UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)4

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

Commission File Number 000-49709

 

 

CARDIFF INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

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

 

411 N New River Drive E, Unit 2202, Ft. Lauderdale, FL 33301

(Address of principal executive offices)

 

(818) 783-2100 (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: Par Value $0.001 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 November 14, 2014, 4,727,873 shares of $0.001 par value Common Stock.

 

 

FORM 10-Q

 

CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

CARDIFF INTERNATIONAL, INC.

 

For the Quarter September 30, 2014

 

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

 

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements:
	Condensed Balance Sheets	3
	Condensed Statements of Operations	4
	Condensed Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6– 18
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 4.	Controls and Procedures, Evaluation of Disclosure Controls and Procedures	22
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 5.	Other Information	23
Item 6.	Exhibits	23

 

 

Part I – Financial Information

 

Item 1. Financial Statements

 

CARDIFF INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30,				December 31,
		2014				2013
		(Unaudited)
ASSETS
Current assets
Cash		$	91,045			$	4,676
Accounts receivable			954				–
Prepaid and other (See Note 1)			34,392				1,659
Total current assets			126,391				6,935
Property and equipment			631,049				–
Land			603,000				–
Goodwill			1,668,621				–
Deposits			600				600
Total Assets		$	3,029,661			$	6,935
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accounts Payable and accrued expenses		$	761,303			$	814,265
Interest payable			140,974				121,440
Accrued payroll taxes			439,623				412,623
Deferred revenue			11,760				–
Derivative liability			48,779				97,390
Due to officers and shareholders			408,160				49,500
Notes Payable, unrelated party			50,000				50,000
Convertible notes payable			174,000				195,750
Notes Payable acquired - current portion			23,000				–
Total current liabilities			2,057,599				1,740,968
Long-Term Liabilities
Notes payable acquired - long-term portion			91,218				–
Notes payable, related-party, net of current portion and discount $113,500 and $125,000 respectively			77,175				74,925
Total liabilities			2,225,992				1,815,893
SHAREHOLDERS' EQUITY (DEFICIENCY)
Series A Preferred			–				–
Series B Preferred			11,599,096				11,324,471
Series C Preferred			13,509				13,500
Series D Preferred			1,000,000				–
Series E Preferred			603,000				–
Series F Preferred			700,174				–
Series F-1 Preferred			379,826				–
Common stock; 5,000,000 shares authorized with $0.001 par value; 101,673 and 82,777 issued and outstanding at September 30, 2014 and December 31, 2013, respectively			11,319,463				11,283,603
Additional paid-in capital			1,700,214				1,700,214
Retained deficit			(26,511,613	)			(26,130,747	)
Total shareholders' equity (deficiency)			803,669				(1,808,959	)
Total liabilities and shareholders' equity (deficiency)		$	3,029,661			$	6,935

 

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

 

 

CARDIFF INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

                     

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
REVENUE		$	421,450			$	–			$	428,285			$	–
COST OF SALES			304,004				–				314,095				–
GROSS MARGIN			117,446				–				114,190				–
OPERATING EXPENSES			343,186				156,764				650,410				478,807
LOSS FROM OPERATIONS			(225,740	)			(156,764	)			(536,220	)			(478,807	)
OTHER INCOME (EXPENSE)
Gain on settlement of debt			152,188				–				152,188				–
Change in value of derivative liability			–				656				48,613				40,640
Other			1,852				–				1,852				–
Interest expense			(16,054	)			(77,667	)			(47,299	)			(448,023	)
TOTAL OTHER INCOME (EXPENSE)			137,986				(77,011	)			155,354				(407,383	)
NET INCOME (LOSS) FOR THE PERIOD		$	(87,754	)		$	(233,775	)		$	(380,866	)		$	(886,190	)
INCOME (LOSS) PER COMMON SHARE
-BASIC		$	(0.87	)		$	(30.99	)		$	(3.94	)		$	(128.08	)
-DILUTED		$	(0.87	)		$	(30.99	)		$	(3.94	)		$	(128.08	)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES - BASIC AND DILUTED			100,673				7,543				96,618				6,919

 

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

 

 

CARDIFF INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

             

