XOTC:CDIF Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 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.)

 

16255 Ventura Boulevard, Suite 525, Encino, CA 91436

(Address of principal executive offices)

 

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

 

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

 

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

 

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

 

Yes £           No S

 

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£         NoS

 

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£            NoS

 

Common Stock outstanding at June 30, 2012, 56,049,408 shares of no par value Common Stock.

 

 

 
 

 

 

FORM 10-Q

 

CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

CARDIFF INTERNATIONAL, INC.

 

For the Quarter June 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. Financial Statements:  
     
  Condensed Balance Sheets 3
  Condensed Statements of Operations 4
  Condensed Statements of Cash Flows 5
  Condensed Statements of Shareholders’ Equity (Deficiency) 6
  Notes to Condensed Consolidated Financial Statements 7– 17
     
Item 2.

Management's Discussion and Analysis of Financial Condition

and Results of Operations

18
     
Item 4. Controls and Procedures, Evaluation of Disclosure Controls and Procedures 22

 

 

PART II - OTHER INFORMATION

 

Page

 

Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23

 

 

2
 

 

CARDIFF INTERNATIONAL, INC.   

dba LEGACY CARD COMPANY  

(A Development Stage Company)  

CONDENSED CONSOLIDATED BALANCE SHEETS  

 

  June 30,   December 30, 
   2012   2011 
  (Unaudited)    (Audited) 
ASSETS        
Current assets          
Cash  $8,304   $8,874 
Advances to employees   1,659    1,659 
 Total current assets   9,963    10,533 
           
Property and equipment          
Computer equipment   4,124    4,124 
Website   43,000    43,000 
Accumulated depreciation   (20,602)   (12,748)
 Property and equipment, net   26,522    34,376 
           
Other assets          
Patents and trademarks, net of accumulated amortization of $22 and $43, respectively   585    607 
Deposits   600    600 
           
Total Assets  $37,670   $46,116 
LIABILITIES AND SHAREHOLDERS' DEFICIENCY          
           
Current Liabilities          
Accounts Payable  and Accrued Expenses  $751,979   $841,760 
Accounts payable, related party   273,565    241,863 
Interest payable   919,897    825,799 
Accrued payroll taxes   355,023    335,823 
Current portion of settlement payable, shareholder   30,500    32,500 
Derivative liability   1,691,125    3,679,746 
Due to officers   1,102,640    900,939 
Advance from International Card Establishment, Inc.   50,000    50,000 
Note Payable - Legacy Investors   518,000    518,000 
Note Payable - Maricopa Equity Management Corporation   100,000    100,000 
Note Payable, unrelated party   50,000    50,000 
Notes Payable, convertible, unrelated party   346,000    250,000 
Convertible notes payable, related-party   200,000    200,000 
Current portion of notes payable, related-party   24,990    24,990 
 Total current liabilities   6,413,719    8,051,420 
           
Long-Term Liabilities          
Settlement payable, shareholders   20,000    20,000 
Notes payable, unrelated-party, net of discount of $251,258 and $283,758, respectively   73,742    41,242 
Notes payable, related-party, net of discount $200,819 and $230,985, respectively   147,272    117,106 
   Total liabilities   6,654,733    8,229,768 
           
STOCKHOLDERS' DEFICIENCY          
Common stock; 60,000,000 shares authorized with no par value; 56,049,408 and 54,194,408 issued and outstanding at June 30, 2012 and December 31, 2011 respectively   7,531,783    7,472,783 
Additional paid-in capital   87,762    87,762 
Deficit accumulated during development stage   (14,236,608)   (15,744,197)
Total stockholders' equity   (6,617,063)   (8,183,652)
Total liabilities and stockholders' deficiency  $37,670   $46,116 

 

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 OPERATIONS

     (unaudited)

 


                   From inception (August 29, 2001) 
  Three months ended  Six months ended    through 
  June 30, 2012   June 30, 2011   June 30, 2012   June 30, 2011   June 30, 2012 
REVENUE  $304   $84   $839   $84   $1,869 
                          
