Cardiff Lexington Corp - Quarter Report: 2012 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)4
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
Commission File Number 000-49709
CARDIFF INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
| Colorado | 84-1044583 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2747 Paradise Road, Unit 1103 Las Vegas, NV 89109
(Address of principal executive offices)
(818) 783-2100 (Registrant's telephone no., including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: No Par Value Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes S No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of ‘‘accelerated filer,” “large accelerated filer,’’ and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £ Accelerated filer £ Non-accelerated filer £ Smaller reporting company S
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No S
Common Stock outstanding at September 30, 2012, 63,608,297 shares of no par value Common Stock.
FORM 10-Q
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
CARDIFF INTERNATIONAL, INC.
For the Quarter September 30, 2012
The following financial statements and schedules of the registrant are submitted herewith:
PART I - FINANCIAL INFORMATION
Page of Form 10-Q | ||
| Item 1. | Consolidated Financial Statements: | |
| Condensed Balance Sheets | 1 | |
| Condensed Statements of Operations | 2 | |
| Condensed Statements of Cash Flows | 3 | |
| Condensed Statements of Shareholders’ Equity (Deficiency) | 4 | |
| Notes to Condensed Consolidated Financial Statements | 5 – 16 | |
| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
17 |
| Item 4. | Controls and Procedures, Evaluation of Disclosure Controls and Procedures | 21 |
PART II - OTHER INFORMATION
| Page | ||
| Item 1. | Legal Proceedings | 22 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 22 |
| Item 3. | Defaults Upon Senior Securities | 22 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 22 |
| Item 5. | Other Information | 22 |
| Item 6. | Exhibits | 22 |
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 9,577 | $ | 8,874 | ||||
| Advances to employees | 1,659 | 1,659 | ||||||
| Total current assets | 11,236 | 10,533 | ||||||
| Property and equipment | ||||||||
| Computer equipment | 4,124 | 4,124 | ||||||
| Website | 43,000 | 43,000 | ||||||
| Accumulated depreciation | (24,529 | ) | (12,748 | ) | ||||
| Property and equipment, net | 22,595 | 34,376 | ||||||
| Other assets | ||||||||
| Patents and trademarks, net of accumulated amortization of $76 and $43, respectively | 574 | 607 | ||||||
| Deposits | 600 | 600 | ||||||
| Total Assets | $ | 35,005 | $ | 46,116 | ||||
| LIABILITIES AND SHAREHOLDERS' DEFICIENCY | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable and Accrued Expenses | $ | 760,055 | $ | 841,760 | ||||
| Accounts payable, related party | 273,565 | 241,863 | ||||||
| Interest payable | 976,884 | 825,799 | ||||||
| Accrued payroll taxes | 364,623 | 335,823 | ||||||
| Settlement payable, shareholder | 50,500 | 52,500 | ||||||
| Derivative liability | 272,784 | 3,679,746 | ||||||
| Due to officers | 1,185,340 | 900,939 | ||||||
| Notes Payable, unrelated party | 718,000 | 718,000 | ||||||
| Convertible notes payable | 536,000 | 450,000 | ||||||
| Notes payable, related-party - current portion | 19,990 | 24,990 | ||||||
| Total current liabilities | 5,157,741 | 8,071,420 | ||||||
| Long-Term Liabilities | ||||||||
| Notes payable, unrelated-party, net of current portion and discount of $235,008 and $283,758, respectively | 89,992 | 41,242 | ||||||
| Notes payable, related-party, net of current portion and discount $185,985 and $230,985, respectively | 156,606 | 117,106 | ||||||
| Total liabilities | 5,404,339 | 8,229,768 | ||||||
| SHAREHOLDERS' DEFICIENCY | ||||||||
| Common stock; 250,000,000 shares authorized with no par value; 63,608,297 and 54,194,408 issued and outstanding at September 30, 2012 and December 31, 2011, respectively | 7,628,983 | 7,472,783 | ||||||
| Additional paid-in capital | 1,674,182 | 87,762 | ||||||
| Deficit accumulated during development stage | (14,672,499 | ) | (15,744,197 | ) | ||||
| Total shareholders' deficiency | (5,369,334 | ) | (8,183,652 | ) | ||||
| Total liabilities and shareholders' deficiency | $ | 35,005 | $ | 46,116 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 1 |
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY
(An Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three months ended | Nine months ended | From inception (August 29, 2001) through | ||||||||||||||||||
| September 30, 2012 | September 30, 2011 | September 30, 2012 | September 30, 2011 | September 30, 2012 | ||||||||||||||||
| REVENUE | $ | – | $ | (36 | ) | $ | 839 | $ | 48 | $ | 1,869 | |||||||||
| OPERATING EXPENSES | ||||||||||||||||||||
| Advertising | 90 | 4,640 | 4,871 | 13,233 | 605,205 | |||||||||||||||
| General and Administrative | 13,636 | 109,346 | 36,172 | 373,035 | 3,483,437 | |||||||||||||||
| Consulting Fees | 20,500 | 5,641 | 25,650 | 17,480 | 2,999,832 | |||||||||||||||
| Rent | – | – | – | – | 514,936 | |||||||||||||||
| Guaranteed payments | – | – | – | – | 512,958 | |||||||||||||||
| Officers' salaries | 136,240 | 150,000 | 395,728 | 410,000 | 2,320,728 | |||||||||||||||
| Salaries and wages | – | – | – | – | 1,192,927 | |||||||||||||||
| Stock based compensation | – | – | – | – | 449,916 | |||||||||||||||
| Legal and Professional | 8,075 | – | 41,227 | – | 993,300 | |||||||||||||||
| Total Operating Expenses | 178,541 | 269,627 | 503,648 | 813,748 | 13,073,239 | |||||||||||||||
| LOSS FROM OPERATIONS | (178,541 | ) | (269,663 | ) | (502,809 | ) | (813,700 | ) | (13,071,370 | ) | ||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||||||
| Interest Income | – | – | – | – | 6,775 | |||||||||||||||
| Sublease rental income | – | – | – | – | 55,979 | |||||||||||||||
| Other miscellaneous income (expense) | – | – | – | – | 106,512 | |||||||||||||||
| Change in value of derivative liability | (168,079 | ) | (235,318 | ) | 1,820,542 | 610,115 | 661,318 | |||||||||||||
| Interest expense | (89,271 | ) | (198,114 | ) | (246,035 | ) | (769,844 | ) | (2,431,713 | ) | ||||||||||
| TOTAL OTHER INCOME (EXPENSE) | (257,350 | ) | (433,432 | ) | 1,574,507 | (159,729 | ) | (1,601,129 | ) | |||||||||||
| NET INCOME (LOSS) FOR THE PERIOD | $ | (435,891 | ) | $ | (703,095 | ) | $ | 1,071,698 | $ | (973,429 | ) | $ | (14,672,499 | ) | ||||||
| INCOME (LOSS) PER COMMON SHARE | ||||||||||||||||||||