		Nine Months Ended September  30,
		2014				2013
OPERATING ACTIVITIES
Net income (loss)		$	(380,866	)		$	(886,190	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			18,519				155
Amortization of loan discount			17,250				86,251
Change in value of derivative liability			(48,612	)			(40,640	)
Issuance of warrants as loan costs			–				213,800
Gain on settlement of accounts payable			(152,188	)			–
(Increase) decrease in:
Accounts receivable			(928	)			–
Prepaids and other			(7,294	)			–
Increase (decrease) in:
Accounts payable and accrued expenses			45,267				50,800
Accrued officers' salaries			289,700				264,278
Interest payable			29,805				147,974
Deferred Revenue			4,419				–
Settlement payable, shareholder			–				(3,250	)
Net cash used in operating activities			(184,928	)			(166,822	)
INVESTING ACTIVITIES
Investment in fixed assets			(84,337	)			–
Cash acquired in acquisitions			1,619				–
Net cash used in investing activities			(82,718	)			–
FINANCING ACTIVITIES
Advances from third parties			–				70,000
Proceeds of notes payable, net of repayments			14,382				–
Proceeds from sale of common stock			–				107,750
Proceeds from sale of preferred stock			339,633				–
Net cash provided by financing activities			354,015				177,750
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			86,369				10,928
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD			4,676				1,852
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	91,045			$	12,780
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	–			$	–
Cash paid for taxes		$	–			$	–
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Series D Preferred shares issued for acquisition		$	1,000,000			$	–
Series E Preferred shares issued for acquisition		$	603,000			$	–
Series F & F-1 Preferred shares issued for acquisition		$	1,000,000			$	–
Common stock issued upon conversion of notes payable		$	30,750			$	65,874

 

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

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

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. In first quarter of 2013, it was decided to restructure Cardiff into a new holding company who adopted a new business model known as "Collaborative Governance" a new form of governance enabling businesses to take advantage of the power of a public Company. Targeting the acquisition of undervalued, niche companies with high growth potential, income-producing commercial real estate properties and high return investments, all designed to pay a dividend to our shareholders. The reason for this was to protect our shareholders by acquiring small to minimum size businesses seeking support with both financing and management. The plan was to establish new classes of Preferred stock to streamline voting rights, negate debt and acquire new businesses. By December of 2013 the Company negated 90% plus of all debt; by July of 2014 the Company acquired four businesses, Mission Tuition, We Three, LLC; Romeo’s NY Pizza; and Edge View Properties, Inc.

 

Description of Business

 

Cardiff is a holding company who adopted a new business model known as "Collaborative Governance.” To date, we are not aware of any other holding company using the same business philosophy or governing policies. Our business footprint is to acquire strong companies that meet the following criteria: (1) in business for a minimum of 2 years; (2) profitable; (3) good management team; (4) little to no debt; (5) assets of a minimum of $1,000,000. Cardiff continues to practice all business ethics under the (1934 Act) and acknowledges there are approximately 43 plus successful Business Development Companies (1040 Act) all who may be considered competition to Cardiff that are established and available to the public for investment. These Companies offer experienced management; dividends and financial security.

 

To date Cardiff consist of four (4) subsidiaries; Legacy Card Company, We Three,LLC, Romeo’s NY Pizza and Edge View Properties.

 

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, 2013 was derived from the audited financial statements included in Form 10K filed with the Securities and Exchange Commission. These interim financial statements should be read in conjunction with that report.

 

Prepaid and Other

This disclosure is not explicitly required by the FRF for SMEs accounting framework. However, as the FRF for SMEs framework is principles based, it requires the presentation of sufficient information for a fair presentation. As such, management of Cardiff International, Inc. has decided to include this disclosure in the financial statements as necessary to provide sufficient information to the financial statement users. The $34,392 Prepaid & Others represents the amount collected by the Company as of 09/30/2014; total due the Company on these current lease contracts is $557,080. These mobile homes will be amortized over a 6 and ½ years.

  

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. As of September 30, 2014, the Company had a shareholders’ equity of $803,669, is delinquent in payment of $439,623 in payroll taxes, and is in default of a minor amount of its outstanding debt. 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. As a result, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2013 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

 

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 new acquisitions for the Company. 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. 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 the Company not be able to raise sufficient funds, it may cease their operations.

 

Stock Split

On August 22, 2014, the Company upon filing Articles of Domestication with the state of Florida on August 22, 2014 the Board authorized and approved a reverse stock split of one for twenty five thousand (1:25,000) of the Corporation's total issued, outstanding and authorized shares of common stock (the “Stock Split”).

 

The change in domicile was effectuated on September 2, 2014 under the laws of the state of Florida. The Stock Split was effectuated on September 12, 2014 upon filing the appropriate documentation with FINRA. The Stock Split decreased the Corporation's total issued and outstanding shares of common stock from 2,516,819,560 to 100,673 and the total authorized shares of Common Stock from 3,000,000,000 to 120,000 shares of common stock. The common stock remained at $0.00001 par value. On September 15, 2014 the Company raised the authorizes shares of common stock to 5,000,000 and increased the par value to $0.001.

 

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 to determine whether they would be considered a derivative liability and measured at their fair value for accounting purposes. Prior to July 12, 2012, the Company did not have enough authorized shares to issue common shares resulting in the potential exercise or conversion of its issued and outstanding options/warrants and convertible notes, respectively. Accordingly, these instruments were reflected as derivative liabilities for the period ended September 30, 2014 and prior. In determining the appropriate fair value, the Company uses a weighted average Black-Scholes pricing model. At September 30, 2014 and 2013, the Company adjusted its derivative liability to its fair value and reflected the increase (decrease) in fair value for the nine months ended September 30, 2014 and 2013, of $48,613 and $(39,984), 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 1, 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.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2014.

