENTS AND CONTINGENCIES

Operating Leases

Rent expense for the three months ended March 31, 2011 and 2010 was $0 and $0, respectively. From inception through March 31, 2011, rent expense was $514,936.

Payroll Taxes

The Company has failed to remit payroll tax payments since 2006, as required by various taxing authorities. When payment is ultimately made management believes that the Company will be assessed various penalties for the delayed payments. As of March 31, 2011, management was unable to estimate the amount of penalties that the Company would incur as a result of these unpaid taxes.

Cash Deposits

The Company maintains its cash at a financial institution which may at times exceed federally insured limits. The Company had no uninsured deposits as of March 31, 2011.

Employment Agreement

On October 8, 2009, the Company entered into a five-year Employment Agreement for the Company’s new President. The employment agreement calls for a salary of $180,000 per year. In conjunction with the employment agreement, the Company granted stock options for 2,500,000 shares of its common stock with an option price of $0.10 per share. The options vest on the anniversary date of the Employment Agreement at a rate of 500,000 shares each year for five years. Accrued unpaid salaries for this employee at March 31, 2011 and December 31, 2010 were $225,000 and $180,000, respectively.

The Company has employment agreements with their CEO and former CFO during 2010 and 2011 (see note 2).

5. RECAPITALIZATION

In November 2005, Legacy Card consummated a transaction, pursuant to which Cardiff International, Inc. acquired all the outstanding shares of Legacy Card, with Legacy Card surviving as a wholly-owned subsidiary of Cardiff International. Legacy Card recorded this transaction as a recapitalization followed by the issuance of shares to the shareholders of Cardiff International. Prior to the recapitalization transaction, Cardiff International was not an operating company, and had no assets. Under the terms of the transaction, Cardiff International issued 18,000,000 shares of Cardiff International common stock to the former shareholders of Legacy Card in exchange for all the outstanding shares of Legacy Card.

6. INCOME TAXES

At March 31, 2011, the Company has net operating loss carryforwards available for federal tax purposes. Because of statutory “ownership changes” the amount of net operating losses which may be utilized in future years are subject to significant annual limitations. The Company also has operating loss carryforwards available for state tax purposes. As of March 31, 2011 management is still determining the amount of net operating loss carryforwards that are available to offset federal and state taxable income and their respective expiration dates.

As of March 31, 2011 and December 31, 2010, total deferred income tax assets consist principally of net operating loss carryforwards which have been fully reduced by a valuation allowance due to the uncertainty surrounding their ultimate realization.

The Company has adopted guidance issued by the Financial Accounting Standards Board (“FASB”) that clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. There were no interest and penalties for the three months ended March 31, 2011 and 2010. The Company files income tax returns with the Internal Revenue Service (“IRS”) and various states. For jurisdictions in which tax filings are prepared, the Company is no longer subject to income tax examinations by state tax authorities for tax years through 2005, and by the IRS for tax years through 2006. The Company’s net operating loss carryforwards are subject to IRS examination until they are fully utilized and such tax years are closed. As of March 31, 2011 the Company has not filed all statutory filings.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

7. STOCK OPTIONS AND WARRANTS

Stock Options

Stock based compensation expense related to an employee for the three months ended March 31, 2011 and 2010 amounted to $0 and $288,000, respectively, and $427,090 from August 1, 2001(date of inception) through March 31, 2011.

The following is a schedule summarizing stock option activity for the year ended December 31, 2010 and three months ended March 31, 2011:

	Number of		Exercise
	Options		Price
Outstanding at January 1, 2010		2,925,000	$	0.28
Granted		3,000,000		0.08
Exercised		-		-
Forfeited		-		-
Outstanding at December 31, 2010		5,925,000		0.18
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding at March 31, 2011		5,925,000	$	0.18
Exercisable at March 31, 2011		3,925,000	$	0.22

As of March 31, 2011, the total unrecognized fair value compensation cost related to non-vested stock options was $65,400 which is expected to be recognized over 3.52 years.

Information about stock options outstanding at March 31, 2011 is summarized below:

				Weighted-	Weighted-				Weighted-
				Average	Average				Average
				Remaining	Exercise Price of				Exercise Price of
Exercise Price		Shares Outstanding		Contractual Life	Shares Outstanding		Shares Exercisable		Shares Exercisable

$	1.25		325,000	0.75 years	$	1.25		325,000	$	1.25
$	1.75		100,000	0.75 years	$	1.75		100,000	$	1.75
$	0.10		2,500,000	3.50 years	$	0.10		500,000	$	0.10
$	0.08		3,000,000	3.85 years	$	0.08		3,000,000	$	0.08

			5,925,000					3,925,000

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Warrants

The Company also issued warrants to purchase shares of common stock. As of March 31, 2011, the Company has approximately 32,081,612 warrants outstanding with exercise prices ranging from $0.01 per share to $1.75 per share. These warrants expire through October 2015.