| -BASIC | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.02 | $ | (0.02 | ) | |||||||||
| -DILUTED | $ | (0.01 | ) | $ | (0.01 | ) | $ | 0.02 | $ | (0.02 | ) | |||||||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES | ||||||||||||||||||||
| -BASIC | 59,009,384 | 50,624,408 | 56,234,947 | 53,752,796 | ||||||||||||||||
| -DILUTED | 59,009,384 | 50,624,408 | 64,525,571 | 53,752,796 | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
| Additional | Accumulated Deficit | |||||||||||||||||||
| Common Stock | Paid-in | During | ||||||||||||||||||
| Shares | Amount | Capital | Exploration | Total | ||||||||||||||||
| Balance December 31, 2011 | 54,194,408 | $ | 7,472,783 | $ | 87,762 | $ | (15,744,197 | ) | $ | (8,183,652 | ) | |||||||||
| Common stock issued for cash, $0.05 per share | 730,000 | 36,500 | – | – | 36,500 | |||||||||||||||
| Common stock issued for cash, $0.02 per share | 2,375,000 | 47,500 | – | – | 47,500 | |||||||||||||||
| Common stock issued for cash, $0.01 per share | 4,270,000 | 42,700 | – | – | 42,700 | |||||||||||||||
| Common stock issued for services | 650,000 | 19,500 | – | – | 19,500 | |||||||||||||||
| Extinguishment of fair value of derivatives | – | – | 1,578,405 | – | 1,578,405 | |||||||||||||||
| Common stock issued upon conversion of convertible debenture | 1,388,889 | 10,000 | 8,015 | – | 18,015 | |||||||||||||||
| Net income | – | – | – | 1,071,698 | 1,071,698 | |||||||||||||||
| Balance September 30, 2012 (unaudited) | 63,608,297 | 7,628,983 | 1,674,182 | (14,672,499 | ) | (5,369,334 | ) | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY
(An Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine months ended | From inception (August 29, 2001) through | |||||||||||
| Septmeber 30, 2012 | September 30, 2011 | September 30, 2012 | ||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net income (loss) | $ | 1,071,698 | $ | (973,429 | ) | $ | (14,672,499 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||
| Depreciation and amortization | 11,814 | 8,878 | 261,997 | |||||||||
| Loss on disposal of property and equipment | – | – | 1,404 | |||||||||
| Amortization of loan discount | 93,750 | 623,933 | 1,201,266 | |||||||||
| Stock-based compensation | – | – | 449,916 | |||||||||
| Change in value of derivative liability | (1,820,542 | ) | (610,115 | ) | (661,318 | ) | ||||||
| Issuance of common stock for loan costs | – | – | 110,000 | |||||||||
| Issuance of warrants for services | – | – | 254,800 | |||||||||
| Issuance of warrants as loan costs | – | – | 85,734 | |||||||||
| Issuance of common stock for services | 19,500 | – | 1,460,722 | |||||||||
| Gain on settlement of accounts payable | – | – | (23,435 | ) | ||||||||
| (Increase) decrease in: | ||||||||||||
| Advances to employees | – | – | (1,659 | ) | ||||||||
| Deposits | – | – | (600 | ) | ||||||||
| Increase (decrease) in: | ||||||||||||
| Accounts payable and accrued expenses | (81,705 | ) | 219,364 | 1,459,515 | ||||||||
| Accounts payable and accrued expenses, related party | 31,702 | – | 31,702 | |||||||||
| Accrued officers' salaries | 284,401 | 400,000 | 2,149,401 | |||||||||
| Payroll taxes accrued | 28,800 | – | 28,800 | |||||||||
| Interest payable | 151,085 | 132,548 | 1,180,243 | |||||||||
| Settlement payable, shareholder | (2,000 | ) | (20,000 | ) | (39,500 | ) | ||||||
| Net cash used in operating activities | (211,497 | ) | (218,821 | ) | (6,723,511 | ) | ||||||
| INVESTING ACTIVITIES | ||||||||||||
| Acquisition of property and equipment | – | (37,500 | ) | (241,571 | ) | |||||||
| Net cash used in investing activities | – | (37,500 | ) | (241,571 | ) | |||||||
| FINANCING ACTIVITIES | ||||||||||||
| Proceeds from shareholder advances | – | 1,350 | 1,463,477 | |||||||||
| Repayments of shareholder advances | – | (96,666 | ) | (2,255,051 | ) | |||||||
| Proceeds from ICE advance | – | – | 50,000 | |||||||||
| Proceeds from note payable-Legacy Investors | – | – | 451,428 | |||||||||
| Proceeds from note payable-Maricopa Equity Management | – | – | 100,000 | |||||||||
| Proceeds from convertible notes payable, related-party | – | – | 1,283,699 | |||||||||
| Proceeds from notes payable, unrealated-party | – | 260,000 | 385,000 | |||||||||
| Repayment of notes payable, unrelated-party | – | – | (10,000 | ) | ||||||||
| Proceeds from note payable, convertible, unrelated-party | 96,000 | – | 346,000 | |||||||||
| Proceeds from notes payable, related-party | – | 125,000 | 494,990 | |||||||||
| Repayment of notes payable, related-party | (10,500 | ) | (47,500 | ) | (117,410 | ) | ||||||
| Proceeds from sale of common stock | 126,700 | 16,000 | 4,746,815 | |||||||||
| Write-off of payable | – | – | 35,711 | |||||||||
| Net cash provided by financing activities | 212,200 | 258,184 | 6,974,659 | |||||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 703 | 1,863 | 9,577 | |||||||||
| CASH AND CASH EQUIVALENTS | ||||||||||||
| -BEGINNING OF PERIOD | 8,874 | 1,822 | – | |||||||||
| CASH AND CASH EQUIVALENTS | ||||||||||||
| -END OF PERIOD | $ | 9,577 | $ | 3,685 | $ | 9,577 | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||
| Cash paid for interest | $ | – | $ | 4,778 | $ | – | ||||||
| Cash paid for taxes | $ | – | $ | – | $ | – | ||||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||||
| Extinguishment of equity instrument derivative | $ | 1,578,405 | $ | – | $ | 1,578,405 | ||||||
| Common stock issued upon conversion of notes payable | $ | 18,015 | $ | – | $ | 18,015 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization and Nature of Operations
Legacy Card Company was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, the Company converted from a California Limited Liability Company to a Nevada Corporation. On November 10, 2005, the Company merged with Cardiff International, Inc. (“Cardiff”), a publicly held corporation. The purpose of the Company is to develop a co-marketing agreement with a premier national bank to offer an integrated financial program to consumers. Cardiff International, Inc., is a tech company who has developed a proprietary software system to track and manage consumer purchases from unlimited businesses: service companies, retailers, merchants, health industry, insurance industry, most consumer orientated businesses. Our software infrastructure tracks all commissions, rebates, discounts providing the public the ability to track all savings regardless of what program they participate in as long as the program utilizes the Cardiff technology.