 

		Level 1				Level 2				Level 3				Total
Fair Value of Derivative Liability		$	–			$	–			$	48,613			$	48,613

     

Stock Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

Income Taxes

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

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

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

Principles of Consolidation

The consolidated financial statements include the accounts of Cardiff International, Inc. and its wholly owned subsidiary, Legacy Card Company, d/b/a Mission Tuition, We Three, LLC., Romeo's Pizza and Edge View Properties, Inc. All significant intercompany accounts and transactions are eliminated in consolidation.

 

Recently Issued Accounting Pronouncements

The Company has evaluated all of the recent accounting pronouncements through the filing date of these financial statements and feels that none of them will have a material effect on the Company’s interim financial statements.

 

ASU 2014-10, Development Stage Entities

 

On June 10, 2014, the Financial Accounting Standards Board ("FASB") issued update ASU 2014-10, Development Stage Entities (Topic 915). Amongst other things, the amendments in this update removed the definition of development stage entity from Topic 915, thereby removing the distinction between development stage entities and other reporting entities from US GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date information on the statements of income, cash flows and shareholders equity, (2) label the financial statements as those of a development stage entity; (3) disclose a description of the development stage activities in which the entity is engaged and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. The amendments are effective for annual reporting periods beginning after December 31, 2014 and interim reporting periods beginning after December 15, 2015, however entities are permitted to early adopt for any annual or interim reporting period for which the financial statements have yet to be issued. The Company has elected to early adopt these amendments and accordingly have not labeled the financial statements as those of a development stage entity and have not presented inception-to-date information on the respective financial statements.

 

2.

ACQUISITIONS

 

We Three, LLC

The Company completed the acquisition of We Three, LLC (d/b/a Affordable Housing Initiative)(“AHI”) The acquisition became effective, May 15, 2014. The Company issued approximately 280,069 shares of Preferred Class “F” Shares as consideration for the Acquisition. In addition, the Company issued 119,931 shares of Preferred Class “F1” for total shares issued of 400,000. Based on the price of $2.50 per Preferred “F” and “F1” Class of stock the acquisition consideration represents a $1,000,000 evaluation.

 

		Fair Value
Cash		$	37,000
Property and equipment			88,000
Goodwill			957,000
Liabilities			(7,000	)
Notes payable - related party			(75,000	)
		$	1,000,000

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

Romeo's NY Pizza

On September 30, 2014, the Company completed the acquisition of Romeo’s NY Pizza. The Company issued approximately 400,000 shares of Preferred Class “D” Shares as consideration for the Acquisition. Based on the price of $2.50 per Preferred “D” Class of stock the acquisition consideration represents a $1,000,000 evaluation.

 

		Fair Value
Cash		$	39,000
Other current assets			25,000
Property and equipment			477,000
Goodwill			712,000
Accounts payable and accrued expenses			(65,000	)
Notes payable			(120,000	)
Notes payable - related party			(68,000	)
		$	1,000,000

 

Edge View Properties

 

On July 11, 2014, the Company completed the acquisition of Edge View Properties. The Company issued 300,000 shares of Preferred Class “E” Shares as consideration for the Acquisition. Based upon the price of $2.50 per Preferred “E” Class of Stock. The Acquisition consideration represents a $750,000 evaluation.

 

The Preferred “E” share of stock was adjusted as a result of the authorization and declaration of a special distribution with a conversion rate of 1 to 5 Common Stock ("Special Conversion"). The Special Conversion right is granted as a result of a Lock-Up/Leak-Out clause designated by CDIF pursuant to the terms of the Acquisition

 

		Fair Value
Cash		$	–
Land			603,000
		$	603,000

 

The results of the operations for the acquired locations have been included in the condensed consolidated financial statements since the date of the acquisitions. The following table presents the unaudited pro forma results of continuing operations for the nine months ended September 30, 2014 and 2013, as if the acquisitions had been consummated at the beginning of each period presented. The pro forma results of continuing operations are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the beginning of the year presented or the results which may occur in the future.

 

		Nine Months Ended September 30,
		2014				2013
Pro forma revenue		$	1,249,000			$	1,252,000
Pro forma net loss		$	(158,000	)		$	(803,000	)
Pro forma net income (loss) per common share – basic and diluted		$	(1.64	)		$	(116.00	)

 

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

3.

RELATED PARTY TRANSACTIONS

 

Due to Officers

The Company borrows funds from Daniel Thompson who is a Shareholder and Officer of the Company. The terms of repayment stipulate the loans are due 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. In addition, the Company has an employment agreement, renewed May 15, 2014, with Daniel Thompson whereby the Company provides for compensation of $20,000 per month. A total salary of $202,500 was reflected as an expense to Daniel Thompson during the nine months ended September 30, 2014. The total balance due to Daniel Thompson for accrued salaries, advances, and accrued interest, at September 30, 2014 and December 31, 2013, was $170,500 and $0, respectively.