The following table summarizes information about warrants outstanding at March 31, 2011:

		Weighted-
		Average
Exercise	Number of	Remaining
Prices	Warrants	Life

$0.01 - $0.15	25,631,613	2.97 years
$0.20 - $0.50	6,263,334	2.42 years
$1.10 - $1.75	186,665	1.02 years
Total warrants outstanding:	32,081,612

8. SUBSEQUENT EVENTS

Notes Payable

On May 10, 2011, the Company entered into a Promissory Note agreement with an unrelated party for $25,000. The Note bears interest at 8% per year and matures on May 10, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 1,250,000 shares of its common stock to the lender.

During July 2011, the Company entered into a Promissory Note agreement with a related party for $50,000. The Note bears interest at 8% per year and matures on May 16, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 3,500,000 shares of its common stock to the lender.

On August 22, 2011, the Company entered into two separate Promissory Note agreements with unrelated parties for $5,000 each. Both notes bear interest at 8% per year and mature on September 22, 2011. Interest is payable annually on the anniversary of the Notes, and the principal and any unpaid interest will be due upon maturity. In conjunction with these Notes, the Company issued options to each of the note Holders for 100,000 shares of its common stock..

On September 7, 2011, the Company entered into a Promissory Note agreement with a related party for $50,000. The Note bears interest at 8% per year and matures on September 7, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 2,500,000 shares of its common stock to the lender.

On October 1, 2011, the Company entered into a Promissory Note agreement with an unrelated party for $25,000. The Note bears interest at 8% per year and matures on October 1, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 1,250,000 shares of its common stock to the lender.

Employment Agreement

On June 1, 2011, the Company entered into a five-year Employment Agreement for the Company’s new Chief Operating Officer. The employment agreement calls for a salary of $240,000 per year. In conjunction with the employment agreement, the Company granted stock options for 2,500,000 shares of its common stock with an option price of $0.10 per share. The options vest at a rate of 500,000 shares each year for five years. In addition, the Company issued 2,500,000 shares of the Company’s common stock. These shares vest at a rate of 500,000 shares each year for five years.

CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Issuance of Common Stock

The Company received $36,000 in exchange for 720,000 shares of common stock from April 1, 2011 through October 28, 2011. The Company issued 360,000 warrants in conjunction with the sale of these common shares.

The Company granted 8,500,000 shares of common stock from April 1, 2011 through October 28, 2011 as part of four financing agreements. As of October 28, 2011, 6,500,000 shares were due to be issued.

Total shares of common stock granted from April 1, 2011 through October 28, 2011 totaled 9,220,000. At October 28, 2011, there were 6,500,000 shares due to be issued.

On April 21, 2011, 8,275,000 shares of the Company’s common stock were returned and cancelled.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements including the related notes, and the other financial information included in this report. For ease of reference, “we,” “us” or “our” refer to Cardiff International, Inc., and Legacy Card Company, Inc. unless otherwise stated.

Cautionary Statement Concerning Forward-Looking Information

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

Operating History. We have not commenced active business operations. We anticipate we will commence active operations during the third quarter of 2011. Potential investors should be aware that there is only a limited basis upon which to evaluate our prospects for achieving our intended business objectives. We have limited resources and have had no revenues since our formation.

Possibility of Total Loss of Investment. An investment in Cardiff is a high risk investment, and should not be made unless the investor has no need for current income from the invested funds and unless the investor can afford a total loss of his or her investment.

Additional Financing Requirements. We will likely be required to seek additional financing in order to fund our operations and carry out our business plan. In order to fund our operations and effect additional acquisitions, we will be required to obtain additional capital. There can be no assurance that such financing will be available on acceptable terms, or at all. We do not have any arrangements with any bank or financial institution to secure additional financing and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our best interest.

No Public Market for Securities. There is no active public market for our common stock and we can give no assurance that an active market will develop, or if developed, that it will be sustained.

Auditor’s Opinion has a Going Concern Qualification. Our auditor’s report dated July 6, 2011, for the years ended December 31, 2010 and 2009 and from August 29, 2001 (date of inception) through December 31, 2010 includes a going concern qualification which states that our significant recurring operating losses and negative working capital raise substantial doubt about our ability to continue as a going concern.

We do not anticipate paying any dividends and any gains from your investment in our stock will have to come from increases in the price of such stock. We currently intend to retain any future earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future.