The Company is a technology company who has developed a proprietary software system to track and manage consumer purchases from unlimited businesses: service companies, retailers, merchants, health industry, insurance industry, and most consumer orientated businesses. Our software infrastructure tracks all commissions, rebates, discounts providing the public the ability to track all savings regardless of what program they participate in as long as the program utilizes the Company’s technology.
The Company’s first national program launched during the fourth quarter 2011 is “Mission Tuition” a rewards program that helps solve a real need for families – saving for education. The Mission Tuition program is easy to understand and use, and is emotionally positioned to appeal to all consumers. The Mission Tuition Rewards program will become the rewards program of preference for every day spending for families with young children.
The Company will derive its revenues from five different revenue streams: commissions earned from merchants; interest earned on member’s savings accounts; credit card activation fees; 20 basis points (0.20%) on all credit card transactions; 10 basis points on interest earned on revolving credit balances; and an annual fee. The site launched on a national level in late October/November 2011.
After the launch, the company immediately obtained hundreds of members. By the end of October 2012 the company is averaging approximately 1,000 hits per month. As the membership increases, the usage of the membership will increase, and the associated revenues will follow.
Interim Financial Statements
The unaudited condensed consolidated financial statements of Cardiff, a development stage company, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. However, the information included in these interim condensed consolidated financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and the results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The balance sheet information as of December 31, 2011 was derived from the audited financial statements included in Form 10K filed March 30, 2012. These interim financial statements should be read in conjunction with that report.
Development Stage Activities
In October 2011, the Company launched and successfully activated a notable number of new members. Currently we are in negotiations with four (4) union groups: US Postal Service, Iron Workers, Long Shoreman and Greater Boston Hotel Group.
Eight states are interested in offering mission tuition to their residents, however, the Company is in the process of raising additional funds to launch a co-op program with each state. We anticipate starting to work with two of the eight states by the end of 2012. Currently we are raising funds to launch our search engine marketing, including social media, blogging and Search Engine Optimization. We are anticipating launching all on-line media by the end of 2012.
| 5 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
The company entered into a radio network contract with Talk Radio Network (TRN) airing radio commercials in several national syndicated talk shows.
The company entered into a contract with LVEF (Los Virgenes Educational Foundation) giving them the rights to offer Mission Tuition to all private and public schools in the state of California for a one year beta test.
Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The Company is in the development stage and as such has sustained operating losses since its inception and has negative working capital and an accumulated deficit. These factors raise substantial doubts about the Company’s ability to continue as a going concern. Specifically, the Company has cumulated net losses from inception (August 29, 2001) of $14,672,499 and has used cash of $6,755,213 in operating the Company during this same period. The accompanying financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company is unable to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusions. Management has prospective investors and believes the raising of capital will allow the Company to pursue the development of its credit card business. Should the Company not be able to raise sufficient funds, they may cease their operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three (3) months or less to be cash equivalents.
Advertising
Advertising costs are charged to expense when incurred. During the nine months ended September 30, 2012 and 2011, the amount charged to expense was $4,871 and $13,233, respectively. From inception (August 29, 2001) through September 30, 2012, advertising costs was $605,205.
Revenue Recognition
The Company recognizes revenue on an accrual basis. Revenue is generally realized or realizable and earned when all of the following criteria are met: 1) persuasive evidence of an arrangement exists between the Company and our customer(s); 2) services have been rendered; 3) our price to our customer is fixed or determinable; and 4) collectability is reasonably assured.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management uses its historical records and knowledge of its business in making estimates. Accordingly, actual results could differ from those estimates.
Valuation of Derivative Instruments
FASB ASC 815-10, Derivatives and Hedging, requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date to determine whether they would be considered a derivative liability and measured at their fair value for accounting purposes. Prior to July 12,2012, the Company did not have enough authorized shares to issue common shares resulting in the potential exercise or conversion of its issued and outstanding options/warrants and convertible notes, respectively. Accordingly, these instruments were reflected as derivative liabilities for the period ended June 30, 2012 and prior. In July 2012, the Company was successful in increasing the number of authorized shares in the corporate treasury effectively eliminating the majority of the derivative liability. As such derivative liabilities with a fair value of $1,578,405 on July 12, 2012 related to equity investments were extinguished and accounted for as additional paid in capital. In determining the appropriate fair value, the Company uses a weighted average Black-Scholes pricing model. At September 30, 2012 and 2011, the Company adjusted its derivative liability to its fair value and reflected the increase (decrease) in fair value for the nine months ended September 30, 2012 and 2011, of ($1,820,542) and ($610,115), respectively, as other income on the Condensed Consolidated Statement of Operations.
| 6 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
| Level Input: | Input Definition: | |
| Level 1 | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. | |
| Level 2 | Inputs, other than quoted prices included in Level I, that are observable for the asset or liability through corroboration with market data at the measurement date. | |
| Level 3 | Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2012.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Fair value of Derivative Liability | $ | – | $ | – | $ | 272,784 | $ | 272,784 | ||||||||
Property and Equipment
Property and equipment are carried at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization of property and equipment is provided using the straight-line method for financial reporting purposes at rates based on the following estimated useful lives:
| Classification | Useful Life | |
| Computer equipment | 3 Years | |
| Website design | 3 Years | |
| Patents and trademarks | 15 Years |
During the nine months ended September 30, 2012 and 2011, depreciation and amortization expense was $11,814 and $8,878 respectively.
| 7 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Earnings (Loss) per Share
FASB ASC Subtopic 260, Earnings Per Share, provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options, warrants, and debts convertible into common shares. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities.
The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2012. During a period of net loss, all potentially dilutive securities are antidilutive. Accordingly, for the three and nine months ended September 30, 2011, potentially dilutive securities have been excluded from the computations since they would be antidilutive. However, these dilutive securities could potentially dilute earnings per share in the future:
| Three months | Nine months | |||||||
| Ended | Ended | |||||||
| September 30, 2012 | September 30, 2012 | |||||||
| Numerator: | ||||||||
| Net income (loss) | $ | (435,891 | ) | $ | 1,071,698 | |||
| Denominator: | ||||||||
| Weighted-average shares outstanding | 59,009,384 | 56,234,947 | ||||||
| Effect of dilutive securities | – | 8,290,624 | ||||||
| Weighted-average diluted shares outstanding | 59,009,384 | 64,525,571 | ||||||
| Basic earnings (loss) per share | $ | (0.01 | ) | $ | 0.02 | |||
| Diluted earnings (loss) per share | $ | (0.01 | ) | $ | 0.02 | |||
Potentially dilutive securities issued as Stock Options representing 2,500,000 shares of common stock and Warrants representing 16,287,446 for the three and nine months ended September 30, 2012, were excluded from the computation of diluted earnings per common share for these periods because their effect would have been antidilutive.