 

The Company has an employment agreement with the Company President whereby the Company provides for compensation of $25,000 per month beginning May 15, 2014. A total salary of $112,500 was reflected as an expense during the nine months ended September 30, 2014. The total balance due to the President for accrued salaries at September 30, 2014 and December 31, 2013, was $108,700 and $0, respectively.

 

The total balance due others for accrued salaries at September 30, 2014 and December 31, 2013, was $96,960 and $49,500, respectively.

 

Notes Payable – Related Party

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

  

4.

NOTES PAYABLE

 

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.

 

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.

 

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 September 30, 2014 and December 31, 2013 was $50,000 and is currently in default. The Company is in negotiations to settle a contractual dispute in the 2007 agreement.

 

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

5.

CONVERTIBLE NOTES PAYABLE AND NOTES PAYABLE RELATED PARTY

 

Some of the Convertible Notes issued as described below included an anti-dilution provision that allowed for the adjustment of the conversion price. The Company considered the current Financial Accounting Standards Board guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that as the conversion price of the Notes issued in connection therewith could fluctuate based future events, such prices were not fixed amounts. As a result, the Company determined that the conversion features of the Notes issued in connection therewith are not considered indexed to the Company’s own stock and characterized the value of the conversion feature of such notes as derivative liabilities upon issuance.

 

Convertible notes at September 30, 2014 and December 31, 2013 are summarized as follows:

 

		September 30, 2014				December 31, 2013
Unrelated Party		$	9,000			$	30,750
Related Party			165,000				165,000
Total - Current		$	174,000			$	195,750

 

Convertible notes payable – unrelated party

 

On August 10, 2012, the Company entered into an unsecured Convertible Promissory Note agreement with an unrelated party for $15,000 and $7,500. The Note bears interest at 8% per year and matures on May 4, 2013. The Note and any accrued and outstanding interest is convertible into the Company’s common shares at a discount of 45% of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. The balance of the note was $0 and $22,500 at September 30, 2014 and December 31, 2013, respectively. The notes payable was converted into common stock.

 

On December 3, 2012, the Company entered into an unsecured Convertible Promissory Note agreement with an unrelated party for $8,250. The Note bears interest at 8% per year and matures on September 5, 2013. The Note and any accrued and outstanding interest is convertible into the Company’s common shares at a discount of 45% of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. The balance of the note was $0 and $8,250 at September 30, 2014 and December 31, 2013, respectively. The notes payable and accrued interest was converted into common stock.

 

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, matured 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 which has been fully amortized. The Company is in default on this Convertible Debenture, the warrants have not been exercised. The balance of the note was $150,000 at September 30, 2014 and December 31, 2013.

 

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. The balance of the note was $15,000 at September 30, 2014 and December 31, 2013.

 

On April 17, 2014, the Company entered into a convertible note in the amount of $9,000. The note is convertible into common shares of the Company at $0.005 per share at the option of the holder.  The note payable bears interest at 8% per year, matured June 17, 2014, and is unsecured. All principal and unpaid accrued interest is due at maturity. The balance of the note was $9,000 and $0 at September 30, 2014 and December 31, 2013, respectively.

 

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

Notes payable – related party at September 30, 2014 and December 31, 2013 are summarized as follows:

 

		September 30, 2014				December 31, 2013
Total Principal Balance		$	113,500			$	125,000
Discount on Notes			(36,325	)			(50,075	)
			77,175				74,925
Current Portion			–				–
Total - Current		$	77,175			$	74,925

 

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. As a result of the shares issued in conjunction with the note, the Company recorded a $50,000 debt discount during 2011. The balance of the note, net of discount was $30,630 and $23,130 at September 30, 2014 and December 31, 2013, respectively. 

 

On November 17, 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 November 17, 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. As a result of the shares issued in conjunction with the note, the Company recorded a $50,000 debt discount during 2011. The Company has not distributed these shares to the lender, therefore, these shares are not in equity and have been included in the calculation of the derivative liability at December 31, 2013. The balance of the note, net of discount was $28,295 and $20,795 at September 30, 2014 and December 31, 2013, respectively.

 

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.  The balance of the note was $12,150 at September 30, 2014 and December 31, 2013.

 

6.

DERIVATIVE LIABILITY

 

In April 2008, the FASB issued a pronouncement that provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants with such provisions will no longer be recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price.

 

The Company evaluated whether convertible debt and warrants to acquire stock of the Company contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price under the respective convertible debt and warrant agreements. The Company determined that the notes and the conversion notes of certain notes contained such provisions and recorded such instruments as derivative liabilities upon issuance. In addition, in periods prior to July 1, 2012, the Company did not have enough authorized shares to issue common shares resulting in the potential exercise or conversion of its issued and outstanding options, warrants or convertible notes. Accordingly, these instruments were reflected as derivative liabilities as of June 30, 2012 and prior. In July 2012, the Company was successful in increasing the number of authorized shares in the corporate treasury effectively eliminating the majority of the derivative liability.

