NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Organization and Nature of Operations
Legacy Card Company (“Legacy”)
was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, Legacy converted from a California Limited Liability
Company to a Nevada Corporation. On November 10, 2005, Legacy merged with Cardiff Lexington Corp. (“Cardiff”, the
“Company”), a publicly held corporation.
In the first quarter of 2013, it was decided
to restructure Cardiff into a holding company that adopted a new business model known as "Collaborative Governance,"
a form of governance enabling businesses to take advantage of the power of a public company. Cardiff began targeting the acquisition
of, niche companies with high growth potential. The reason for this strategy was to protect the Company’s shareholders by
acquiring businesses with little to no debt, seeking support with both financing and management that had the ability to offer
a return to investors.
Description of Business
To date, Cardiff consists of the following wholly-owned subsidiaries:
We Three, LLC dba Affordable Housing Initiative (“AHI”),
acquired May 15, 2014
Romeo’s Alpharetta, LLC dba Romeo’s NY
Pizza (“Romeo’s Pizza”), acquired June 30, 2014
Edge View Properties, Inc., (“Edge View”)
acquired July 16, 2014
Repicci’s Franchise Group, LLC (“Repicci’s
Group”), acquired August 10, 2016
Platinum Tax Defenders, LLC (“Platinum Tax”),
acquired July 31, 2018
JM Enterprises 1, Inc. dba Key Tax Group (“Key
Tax”), acquired May 2019
Red Rock Travel Group, LLC (“Red Rock”),
acquired July 31, 2018, discontinued May 31, 2019
Principles of Consolidation
The consolidated financial statements
include the accounts of Cardiff, and its wholly-owned subsidiaries: We Three, LLC; Romeo’s NY Pizza; Edge View Properties,
Inc.; Repicci’s Franchise Group, LLC, Platinum Tax Defenders LLC and Key Tax Group. All significant intercompany accounts
and transactions are eliminated in consolidation. Certain prior period amounts may have been reclassified for consistency with
the current period presentation. These reclassifications would have no material effect on the reported financial results.
Use of Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures.
Management uses its historical records and knowledge of its business in making estimates. Accordingly, actual results could differ
from those estimates.
Change in Capital Structure
In January 2020, the Company announced
a reverse split of several of its Preferred Stock Classes which has been given retrospective treatment in the consolidated financial
statements.
In the first quarter of 2019, the Company
executed a reverse stock split of 1500:1 effective March 21, 2019.
Revenue Recognition
On January 1, 2018, we adopted ASC 606,
Revenue from contracts with customers (“Topic 606”) using the modified retrospective method applied to those contracts
which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under
Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting
under Topic 605.
There was no impact to the opening balance
of accumulated deficit or revenues for the year ended December 31, 2018, as a result of applying Topic 606.
The Company applies a five-step approach
in determining the amount and timing of revenue to be recognized:
|
(1)
|
identifying the contract with
a customer,
|
|
(2)
|
identifying the performance obligations
in the contract,
|
|
(3)
|
determining the transaction price,
|
|
(4)
|
allocating the transaction price
to the performance obligations in the contract and
|
|
(5)
|
recognizing revenue when the
performance obligation is satisfied.
|
Substantially all of the Company’s
revenue is recognized at the time control of the products transfers to the customer.
The Company generates revenue from our
subsidiaries primarily on a cash basis for sale of food items and monthly rentals of mobile homes. As allowed by a practical expedient
in Topic 606, the entity recognizes revenue in the amount to which the entity has a right to invoice. The term between invoicing
and when payment is due is not significant.
Our subsidiary Repicci, generates some
revenues through franchise fees. Revenues from franchise fees are recognized in accordance with guidance Topic 606, as the fees
are earned. One-third of the revenues are recognized within 60 days and the balance are recognized over the life of the franchise
agreement, which can be up to 15 years.
Our tax services subsidiaries receive
payments in advance of service and are recorded as deferred revenue. Revenues are as services are provided.
Rental Income
The Company’s rent revenue is derived
from the mobile home leases. The expired leases are considered month-to-month leases. In accordance with section 605- 10-S99-1
of the FASB Accounting Standards Codification for revenue recognition, the cost of property held for leasing by major classes
of property according to nature or function, and the amount of accumulated depreciation in total, is presented in the accompanying
consolidated balance sheets as of December 31, 2019 and 2018. There are no contingent rentals included in income in the accompanying
statements of operations. With the exception of the month-to-month leases, revenue was recognized on a straight-line basis and
amortized into income on a monthly basis, over the lease term.
Restaurant Sales
Revenue from restaurant sales were recognized
when food and beverage products are sold. The Company reports revenue net of sales taxes collected from customers and remitted
to governmental taxing authorities.
On January 1, 2018, we adopted Topic 606
using the modified retrospective method which did not have a material impact to the opening balance of accumulated deficit. Results
for reporting periods beginning after January 1, 2018 are presented under Topic 606.
The Company applies a five-step approach
in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying
the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the
performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially
all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
The Company generates revenue from our
subsidiaries primarily on a cash basis for sale of food items and monthly rentals of mobile homes. As allowed by a practical expedient
in Topic 606, the entity recognizes revenue in the amount to which the entity has a right to invoice. The term between invoicing
and when payment is due is not significant.
Our subsidiary Repicci’s, generates
revenues through franchise fees. Revenues from franchise fees are recognized in accordance with guidance Topic 606, as the reference
objections are satisfied. The perinate franchise fees associated with the right to intellectual property is earned over the life
of the franchise agreement, which can be up to 15 years.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less to be cash equivalents. The Company has no cash equivalents.
Accounts Receivable
Accounts receivable is reported on the
balance sheet at gross amounts due to the Company. Management closely monitors outstanding accounts receivable and charges off
to expense any balances that are determined to be uncollectible. As of December 31, 2019 and 2018, the Company had accounts receivable
of $118,125 and $64,345, respectively. Accounts receivables are primarily generated from our subsidiaries in their normal course
of business.
Inventory
Inventory consists of finished goods purchased,
which are valued at the lower of cost or market value, with cost being determined on the first-in, first-out (FIFO) method. The
Company periodically reviews historical sales activity to determine potentially obsolete items and also evaluates the impact of
any anticipated changes in future demand.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements
are carried at cost. Expenditures for renewals and betterments that extend the useful lives of property, equipment or leasehold
improvements are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is calculated
using the straight-line method for financial reporting purposes based on the following estimated useful lives:
Classification
|
Useful Life
|
Equipment, furniture and fixtures
|
5 - 7 years
|
Leasehold improvements
|
10 years or lease term, if shorter
|
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived brands are
not amortized, but are evaluated for impairment annually or when indicators of a potential impairment are present. Our impairment
testing of goodwill is performed separately from our impairment testing of indefinite-lived intangibles. The annual evaluation
for impairment of goodwill and indefinite-lived intangibles is based on valuation models that incorporate assumptions and internal
projections of expected future cash flows and operating plans. The Company believe such assumptions are also comparable to those
that would be used by other marketplace participants. During years-ended December 31, 2019 and 2018, the company had Goodwill
impairment of $0 and $1,459,725, respectively, related to its acquisition of Red Rock Travel, LLC. The Company based this decision on impairment testing off
the underlying assets, expected cash flows, decreased asset value and other factors.
Valuation of long-lived assets
In accordance with the provisions of Accounting
Standards Codification (“ASC”) Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all
long-lived assets such as plant and equipment and construction in progress held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows
expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amounts of the assets exceed the fair value of the assets.
Valuation of Derivative Instruments
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 815-10, Derivatives and Hedging (“ASC 815-10”), requires
that embedded derivative instruments be bifurcated and assessed, along with freestanding derivative instruments such as convertible
promissory notes, on their issuance date to determine whether they would be considered a derivative liability and measured at
their fair value for accounting purposes. The Company evaluates all of it financial instruments, including stock purchase warrants,
to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then
revalued at each reporting date, with changes in the fair value reported as charges or credits to income.
For option based simple derivative financial
instruments, the Company uses the Lattice Binomial option pricing model to value the derivative instruments at inception and subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is reassessed at the end of each reporting period.
Beneficial Conversion Feature
For conventional convertible debt where
the rate of conversion is below market value, the Company records a “beneficial conversion feature” (“BCF”)
discount against the face amount of the respective debt instrument (offset to additional paid in capital).
When the Company records a BCF which
is not a conventional convertible, the fair value of the BCF is recorded as a derivative liability with an offset against the
face amount of the respective debt instrument which is and amortized to interest expense over the term of the debt.
Fair Value Measurements
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are categorized based upon
the level of judgment associated with the inputs used to measure their fair value. The fair value hierarchy distinguishes between
(1) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (2)
an entity’s own assumptions about market participant assumptions developed based on the best information available in the
circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable
inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level Input Definition
Level 1
|
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets
at the measurement date.
|
Level 2
|
Inputs, other than quoted prices included in Level 1, which are observable for the asset
or liability through corroboration with market data at the measurement date.
|
Level 3
|
Unobservable inputs that reflect management's best estimate of what market participants
would use in pricing the asset or liability at the measurement date.
|
The following table presents certain investments
and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s Consolidated
Balance Sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2019 and 2018.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Fair Value of BCF Derivative Liability – December 31, 2019
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
3,102,392
|
|
|
$
|
3,102,392
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Fair Value of BCF Derivative Liability – December 31, 2018
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,870,625
|
|
|
$
|
1,870,625
|
|
Stock-Based Compensation
The Company accounts for its stock based
compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement
principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant
to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine
the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on
which it is probable that performance will occur.
Generally, all forms of share-based payments,
including stock option grants, warrants and restricted stock grants and stock appreciation rights are measured at their fair value
on the awards’ grant date, based on estimated number of awards that are ultimately expected to vest.
The expense resulting from share-based
payments is recorded in general and administrative expense in the consolidated statements of operations.
Equity Instruments Issued to Parties Other Than Employees
for Acquiring Goods or Services
The Company early adopted ASU No 2018-07
for equity instruments issued to parties other than employees.
Income Taxes
Income taxes are determined in accordance
with ASC Topic 740, “Income Taxes” (“ASC 740”). Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted
income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
ASC 740 prescribes a comprehensive model
for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken
or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements
when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must
initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.
For the years ended December 31, 2019
and 2018 the Company did not have any interest and penalties associated with tax positions. As of December 31, 2019 and 2018,
the Company did not have any significant unrecognized uncertain tax positions.