We Operate in a Limited Market. The Educational Rewards program is one of three national programs available to families. We cannot guarantee that we will compete successfully against our potential competitors, especially those with significantly greater financial resources or brand name recognition.

Overview

Cardiff International, Inc. (“Cardiff”), acquired Legacy Card Company, Inc. (“Legacy”) in a merger transaction in November 2005. The transaction was accounted for as a reverse merger transaction whereby Legacy, although a subsidiary of Cardiff, was deemed to be the surviving entity for accounting purposes. In January 2006, Cardiff changed its fiscal year end to December 31st from September 30th to have the same year end as Legacy.

Cardiff International, Inc., a tech company who has developed a proprietary software system to track and manage consumer purchases from unlimited businesses: service companies, retailers, merchants, health industry, insurance industry, most consumer orientated businesses. Our software infrastructure tracks all commissions, rebates, discounts providing the public the ability to track all savings regardless of what program they participate in as long as the program utilizes the Cardiff technology.

Cardiff’s first national program will be ready to launch during the third quarter 2011 is “Mission Tuition” a rewards program that helps solve a real need for families – saving for education. The Mission Tuition program is easy to understand and use, and is emotionally positioned to appeal to all consumers. The Mission Tuition Rewards program will become the rewards program of preference for every day spending for families with young children.

The program leverages the two biggest economic forces in society – consumer spending and consumer savings –to create the most unique value-added rewards program in decades.

The potential success of the Mission Tuition program involves the participation of three groups: (i) Cardiff as the marketer, (ii) The merchant coalition, (iii) the member. As a result of our merchant coalition and cash rebate program we expect that the member will become loyal customers of the coalition merchants and participating banks.

Participating merchants will provide both a member discount and a cash rebate on total purchases between 1% to 30% to our member’s educational savings account. The retailer contribution can be supplemented by additional cash rebates by using the Mission Tuition MasterCard. This issuing bank contribution is applicable no matter where the cardholder shops, therefore encouraging regular and daily usage of the Mission Tuition MasterCard.

The Mission Tuition program is expected to launch during the third quarter 2011.

The auditors’ report for the years ended December 31, 2010 and 2009 include a going concern qualification.

Liquidity and Capital Resources

At MARCH 31, 2011

Since inception, the principal sources of cash have been funds raised from the sale of common stock, advances from shareholders, and loans in the form of debentures and convertible notes. At March 31, 2011, we had $62,974 of cash and cash equivalents and total assets amounted to $75,306. At December 31, 2010 we had $1.82 cash and cash equivalents, and total assets amounted to $75,635, which include fixed assets and other assets.

Net cash used in operating activities was $93,164 and $11,684 for the three months ended March 31, 2011 and 2010, respectively. The increase in the amount of net cash used in operating activities during the period ended March 31, 2011 compared to the same period last year was attributable to the gain resulting from the change in value of derivative liability of $1,162,882 for the three months ended March 31, 2011, compared to the loss resulting from the change in value of derivative liability of $560,291 for the same period last year. In addition to the impact of the change in value of derivative liability, the current period net income was primarily offset by the following additional non-cash transactions: an increase in accrued officers’ salaries of $120,000, interest payable of $44,095, accounts payable $70,764 and amortization of loan costs of $374,650.

Net cash provided by financing activities was $161,816 and $10,002 for the three months ended March 31, 2011 and 2010, respectively. The cash flows from financing activities during the three months ended March 31, 2011 was attributable to proceeds from notes payable from related parties and unrelated parties of $225,000 which was offset by repayments on notes payable from related parties of $15,000. In addition, we repaid $49,534 of amounts due to officer and received $1,350 in officer advances during the three months ended March 31, 2011.

Net cash used in investing activities was $7,500 and $1,166, for the three months ended March 31, 2011 and 2010, respectively. This was a result of the Company acquiring property and equipment during these periods.

We have incurred operating losses since inception and at March 31, 2011, we had an accumulated deficit of $12,442,657.

Current liabilities at March 31, 2011 consisted primarily of accounts payable and accrued expenses of $763,724, accounts payable to related party of $165,235, accrued officer’s salaries of $225,000, payroll tax payable of $301,423, settlement payable of $22,500, derivative liability of $1,223,342, amounts due to officer of $351,485, convertible and non-convertible promissory notes, net of discount, in the amount of $1,151,323, and accrued interest in the amount of $ 690,197. Current liabilities at December 31, 2010 consisted primarily of accounts payable and accrued expenses of $683,859, accounts payable to related party of $183,896, accrued officer’s salaries of $180,000, payroll tax payable of $291,863, settlement payable of $30,000, derivative liability of $1,886,224, amounts due to officers of $324,669, convertible and non-convertible notes, net of discount, in the amount of $1,053,823, and accrued interest in the amount of $646,102.