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

Derivative liabilities were valued using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions:

 

		September 30, 2014		December 31, 2013
Conversion feature :
Risk-free interest rate		0.01 % to 0.27%		0.01 % to 0.27%
Expected volatility		100%		100%
Expected life (in years)		0 – 2 years		0 – 2 years
Expected dividend yield		0%		0%
Fair Value :
Conversion feature		$48,778		$97,391
Warrants		–		–
		$48,778		$97,391

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The expected volatility was based on the Company’s historical volatility, and the expected life of the instruments is determined by the expiration date of the instrument. The expected dividend yield was based on the fact that the Company has not paid dividends to common stockholders in the past and does not expect to pay dividends to common stockholders in the future.

 

The Company determined the fair value of the derivative liabilities to be $48,778 as of September 30, 2014, and the Company recorded a gain for the change in fair value of derivative liabilities of $48,613 in the accompanying statement of operations for the period then ended.

 

7.

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 may be assessed for various penalties for any delayed payments. As of September 30, 2014 and December 31, 2013, to the Company estimates the amount of taxes, interest, and penalties that the Company could incur as a result of these unpaid taxes to be $439,623 and $412,623, respectively. The Company disagrees with past accounting practices and plans of challenging their estimates.

 

8.

CAPITAL STOCK

 

Reverse Stock Split:

 

In August 2014, the Board of Directors approved new Articles of Incorporation per the effectuated domicile change which authorized 4 classes of Preferred Stock having 4 class A authorized, 5,000,000 Class B authorized, 250 Class C and 100,000,000 Blank Check Preferred.

 

The principal features of the Company's capital stock are as follows:

 

In August 2014, the Board of Directors approved an amendment to the Company’s Articles of Incorporation to amend series B Preferred Stock Authorized & Designations, Rights & Privileges and to authorize 3 additional classes of Preferred Stock. After this action the Company has 5 classes of Common Stock and Preferred Stock.

 

Series A Preferred Stock

 

As of September 30, 2014 and December 31, 2013, the Company has designated 4 shares of preferred stock as Series A preferred stock, with a par value of $.0001 per share, of which 1 share of preferred stock are issued and outstanding.  Class A is authorized to have 4 shares which do not bear dividends and converts to common shares four times the sum of: {all shares of Common Stock issued and outstanding at time of conversion + all shares of Series B Preferred Stocks issued and outstanding at time of conversion divided by the number of issued Class A shares at the time of conversion and have voting rights four times the sum of: {all shares of Common Stock issued and outstanding at time of voting + all shares of Series B Preferred Stocks issued and outstanding at time of voting divided by the number of Class A shares issued at the time of voting. )

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

Series B Preferred Stock

 

As of September 30, 2014 and amended from December 31, 2013, the Company has designated 5,000,000 shares of preferred stock as Series B preferred stock, with a par value $0.001 and $2.50 price per share, of which 4,576,701 shares of preferred stock are issued and outstanding.  Shares of Series B Preferred Stock are anti-dilutive to reverse splits. The conversion rate of shares of Series B Preferred Stock, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share of the Series B Preferred Stock shall have no voting rights. The price of each share of Series B Preferred Stock may be changed either through a majority vote of the Board of Directors through a resolution at a meeting of the Board of Directors, or through a resolution passed at an Action Without Meeting of the unanimous Board of Directors, until such time as a listed secondary and/or listed public market develops for the shares.

 

Series C Preferred Stock

 

As of September 30, 2014 and amended from December 31, 2013, the Company has designated 250 shares of preferred stock as Series C preferred stock, with a par value of $.00001 per share, of which 75 shares of preferred stock are issued and outstanding.  Shares of Series C Preferred Stock are non-dilutive to reverse splits. The conversion rate of shares of Series C Preferred Stock, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. One (1) share of Preferred Stock converts to 100,000 shares of Common Stock. Each share of Series C Preferred Stock shall have one (1) votes for any election or other vote placed before the shareholders of the Company. The price of each share of Series C Preferred Stock may be changed either through a majority vote of the Board of Directors through a resolution at a meeting of the Board of Directors, or through a resolution passed at an Action Without Meeting of the unanimous Board of Directors, until such time as a listed secondary and/or listed public market develops for the shares. Shares of Series C Preferred Stock may not be converted into shares of Common Stock for a period of: a) six (6) months after purchase, if the Company voluntarily or involuntarily files public reports pursuant to Section 12 or 15 of the Securities Exchange Act of 1934; or b) twelve (12) months if the Company does not file such public reports

 

During 2014, the Company agreed to issue 20 shares of Class “C” Preferred shares of stock pursuant to agreements

 

Blank Check Preferred Stock

 

As of September 30, 2014 and amended from December 31, 2013, the Company has designated 100,000,000 shares of Blank Check preferred stock, of which 1,041,200 shares of stock have been issued with Designations, Rights & Privileges. The following Series have been assigned from the inventory of Blank Check Preferred Shares. The amount of Blank Check Preferred stock is now 98,958,800.