Earnings (Loss) per Share
FASB ASC Subtopic 260, Earnings Per
Share (“ASC 260”), provides for the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available
to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include
the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been
issued. Potentially dilutive securities include outstanding stock options, warrants, and debts convertible into common shares.
The dilutive effect of potentially dilutive securities is 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.
Going Concern
The accompanying consolidated financial
statements have been prepared using the going concern basis of accounting, which contemplates continuity of operations, realization
of assets and liabilities and commitments in the normal course of business. The Company has sustained operating losses since its
inception and has negative working capital and an accumulated deficit. These factors raise substantial doubts about the Company’s
ability to continue as a going concern. As of December 31, 2019, the Company has sustained recurring loses and accumulated a working
capital deficit. The accompanying consolidated financial statements do not reflect any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company
is unable to continue as a going concern. As a result, the Company’s independent registered public accounting firm, in its
report on the Company’s December 31, 2019 and 2018 consolidated financial statements, has raised substantial doubt about
the Company’s ability to continue as a going concern.
The ability of the Company to continue
as a going concern and the appropriateness of using the going concern basis is dependent upon, among other things, additional
cash infusions. Management has prospective investors and believes the raising of capital will allow the Company to fund its cashflow
shortfalls and pursue new acquisitions. There can be no assurance that the Company will be able to obtain sufficient capital from
debt or equity transactions or from operations in the necessary time frame or on terms acceptable to it. Should the Company be
unable to raise sufficient funds, it may be required to curtail its operating plans. In addition, increases in expenses may require
cost reductions. No assurance can be given that the Company will be able to operate profitably on a consistent basis, or at all,
in the future. Should the Company not be able to raise sufficient funds, it may cause cessation of operations.
Accounting Pronouncements
In February 2016, the FASB issued ASU
No. 2016-02,” Leases” (Topic 842) which includes a lessee accounting model that recognizes two types of leases
- finance leases and operating leases. The standard requires that a lessee recognize on the balance sheet assets and liabilities
for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows
arising from a lease by a lessee will depend on its classification as a finance or an operating lease. New disclosures to help
investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from
leases are also required. These disclosures include qualitative and quantitative requirements, providing information about the
amounts recorded in the financial statements. ASU 2016-02 will be effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years.
In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock
Compensation (Topic 718): Scope of Modification Accounting”, to provide clarity and reduce both (1) diversity in
practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change
to the terms or conditions of a share-based payment award. The ASU provides guidance about which changes to the terms or conditions
of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments are effective for
fiscal years beginning after December 15, 2017 and should be applied prospectively to an award modified on or after the adoption
date. Early adoption is permitted, including adoption in an interim period.
Other pronouncements issued by the FASB
or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to
be significant to the Company’s financial position, results of operations or cash flows.
Reclassifications
Certain prior period amounts have been
reclassified to conform with the current year presentation.
Platinum Tax Defenders
On July 31, 2018, the Company completed
the acquisition of Platinum Tax Defenders. In connection with the closing of the acquisition, a Preferred “L” Class
of stock with a par value of $0.001 was established and issued. The Preferred “L” Class of stock rights and privileges
include voting rights, a conversion ratio of 1:1.25 and were distributed at the adjusted rate of $0.013 per share (pre-split)
for a total of 98.307,692 representing a value of $1,278,000. These Preferred “L” shares have a lock-up/leak-out limiting
the sale of stock for 12 months after which conversions and sales are limited to 20% of their portfolio per year, pursuant to
the terms of the Acquisition Agreement. The preliminary purchase allocation of the net assets acquired is as follows:
|
|
Platinum Fair Value
|
|
Cash
|
|
$
|
138,906
|
|
Accounts receivable
|
|
|
105,669
|
|
Other assets
|
|
|
60,041
|
|
Property and equipment
|
|
|
6,010
|
|
Goodwill
|
|
|
2,092,048
|
|
Liabilities
|
|
|
(272,674
|
)
|
Total
|
|
$
|
2,130,000
|
|
JM Enterprise 1 (dba) Key Tax Group
JM Enterprise 1 (d.b.a. Key Tax Group)
(“Key Tax) and Cardiff Lexington Corp. as previously announced in May 2019 signed a definitive merger agreement under which
Key Tax became a wholly owned subsidiary effective May 8, 2019. In connection with the closing of the acquisition, a Preferred
“G” Class of stock with a par value of $0.001 was established and issued. The Preferred “G” Class of stock
rights and privileges include voting rights, a conversion ratio of 1:1.25 and were distributed at the adjusted rate of $0.07 per
share (pre-split) for a total of 18,571,428 representing a value of $1,300,000. Additionally, The Company issued 500,000 shares
of common stock with a par value of $0.001 to novate a convertible debt of $30,912.32. These Preferred “G” shares
have a lock-up/leak-out limiting the sale of stock for 12 months after which conversions and sales are limited to 20% of their
portfolio per year, pursuant to the terms of the Acquisition Agreement.
The preliminary purchase allocation of
the net assets acquired is as follows:
|
|
Key Tax Fair Value
|
|
Cash
|
|
$
|
9,484
|
|
Accounts receivable
|
|
|
90,766
|
|
Key Tax Group trade name
|
|
|
250,000
|
|
Property and equipment
|
|
|
6,044
|
|
Goodwill
|
|
|
1,407,915
|
|
Liabilities
|
|
|
(464,209
|
)
|
Total
|
|
$
|
1,300,000
|
|
The results of the operations for Platinum
Tax and Red Rock were included in the consolidated financial statements since the date of acquisition which was July 31, 2018.
The results of operations for Key Tax was included in the consolidated financial statements since the date of acquisition which
was May 8, 2019. The results of Red Rock have been included in the consolidated financial statements since the date of the acquisition
of July 31, 2018 through December 31, 2018. On January 1, 2019, they were included as discontinued operations, and have retrospectively
been included within discontinued operations the date of closing on May 31, 2019.
3.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accounts payable
|
|
$
|
236,874
|
|
|
$
|
359,289
|
|
Accrued Credit cards
|
|
|
86,077
|
|
|
|
6,234
|
|
Accrued Income, payroll and other taxes
|
|
|
299,786
|
|
|
|
17,736
|
|
Accrued advertising
|
|
|
53,189
|
|
|
|
44,490
|
|
Accrued payroll
|
|
|
58,760
|
|
|
|
68,579
|
|
Accrue expense - other
|
|
|
143,694
|
|
|
|
598,193
|
|
Total
|
|
$
|
878,380
|
|
|
$
|
1,094,521
|
|
The Company previously reported that it
failed to remit payroll tax payments since 2006, as required by various taxing authorities. Payroll taxes and estimated penalties
were accrued in recognition of accrued salaries subsequently settled via stock issue and other agreements that did not result
in reportable or taxable payroll transactions. As of December 31, 2019 and 2018, the Company estimated the amount of taxes, interest, and penalties that the
Company could incur as a result of payroll related taxes and penalties to be $45,238 and $9,865, respectively.
4.
|
PLANT AND EQUIPMENT, NET
|
Plant and equipment, net as of December
31, 2019 and 2018 was $273,399 and $381,301, respectively, consisting of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Residential housing
|
|
$
|
341,205
|
|
|
$
|
341,205
|
|
Furniture, fixture and equipment
|
|
|
427,233
|
|
|
|
427,492
|
|
Leasehold improvements
|
|
|
71,819
|
|
|
|
71,819
|
|
Total
|
|
|
840,257
|
|
|
|
840,516
|
|
Less: accumulated depreciation
|
|
|
(566,858
|
)
|
|
|
(459,215
|
)
|
Plant and equipment, net
|
|
$
|
273,399
|
|
|
$
|
381,301
|
|
During the years ended December 31,
2019 and 2018, depreciation expense was $278,154 and $80,165, respectively. During the years end December 31, 2019 and 2018,
the Company recorded depreciation expense of $7,318 and $22,697, in operations expense and $ 60,384 and $57,468,
in cost of goods sold, respectively.
During the year ended December 31,
2018, the Company disposed fixed assets of $104,886 and related liabilities related to a company-owned franchise, resulting
in net cash flow of $91,847 and a gain on sale of $874 from disposal.
As of December 31, 2019, and 2018, the
Company had land of $603,000 located in Salmon, Idaho with area of approximately 30 acres, which was in connection with the acquisition
of Edge View Properties, Inc. in July 2014. The Company issued 241,199 shares of Series E Preferred Stock as consideration for
this acquisition. The land is currently vacant and is expected to be developed into residential community.
On December 28, 2016, the Company entered
into an unsecured Business Line of Credit Agreement with Fundation Group LLC (“Fundation”), pursuant to which the
Company was allowed to take a draw from Fundation up to $20,000 from time to time. The Line of Credit bears interest at a rate
of 11.49% per annum, subject to increase or decrease with 90 days notice. There was an initial closing fee of $500 and a 2% draw
fee on subsequent draws. Monthly principal and interest payments are due and the line is due in full in 18 months from the latest
draw. The outstanding principal and interest will be due in payments over 18 months.
As of December 31, 2019 and 2018, The
Company had balance of $91,099 and $1,999, respectively. During the year ended December 31, 2019, total cash advanced was $149,247 and
total cash repaid was $60,147.
7.
|
RELATED PARTY TRANSACTIONS
|
Repiccis Franchise Group leases its
premises from its prior owner under a month-to-month lease at the rate of $1,500 per month. As of December 31, 2019 and
December 31, 2018, the Company had lease payable of $-0- and $0, respectively to the related party, which is reflected in
accrued expenses – related party.
The Company has entered into several unsecured
loan agreements with related parties (see below; Footnote 11, Notes Payable – Related Party; and Footnote 12 Convertible
Notes Payable – Related Party).
The Chairman of the Board was paid deferred
compensation of $300,000 per year for the years 2019 and 2018. Deferred compensation as of December 31, 2019 and 2018, respectively
was $492,500 and $317,500. Additionally, a target bonus was granted and accrued of $150,000. Unpaid deferred compensation as of
December 31, 2019 and 2018, respectively was $642,500 and $317,500.
The Chief Executive Officer was paid compensation of $300,000
per year for the years 2019 and 2018. Additionally, a target bonus was granted and accrued of $150,000. Unpaid deferred compensation
as of December 31, 2019 and 2018, respectively was $657,500 and $322,500.