There can be no assurance that we will be able to obtain sufficient capital from debt or equity transactions or from operations in the necessary time frame or on terms acceptable to us. Should we be unable to raise sufficient funds, we may be required to curtail our operating plans and possibly relinquish rights to portions of our technology or products. In addition, increases in expenses or delays in product development may adversely impact our cash position and may require cost reductions. No assurance can be given that we will be able to operate profitably on a consistent basis, or at all, in the future.

In order to continue our operations, development of our products, and implementation of our business plan, we need additional financing. We are currently attempting to obtain additional working capital in a term loan transaction. Additionally, we anticipate that our credit card will be launched in the third quarter of 2011 thereby commencing the generation of revenues shortly thereafter. In addition, we also anticipate that we will continue to operate at a loss for the foreseeable future.

Results of Operations

For the Quarters Ended March 31, 2011 and 2010

We had operating revenues in the amount of $0 and $163 for the three months ended March 31, 2011 and 2010, respectively.

We had operating expenses of $275,608 and $767,169, for the three months ended March 31, 2011 and 2010, respectively, representing a decrease of $491,561. The decrease was primarily due to decreases in officers’ salaries of $75,000, consulting and outside services of $62,606, and stock based compensation of $ 288,000.

We had a net income of $466,729, for the three months ended March 31, 2011 compared to a net loss of $ 1,370,460 for the three months March 31, 2010, representing an increase of $1,837,189. The increase was primarily due to a gain from the decrease in value of the derivative liability during the three months ended March 31, 2011.

Inflation

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

Plan of Operation

Our current business plan is described in “Item 1 - Description of Business” of Form 10-K for the year ended December 31, 2010.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. Our actual results may differ from these estimates.

We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different results when using different assumptions. We have discussed these critical accounting estimates, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein with the audit committee of our Board of Directors. We believe our accounting policies specific to share-based compensation expense and estimation of the fair value of derivative liability involve our most significant judgments and estimates that are material to our consolidated financial statements. They are discussed further below.

Derivative Liability

We have issued warrants of our common stock, and the amended these warrants. The warrant agreements include provisions that require us to record them as a liability, at fair value, pursuant to FASB accounting rules, including the requirement to deliver registered shares upon exercise, which is considered outside of our control. The warrant liabilities are marked-to-market each reporting period and changes in fair value are recorded as a non-operating gain or loss in our statement of operations, until they are completely settled or expire. The fair value of the warrants is determined each reporting period using the Black-Scholes option pricing model, and is affected by changes in inputs to that model including our stock price, expected stock price volatility, interest rates and expected term.

The change in fair value of the derivative liability amounted to a gain of $1,162,882 and a loss of $560,291 for the three months ended March, 31, 2011 and 2010, respectively. The gain resulted mainly from a decrease in the Company’s stock price. We will continue to re-measure the derivative liability at fair value each quarter-end until they are completely settled or expire.

Share-based compensation expense

We account for the issuance of stock, stock options and warrants for services from employees and non-employees based on an estimate of the fair value of options and warrants issued using the Black-Scholes pricing model. This model’s calculations include the exercise price, the market price of shares on grant date, weighted average assumptions for risk-free interest rates, expected life of the option or warrant, expected volatility of our stock and expected dividend yield.

The amounts recorded in the financial statements for share-based expense could vary significantly if we were to use different assumptions. For example, the assumptions we have made for the expected volatility of our stock price have been based on the historical volatility of our stock, measured over a period generally commensurate with the expected term. If we were to use a different volatility than the actual volatility of our stock price, there may be a significant variance in the amounts of share-based compensation expense from the amounts reported.

Off Balance Sheet Arrangements

As of March 31, 2011, we had no off balance sheet arrangements.

Recent Accounting Pronouncements

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

(a)

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,+ summarized, and reported within the required time periods, and that such information is accumulated and communicated to our management, including our Chairman, Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure.

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Since the most recent evaluation date, there have been no significant changes in our internal control structure, policies, and procedures or in other areas that could significantly affect our internal control over financial reporting.

(b) Changes in Internal Controls

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There have been no events under any bankruptcy act, any criminal proceedings and any judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the last five years.

Item 1A. Risk Factors

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

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

	31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2 Certification by the President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1 Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2 Certification by the President pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

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

Dated: October 31, 2011	CARDIFF INTERNATIONAL, INC.

	By /s/ Daniel Thompson
	Chief Executive Officer

Cardiff Lexington Corp - FORM 10-Q - November 1, 2011

Attached files

Cardiff Lexington Corp Reports