Principles of Consolidation
The consolidated financial statements include the accounts of Cardiff International, Inc. and its wholly owned subsidiary, Legacy Card Company. All significant intercompany accounts and transactions are eliminated in consolidation.
Recently Issued Accounting Pronouncements
The Company has evaluated all of the recent accounting pronouncements through the filing date of these financial statements and feels that none of them will have a material effect on the Company’s interim financial statements.
| 8 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
| 2. | RELATED PARTY TRANSACTIONS |
Due to Officers
The Company borrows funds from Daniel Thompson who is a Shareholder and Officer of the Company. The terms of repayment stipulate the loans are due twenty-four (24) months after the launch of the Legacy Tuition Card (or prior to such date) at an annual interest rate of six (6) percent. In addition, the Company has an employment agreement with Daniel Thompson whereby the Company provides for compensation of $25,000 per month. A total salary of $225,000 was accrued and reflected as an expense to Daniel Thompson during the nine months ended September 30, 2012. The total balance due to Daniel Thompson for accrued salaries, advances, and accrued interest, at September 30, 2012 and December 31, 2011, was $649,340 and $485,939, respectively.
The Company has an employment agreement with the Company President whereby the Company provides for compensation of $15,000 per month. A total salary of $135,000 was accrued and reflected as an expense during the nine months ended September 30, 2012. The total balance due to the President for accrued salaries at September 30, 2012 and December 31, 2011, was $481,000 and $360,000, respectively.
The total balance due others for accrued salaries at September 30, 2012 and December 31, 2011, was $55,000 and $55,000, respectively.
Accounts Payable- Related Party
At September 30, 2012 and December 31, 2011 the Company had amounts payable to a related party of $273,565 and $241,863, respectively, for professional services rendered.
Notes Payable – Related Party
The Company has entered into several loan agreements with related parties (see note 3).
| 3. | NOTES PAYABLE |
Legacy Investors, LLC
On August 5, 2004, the Company entered into a loan agreement with Legacy Investors, LLC, a Florida limited liability company. The initial loan amount of $1,000,000 (the “Initial Loan Amount”) was made by Legacy Investors, LLC upon the satisfaction of the post-closing covenant, comprised of a convertible debenture in the amount of $500,000 and an initial debenture for the amount of $500,000. Legacy Investors, LLC required funds to be deposited into an escrow account. Disbursements were required to be from an escrow agent. The convertible debenture and initial debentures bear interest at 10.00% per year and matured in August 2006. The indebtedness was convertible into Series A Preferred Membership interests of the Company. This loan is secured by all assets of the Company.
During 2004, Legacy Card Company received $451,428, assumed $106,572 of fees, and the balance of $442,000 was deposited in an escrow account. In May 2005, $382,000 was paid back to Legacy Investors, LLC and $60,000 of fees was left with the escrow agent. During 2008, an additional $100,000 was repaid by an officer on behalf of the Company. The balance on the note payable was $518,000 at September 30, 2012 and December 31, 2011, of which a portion is convertible into shares of the Company’s common stock at a conversion price of $0.03 per share.
Under an event of default, the interest rate on both debentures increases to 18% and the terms of repayment and the maturity dates are subject to change. The Company is in default under the terms of the loan agreement and continues to accrue interest on the outstanding principal balance.
| 9 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Maricopa Equity Management Corporation
On October 27, 2005, the Company entered into a loan agreement in the amount of $100,000 with Maricopa Equity Management Corporation. The loan bears interest at 8% per annum and became due at the closing of the merger with Cardiff International, Inc. In connection with the loan, the Company issued 100,000 shares of common stock in 2005. The balance on the loan was $100,000 at September 30, 2012 and December 31, 2011. The Company is in default on this loan agreement.
International Card Establishment, Inc.
The Company entered into an agreement with International Card Establishment, Inc. (“ICE”) on April 19, 2007 whereby ICE will be the exclusive provider for the rewards and loyalty programs related to merchant contributions to a 529 College Savings Plan.
In connection with the agreement, the Company received a $50,000 advance from ICE during the second quarter of 2008. This advance is to be repaid within 120 days of written notice by ICE if the Company launches the card in a test market and the results of that test launch prove to be unsuccessful. If the Company fails to make the required payment within 120 days, the Company will be granted an additional 30 day period to remedy the default. If the Company does not remedy the default within this 30 day period, ICE may, at its discretion, convert the $50,000 debt to equity equaling 10% of the outstanding stock of the Company on a fully diluted basis.
Also, if ICE determines that the test launch was successful, ICE shall obtain up to three (3) $500,000 loan facilities for the Company within five (5) business days of the successful completion of the test launch. The Company will be required to repay the $50,000 advance directly from the loan proceeds. Upon receipt of each of the $500,000 loan facilities, the Company shall issue ICE a warrant to purchase three and one-third percent (3 1/3%) of the Company’s outstanding common stock on a fully diluted basis as of the date of issuance. Each warrant shall have an exercise price equal to $200,000 and shall have a five (5) year term from the issuance date.
In conjunction with the Loan, the Company issued 1,500,000 warrants to purchase its common stock, exercisable at $0.20 per share and expire June 2, 2014. As a result of the warrants issued, the Company recorded $13,639 debt discount during 2009.
All warrants will have a cashless exercise provision and shall entitle ICE to one (1) demand registration right for each warrant, at the Company’s expense.
The balance outstanding on the advance from ICE at September 30, 2012 and December 31, 2011 was $50,000.
Other
On June 2, 2009, the Company entered into a Loan Agreement with an unrelated party for $50,000. The note is non-interest bearing and matured on September 2, 2009. In conjunction with the Loan, the Company issued 1,500,000 warrants to purchase its common stock, exercisable at $0.20 per share and expire June 2, 2014. The Company is in default on this Preferred Debenture, the warrants have not been exercised. The balance of the note, net of discount was $50,000 at September 30, 2012 and December 31, 2011. The Company is in renegotiations with this lender.
On February 8, 2011, the Company entered into an unsecured Promissory Note agreement with an unrelated party for $200,000. The Note bears interest at 8% per year and matures on February 8, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 10,000,000 shares of its common stock to the lender. As a result of the shares issued with the Note, the Company recorded a $200,000 debt discount during 2011.The balance of the note, net of discount was $65,600 and $35,600 at September 30, 2012 and December 31, 2011, respectively.
| 10 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
On May 10, 2011, the Company entered into a Promissory Note agreement with an unrelated party for $25,000. The Note bears interest at 8% per year and matures on May 10, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 1,250,000 shares of its common stock to the lender. As a result of the shares issued in conjunction with the note, the Company recorded a $25,000 debt discount during 2011. The balance of the note, net of discount was $6,950 and $3,200 at September 30, 2012 and December 31, 2011, respectively.