 

Series D Preferred Stock

 

On June 30, 2014, the Company completed the acquisition of Romeo’s NY Pizza. The Company issued approximately 400,000 shares of Preferred Class “D” Shares as consideration for the Acquisition. Based on the price of $2.50 per Preferred “D” Class of stock the acquisition consideration represents a $1,000,000 evaluation. Shares of Series D Preferred Stock are anti-dilutive to reverse splits. The conversion rate of shares of Series B Preferred Stock, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share of the Series D Preferred Stock shall have voting rights equal to one (1) votes of Common Stock. With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series D Preferred Stock shall vote together with the holders of Common Stock, without regard to class, except as to those matters on which separate class voting is required by applicable law or the Corporation’s Certificate of Incorporation or Bylaws.  The initial price of each share of Series D Preferred Stock shall be $2.50.

 

Series E Preferred Stock

 

On July 11, 2014, the Company completed the acquisition of Edge View Properties. The Company issued approximately 241,200 shares of Preferred Class “E” Shares as consideration for the Acquisition. Based on the price of $2.50 per Preferred “E” Class of stock the acquisition consideration represents a $603,000 evaluation. Shares of Series E Preferred Stock are anti-dilutive to reverse splits. The conversion rate of shares of Series E Preferred Stock, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share of the Series E Preferred Stock shall have voting rights equal to one (1) votes of Common Stock. With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series E Preferred Stock shall vote together with the holders of Common Stock, without regard to class, except as to those matters on which separate class voting is required by applicable law or the Corporation’s Certificate of Incorporation or Bylaws.  The initial price of each share of Series E Preferred Stock shall be $2.50.

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

Series F Preferred Stock

 

On May 15, 2014 the Company completed the acquisition of We Three, LLC (d/b/a Affordable Housing Initiative)(“AHI”) The Company issued approximately 280,069 shares of Preferred Class “F” Shares as consideration for the Acquisition. In addition, the Company issued 119,931 shares of Preferred Class “F1” for total shares issued of 400,000. Based on the price of $2.50 per Preferred “F” and “F1” Class of stock the acquisition consideration represents a $1,000,000 evaluation. Shares of Series F Preferred Stock are anti-dilutive to reverse splits. The conversion rate of shares of Series F Preferred Stock, however, would increase proportionately in the case of forward splits, and may not be diluted by a reverse split following a forward split. Each one share of the Series F Preferred Stock shall have voting rights equal to five (5) votes of Common Stock. With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, the holders of the outstanding shares of Series F Preferred Stock shall vote together with the holders of Common Stock, without regard to class, except as to those matters on which separate class voting is required by applicable law or the Corporation’s Certificate of Incorporation or Bylaws.  The initial price of each share of Series F Preferred Stock shall be $2.50.

 

Common Stock

 

2014

 

In September 2014, the Board of Directors approved increasing the number of authorized shares of common stock from 250,000 to 5,000,000 par value to $0.001.

 

On August 22, 2014, the Company effectuated a Reverse Stock Split of its outstanding and authorized shares of common stock at a ratio of one for twenty five thousand (1:25,000). As a result of the Reverse Stock Split, the Company’s authorized shares of common stock were decreased from 5,000,000,000 to 250,000 shares and it authorized 4 classes of Preferred Stock. Upon the effectiveness of the Reverse Stock Split, which occurred on September 12, 2014, the Company’s issued, outstanding and authorized shares of common stock was decreased from 2,516,819,560 to 100,673 issued and outstanding shares and 250,000 authorized shares, all with a par value of $0.00001. Accordingly, all share and per share information has been restated to retroactively show the effect of the Reverse Stock Split.

 

In October 2013, the Board of Directors approved increasing the number of authorized share of common stock from 250,000,000 to 3,000,000,000 and authorize 2 classes of Preferred Stock.

 

On March 28, 2012, a motion to amend the Corporation’s Articles of Incorporation with the State of Colorado to increase the authorized shares of common stock from 60,000,000 to 250,000,000 was brought before the Board and adopted. The board passed the resolution on June 4, 2012 and called a special meeting to be held on July 18, 2012, the agenda of which was to invite all shareholders of record to vote on the proposed amendment. On July 18, 2012 the amendment was passed.

 

During the year ended December 31, 2013, the Company issued 17,895 shares of its common stock for $4,110 in cash and conversion of debt of $33,600.

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

9.	STOCK OPTIONS AND WARRANTS

 

Employee Stock Options

 

The following table summarizes the changes in the options outstanding at September 30, 2014, and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.