The Chief Operating Officer was paid compensation of $120,000
per year for the years 2019 and 2018. Unpaid deferred compensation as of December 31, 2019 and 2018, respectively was $222,000
and 107,000.
8.
|
NOTES AND LOANS PAYABLE
|
Notes and loans payable at December 31,
2019 and 2018 are summarized as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Notes and Loans Payable - Unrelated
Party
|
|
$
|
694,891
|
|
|
$
|
322,340
|
|
Notes and Loans Payable -
Related Party
|
|
|
84,746
|
|
|
|
651,198
|
|
Total
|
|
|
779,637
|
|
|
|
973,538
|
|
Current portion
|
|
|
369,637
|
|
|
|
(973,538
|
)
|
Long-term portion
|
|
$
|
410,000
|
|
|
$
|
–
|
|
Notes and Loans Payable – Related
Party
The Company borrows funds from the Chairman
of the Board (“Chairman”) of the Company. The terms of repayment stipulate the unsecured loans are due 24 months after
the launch of the Legacy Tuition Card (or prior to such date) at an annual interest rate of 6% per year. During 2019, the Company
borrowed $32,000 and repaid $33,467. As of December 31, 2019 and 2018, the Company owed the Chairman $136,349 and $137,816, respectively.
During 2019, the Company reclassified notes payable to related party’s relating to the discontinuance of Red Rock resulting in balance due of $180,747 at
December 31, 2019. Additionally, the Company assumed notes payable from the previous owners of Key
Tax related to the acquisition of Key Tax on May 8, 2019 of $58,649.
On March 12, 2009, the Company entered
into a preferred debenture agreement with a shareholder for $20,000. The note bore interest at 12% per year and matured on September
12, 2009. In conjunction with the preferred debenture, the Company issued 2,000,000 warrants to purchase its Common Stock, exercisable
at $0.10 per share and expired on March 12, 2014. As a result of the warrants issued, the Company recorded a $20,000 debt discount
during 2009 which has been fully amortized. The Company assigned all of its receivables from consumer activations of the rewards
program as collateral on this debenture. On March 24, 2011, the Company amended the note and the principal balance was reduced
to $15,000. The Company was due to pay annual principal payments of $5,000 plus accrued interest beginning March 12, 2012. On
July 20, 2011, the Company repaid $5,000 of the note. No warrants had been exercised before the expiration. As of September 30,
2019, the Company is in default on this debenture. The balance of the note was $10,959 at December 31, 2019 and 2018,
respectively.
See Footnote 7 for amounts due to our
Chairman of the Board.
Loans and Notes Payable – Unrelated
Party
On September 7, 2011, the Company entered
into a Promissory Note agreement with 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 Note 3, 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 debt discount, was $50,000
and $50,000 at December 31, 2019 and 2018, respectively. This note is currently in default.
On November 17, 2011, the Company entered
into a Promissory Note agreement 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 balance of the note, net of debt discount, was $50,000
and $50,000 at December 31, 2019 and 2018, respectively. The note is currently in default
The Company had unrelated party notes
and loans payable of $322,340 as of December 31, 2018. The Company had unrelated party proceeds of $571,814 from notes and loans
payable, repaid $65,516 to unrelated party noteholders and reclassified $402,400 of notes payable to an unrelated party relating
to the discontinuance of Red Rock resulting in balance as of December 31, 2019. Additionally, the Company assumed notes payable
from two unrelated parties from the acquisition of Key Tax on May 8, 2019 of $107,351.
On September 9, 2019, the Company entered
into a Senior Secured Promissory Note with an unrelated entity in the amount $410,000. The note bears interest at the rate of
10% per annum and matures September 9, 2020. The Company has agreed to use the proceeds to repay amounts owed to existing lender
of the Company as identified in the agreement. The is secured and is current as of December 31, 2019. The balance of the note
at December 31, 2019 is $410,000 and accrued interest is $12,693.
As of September 30, 2019, the Company
had lease payables of $45,721 in connection with three capital leases on two Mercedes Sprinter Vans and a generator and eight
auto loans related to our pizza business. There are purchase options at the end of all lease terms that are based on the fair
market value of the vans at the time. The leases are current as of December 31, 2019.
Notes payable to unrelated party of $11,783
was due to the auto loans for the vehicles used in the Pizza restaurants and Repicci’s Group and for daily operations. The
loans carry interest from 0% to 6% interest and are not currently in default.
9.
|
CONVERTIBLE NOTES PAYABLE
|
Some of the Convertible Notes issued as
described below included an anti-dilution provisions that allowed for the adjustment of the conversion price. The Company considered
the guidance provided by the FASB in “Determining Whether an Instrument Indexed to an Entity’s Own Stock,” the
result of which indicates that the instrument is not indexed to the issuer’s own stock. Accordingly, the Company determined
that, as the conversion price of the Notes issued in connection therewith could fluctuate based future events, such prices were
not fixed amounts. As a result, the Company determined that the conversion features of the Notes issued in connection therewith
are not considered indexed to the Company’s stock and characterized the value of the conversion feature of such notes as
derivative liabilities.
During the years ending December 31,
2019 and 2018, the Company had proceeds of $613,526 and $1,702,603 from convertible notes, repaid $218,863 and $0 to
convertible noteholders resulting in balances due to convertible note holders of $1,079,825 and $1,825,778, as of December
31, 2019 and 2018, respectively. The following amounts reflect debt discount of $828,468 and $201,024 as of December 31,
2019 and 2018 respectively.
During the years ending December 31, 2019
and 2018, the Company recorded amortization of debt discounts of $972,047 and $950,736 during the years ending December 31,
2019 and 2018, respectively.
During the years ended December 31, 2019
and 2018, respectively, the Company converted $422,809 and $748,571 of convertible debt and $53,255 and $251,733 in interest,
penalties and fees into 577,444,444 shares (post reverse split of 1500:1) of the company’s Common Stock.
Convertible notes at December 31, 2019 and December 31, 2018
are summarized as follows:
|
|
Year Ended December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Convertible notes payable - unrelated
party
|
|
$
|
1,908,293
|
|
|
$
|
2,026,800
|
|
Convertible notes payable
- related party
|
|
|
–
|
|
|
|
165,000
|
|
Total convertible debt
|
|
|
1,908,293
|
|
|
|
2,191,800
|
|
Discounts on convertible
notes payable
|
|
|
(828,468
|
)
|
|
|
(201,024
|
)
|
Total convertible debt less debt discount
|
|
|
1,079,825
|
|
|
|
1,990,776
|
|
Current portion
|
|
|
595,257
|
|
|
|
950,776
|
|
Long-term portion
|
|
$
|
484,568
|
|
|
$
|
1,040,000
|
|
Convertible Notes Payable – Unrelated Party
Note 7
On February 9, 2016, the Company entered
into a 15% convertible line of credit (“Note 7”) with an unrelated entity in the amount up to $50,000. On February
9, 2016, the Company received $17,500 cash for the line of credit, matured on February 9, 2017, and is unsecured. Note 7 is convertible
into common shares of the Company at the conversion ratio of $0.03 or 50% discount of the lowest closing price on the primary
trading market on which Company's common stock is quoted for the last five trading days prior to the conversion date, whichever
is lower. In January 2017, the Company determined that the conversion features contained in Note 7 carrying value represents a
freestanding derivative instrument that meets the requirements for liability classification under ASC 815. As a result, the fair
value of the derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The
fair value of the derivative financial instrument of the convertible note was measured using the Black-Scholes Model as of January
2017 and remeasured on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments
are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified
into additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities. Note 7 principal
of $6,000 was converted into 200,000 shares of common stock at the end of 2016. Note 7, is currently in default and accrues a
late fee of 5% and default interest rate of 20%.
Note 7-1
On October 28, 2016, the Company received
$25,000 cash pursuant to the terms of Note 7, which matured on October 28, 2017 (“Note 7-1”). Note 7-1 was entitled
to conversion after April 28, 2017 which met the requirements for liability classification under ASC 815. See Footnote 11 for
more information on derivative liabilities.
During the year ended December 31, 2017,
the Company recorded interest expense related to Note 7-1 in amount of $11,454 and amortization of debt discount in amount of
$18,333. The balance of Note 7-1 was $25,000 as
of December 31, 2017 and December 31, 2016, respectively. Note 7-1 is currently in default and will incur a late fee of 5% and
default interest rate of 20%.
Note 8
On March 8, 2016, the Company entered
into a 15% convertible promissory note in the principal of $50,000 (“Note 8”) with an unrelated entity for services
rendered. Note 8 is matured on March 8, 2017, and is unsecured. This Note is convertible into common shares of the Company at
the conversion ratio of $0.03 or 50% discount of the lowest closing price on the primary trading market on which Company's common
stock is quoted for the last five trading days prior to the conversion date, whichever is lower. The Company determined that the
conversion features contained in Note 8 carrying value represents a freestanding derivative instrument that meets the requirements
for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is
reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible
note was measured using the Black-Scholes model at the inception date of the note and remeasured on each subsequent balance sheet
date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or
expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
See Footnote 10 for more information on derivative liabilities.
Note 8 was in default with principal balance
of $12,294 as of December 31, 2017. During the year ended December 31, 2017, the Company recorded late fee and default interest
related to Note 8 in total amount of $8,748 and amortization of debt discounts in amount of $50,000. The balance of Note 8 was
$50,000, Note 8, is currently in default and will incur a late fee of 5% and default interest rate of 20%.
Note 9
On September 12, 2016, the Company
entered into a 10% convertible promissory note in the principal of $80,000 (“Note 9”) with an unrelated entity
for services rendered. Note 9 is matured on September 12, 2017, and is unsecured. This Note is convertible into common shares
of the Company at the conversion ratio of $0.03 or 50% discount of the lowest closing bid price on the primary trading market
on which Company's common stock is quoted for the last five trading days prior to the conversion date, whichever is lower.
The Company determined that the conversion features contained in Note 9 carrying value represents a freestanding derivative
instrument that meets the requirements for liability classification under ASC 815. As a result, the fair value of the
derivative financial instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value
of the derivative financial instrument of the convertible note was measured using the Black-Scholes Model at the inception
date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative
financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative
liabilities will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on
derivative liabilities. Note 9 is currently in default and will incur a late fee of 5% and default interest rate of 20%.