On September 30, 2011, the Company entered into a Promissory Note agreement with an unrelated party for $25,000. The Note bears interest at 8% per year and matures on October 1, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 1,250,000 shares of its common stock to the lender. As a result of the shares issued in conjunction with the note, the Company recorded a $25,000 debt discount during 2011. The balance of the note, net of discount was $5,000 and $1,250 at September 30, 2012 and December 31, 2011, respectively.
On November 1, 2011, the Company entered into a Promissory Note agreement with an unrelated party for $75,000. The Note bears interest at 8% per year and matures on November 1, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 3,750,000 shares of its common stock to the lender. As a result of the shares issued in conjunction with the note, the Company recorded a $75,000 debt discount during 2011. The balance of the note, net of discount was $12,442 and $1,192 at September 30, 2012 and December 31, 2011, respectively.
Notes payable at September 30, 2012 and December 31, 2011 are summarized as follows:
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Legacy Investors, LLC | $ | 518,000 | $ | 518,000 | ||||
| Maricopa Equity | 100,000 | 100,000 | ||||||
| International Card Establishment, Inc. | 50,000 | 50,000 | ||||||
| Other | 375,000 | 375,000 | ||||||
| Discount on notes | (235,008 | ) | (283,758 | ) | ||||
| Total | $ | 807,992 | $ | 759,242 | ||||
| Current portion | (718,000 | ) | (718,000 | ) | ||||
| Long-term portion | $ | 89,992 | $ | 41,242 | ||||
| 4. | CONVERTIBLE NOTES PAYABLE |
Some of the Convertible Notes issued as described below included an anti-dilution provision that allowed for the adjustment of the conversion price. The Company considered the current Financial Accounting Standards Board guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that as the conversion price of the Notes issued in connection therewith could fluctuate based future events, such prices were not fixed amounts. As a result, the Company determined that the conversion features of the Notes issued in connection therewith are not considered indexed to the Company’s own stock and characterized the value of the conversion feature of such notes as derivative liabilities upon issuance.
| 11 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Convertible Notes Payable – Unrelated Party
On June 3, 2010, the Company entered into an unsecured Convertible Promissory Note agreement with an unrelated party for $250,000. The Note bears interest at 8% per year and matured on June 3, 2011. The Note is convertible into the Company’s common shares at $0.08 per share. In conjunction with this loan, the Company issued warrants to purchase 5,000,000 shares of its common stock, exercisable at $0.08 per share, which expires on June 3, 2015. As a result of issued warrants, the Company recorded a $250,000 debt discount during 2009. As of September 30, 2012, the Company is in default on this Preferred Debenture and the warrants have not been exercised. The balance of the note, net of discount was $250,000 at September 30, 2012 and December 31, 2011.
On March 15, 2012, the Company entered into an unsecured Convertible Promissory Note agreement with an unrelated party for $50,000. The Note bears interest at 8% per year and matures on December 19, 2012. The Note and any accrued and outstanding interest is convertible into the Company’s common shares at a discount of 42% of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. During the three months ended September 30, 2012, $10,000 of this note was converted into 1,388,889 shares of common stock. The balance of the note, net of discount was $40,000 and $0 at September 30, 2012 and December 31, 2011, respectively.
On March 29, 2012, the Company entered into a Loan Agreement with an unrelated party for $25,000. The Note bears interest at 6% per year and matured on September 29, 2012. In conjunction with the Loan, the Company agreed to issue 1,250,000 shares of common stock. The balance of the note, net of discount was $25,000 and $0 at September 30, 2012 and December 31, 2011, respectively.
On May 4, 2012, the Company entered into an unsecured Convertible Promissory Note agreement with an unrelated party for $21,000. The Note bears interest at 8% per year and matures on February 4, 2013. The Note and any accrued and outstanding interest is convertible into the Company’s common shares at a discount of 42% of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. The balance of the note, net of discount was $21,000 and $0 at September 30, 2012 and December 31, 2011, respectively.
Convertible Note Payable – Related Party
On April 21, 2008, the Company entered into a Convertible Debenture with a shareholder in the amount of $150,000. The Debenture is convertible into common shares of the Company at $0.03 per share at the option of the holder no earlier than August 21, 2008. The Debenture bears interest at 12% per year, matured in August 2009, and is unsecured. All principal and unpaid accrued interest is due at maturity. In conjunction with the Convertible Debenture, the company also issued warrants to purchase 5,000,000 shares of the Company’s common stock at $0.03 per share. The warrants expire on April 20, 2013. As a result of issued warrants, the Company recorded a $150,000 debt discount during 2008. The Company is in default on this Convertible Debenture, the warrants have not been exercised. The balance of the note, net of discount was $150,000 at September 30, 2012 and December 31, 2011.
On March 11, 2009, the Company entered into a Convertible Debenture with a shareholder in the amount of $15,000. The Debenture is convertible into common shares of the Company at $0.03 per share at the option of the holder. The Debenture bears interest at 12% per year, matures March 11, 2014, and is unsecured. All principal and unpaid accrued interest is due at maturity. The balance of the note, net of discount was $15,000 at September 30, 2012 and December 31, 2011.
On April 29, 2009, the Company entered into an unsecured Convertible Debenture agreement with a shareholder in the amount of $35,000. The Debenture is convertible into common shares of the Company at $0.08 per share at the option of the holder no earlier than August 21, 2009. The Debenture bears interest at 12% per year, matured on April 29, 2011, and is unsecured. All principal and unpaid accrued interest is due at maturity. As a result of the convertible nature of the note the company has recorded a derivative liability which is revalued every quarter. The Company is in default on this Convertible Debenture. The balance of the note, net of discount was $35,000 at September 30, 2012 and December 31, 2011.
| 12 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
Convertible notes at September 30, 2012 and December 31, 2011 are summarized as follows:
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Unrelated party | $ | 336,000 | $ | 250,000 | ||||
| Related party | 200,000 | 200,000 | ||||||
| Total - current | $ | 536,000 | $ | 450,000 | ||||
| 5. | NOTES PAYABLE – RELATED PARTY |
On March 12, 2009, the Company entered into a Preferred Debenture agreement with a shareholder for $20,000. The note bears interest at 12% per year and 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 expire March 12, 2014. As a result of the warrants issued, the Company recorded a $20,000 debt discount during 2009. The Company assigned all of its receivables from consumer activations of the rewards program as collateral on this debenture. On March 24, 2011, the Company amended the note and the principal balance was reduced to $15,000. The Company is due to pay annual principal payments of $5,000 plus accrued interest beginning March 12, 2012. On July 20, 2011 the Company repaid $5,000 of the note. As of September 30, 2012, the warrants have not been exercised. As of September 30, 2012, the Company is in default on this Debenture Agreement. The balance of the note, net of discount was $10,000 and $15,000 at September 30, 2012 and December 31, 2011, respectively.