OPERATING EXPENSES                         
Advertising   1,436    (6,953)   4,781    8,593    605,115 
General and Administrative   22,536    131,836    22,536    263,689    3,469,801 
Consulting Fees   4,665    3,360    5,150    11,839    2,979,332 
Rent   —      —      —      —      514,936 
Guaranteed payments   —      —      —      —      512,958 
Officers' salaries   139,488    140,000    259,488    260,000    2,184,488 
Salaries and wages   —      —      —      1,192,927      
Stock based compensation   —      —      —      —      449,916 
Legal and Professional   29,152    —      33,152    —      985,225 
    Total Operating Expenses   197,277    268,243    325,107    544,121    12,894,698 
                          
LOSS FROM OPERATIONS   (196,973)   (268,159)   (324,268)   (544,037)   (12,892,829)
                          
OTHER (INCOME) EXPENSE                         
Interest Income   —      —      (6,775)          
Sublease rental income   —      —      (55,979)          
Other miscellaneous income (expense)   —      —      (106,512)          
Change in value of derivative liability   (2,104,382)   317,449    (1,988,621)   (845,433)   (829,397)
Interest expense   65,520    151,185    156,764    571,730    2,342,442 
    TOTAL OTHER (INCOME) EXPENSE   (2,038,862)   468,634    (1,831,857)   (273,703)   1,343,779 
                          
NET INCOME (LOSS) FOR THE PERIOD  $1,841,889   $(736,793)  $1,507,589   $(270,334)  $(14,236,608)
                          
INCOME (LOSS) PER COMMON SHARE                         
   -BASIC  $0.03   $(0.01)  $0.03  $(0.00) 
   -DILUTED  $0.02   $(0.01)  $0.02  $(0.00) 
                          
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES - BASIC

 

 

55,190,892

 

 

 
52,227,155  
 

 
54,826,551
 

 

 

55,342,916

 

 

 

 

 
   -DILUTED   76,856,725    52,227,155    76,492,384    55,342,916     

 

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

 

4
 

 

 

CARDIFF INTERNATIONAL, INC. 

dba LEGACY CARD COMPANY

(An Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

           From inception (August 29, 2001) 
   Six months ended   through 
   June 30, 2012   June 30, 2011   June 30, 2012 
OPERATING ACTIVITIES               
Net income (loss)  $1,507,589   $(270,334)  $(14,236,608)
Adjustments to reconcile net loss from operations:               
  Depreciation and amortization   7,876    3,522    258,059 
  Loss on disposal of property and equipment           1,404 
  Amortization of loan discount   62,666    472,017    1,170,182 
  Stock-based compensation           449,916 
  Change in value of derivative liability   (1,988,621)   (845,433)   (829,397)
  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           1,441,222 
 Gain on settlement of accounts payable           (23,435)
(Increase) decrease in:               
  Advances to employees           (1,659)
  Deposits           (600)
Increase (decrease) in:               
  Accounts payable and accrued expenses   (21,781)   166,511    1,519,439 
  Accounts payable and accrued expenses, related party   31,702    31,702      
  Accrued officers' salaries   231,500    260,000    2,096,500 
  Payroll taxes accrued   19,200        19,200 
  Interest payable   94,098    86,344    1,123,256 
  Settlement payable, shareholder       (15,000)   (37,500)
Net cash used in operating activities   (55,771)   (142,373)   (6,567,785)
                
INVESTING ACTIVITIES               
  Acquisition of property and equipment       (22,500)   (241,571)
Net cash used in investing activities       (22,500)   (241,571)
                
FINANCING ACTIVITIES               
Book overdraft       1,350     
Proceeds from shareholder advances       (64,299)   1,463,477 
Repayments of shareholder advances           (2,255,051)
Repayments on settlement payable   (2,000)       (2,000)
Payments on due to officer   (29,799)       (29,799)
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 convertible notes payable, unrelated-party   28,000        28,000 
Proceeds from notes payable, unrealated-party       225,000    435,000 
Repayment of notes payable, unrelated-party           (10,000)
Proceeds from note payable, convertible, unrelated-party           250,000 
Proceeds from notes payable, related-party       25,000    494,990 
Repayment of notes payable, related-party       (40,000)   (106,910)
Proceeds from sale of common stock   59,000    16,000    4,679,115 
Write-off of payable           35,711 
Net cash provided by financing activities   55,201    163,051    6,817,660 
                