 

Range of Exercise Prices				Number Outstanding				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life				Number Exercisable				Weighted Average Exercise Price
$	0.10				100			$	0.10				8.24				100			$	0.10
					100								8.24				100

 

A summary of the Company’s stock awards for options as of December 31, 2013 and changes for the year ended December 31, 2013 is presented below:

 

		Stock Options				Weighted Average Exercise Price
Outstanding, December 31, 2013			100			$	0.10
Granted			–				–
Exercised			–				–
Expired/Cancelled			–				–
Outstanding, September 30, 2014			100			$	0.10
Exercisable, September 30, 2014			100			$	0.10

 

The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award.

 

 

CARDIFF INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Unaudited)

Nine months ended September 30, 2014 and 2013

 

We estimate the volatility of our common stock based on the calculated historical volatility of similar entities in industry, in size and in financial leverage whose share prices are publicly available. We base the risk-free interest rate used in the Black-Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. We have not paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes-Merton option valuation model.

 

There were no options exercised during the period ended September 30, 2014 or 2013. Additionally, none of the options outstanding and unvested as of September 30, 2014 had any intrinsic value.

 

Warrants

 

The following table summarizes the changes in the warrants outstanding at September 30, 2014, and the related prices for the shares of the Company’s common stock issued to non-employees of the Company. These warrants were issued in lieu of cash compensation for services performed or financing expenses and in connection with the private placements.

 

Range of Exercise Prices				Number Outstanding				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life				Number Exercisable				Weighted Average Exercise Price
$	0.01 - $0.15				187			$	0.13				1.23				187			$	0.13
$	0.20				202			$	0.20				0.68				202			$	0.20
					389								0.94				389

 

A summary of the Company’s stock awards for warrants as of September 30, 2014 and changes for the period ended September 30, 2014 is presented below:

 

		Warrants				Weighted Average Exercise Price
Outstanding, December 31, 2013			674				0.12
Granted			–				–
Exercised			–				–
Expired/Cancelled			(285	)			0.05
Outstanding, September 30, 2014			389				0.17
Exercisable, September 30, 2014			389				0.17

 

10.

SUBSEQUENT EVENTS

 

In accordance with SFAS 165 (ASC 855-10) the Company has analyzed its operations subsequent to September 30, 2014 to the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements other than those specified below.

 

Common Stock Issuances

 

On October 10, 2014, the Company appointed Kathleen Robertson, the Company's Chief Executive Officer, and Jason Levy, the Company's Chief Operating Officer to the Board of Directors. In conjunction with the appointment, 1,500,000 shares of common stock, was issued to both Kathleen Roberton and Jason Levy, and 1,427,200 shares of common stock was issued to Daniel Thompson, the Company's Chairman of the Board.

 

 

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 2013. 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 August 19, 2014, for the year ended December 31, 2013 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 is a holding company who adopted a new business model known as "Collaborative Governance.” To date, we are not aware of any other holding company using the same business philosophy or governing policies. Our business footprint is to acquire strong companies that meet the following criteria: (1) in business for a minimum of 2 years; (2) profitable; (3) good management team; (4) little to no debt; (5) assets of a minimum of $1,000,000. Cardiff continues to practice all business ethics under the (1934 Act) and acknowledges there are approximately 43 plus successful Business Development Companies (1040 Act) all who may be considered competition to CDIF that are established and available to the public for investment. These Companies offer experienced management; dividends and financial security.

 

To date Cardiff consist of 4 Subsidiaries; Legacy Card Company, We Three,LLC, Romeo’s NY Pizza and Edge View Properties.

 

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

 

The Company evaluates its financial instruments 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 re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses the probability weighted average Black-Scholes-Merton models to value the derivative instruments at inception and on subsequent valuation dates through the September 30, 2014 reporting date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

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.

 

 

Recent Accounting Pronouncements

 

ASU 2014-10, Development Stage Entities

 

On June 10, 2014, the Financial Accounting Standards Board ("FASB") issued update ASU 2014-10, Development Stage Entities (Topic 915). Amongst other things, the amendments in this update removed the definition of development stage entity from Topic 915, thereby removing the distinction between development stage entities and other reporting entities from US GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date information on the statements of income, cash flows and shareholders equity, (2) label the financial statements as those of a development stage entity; (3) disclose a description of the development stage activities in which the entity is engaged and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. The amendments are effective for annual reporting periods beginning after December 31, 2014 and interim reporting periods beginning after December 15, 2015, however entities are permitted to early adopt for any annual or interim reporting period for which the financial statements have yet to be issued. The Company has elected to early adopt these amendments and accordingly have not labeled the financial statements as those of a development stage entity and have not presented inception-to-date information on the respective financial statements.

 

Results of Operations

 

For the Three Months Ended September 30, 2014 and 2013

 

We had revenues in the amount of $421,450 and $0 for the three months ended September 30, 2014 and 2013, respectively. The revenue for the three months ended September 30, 2014 is attributable to our acquisitions of Romeo's NY Pizza and We Three, LLC in the amount of $405,936 and $15,514. There was no revenue in the three months ended September 30, 2013.