On April 27, 2009, the Company entered into a Preferred Debenture agreement with a shareholder for $19,990. The note bears interest at 12% per year and matured on October 27, 2009. In conjunction with the Preferred Debenture, the Company issued 2,000,000 warrants to purchase its common stock exercisable at $0.10 per share and expire on April 27, 2014. As a result of the warrants issued, the Company recorded a discount of $19,990 during 2009. The Company assigned all of its receivables from consumer activations of the rewards program as collateral on this debenture. The Company is in default on this Preferred Debenture and the warrants have not been exercised. The balance of the note, net of discount was $19,990 at September 30, 2012 and December 31, 2011.
On October 8, 2009, the Company entered into a Preferred Debenture agreement with an individual who is a shareholder and employee of the Company for $250,000. The Debenture bears interest at 7% per year and matures on October 1, 2014, and is unsecured. Monthly interest-only payments are due from November 1, 2009 through October 1, 2014. The principal and interest balances are due upon maturity, however, prepayments are allowed. In conjunction with the Debenture, the Company will issue 2,500,000 shares of its common stock to this lender, to be distributed at 500,000 shares per year for five years commencing October 1, 2009. As of September 30, 2012, the Company has distributed 500,000 shares and is due to distribute the remaining 2,000,000 shares of its common stock to the lender. As a result of the 2,500,000 shares, the Company recorded a discount of $250,000 during 2009. As of September 30, 2012 and December 31, 2011, the balance of this note net of discount was $107,590 and $94,340, respectively.
On March 10, 2011, the Company entered into a Promissory Note agreement with a shareholder for $25,000. The Note bears interest at 8% per year and matures on March 10, 2015. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 1,250,000 shares of its common stock to the lender. As a result of the issuance of these shares, the Company recorded a debt discount of $25,000 during 2011. The balance of the note, net of discount was $7,800 and $4,050 at September 30, 2012 and December 31, 2011, respectively.
| 13 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
During July 2011, the Company entered into a Promissory Note agreement with a related party for $50,000. The Note bears interest at 8% per year and matures on May 16, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 3,500,000 shares of its common stock to the lender. As a result of the of the shares issued in conjunction with the note, the Company recorded a $50,000 debt discount during 2011. The Company has not distributed these shares to the lender, therefore, these shares are not in equity and have been included in the calculation of the derivative liability at September 30, 2012. The balance of the note, net of discount was $12,290 and $4,790 at September 30, 2012 and December 31, 2011, respectively.
On September 7, 2011, the Company entered into a Promissory Note agreement with a related party for $50,000. The Note bears interest at 8% per year and matures on September 7, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 2,500,000 shares of its common stock to the lender. As a result of the of the shares issued in conjunction with the note, the Company recorded a $50,000 debt discount during 2011. The balance of the note, net of discount was $10,630 and $3,130 at September 30, 2012 and December 31, 2011, respectively.
On November 17, 2011, the Company entered into a Promissory Note agreement with a related party for $50,000. The Note bears interest at 8% per year and matures on November 17, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 2,500,000 shares of its common stock to the lender. As a result of the shares issued in conjunction with the note, the Company recorded a $50,000 debt discount during 2011. The Company has not distributed these shares to the lender, therefore, these shares are not in equity and have been included in the calculation of the derivative liability at September 30, 2012. The balance of the note, net of discount was $8,295 and $795 at September 30, 2012 and December 31, 2011, respectively.
Notes payable – related party at September 30, 2012 and December 31, 2011 are summarized as follows:
| September 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| Total principal balance | $ | 362,581 | $ | 373,081 | ||||
| Discount on notes | (185,985 | ) | (230,985 | ) | ||||
| 176,596 | 142,096 | |||||||
| Current portion | (19,990 | ) | (24,990 | ) | ||||
| Long-term portion | $ | 156,606 | $ | 117,106 | ||||
| 6. | DERIVATIVE LIABILITY |
In April 2008, the FASB issued a pronouncement that provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants with such provisions will no longer be recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price.
| 14 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
The Company evaluated whether convertible debt and warrants to acquire stock of the Company contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price under the respective convertible debt and warrant agreements. The Company determined that the notes and the conversion notes of certain notes contained such provisions and recorded such instruments as derivative liabilities upon issuance. In addition, in periods prior to July 1, 2012, the Company did not have enough authorized shares to issue common shares resulting in the potential exercise or conversion of its issued and outstanding options, warrants or convertible notes. Accordingly, these instruments were reflected as derivative liabilities as of June 30, 2012 and prior. In July 2012, the Company was successful in increasing the number of authorized shares in the corporate treasury effectively eliminating the majority of the derivative liability.
Derivative liabilities were valued using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions:
| September 30, 2012 | December 31, 2011 | |||||||
| (Unaudited) | ||||||||
| Conversion feature : | ||||||||
| Risk-free interest rate | 0.25% | 0.25% | ||||||
| Expected volatility | 100% | 100% | ||||||
| Expected life (in years) | 2 years | 2 years | ||||||
| Expected dividend yield | 0% | 0% | ||||||
| Warrants : | ||||||||
| Risk-free interest rate | N/A | 0.88% | ||||||
| Expected volatility | N/A | 100% | ||||||
| Expected weighted average life (in years) | N/A | 0.1 to 5 years | ||||||
| Expected dividend yield | N/A | 0% | ||||||
| Fair Value : | ||||||||
| Conversion feature | $ | 272,784 | $ | 291,163 | ||||
| Warrants | – | 3,388,583 | ||||||
| $ | 272,7843 | $ | 3,679,746 | |||||
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company based the expected volatility assumption on a volatility index of peer companies as the Company did not have sufficient market information to estimate the volatility of its own stock, and the expected life of the instruments is determined by the expiration date of the instrument. The expected dividend yield was based on the fact that the Company has not paid dividends to common stockholders in the past and does not expect to pay dividends to common stockholders in the future.
The Company determined the fair value of the derivative liabilities to be $272,784 as of September 30, 2012, and the Company recorded a gain for the change in fair value of derivative liabilities of $1,820,542 in the accompanying statement of operations for the period then ended. Upon completion of the increase in the number of authorized shares, the Company recorded the extinguishment of derivative liabilities of $1,578,405 as an adjustment to additional paid in capital
| 15 |
CARDIFF INTERNATIONAL, INC.
dba: Legacy Card Company
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
| 7. | COMMITMENTS AND CONTINGENCIES |
Operating Leases
Rent expense for the three and nine months ended September 30, 2012 and 2011 was $0 and $0, respectively. From inception (August 29, 2001) through September 30, 2012, rent expense was $514,936.
Payroll Taxes
The Company has failed to remit payroll tax payments since 2006, as required by various taxing authorities. When payment is ultimately made management believes that the Company will be assessed various penalties for the delayed payments. As of September 30, 2012, to the Company estimates the amount of taxes, interest, and penalties that the Company would incur as a result of these unpaid taxes to be $364,623.