Note 9 was in default with principal balance
of $80,000 as of December 31, 2017. Note 9 is currently in default and accrues a late fee of 5% and default interest of 20%.
Note 10
On January 24, 2017, the Company
entered into a 10% convertible promissory note in the principal of $80,000 (“Note 10”) with an unrelated entity
for services rendered. Note 10 is matured on January 24, 2018, and is unsecured. This Note is convertible into common shares
of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing bid price on the primary trading market
on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever is lower.
This Note is convertible into common shares of the Company as described above. The Company determined that the conversion
features contained in Note 10 carrying value represents a freestanding derivative instrument that meets the requirements for
liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is
reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the
convertible note was measured using the Binomial-Lattice and Black-Scholes valuation models at the inception date of the note
and will do so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial
instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities
will be reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative
liabilities.
As a result, Note 10 was discounted in
the amount of $80,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company
recorded amortization of debt discounts in amount of $35,555.56. During the year ended December 31, 2017, the Company recorded
interest expense related to Note 10 in amount of $5,494. The balance of Note 10 was $55,000 with unamortized debt discount of
$19,444 as of December 31, 2017. Note 10 is currently in default and will incur a late fee of 5% and default interest rate of
20%.
Note 11
On January 24, 2017, the Company entered
into a 15% convertible line of credit (“Note 11”) with an unrelated entity in the amount up to $250,000. On January
24, 2017, the Company received $50,000 cash for the line of credit, is matured on January 24, 2018, and unsecured. Note 11 is
convertible into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on
the primary trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date,
whichever is lower. However, Note 11 is convertible after 6 months of the effective date of this Note, which is July 27, 2017.
The Company determined that the conversion features contained in Note 11 carrying value represents a freestanding derivative instrument
that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial
instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial
instrument of the convertible note was measured using the Black-Scholes Model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into
additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.
As a result, Note 11 was discounted in
the amount of $50,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the Company
recorded amortization of debt discounts in amount of $43,611. During the year ended December 31, 2017, the Company recorded interest
expense related to Note 11 in amount of $7,042. The balance of Note 11 was $50,000 with unamortized debt discount of $6,389 as
of December 31, 2017. Note 11 is currently in default and will incur a late fee of 5% and default interest rate of 20%.
Note 11-1
On February 21, 2017, the Company received
$25,000 cash pursuant to the terms of Note 11, is matured on February 21, 2018 (“Note 11-1”). Note 11 is convertible
into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary
trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever
is lower. However, Note 11-1 is convertible after 6 months of the effective date of this Note, which is August 21, 2017. The Company
determined that the conversion features contained in Note 11-1 carrying value represents a freestanding derivative instrument
that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial
instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial
instrument of the convertible note was measured using the Black-Scholes Model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into
additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.
As a result, Note 11-1 was discounted
in the amount of $25,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the
Company recorded amortization of debt discounts in amount of $18,833. The balance of Note 11-1 was $25,000 with unamortized
debt discount of $6,667 as of December 31, 2017. Note 11-1 is currently in default and will incur a late fee of 5% and
default interest rate of 20%.
On March 16, 2017, the Company received
$40,000 cash pursuant to the terms of Note 11, is matured on March 16, 2018 (“Note 11-2”). Note 11-2 is convertible
into common shares of the Company at the conversion ratio of $0.25 or 50% discount of the lowest closing price on the primary
trading market on which Company's common stock is quoted for the last ten trading days prior to the conversion date, whichever
is lower. However, Note 11-2 is convertible after 6 months of the effective date of this Note, which is September 16, 2017. The
Company determined that the conversion features contained in Note 11-2 carrying value represents a freestanding derivative instrument
that meets the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial
instrument in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial
instrument of the convertible note was measured using the Black-Scholes Model at the inception date of the note and will do so
again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be reclassified into
additional paid in capital upon conversion. See Footnote 10 for more information on derivative liabilities.
As a result, Note 11-2 was discounted
in the amount of $40,000 and amortized over the remaining life of this Note. During the year ended December 31, 2017, the
Company recorded amortization of debt discounts in amount of $23,556. The balance of Note 11-2 was $40,000 with unamortized
debt discount of $16,444 as of December 31, 2017. Note 11-2 is currently in default and will incur a late fee of 5% and
default interest rate of 20%.
Note 12
On April 6, 2017, the Company entered
into a 15% convertible promissory note with an unrelated entity in the amount $50,000 (“Note 12”). Note 12 is matured
on April 6, 2018, and unsecured. This Note is convertible into common shares of the Company as defined in the agreement. However,
Note 12 is convertible after 6 months of the effective date of this Note, which is October 6, 2017. The Company determined that
the conversion features contained in Note 12 carrying value represents a freestanding derivative instrument that meets the requirements
for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is
reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible
note was measured using the Black-Scholes Model at the inception date of the note and will do so again on each subsequent balance
sheet date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income
or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
See Footnote 10 for more information on derivative liabilities.
On November 8, 2017, a portion of principal
of $6,503, plus $1,500 conversion cost reimbursement and $1,036 in interest, were converted into 1,095,636 shares of common stock
at a conversion price of $0.0825 per share.
As a result, Note 12 was discounted in
the amount of $50,000 and amortized over the remaining life of this Note. The balance of Note 12 was $43,478 with unamortized debt discount of $19,608 as
of December 31, 2017. Note 12 is currently in default and will incur a late fee of 5% and default interest rate of 20%.
Note 13-1
On April 21, 2017, the Company entered
into a convertible promissory note with an unrelated entity in the amount $330,000, with original issue discount of $30,000 for
net cash to the company of $300,000 (“Note 13-1”). Note 13-1 matures on April 21, 2018 and is unsecured. Note 13-1
is convertible into common shares of the Company as defined in the agreement. The Company determined that the conversion features
contained in Note 13-1 carrying value represents a freestanding derivative instrument that meets the requirements for liability
classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the
Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was
measured using the Black-Scholes Model at the inception date of the note and will do so again on each subsequent balance sheet
date. Any changes in the fair value of the derivative financial instruments are recorded as non-operating, non-cash income or
expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
See Footnote 10 for more information on derivative liabilities.
In addition, in connection with this Securities
Purchase Agreement, the Company granted purchasers 2,357,143 warrants with exercise price of $0.14 per share (“Warrants
A”), 1,885,715 warrants with exercise price of $0.175 per share (“Warrants B”) and 1,571,429 warrants with exercise
price of $0.21 per share (“Warrants C”). Warrants A, B and C are exercisable on the grant date and expire in three
years, each of which represents 100% of the Principal Amount at the Closing divided by the respective exercise price. The
fair value of these warrants was measured using the Black-Scholes Model at the grant date. Accordingly, the Company recorded warrant
expenses at the fair market value of $219,210 during the year ended December 31, 2017. See footnote 13 for more information.
On July 24, 2018, Note 13-1 was purchased
by an unrelated party with a new Replacement Convertible Promissory Note (“Note 13-2”) in the amount of $237,909.17.
Note 13-2 bears interest at 5%, matures on January 24, 2019, and is unsecured. This Note is convertible into common shares of
the Company as defined in the agreement. The new principal amount of the note is consisting of $172,000 of principal, $51,600
of penalties and $14,309.17 of accrued interest.
Note 18
On January 19, 2018, the Company entered
into a 12% convertible note with an unrelated entity in the amount $83,500, with an original issue discount of $5,160 and expenses
of $3,340 resulting in net cash to the company of $75,000 (“Note 18”). Note 18 matures January 19, 2019 and is secured
by the Company’s common stock. This Note is eligible to convert January 19, 2018 and is convertible into shares of the Company’s
common stock as defined in the agreement.
The Company determined that the conversion
features contained in this note’s carrying value represents a freestanding derivative instrument that meets the requirements
for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is
reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible
note was calculated using the Black-Scholes Model at the inception date of the note and will be calculated again on each subsequent
balance sheet date. Any change in the fair value of the derivative financial instrument is recorded as non-operating, non-cash
income or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital
upon conversion. See Footnote 11 for more information on derivative liabilities.
Note 20
On March 29, 2018, the Company
entered into a 8% Convertible Secured Redeemable Note (“Note 20”) with an unrelated entity in the amount $100,000
with expenses of $5,000 resulting in net cash to the company of $95,000. Note 20 is unsecured, matures March 29, 2019 and was
settled as of December 31, 2019. This Note was eligible to convert upon issuance and is convertible into shares of the
Company’s common stock as defined in the agreement. Footnote 11 for more information on derivative liabilities and the
schedule of convertible notes payable for more details of this note.
The Company determined that the
conversion features contained in this note’s carrying value represents a freestanding derivative instrument that meets
the requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial
instrument in the note was reflected in the Company’s balance sheet as a liability. The fair value of the derivative
financial instrument of the convertible note was calculated using the Black-Scholes Model at the inception date of the note
and will be calculated again on each subsequent balance sheet date. Any change in the fair value of the derivative financial
instrument is recorded as non-operating, non-cash income or expense at each balance sheet date. See Footnote 10 for more information on derivative
liabilities.
Note 21
On April 9, 2018, the Company entered
into a Convertible Promissory Note (“Note 21”) with an unrelated entity in the amount $145,000, with expenses of $14,000
resulting in net cash to the company of $131,000. Note 21 was unsecured, matures March 29, 2019 and was settled. This
Note is eligible to convert upon issuance and is convertible into shares of the Company’s common stock as defined in the
agreement.
The Company determined that the conversion
features contained in this note’s carrying value represents a freestanding derivative instrument that meets the requirements
for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note was
reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible
note was calculated using the Black-Scholes Model at the inception date of the note and revalued on each subsequent
balance sheet date. Any change in the fair value of the derivative financial instrument was recorded as non-operating, non-cash
income or expense at each balance sheet date. See Footnote 11 for more information on derivative liabilities and the schedule of convertible notes payable
for more details of this note.
Note 22
On July 10, 2018, the Company entered
into a Senior Secured Convertible Promissory Note (“Note 22”) with an unrelated entity in the amount $1,040,000,
with original issue discount of $103,000, expenses of $64,160 and an interest deposit of $20,000 resulting in net cash to the
company of $852,840. Note 22 is secured, matures January 10, 2021 and is current. This Note became eligible to convert July
10, 2019 and is convertible into shares of the Company’s common stock as defined in the agreement. On February 20,
2019, the Company executed an addendum to Note 22, whereby the Company will receive 2 additional tranches. The first upon
closing, the Company received $55,216 less expenses of $5,216 resulting in net cash to the Company of $50,000 and on April
10, 2019, the Company received the second tranche, upon completing certain events, of $55,616 less expenses of $5,616
resulting in net cash of $50,000 which was paid directly to a certain vendor.