 

We had costs of sales in the amount of $304,004 and $0 for the three months ended September 30, 2014 and 2013, respectively. The costs for the three months ended September 30, 2014 is attributable to our acquisitions of Romeo's NY Pizza and We Three, LLC in the amount of $269,800 and $34,204. There was no revenue in the three months ended September 30, 2013.

 

We had operating expenses of $343,186 and $156,764 for the three months ended September 30, 2014 and 2013, respectively, representing an increase of $186,422. The increase is result of principally a result of an increase in professional fees of approximately $51,000 and an increase in salaries of $15,000 compared to the prior year period. In addition, the operating expenses increased in costs of our new acquired companies of approximately $128,000.

 

We had a net loss of $87,754 for the three months ended September 30, 2014 compared to a net loss of $233,775 for the three months ended September 30, 2013, representing a decrease of $146,021. As the operating costs increased, there was a decrease in the interest expense and gain from the change in value of the derivative liability of approximately $62,000 compared to the prior period as the Company has converted a majority of historical debt to preferred stock. Furthermore, the Company was able to extinguish approximately $152,000 of historical accounts payable.

 

For the Nine Months Ended September 30, 2014 and 2013

 

We had revenues in the amount of $428,285 and $0 for the nine months ended September 30, 2014 and 2013, respectively. The revenue for the nine months ended September 30, 2014 is attributable to our acquisitions of Romeo's NY Pizza on June 30, 2014 and We Three, LLC on May 15, 2014 in the amount of $405,936 and $22,349. There was no revenue in the three months ended September 30, 2013.

 

We had costs of sales in the amount of $314,095 and $0 for the three months ended September 30, 2014 and 2013, respectively. The revenue for the nine months ended September 30, 2014 is attributable to our acquisitions of Romeo's NY Pizza and We Three, LLC in the amount of $269,800 and $44,295. There was no revenue in the three months ended September 30, 2013.

 

We had operating expenses of $650,410 and $478,807 for the nine months ended September 30, 2014 and 2013, respectively, representing an increase of $171,603. The increase is principally a result of a reduction in professional fees offset by increase costs of our new acquired company.

 

We had a net loss of $380,866 for the nine months ended September 30, 2014 compared to a net income of $886,190 nine months ended September 30, 2013, representing a decrease of $485,324. As the operating costs increased, there was a decrease in the interest expense and gain from the change in value of the derivative liability of approximately $401,000 compared to the prior period as the Company has converted a majority of historical debt to preferred stock. Furthermore, the Company was able to extinguish approximately $152,000 of historical accounts payable.

 

Inflation

 

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

 

 

Liquidity and Capital Resources

 

Since inception, the principal sources of cash have been funds raised from the sale of common stock, advances from shareholders, and loans in the form of debentures and convertible notes. At September 30, 2014, we had $91,045 in cash and cash equivalents and total assets amounted to $3,029,661. At December 31, 2013 we had $4,676 of cash and cash equivalents, and total assets amounted to $6,935, which include other assets.

 

Net cash used in operating activities was $184,928 and $166,822 for the nine months ended September 30, 2014 and 2013, respectively. The increase in the amount of net cash used in operating activities during the nine months ended September 30, 2014 compared to the same period last year was attributable the operating losses incurred in the current year.

 

Net cash used in by investing activities was $82,718 and $0 for the nine months ended September 30, 2014 and 2013, respectively. The cash flows used in investing activities during the nine months ended September 30, 2014 was attributable to the purchase of fixed assets and an investment of $75,000, net of cash acquired of $76,619, for We Three, LLC. acquired on May 15, 2014 and Romeo's NY Pizza on June 30, 2014.

 

Net cash provided by financing activities was $354,015 and $177,750 for the nine months ended September 30, 2014 and 2013, respectively. The cash flows from financing activities during the nine months ended September 30, 2014 was attributable to proceeds from the sale of preferred stock of $339,633 and the proceeds from notes payable, net of repayments, of $14,382. The cash flows from financing activities during the nine months ended September 30, 2013 was attributable to proceeds from the sale of common stock of $107,750 and advances from third parties of $70,000.

 

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.

 

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, 2013.

 

Off Balance Sheet Arrangements

 

As of September 30, 2014, we had no off balance sheet arrangements.

 

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. Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer has concluded that these disclosure controls and procedures are ineffective. There have been no changes to our disclosure controls and procedures during the nine months ended September 30, 2014.

 

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2014 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 Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Temporary Hardship Exemption
101.INS*	XBRL Instances Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

 

*To be furnished by amendment per Temporary Hardship Exemption under Regulation S-T.

 

 

SIGNATURE

 

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

 

 

Dated: November 19, 2014	CARDIFF INTERNATIONAL, INC.
	By: /s/ Kathleen Roberton
	Chief Executive Officer
	By: /s/ Daniel Thompson
	Chairman (Acting President and Treasurer)