Cash Deposits
The Company maintains its cash at a financial institution which may at times exceed federally insured limits. The Company had no uninsured deposits as of September 30, 2012.
| 8. | CAPITAL STOCK |
On March 28, 2012, a motion to amend the Corporation’s Articles of Incorporation with the State of Colorado to increase the authorized shares of common stock from 60,000,000 to 250,000,000 was brought before the Board and adopted. The board passed the resolution on June 4, 2012 and called a special meeting to be held on July 18, 2012, the agenda of which was to invite all shareholders of record to vote on the proposed amendment. On July 18, 2012 the amendment was passed.
The Company has granted 24,350,000 shares of its common stock to certain note holders as additional consideration for the issuance of the notes. The value of the shares has been reflected by the Company as a valuation discount upon issuance of the note. The Company has yet to issue the shares as of September 30, 2012 but has reflected these shares as outstanding in the accompanying statement of shareholders’ equity (deficiency).
During the nine months ended September 30, 2012, the Company issued 650,000 shares of common stock to consultants for services rendered that were valued at $19,500.
Stock Options
Stock based compensation expense related to an employee for the nine months ended September 30, 2012 and 2011. The Company has issued options to purchase shares of common stock. As of September 30, 2012, the Company has 5,500,000 options outstanding with exercise prices ranging from $0.08 to $0.10 per share.
There was no activity in relation to the Companies Stock Options for the three and nine months ended September 30, 2012.
Warrants
The Company also issued warrants to purchase shares of common stock. As of September 30, 2012, the Company has 27,708,280 warrants outstanding with exercise prices ranging from $0.01 per share to $1.75 per share. These warrants expire through October 2015.
During the nine months ended September 30, 2012, the Company issued an additional 927,500 warrants in connection with the common stock cash subscriptions and 3,856,665 warrants expired or were surrendered.
| 9. | SUBSEQUENT EVENTS |
In October 2012, the issued 46,958,514 shares of its common stock in exchange for amounts due to officers of $704,378 and issued 2,088,800 shares of its common stock in exchange for a note payable in the amount of $104,440.
| 16 |
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements including the related notes, and the other financial information included in this report. For ease of reference, “we,” “us” or “our” refer to Cardiff International, Inc., and Legacy Card Company, Inc. unless otherwise stated.
Cautionary Statement Concerning Forward-Looking Information
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for stock of Cardiff International, Inc. and other matters. Statements in this report that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Such forward-looking statements, including, without limitation, those relating to the future business prospects, revenue and income of Cardiff International, Inc., wherever they occur, are necessarily estimates reflecting the best judgment of the senior management of Cardiff International, Inc. on the date on which they were made, or if no date is stated, as of the date of this report. These forward-looking statements are subject to risks, uncertainties and assumptions, including those described in the “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”), that may affect the operations, performance, development and results of our business. Because the factors discussed in this report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The Company assumes no obligation and does not intend to update these forward looking statements, except as required by law.
Operating History. We have not commenced active business operations. We anticipate we will commence active operations during the third quarter of 2011. Potential investors should be aware that there is only a limited basis upon which to evaluate our prospects for achieving our intended business objectives. We have limited resources and have had no revenues since our formation.
Possibility of Total Loss of Investment. An investment in Cardiff is a high risk investment, and should not be made unless the investor has no need for current income from the invested funds and unless the investor can afford a total loss of his or her investment.
Additional Financing Requirements. We will likely be required to seek additional financing in order to fund our operations and carry out our business plan. In order to fund our operations and effect additional acquisitions, we will be required to obtain additional capital. There can be no assurance that such financing will be available on acceptable terms, or at all. We do not have any arrangements with any bank or financial institution to secure additional financing and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our best interest.
No Public Market for Securities. There is no active public market for our common stock and we can give no assurance that an active market will develop, or if developed, that it will be sustained.
Auditor’s Opinion has a Going Concern Qualification. Our auditor’s report dated March 30, 2012, for the years ended December 31, 2011 and 2010 and from August 29, 2001 (date of inception) through December 31, 2011 includes a going concern qualification which states that our significant recurring operating losses and negative working capital raise substantial doubt about our ability to continue as a going concern.
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We do not anticipate paying any dividends and any gains from your investment in our stock will have to come from increases in the price of such stock. We currently intend to retain any future earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future.
We Operate in a Limited Market. The Educational Rewards program is one of three national programs available to families. We cannot guarantee that we will compete successfully against our potential competitors, especially those with significantly greater financial resources or brand name recognition.
Overview
Cardiff International, Inc. (“Cardiff”), acquired Legacy Card Company, Inc. (“Legacy”) in a merger transaction in November 2005. The transaction was accounted for as a reverse merger transaction whereby Legacy, although a subsidiary of Cardiff, was deemed to be the surviving entity for accounting purposes. In January 2006, Cardiff changed its fiscal year end to December 31st from September 30th to have the same year end as Legacy.
Cardiff International, Inc., a tech company who has developed a proprietary software system to track and manage consumer purchases from unlimited businesses: service companies, retailers, merchants, health industry, insurance industry, most consumer orientated businesses. Our software infrastructure tracks all commissions, rebates, discounts providing the public the ability to track all savings regardless of what program they participate in as long as the program utilizes the Cardiff technology.
Cardiff’s first national program launched during the fourth quarter 2011 is “Mission Tuition” a rewards program that helps solve a real need for families – saving for education. The Mission Tuition program is easy to understand and use, and is emotionally positioned to appeal to all consumers. The Mission Tuition Rewards program will become the rewards program of preference for every day spending for families with young children.
The program leverages the two biggest economic forces in society – consumer spending and consumer savings –to create the most unique value-added rewards program in decades.
The potential success of the Mission Tuition program involves the participation of three groups: (i) Cardiff as the marketer, (ii) The merchant coalition, (iii) the member. As a result of our merchant coalition and cash rebate program we expect that the member will become loyal customers of the coalition merchants and participating banks.
Participating merchants will provide both a member discount and a cash rebate on total purchases between 1% to 30% to our member’s educational savings account. The retailer contribution can be supplemented by additional cash rebates by using the Mission Tuition MasterCard. This issuing bank contribution is applicable no matter where the cardholder shops, therefore encouraging regular and daily usage of the Mission Tuition MasterCard.
The Mission Tuition program launched during the fourth quarter 2011.
The auditors’ report for the years ended December 31, 2011 and 2010 include a going concern qualification.
Liquidity and Capital Resources
AT SEPTEMBER 30, 2012
Since inception, the principal sources of cash have been funds raised from the sale of common stock, advances from shareholders, and loans in the form of debentures and convertible notes. At September 30, 2012, we had $9,577 in cash and cash equivalents and total assets amounted to $35,005. At December 31, 2011 we had $8,874 of cash and cash equivalents, and total assets amounted to $46,116, which include fixed assets and other assets.