The Company determined that the conversion
features contained in Note 22 carrying value represents a freestanding derivative instrument that meets the requirements for liability
classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the
Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was
calculated using the Black-Scholes Model at the inception date of the note and will be calculated again on each subsequent balance
sheet date. Any change in the fair value of the derivative financial instrument is recorded as non-operating, non-cash income
or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
See Footnote 11 for more information on derivative liabilities and the schedule of convertible notes payable for more details
of this note.
Note 25
On August 13, 2018, the Company entered
into a Convertible Promissory Note (“Note 25) with an unrelated entity in the amount $126,560, with original issue discount
of $13,560 and expenses of $13,000 resulting in net cash to the company of $100,000. Note 25 is unsecured, matures February 13,
2019 and is currently in default. This Note is eligible to convert upon issuance and is convertible into shares of the Company’s
common stock as defined in the agreement.
The Company determined that the conversion
features contained in Note 25 carrying value represents a freestanding derivative instrument that meets the requirements for liability
classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the
Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was
calculated using the Black-Scholes Model at the inception date of the note and will be calculated again on each subsequent balance
sheet date. Any change in the fair value of the derivative financial instrument is recorded as non-operating, non-cash income
or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
See Footnote 11 for more information on derivative liabilities and the schedule of convertible notes payable for more details
of this note.
Note 26
On August 10, 2017, the Company entered
into a Debt Purchase Agreement (“Note 26”) with an unrelated entity in the amount $20,000. The Note is unsecured,
matures January 27, 2018 and is currently in default. This Note is eligible to convert upon issuance and is convertible into shares
of the Company’s common stock as defined in the agreement.
The Company determined that the conversion
features contained in Note 26 carrying value represents a freestanding derivative instrument that meets the requirements for liability
classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the
Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was
calculated using the Black-Scholes Model at the inception date of the note and will be calculated again on each subsequent balance
sheet date. Any change in the fair value of the derivative financial instrument is recorded as non-operating, non-cash income
or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
Footnote 11 for more information on derivative liabilities and the schedule of convertible notes payable for more details of this
note.
Note 27-1-4
On December 10, 2018, the Company
entered into an 8% Convertible Redeemable Note (“Note 27-1-4) with an unrelated entity in the amount $108,000, with
original issue discount of $4,000 and expenses of $2,500 resulting in net cash to the company of $101,500. Note 27-1-4 is
unsecured, matures December 10, 2019 and was settled.
The Company determined that the conversion
features contained in Note 27-1-4 carrying value represents a freestanding derivative instrument that meets the requirements for
liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected
in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible
note was calculated using the Black-Scholes Model at the inception date of the note and will be calculated again on each subsequent
balance sheet date. Any change in the fair value of the derivative financial instrument is recorded as non-operating, non-cash
income or expense at each balance sheet date. Footnote 11 for more information on derivative liabilities and the schedule of convertible notes payable for
more details of this note.
Note 28
On December 5, 2018, the Company entered
into a Convertible Secured Redeemable Note (“Note 28”) with an unrelated entity in the amount $100,000, with expenses
of $5,000 resulting in net cash to the company of $95,000. Note 28 is secured and was settled as of December 31, 2019. This
Note was eligible to convert upon issuance and was convertible into shares of the Company’s common stock as defined in the
agreement.
The Company determined that the conversion
features contained in Note 28 carrying value represents a freestanding derivative instrument that meets the requirements for liability
classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the
Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was
calculated using the Black-Scholes Model at the inception date of the note and will be calculated again on each subsequent balance
sheet date. Any change in the fair value of the derivative financial instrument is recorded as non-operating, non-cash income
or expense at each balance sheet date. Footnote 11 for more information on derivative liabilities and the schedule of convertible notes payable for more details of this
note.
Note 29
On May 10, 2019, the Company entered into
an 8% Convertible Secured Redeemable Note (“Note 29”) with an unrelated entity in the amount $150,000 and expenses
of $7,500 resulting in net cash to the company of $142,500. Note 29 is secured, prior to maturity of May 10, 2020, . This Note
is eligible to convert upon issuance and is convertible into shares of the Company’s common stock as defined in the agreement.
The Company determined that the conversion
features contained in Note 29 carrying value represents a freestanding derivative instrument that meets the requirements for liability
classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the
Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was
calculated using the Black-Scholes Model at the inception date of the note and will be calculated again on each subsequent balance
sheet date. Any change in the fair value of the derivative financial instrument is recorded as non-operating, non-cash income
or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
Footnote 11 for more information on derivative liabilities and the schedule of convertible notes payable for more details of this
note.
On November 8, 2019, Note 29 was purchased
by and assigned to an unrelated party upon execution of Amendment No. 1 to Convertible Promissory Note. The amount assigned was
the existing principal amount of the Note 29 of $150,000 and accrued interest of $5,917.81 (“Note 29-1”) plus a new
8% Convertible Secured Redeemable Note (“Note 29-2). The total amount assigned to the new note holder is $218,284.93. Note
29-2 bears interest at 8%, matures November 8, 2020 and is secured. This Note is convertible into common shares of the Company
as defined in the agreement.
Note 30
On July 26, 2019, the Company entered
into a Convertible Note Payable (“Note 30”) with an unrelated entity in the amount $73,500, with expenses of
$3,000 resulting in net cash to the company of $70,500. Note 30 is unsecured, matures July 26, 2020 and is current. This Note
is eligible to convert January 26, 2020 and is convertible into shares of the Company’s common stock as defined in the
agreement.
The Company determined that the conversion
features contained in Note 30 carrying value represents a freestanding derivative instrument that meets the requirements for liability
classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the
Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was
calculated using the Black-Scholes Model at the inception date of the note and will be calculated again on each subsequent balance
sheet date. Any change in the fair value of the derivative financial instrument is recorded as non-operating, non-cash income
or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
Footnote 11 for more information on derivative liabilities and the schedule of convertible notes payable for more details of this
note.
Note 31
On August 28, 2019, the Company entered
into an 8% Convertible Secured Redeemable Note (“Note 31”) with an unrelated entity in the amount $120,000, with expenses
of $6,000 resulting in net cash to the company of $114,000. Note 31 is secured, matures August 28, 2020 and is current. This Note
is eligible to convert upon issuance and is convertible into shares of the Company’s common stock as defined in the agreement.
The Company determined that the conversion
features contained in Note 31 carrying value represents a freestanding derivative instrument that meets the requirements for liability
classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected in the
Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible note was
calculated using the Black-Scholes Model at the inception date of the note and will be calculated again on each subsequent balance
sheet date. Any change in the fair value of the derivative financial instrument is recorded as non-operating, non-cash income
or expense at each balance sheet date. The derivative liabilities will be reclassified into additional paid in capital upon conversion.
Footnote 11 for more information on derivative liabilities and the schedule of convertible notes payable for more details of this
note.
Note 32
On May 22, 2019, the Company received
$25,000 from a draw on the line of credit (Note 32”) described in of Note 11. Note 32 is unsecured, matures May 22, 2020,
and is current. Note 32 is convertible into common shares of the Company as defined in the agreement and is convertible after
6 months of the effective date of this Note. The Company determined that the conversion features contained in Note 11-2 carrying
value represents a freestanding derivative instrument that meets the requirements for liability classification under ASC 815.
As a result, the fair value of the derivative financial instrument in the note is reflected in the Company’s balance sheet
as a liability. The fair value of the derivative financial instrument of the convertible note was measured using the Black-Scholes
Model at the inception date of the note and will do so again on each subsequent balance sheet date. Any changes in the fair value
of the derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date.
The derivative liabilities will be reclassified into additional paid in capital upon conversion. Footnote 11 for more information
on derivative liabilities and the schedule of convertible notes payable for more details of this note.
On April 21, 2008, the Company entered
into an unsecured Convertible Debenture (“Debenture 1”) with a shareholder in the amount of $150,000. Debenture 1
was convertible into Common Shares of the Company at $0.03 per share at the option of the holder no earlier than August 21, 2008.
Debenture 1 bore interest at 12% per year, matured in August 2009, and was unsecured. All principal and unpaid accrued interest
was due at maturity. In conjunction with the Debenture 1, the Company also issued warrants to purchase 5,000,000 shares of the
Company’s Common Stock at $0.03 per share. The warrants expired on April 20, 2013. As a result, of issued warrants, the
Company recorded a $150,000 debt discount during 2008 which has been fully amortized. The Company was in default on Debenture
1, and no warrants had been exercised before expiration.
On March 11, 2009, the Company entered
into an unsecured Convertible Debenture (“Debenture 2”) with a shareholder in the amount of $15,000. Debenture 2 was
convertible into Common Shares of the Company at $0.03 per share at the option of the holder. Debenture 2 bore interest at 12%
per year, matured on March 11, 2014, and was unsecured. All principal and unpaid accrued interest was due at maturity. The Company
was in default on Debenture 2.
As a result of the tainted issue
by the derivative financial instrument of the convertible notes, The Company determined that the conversion features
contained in Debenture 1 and Debenture 2 carrying value represents an embedded derivative instrument that meets the
requirements for liability classification under ASC 815. As a result, the fair value of the derivative financial instrument
in the note is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial
instrument of the convertible note was measured using the Black-Scholes Model at the inception date of the note and will do
so again on each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments are
recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative liabilities will be
reclassified into additional paid in capital upon conversion. See Footnote 10 for more information on derivative
liabilities.
As of December 31, 2019, the Company’s
derivative liabilities are embedded derivatives associated with the Company’s convertible notes payable. Due to the Notes’
conversion feature, the actual number of shares of common stock that would be required if a conversion of the note as described
in Note 9 was made through the issuance of the Company’s common stock cannot be predicted. As a result, the conversion feature
requires derivative accounting treatment and will be bifurcated from the note and “marked to market” each reporting
period through the statement of operations.
The Company used the Black-Scholes Model
to measure the fair value of the derivative liabilities of $3,102,392 and will subsequently remeasure the fair value at the end
of each reporting period and record the change of fair value in the consolidated statement of operation during the corresponding
period.