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Net cash used in operating activities was $211,497 and $218,821 for the nine months September 30, 2012 and 2011, respectively. The decrease in the amount of net cash used in operating activities during the period ended September 30, 2012 compared to the same period last year was attributable to the gain resulting from the change in value of derivative liability of $610,115 during the nine months ended September 30, 2011 compared to a gain resulting from the change in value of derivative liability of $1,820,542 for the nine months ended September 30, 2012. In addition to the impact of the change in value of derivative liability, the current period income of $1,071,698 was primarily offset by the following non-cash transactions: an increase in accounts payable and accrued expenses of $81,705, accrued officers’ salaries of $284,401, and interest payable of $151,085.
Net cash provided by financing activities was $212,200 and $258,184 for the nine months ended September 30, 2012 and 2011, respectively. The cash flows from financing activities during the nine months ended September 30, 2012 was attributable to proceeds from the sale of common stock of $126,700, and proceeds from notes payable from related parties and unrelated parties of $96,000.
Net cash used in investing activities was $-0- and $37,500, for the nine months ended September 30, 2012 and 2011, respectively. This was a result of the Company acquiring property and equipment during these periods.
We have incurred operating losses since inception and at September 30, 2012, we had an accumulated deficit of $14,672,499.
Current liabilities at September 30, 2012 consisted primarily of accounts payable and accrued expenses of $760,055, accounts payable to related party of $273,565, payroll tax payable of $364,623, derivative liability of $272,784, amounts due to officer of $1,185,340, convertible and non-convertible promissory notes, net of discount, in the amount of $1,273,990, and accrued interest in the amount of $976,884. Current liabilities at December 31, 2011 consisted primarily of accounts payable and accrued expenses of $841,760, accounts payable to related party of $241,863, payroll tax payable of $335,823, settlement payable of $52,500, derivative liability of $3,679,746, amounts due to officers of $900,939, convertible and non-convertible notes, net of discount, in the amount of $1,192,990, and accrued interest in the amount of $825,799.
There can be no assurance that we will be able to obtain sufficient capital from debt or equity transactions or from operations in the necessary time frame or on terms acceptable to us. Should we be unable to raise sufficient funds, we may be required to curtail our operating plans and possibly relinquish rights to portions of our technology or products. In addition, increases in expenses or delays in product development may adversely impact our cash position and may require cost reductions. No assurance can be given that we will be able to operate profitably on a consistent basis, or at all, in the future.
In order to continue our operations, development of our products, and implementation of our business plan, we need additional financing. We are currently attempting to obtain additional working capital in a term loan transaction. Additionally, we anticipate that our credit card will be launched in the third quarter of 2011 thereby commencing the generation of revenues shortly thereafter. In addition, we also anticipate that we will continue to operate at a loss for the foreseeable future.
Results of Operations
For the Periods Ended September 30, 2012 and 2011
We had revenues in the amount of $-0- and $(36) for the three months ended September 30, 2012 and 2011, respectively. Accordingly, we had revenues of $839 and $48 during the nine month period ending September 30, 2012 and 2011, respectively.
We had operating expenses of $178,541, and $269,627, for the three months ended and $503,648 and $813,748 for the nine months ended September 30, 2012 and 2011, respectively, representing a decrease of $91,086 and $310,100 for the three and nine months, respectively.
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We had a net loss of $435,891 and an income of $1,071,698 for the three months and nine months ended September 30, 2012 compared to a net loss of $703,095 and $973,429 for the same nine and three months ended September 30, 2011, representing an increase of $267,204 and $2,045,127 for the three and nine month comparatives, respectively. The increase were both primarily due to a gain from the change in value of the derivative liability during the three and nine months ended September 30, 2012.
Inflation
We do not believe that inflation will negatively impact our business plans.
Plan of Operation
Our current business plan is described in “Item 1 - Description of Business” of Form 10-K for the year ended December 31, 2011.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. Our actual results may differ from these estimates.
We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different results when using different assumptions. We have discussed these critical accounting estimates, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein with the audit committee of our Board of Directors. We believe our accounting policies specific to share-based compensation expense and estimation of the fair value of derivative liability involve our most significant judgments and estimates that are material to our consolidated financial statements. They are discussed further below.
Derivative Liability
We have issued warrants of our common stock, and the amended these warrants. The warrant agreements include provisions that require us to record them as a liability, at fair value, pursuant to FASB accounting rules, including the requirement to deliver registered shares upon exercise, which is considered outside of our control. The warrant liabilities are marked-to-market each reporting period and changes in fair value are recorded as a non-operating gain or loss in our statement of operations, until they are completely settled or expire. The fair value of the warrants is determined each reporting period using the Black-Scholes option pricing model, and is affected by changes in inputs to that model including our stock price, expected stock price volatility, interest rates and expected term.
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Share-based compensation expense
We account for the issuance of stock, stock options and warrants for services from employees and non-employees based on an estimate of the fair value of options and warrants issued using the Black-Scholes pricing model. This model’s calculations include the exercise price, the market price of shares on grant date, weighted average assumptions for risk-free interest rates, expected life of the option or warrant, expected volatility of our stock and expected dividend yield.
The amounts recorded in the financial statements for share-based expense could vary significantly if we were to use different assumptions. For example, the assumptions we have made for the expected volatility of our stock price have been based on the historical volatility of our stock, measured over a period generally commensurate with the expected term. If we were to use a different volatility than the actual volatility of our stock price, there may be a significant variance in the amounts of share-based compensation expense from the amounts reported.
Off Balance Sheet Arrangements
As of September 30, 2012, we had no off balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
| (a) | Evaluation of Disclosure Controls and Procedures |
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,+ summarized, and reported within the required time periods, and that such information is accumulated and communicated to our management, including our Chairman, Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure. Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer has concluded that these disclosure controls and procedures are ineffective. There have been no changes to our disclosure controls and procedures during the nine months ended September 30, 2012.
There has been no change in our internal control over financial reporting during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Since the most recent evaluation date, there have been no significant changes in our internal control structure, policies, and procedures or in other areas that could significantly affect our internal control over financial reporting.
| (b) | Changes in Internal Controls |
There were no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no events under any bankruptcy act, any criminal proceedings and any judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the last five years.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in the Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
| 31.1 | Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 | |
| 31.2 | Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 | |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Schema Document | |
| 101.CAL | XBRL Calculation Linkbase Document | |
| 101.DEF | XBRL Definition Linkbase Document | |
| 101.LAB | XBRL Label Linkbase Document | |
| 101.PRE | XBRL Presentation Linkbase Document |
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SIGNATURE
In accordance with the requirements of the Exchange Act, the Company has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: November __, 2012 | CARDIFF INTERNATIONAL, INC. | ||
| By: | /s/ Daniel Thompson | ||
| Chief Executive Officer | |||
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