The valuation of the derivative liabilities
attached to the convertible debt was arrived at through the use of the Black-Scholes Option Pricing Model (“Black-Scholes
Model”) using the following assumptions:
|
|
|
Year Ended December
31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
Volatility
|
|
|
378.8% - 1,872.7%
|
|
|
|
182.9% - 247.1%
|
|
Risk-free interest rate
|
|
|
1.55% - 1.62%
|
|
|
|
2.36% - 2.72%
|
|
Expected term
|
|
|
.47 – 2.8
|
|
|
|
.13 – 5.14
|
|
Refer
to Note 11 for the derivative liabilities associated with convertible debt instruments, at December 2019 and 2018.
The following is a schedule of convertible notes payable from
December 31, 2018 to December 31, 2019.
Note
#
|
Issuance
|
Maturity
|
Principal
Balance 12/31/18
|
|
New
Loans
|
|
Cash
Paydown
|
|
Principal
Conversions
|
|
Shares
Issued Upon Conversion
|
|
Principal
Balance 12-31-19
|
|
Interest
Expense On Convertible Debt For Year Ended 12-31-19
|
|
Accrued
Interest on Convertible Debt at 12-31-19
|
|
1
|
8/21/08
|
8/21/2009
|
$
|
150,000
|
|
$
|
–
|
|
$
|
–
|
|
$
|
–
|
|
|
–
|
|
$
|
150,000
|
|
|
96,358
|
|
|
204,608
|
|
2
|
3/11/09
|
4/29/2014
|
|
15,000
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
15,000
|
|
|
8,640
|
|
|
19,465
|
|
7
|
2/9/16
|
On demand
|
|
8,485
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
8,485
|
|
|
1,697
|
|
|
2,412
|
|
7-1
|
10/28/16
|
10/28/2017
|
|
25,000
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
25,000
|
|
|
5,000
|
|
|
10,321
|
|
8
|
3/8/16
|
3/8/2017
|
|
1,500
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
1,500
|
|
|
300
|
|
|
9,863
|
|
9
|
9/12/16
|
9/12/2017
|
|
80,000
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
80,000
|
|
|
16,000
|
|
|
47,876
|
|
10
|
1/24/17
|
1/24/2018
|
|
55,000
|
|
|
–
|
|
|
–
|
|
|
(22,379
|
)
|
|
50,009,000
|
|
|
32,621
|
|
|
10,665
|
|
|
23,212
|
|
11
|
1/27/17
|
1/27/2018
|
|
2,698
|
|
|
–
|
|
|
(2,698
|
)
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
11-1
|
2/21/17
|
2/21/2018
|
|
25,000
|
|
|
–
|
|
|
–
|
|
|
(15,267
|
)
|
|
44,518,593
|
|
|
9,733
|
|
|
4,008
|
|
|
2,533
|
|
11-2
|
3/16/17
|
3/16/2018
|
|
40,000
|
|
|
–
|
|
|
–
|
|
|
(19,968
|
)
|
|
5,481,176
|
|
|
20,032
|
|
|
5,643
|
|
|
2,367
|
|
12
|
4/6/17
|
4/6/2018
|
|
31,997
|
|
|
–
|
|
|
–
|
|
|
(31,997
|
)
|
|
1,695,400
|
|
|
–
|
|
|
2,490
|
|
|
996
|
|
13-1
|
4/21/17
|
4/21/2018
|
|
172,000
|
|
|
65,909
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
13-2
|
7/24/18
|
1/24/2019
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(145,704
|
)
|
|
156,065,401
|
|
|
92,205
|
|
|
16,431
|
|
|
24,002
|
|
18
|
1/19/18
|
1/19/2019
|
|
83,500
|
|
|
–
|
|
|
(48,072
|
)
|
|
(35,428
|
)
|
|
384,963
|
|
|
–
|
|
|
4,368
|
|
|
(119
|
)
|
20
|
3/29/18
|
3/29/2019
|
|
25,100
|
|
|
–
|
|
|
–
|
|
|
(25,100
|
)
|
|
112,844
|
|
|
–
|
|
|
131
|
|
|
–
|
|
21
|
4/9/18
|
4/9/2019
|
|
130,206
|
|
|
–
|
|
|
(127,691
|
)
|
|
(2,515
|
)
|
|
72,901
|
|
|
0
|
|
|
8,809
|
|
|
–
|
|
22
|
7/10/18
|
1/10/2021
|
|
1,040,000
|
|
|
110,832
|
|
|
(197,418
|
)
|
|
–
|
|
|
–
|
|
|
953,414
|
|
|
116,675
|
|
|
116,675
|
|
25
|
8/13/18
|
2/13/2019
|
|
78,314
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
37,581,722
|
|
|
78,314
|
|
|
9,398
|
|
|
–
|
|
26
|
8/10/17
|
1/27/2018
|
|
20,000
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
20,000
|
|
|
3,000
|
|
|
4,533
|
|
27-1-4
|
12/10/18
|
12/10/2019
|
|
108,000
|
|
|
–
|
|
|
(54,289
|
)
|
|
(53,711
|
)
|
|
141,439,120
|
|
|
–
|
|
|
2,856
|
|
|
–
|
|
28
|
12/5/18
|
12/5/2019
|
|
100,000
|
|
|
–
|
|
|
(43,100
|
)
|
|
(56,900
|
)
|
|
125,056,692
|
|
|
–
|
|
|
4,900
|
|
|
–
|
|
29-1
|
11/8/19
|
11/8/2020
|
|
–
|
|
|
–
|
|
|
–
|
|
|
(14,796
|
)
|
|
–
|
|
|
141,122
|
|
|
2,409
|
|
|
2,409
|
|
29-2
|
11/8/19
|
11/8/2020
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
62,367
|
|
|
–
|
|
|
–
|
|
30
|
7/26/19
|
7/26/2020
|
|
–
|
|
|
73,500
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
73,500
|
|
|
1,909
|
|
|
1,909
|
|
31
|
8/28/19
|
8/28/2020
|
|
–
|
|
|
120,000
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
120,000
|
|
|
3,288
|
|
|
3,288
|
|
32
|
5/22/19
|
5/10/2020
|
|
–
|
|
|
25,000
|
|
|
–
|
|
|
–
|
|
|
27,400,000
|
|
|
25,000
|
|
|
1,222
|
|
|
1,222
|
|
|
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
–
|
|
|
|
|
$
|
2,191,800
|
|
$
|
395,241
|
|
$
|
(473,268
|
)
|
$
|
(423,766
|
)
|
|
589,817,812
|
|
$
|
1,690,008
|
|
|
326,195
|
|
|
477,571
|
|
10.
|
FAIR VALUE MEASUREMENT
|
The Company measures assets and liabilities
at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents
the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction
between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an
asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair
value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The Company adopted the provisions of
Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10
defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required
or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact
and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels
of inputs that may be used to measure fair value:
The following are the hierarchical levels
of inputs to measure fair value:
|
·
|
Level 1 – Observable inputs that reflect quoted market
prices in active markets for identical assets or liabilities.
|
|
·
|
Level 2 Inputs reflect quoted prices for identical assets or
liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs
other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from
or corroborated by observable market data by correlation or other means.
|
|
·
|
Level 3 – Unobservable inputs reflecting the Company’s
assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent
with market participant assumptions that are reasonably available.
|
The carrying amounts of the Company’s
financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable & accrued expenses,
certain notes payable and notes payable – related party, approximate their fair values because of the short maturity of
these instruments.
The Company recognizes its derivative
liabilities as level 3 and values its derivatives using the methods discussed in note 12. While the Company believes that its
valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies
or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value
at the reporting date. The primary assumptions that would significantly affect the fair values using terms in the notes that are
subject to volatility and market price of the underlying common stock of the Company.
As of December 31, 2019, and December
31, 2018, the Company did not have any derivative instruments that were designated as hedges.
The derivative liability as of December
31, 2019 and 2018, respectively, in the amounts of $3,102,392 and $1,870,625 have a level 3 classification.
Fluctuations in the Company’s stock
price are a primary driver for the changes in the derivative valuations during each reporting period. During the year ended December
31, 2019, the Company’s stock price decreased from its initial valuation and thus, the derivative liability also decreased.
Generally, as the stock price decreases for each of the related convertible notes that have an embedded derivative liability,
the value of the derivative liability decreases. Stock price is one of the significant unobservable inputs used in the fair value
measurement of each of the Company’s convertible notes with an embedded derivative liability.
The Company used the Black-Scholes Model
to measure the fair value of the derivative liabilities as $3,102,392 and $1,870,625 on December 31, 2019 and 2018, respectively,
and will subsequently remeasure the fair value at the end of each period, and record the change of fair value in the consolidated
statement of operation during the corresponding period. The Company recorded a net decrease of $2,842,145 and $629,176 in its derivative
liability for years December 31, 2019 and 2018, respectively.
The following table provides a summary
of changes in fair value of the Company’s Level 3 financial liabilities for the year ended December 31, 2018:
Derivative Liability, December 31,2017
|
|
$
|
2,236,656
|
|
Day 1 Loss
|
|
|
987,021
|
|
Discount from derivatives
|
|
|
775,790
|
|
Resolution of derivative liability upon conversion
|
|
|
(1,770,997
|
)
|
Mark to market adjustment
|
|
|
(357,845
|
)
|
Derivative Liability, December 31, 2018
|
|
$
|
1,870,625
|
|
The above tables also include derivative
liabilities related to warrants to purchase common stock of $3,795 at December 31, 2018. Net loss for the period included mark-to-market
adjustments relating to the liabilities held during the year ended December 31, 2018 in the amounts of $133,123.
Fluctuations in the Company’s stock
price are a primary driver for the changes in the derivative valuations during each reporting period. During the year ended December
31, 2019, the Company’s stock price decreased from initial valuation. As the stock price decreases for each of the related
derivative instruments, the value to the holder of the instrument generally decreases. Stock price is one of the significant unobservable
inputs used in the fair value measurement of each of the Company’s derivative instruments.
Derivative Liability, December 31,2018
|
|
$
|
1,870,625
|
|
Day 1 Loss
|
|
|
24,762,381
|
|
Discount from derivatives
|
|
|
1,275,912
|
|
Derivatives settled
|
|
|
(2,856,994
|
)
|
Mark to market adjustment
|
|
|
21,949,532
|
|
Derivative Liability, December 31, 2019
|
|
$
|
3,102,392
|
|
The above tables also include derivative
liabilities related to warrants to purchase common stock of $6,135 at December 31, 2019. Net gain for the period included mark-to-market
adjustments relating to the liabilities held during the year ended December 31, 2018 in the amounts of $2,340.
The valuation of the derivative liabilities
attached to the convertible debt was arrived at through the use of the Black-Scholes Option Pricing Model (“Black-Scholes
Model”) using the following assumptions:
|
|
|
Year Ended December
31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
Volatility
|
|
|
378.8% - 1,872.7%
|
|
|
|
182.9% - 247.1%
|
|
Risk-free interest rate
|
|
|
1.55% - 1.62%
|
|
|
|
2.36% - 2.72%
|
|
Expected term
|
|
|
.47 – 2.8
|
|
|
|
.13 – 5.14
|
|
For the year-ended December 31, 2019, the Company has recorded
derivative liabilities associated with convertible debt instruments, as more fully discussed at Note 11.
During January 2020, the Company facilitated a reverse split
of several of its Preferred Stock Classes which has been given retrospective treatment in these consolidated financial statements.
In addition to the reverse stock split, management established new rights & privileges for certain
classes of preferred stock. The reverse split ratio ranges from 1.6:1 to 307.7:1 resulting in a reclassification of $98,989
from preferred stock to additional paid in capital.
Blank Check Preferred Stock
As of December 31, 2019, the Company has
designated 100,000,000 shares of Blank Check Preferred Stock zero of which have been issued.
2018 Preferred Stock Activity:
Series B Preferred Stock
During the year ended December 31, 2018,
the holder of 33,999 shares of Series B Preferred Stock exercised the option to convert into 169,995 shares of Common Stock of
the Company. Pre-reverse.
Series C Preferred Stock
During the year ended December 31, 2018,
the Company issued 2 shares of Series C Preferred stock to the prior owners of Edgeview Properties for services provided to the
Company.
Series H Preferred Stock
During the year ended December 31, 2018,
the holder of 4,859,469 shares of Series H Preferred Stock exercised the option to convert into 6,074,223 shares of Common Stock
of the Company. Pre-reverse.
Series I Preferred Stock
During the year ended December 31, 2018,
the holder of 203,655 shares of Series I Preferred Stock exercised the option to convert into 305,483 shares of Common Stock of
the Company. Pre-reverse.
In the fourth quarter of 2018, the Company
agreed to issue 125,000,000 preferred I shares to Chairman of the Board and the CEO, which were reflected as preferred shares
to be issued on the financial statements at a total cost of stock compensation of $200,000. The shares were issued in March 2019.
In the third quarter of 2019, the Company
issued 250,000,000 shares of Series I Preferred Stock to officers of the Company, which were granted during year ended December
31, 2018. See Note 8, for more details.
Series K Preferred Stock
During the year ended December 31, 2018,
the Company issued 8,200,562 shares of series K Preferred Stock to the prior owners of Red Rock Travel Group. The fair market
value of the shares on the date of issuances was $0.0201 per share, at a total cost of $175,000. All shares were cancelled.
Series K-1 Preferred Stock
During the year ended December 31, 2018,
the Company issued 1,447,457 shares of Series K-1 Preferred Stock in settlement of a note payable. The fair market value of the
shares were valued at the face amount of the note of $100,000.
Series L Preferred Stock
During the year ended December 31, 2018,
the Company issued 98,307,692 shares of Series L Preferred Stock to the prior owner of Platinum Tax Defenders. The fair market
value of the shares on the date of issuances was $0.013 per share, at a total cost of $1,278,000.
2019 Preferred Stock Activity
Series I Preferred Stock
In the fourth quarter of 2018, the Company
agreed to issue 125,000,000 preferred I shares to the Chairman of the Board and the CEO, which were reflected as preferred shares
to be issued on the financial statements at a total cost of stock compensation of $200,000. The shares were issued in March 2019.
In the fourth quarter of 2019, the Company
issued 165 shares of Series R preferred with a par value of $1,200
Series R Preferred Stock
The Company has designated shares of preferred stock as Series R Preferred Stock (“Series R”), with a par value of $1,200 per share, of which
165 shares were issued November 20, 2019 and outstanding as of December 31, 2019. Series R is awarded “Voting Right”
at the ratio of 1 vote per share owned. Each one share of Series I convertible as defined in the agreement.
Common Stock
During the year ended December 31,
2018, the Company canceled 1,000,000 shares previously issued and issued 3,886,930 shares to third-party consultants. The fair
market value of the shares on the date of issuances was $0.0186 to $0.0247 per share, at a total cost of $86,751. The Company also
issued 3,428,571 shares in settlement of $240,000 in liabilities owed to a former officer of the Company.
Effective March 21, 2019, the Company completed
a reverse stock split of 1500 :1 for common shares. In conjunction with the reverse stock split, the Company canceled 826
partial rounding shares to balance the shares outstanding.
May 8, 2019, the Company issued 500,000
shares of common stock with a par value of $0.001 to novate a convertible debt of $30,912.32. These Preferred “G” shares
have a lock-up/leak-out limiting the sale of stock for 12 months after which conversions and sales are limited to 20% of their
portfolio per year, pursuant to the terms of the Acquisition Agreement.
In the second quarter of 2019, the Company
converted 55,000,000 shares of Preferred Stock I into 82,500,000 shares of common stock at a par value of $0.001. Of the converted
shares, 27,500,000 shares were owed by the Chairman of the Board and 27,500,000 shares were owned by the CEO.
During the years ended December 31, 2019
and 2018, respectively, the Company converted $423,766 and $748,571 of convertible debt and $604,628 and $251,733
in interest, penalties and fees into 593,817,812 shares (post reverse split of 1500:1) of the company’s commons stock.
Pursuant to the same consulting agreement,
dated February 10, 2017, in addition to the 800,000 shares of common stock, the Company agreed to grant a total 800,000 warrants
to the consultant for consulting services related to marketing and business development and are exercisable on the grant date
and expire in three years. The initial allotment of 200,000 warrants were granted during the first quarter of 2017. The second
allotment of 200,000 warrants were granted during the second quarter of 2017. The third allotment of 200,000 warrants were granted
during the third quarter of 2017. The fourth allotment of 200,000 warrants were granted during the fourth quarter of 2017.
The Company determined that the warrants
were tainted and therefore the carrying value represents an embedded derivative instrument that meets the requirements for
liability classification under ASC 815. As a result, the fair value of the derivative financial instrument in the note is reflected
in the Company’s balance sheet as a liability. The fair value of the derivative financial instrument of the convertible
note was measured using the Black-Scholes Model at the grant dates of the agreement (February 10, 2017, May 10, 2017, August 10,
2017 and December 10, 2017.) and will do so again on each subsequent balance sheet date. Any changes in the fair value of the
derivative financial instruments are recorded as non-operating, non-cash income or expense at each balance sheet date. The derivative
liabilities will be reclassified into additional paid in capital upon conversion.
On April 21, 2017, the Company entered
into a Securities Purchase Agreement with an unrelated entity, pursuant to which the purchasers agreed to pay the Company an aggregate
of up to $600,000 for an aggregate of up to 660,000 in Principal Amount of Notes. The first tranche of $330,000 was closed simultaneously
(“Note 13-1”). The proceeds of $300,000, net of $30,000 Original Issuance Discount, was received by the Company.
In addition, in connection with this Securities
Purchase Agreement, the Company granted purchasers 2,357,143 warrants with exercise price of $0.14 per share (“Warrants
A”), 1,885,715 warrants with exercise price of $0.175 per share (“Warrants B”) and 1,571,429 warrants with exercise
price of $0.21 per share (“Warrants C”). Warrants A, B and C are exercisable on the grant date and expire in three
years, each of which represents 100% of the Principal Amount at the Closing divided by the respective exercise price.
During the year ended December 31, 2018,
the Company entered into a note agreement for $1,040,000, as part of the note agreement the Company agreed to issue the noteholder
warrants exercisable for 4,000,000 shares of common stock with a term of eight years, at an exercise price of $0.04. The terms
also include a full-ratchet anti-dilution protection provision and therefore the Company has deemed them to be a derivative liability.
The initial and ending valuation of the
warrants as of December 31, 2018 are as follows:
|
Year
Ended
December 31,
2018
|
|
Initial Valuation
|
$
|
89,359
|
|
Ending Value
|
$
|
3,795
|
|
The table below set forth the assumptions
for the Black-Scholes Model on each initial date and December 31, 2018:
|
|
Year Ended
December 31, 2018
|
|
Volatility
|
|
213% - 494%
|
|
Risk-free interest rate
|
|
0.147% - 0.269%
|
|
Expected term
|
|
2.11 – 2.53
|
|
Accordingly, the Company recorded warrant
expense of $133,123 during the year ended December 31, 2018.
The initial and ending valuation of the
warrants as of December 31, 2019 are as follows:
|
Year Ended
December 31, 2019
|
|
Initial Valuation
|
$
|
3,795
|
|
Ending Value
|
$
|
6,135
|
|
The table below set forth the assumptions
for the Black-Scholes Model on each initial date and December 31, 2019:
|
|
Year
Ended
December 31, 2019
|
|
Volatility
|
|
1,847% - 1,861%
|
|
Risk-free interest rate
|
|
1.60% - 1.83%
|
|
Expected term
|
|
0.5 – 7.0
|
|
Accordingly, the Company recorded warrant
expense of $2,340 during the year ended December 31, 2019.
The following tables summarize all warrant
outstanding as of December 31, 2019, and the related changes during this period. The warrants expire three years from grant date,
which as of December 31, 201 is 2.31 years. The intrinsic value of the warrants as of December 31, 2019 was $-0-.
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Stock Warrants
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
|
|
6,614,287
|
|
|
$
|
0.21
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
Balance at December 31, 2019
|
|
|
6,614,287
|
|
|
|
0.21
|
|
Warrants Exercisable at December 31, 2019
|
|
|
6,614,287
|
|
|
$
|
0.21
|
|
The Company previously agreed to
grant Mr. Roberts stock options for a minimum of 300,000 shares of the Company's common stock at an exercise price of 50% of
the current last ten (10) day stock average per share, and 600,000 shares of common stock as a key officer employment
incentive to be earned and vested on a pro rata basis at 25,000 shares per month for twenty-four (24) months. The fair value
of both 300,000 options and 600,000 shares were determined by the fair value of the Company’s Common Stock on the grant
date, at a price of approximately $0.226 per share. Accordingly, the accrued expense was $135,600 as of December 31, 2017. On
August 8, 2017, Mr. Roberts accepted the offer from the Company to issue 3,000,000 common shares to supersede all his options
and warrants in the employment agreement.
After the cancellation of the above transaction,
there were no stock options issued as of December 31, 2017, 2018 or 2019.
14.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
The Company had operating lease expense
of $217,090 and $242,567 for the year ended December 31, 2019 and 2018, respectively, consisting of the followings.
|
|
For the year ended
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Restaurants
|
|
$
|
75,904
|
|
|
$
|
72,121
|
|
Lot
|
|
|
65,208
|
|
|
|
73,782
|
|
Office
|
|
|
71,557
|
|
|
|
96,664
|
|
Equipment Rentals
|
|
|
4,421
|
|
|
|
–
|
|
Total
|
|
$
|
217,090
|
|
|
$
|
242,567
|
|
The Company has property leases that are
renewable on an annual basis, with no long-term property leases.
We have an employment agreement,
renewed May 15, 2014, with the Chairman, Mr. Thompson amended on July 27, 2017, effective January 1, 2017 to December 31, 2021
with automatic extension for additional successive one (1) year renewals terms unless terminated as defined the agreement. We
provide for compensation of $25,000 per month along with additional incentives.
We have an employment agreement with
the Chief Executive Officer, Mr. Cunningham, amended on July 27, 2017, effective on January 1, 2017 to December 31, 2021 with automatic
extension for additional successive one (1) year renewals terms unless terminated as defined the agreement. We provide for compensation
of $25,000 per month.
We have an employment agreement with
the Chief Operating Officer, effective June 13 2016 to December 31, 2021 with automatic extension for additional successive one
(1) year renewals terms unless terminated as defined in the agreement. We provide for compensation of $10,000 per month.
We have an employment agreement with
a subsidiary manager, effective May 31, 2019 with a term of 5 years, whereby we provide for compensation of $17,333 per month along
with a bonus incentive if financial performance measures are met.
We have an employment agreement
with a subsidiary manager, effective July 1, 2018 with a term of 5 years, whereby we provide for compensation of $20,000 per month
along with a bonus incentive if financial performance measures are met.
There are no other stock option plans,
retirement, pension, or profit sharing plans for the benefit of our sole officer and director other than as described herein.
The Company acquired Redrock Travel on
May 1, 2018. It was determined by the BOD to terminated the acquisition agreement and
to file with the State of Florida the cancelation of the Redrock Stock Class.
At December 31, 2019, the Company had
federal and state net operating loss carry forwards of approximately $14,586,354 that expire in various years through the year
2038.
Due to operating losses, there is no provision
for current federal or state income taxes for the years ended December 31, 2019 and 2018.
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amount used for federal and state income tax purposes.
The Company’s deferred tax asset
at December 31, 2019 and 2018 consists of net operating loss carry forwards calculated using federal and state effective tax rates
equating to approximately $3,815,102 and $3,815,102, respectively, less a valuation allowance in the amount of approximately $3,815,102
and $3,815,102, respectively. Because of the Company’s lack of earnings history, the deferred tax asset has been fully offset
by a valuation allowance in both 2019 and 2018. The valuation allowance increased by approximately $811,314 for the year ended
December 31, 2019.
The Company’s total deferred tax
asset as of December 31, 2019 and 2018 is as follows:
|
|
2019
|
|
|
2018
|
|
Deferred tax assets
|
|
$
|
3,815,102
|
|
|
$
|
3,815,102
|
|
Valuation allowance
|
|
|
(3,815,102
|
)
|
|
|
(3,815,102
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
–
|
|
|
$
|
–
|
|
The reconciliation of income taxes computed at the federal
and state statutory income tax rate to total income taxes for the years ended December 31, 2019 and 2018 is as follows:
On December 22, 2017, the U.S. Tax Cuts
and Jobs Act (the “Tax Reform Act”) was signed into law by President Trump. The Tax Reform Act significantly revised
the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January
1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing
a repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation
be recognized in the period in which the law was enacted. The provisional amounts incorporate assumptions made based upon the
Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and
implementation guidance.
The Company has four reportable operating
segments as determined by management using the “management approach” as defined by the authoritative guidance on Disclosures
about Segments of an Enterprise and Related Information:
|
(1)
|
Affordable Housing (We Three),
|
|
(2)
|
Pizza Restaurant (Romeo’s
NY Pizza),
|
|
(3)
|
Italian Ice Franchised Stores
and Franchisor (Repicci’s Group),
|
|
(4)
|
Tax Resolution Services (Platinum
Tax and Key Tax), and
|
|
(5)
|
Travel Services (Red Rock Travel
has been discontinued May 31, 2019)
|
These segments are a result of differences
in the nature of the products and services sold. Corporate administration costs, which include, but are not limited to, general
accounting, human resources, legal and credit and collections, are partially allocated to the three operating segments What is
allocated. Other revenue consists of nonrecurring items.
The Affordable Housing segment leases
and sells mobile homes as an option for a homeowner wishing to avoid large down payments, expensive maintenance costs, large monthly
mortgage payments and high property taxes and insurance which is a common trait of brick and mortar homes. Additionally, if bad
credit is an issue preventing potential home owners from purchasing a traditional house, the Company will provide a "lease
to own" option so people secure their family home.
The Pizza Restaurant segment includes
sales and operating results for all Company-owned restaurants. Assets for this segment include equipment, furniture and fixtures
for the Company-owned restaurants.
Repicci’s Group offers Italian Ice
franchises under the well-known name “Repicci’s Italian Ice”. These franchised stores specialize in the distribution
of nonfat frozen confections.
The number of franchise agreements in
force as of December 31, 2019 was forty-five (45), seven (7) new state of the art “mobile” units.
Platinum Tax Defenders and Key Tax provides
tax resolution services to individuals and companies that have federal and state tax liabilities. The company collects fees based
on efforts to negotiate and assist in the settlement of outstanding tax debts.
|
As of
|
|
As of
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
Assets:
|
|
|
|
|
|
|
Affordable Housing Rentals
|
$
|
299,565
|
|
$
|
318,285
|
|
New York Style Pizza Restaurant
|
|
398,253
|
|
|
108,908
|
|
Italian Ice Franchise Group
|
|
27,735
|
|
|
169,030
|
|
Tax Resolution Services
|
|
4,302,238
|
|
|
60,578
|
|
Others
|
|
269,401
|
|
|
2,684,265
|
|
Consolidated assets
|
$
|
4,907,113
|
|
$
|
3,341,066
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
Revenues:
|
|
|
|
|
|
|
Affordable Housing Rentals
|
|
$
|
176,882
|
|
|
$
|
186,096
|
|
New York Style Pizza Restaurant
|
|
|
626,123
|
|
|
|
602,866
|
|
Italian Ice Franchise Group
|
|
|
207,658
|
|
|
|
538,156
|
|
Tax Resolution Services
|
|
|
3,530,480
|
|
|
|
899,748
|
|
Other
|
|
|
–
|
|
|
|
147,072
|
|
Consolidated revenues
|
|
$
|
4,541,142
|
|
|
$
|
2,373,938
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
Affordable Housing Rentals
|
|
$
|
174,433
|
|
|
$
|
182,690
|
|
New York Style Pizza Restaurant
|
|
|
454,691
|
|
|
|
446,880
|
|
Italian Ice Franchise Group
|
|
|
176,904
|
|
|
|
503,478
|
|
Tax Resolution Services
|
|
|
1,491,053
|
|
|
|
337,986
|
|
Other
|
|
|
–
|
|
|
|
156,664
|
|
Consolidated cost of sales
|
|
$
|
2,297,081
|
|
|
$
|
1,627,698
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations from subsidiaries
|
|
|
|
|
|
|
|
|
Affordable Housing Rentals
|
|
$
|
(18,720
|
)
|
|
$
|
(1,468)
|
|
New York Style Pizza Restaurant
|
|
|
10,350
|
|
|
|
28,336
|
|
Italian Ice Franchise Group
|
|
|
(47,983
|
)
|
|
|
(10,395)
|
|
Tax Resolution Services
|
|
|
114,773
|
|
|
|
(168,851
|
)
|
Loss from operations
|
|
|
58,420
|
|
|
$
|
(152,378
|
)
|
|
|
|
|
|
|
|
|
|
Loss from operations from Cardiff Lexington
|
|
$
|
(1,374,409
|
)
|
|
$
|
(3,297,873
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) before taxes
|
|
|
|
|
|
|
|
|
Affordable Housing Rentals
|
|
$
|
(18,720
|
)
|
|
$
|
(1,468
|
)
|
New York Style Pizza Restaurant
|
|
|
7,591
|
|
|
|
28,336
|
)
|
Italian Ice Franchise Group
|
|
|
(52,313
|
)
|
|
|
(10,395
|
)
|
Tax Resolution Services
|
|
|
82,354
|
|
|
|
(168,851)
|
|
Other
|
|
|
(6,382,542
|
)
|
|
|
(6,112,252
|
)
|
Consolidated income (loss) before taxes
|
|
$
|
(6,363,630
|
)
|
|
$
|
(6,265,252
|
)
|
During January 2020, the Company facilitated a reverse split
of several of its Preferred Stock Classes which has been given retrospective treatment in these consolidated financial statements.
In addition to the reverse stock split, management established new rights & privileges for certain classes of preferred stock.
The reverse split ratio ranges from 1.6:1 to 307.7:1 resulting in a reclassification of $98,989 from preferred stock to additional
paid in capital. The rights and privileges were changed with unanimous consent of all parties. All holders agreed to replace existing
rights and privileges with new uniform conditions and a simplified uniform preferred $4 per share stated value.
On January 9, 2020, the Company executed
Boards of Directors consent to issue 25,000 warrants and a free trading common share certificate in the amount of 35,000,000 shares
of common stock for settlement of a dispute regarding a threatened lawsuit.
On January 27, 220, the Company hired
a Chief Financial Officer.
The Board of Directors declared a bonus to the Chairman of the
Board and the Chief Executive Officer in the amount of $150,000 each for the year ending December 31, 2019.
PART II - INFORMATION NOT REQUIRED IN
PROSPECTUS