NET (DECREASE) IN CASH AND CASH EQUIVALENTS   (570)   (1,822)   8,304 
                
CASH AND CASH EQUIVALENTS               
-BEGINNING OF PERIOD   8,874    1,822     
                
CASH AND CASH EQUIVALENTS               
-END OF PERIOD  $8,304   $   $8,304 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:               
Cash paid for interest  $   $   $ 
Cash paid for taxes  $   $   $ 
                
 NON-CASH INVESTING AND FINANCING ACTIVITIES:               
Notes payable used to pay off Accounts payable directly  $68,000   $   $68,000 

 

             

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

             

 

5
 

 

 

CARDIFF INTERNATIONAL, INC. 

dba LEGACY CARD COMPANY

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)

 

 

              Accumulated     
        Additional    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   1,125,000    22,500            22,500 
Net income               1,507,589    1,507,589 
Balance June 30, 2012   56,049,408   $7,531,783   $87,762   $(14,236,608)  $(6,617,063)

 

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

 

 

 

6
 

 

CARDIFF INTERNATIONAL, INC.

dba: Legacy Card Company

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)

 

 

1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of Operations

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

 

The Company will derive its revenues from 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. There is generally a 90 day waiting period between when the customer makes the purchase and the funds are transmitted to Cardiff.

 

After the launch, the company immediately obtained hundreds of members. By the end of July, 2012 the company had 8,500 members. 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, 2012 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 September of this year.

 

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.

8
 

 

CARDIFF INTERNATIONAL, INC.

dba: Legacy Card Company

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)

 

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 $14,236,608 and has used cash of $6,567,785 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 six months ended June 30, 2012 and 2011, the amount charged to expense was $4,781 and $8,593, respectively.  From inception (August 29, 2001) through June 30, 2012, advertising costs was $605,115.

 

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. As of June 30, 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 have been reflected as derivative liabilities as of June 30, 2012. Subsequent to the Balance Sheet date, the Company was successful in increasing the number of authorized shares in the corporate treasury effectively eliminating the majority of the derivative liability (see Note 6). In determining the appropriate fair value, the Company uses the Black-Scholes pricing model. At June 30, 2012 and 2011, the Company adjusted its derivative liability to its fair value and reflected the increase (decrease) in fair value for the six months ended June 30, 2012 and 2011, of ($2,104,382) and ($1,988,621), respectively, as other income on the Condensed Consolidated Statement of Operations.

 

9
 

 

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 June 30, 2012.

 

  Level 1     Level 2     Level 3     Total  
Fair value of Derivative Liability   $     $     $ 1,691,125     $ 1,691,125  
                                 

 

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 six months ended June 30, 2012 and 2011, depreciation and amortization expense was $7,876 and $3,522 respectively.

 

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.

10
 

 

CARDIFF INTERNATIONAL, INC.

dba: Legacy Card Company

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)

 

The following table sets forth the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2012. During a period of net loss, all potentially dilutive securities are antidilutive. Accordingly, for the three and six months ended June 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
2012
   Six
Months
2012
 
           
Numerator:          
Net income  $1,841,888   $1,507,588 
Denominator:          
Weighted-average shares outstanding   55,190,892    54,826,551 
Effect of dilutive securities   21, 665,833    22, 665,833 
Weighted-average diluted shares   76, 856,725    76, 492,384 
Basic earnings per common share  $0.03   $0.03 
Diluted earnings per common share  $0.02   $0.02 

 

Potentially dilutive securities issued as Stock Options representing 2,500,000 shares of common stock and Warrants representing 12,899,112 for the three and six months ended June 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.

 

11
 

 

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 $150,000 was accrued and reflected as an expense to Daniel Thompson during the six months ended June 30, 2012.  The total balance due to Daniel Thompson for accrued salaries, advances, and accrued interest, at June 30, 2012 and December 31, 2011, was $606,140 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 $90,000 was accrued and reflected as an expense during the six months ended June 30, 2012.  The total balance due to the President for accrued salaries at June 30, 2012 and December 31, 2011, was $441,500 and $360,000, respectively.

 

The total balance due others for accrued salaries at June 30, 2012 and December 31, 2011, was $55,000 and $55,000, respectively.

 

Accounts Payable- Related Party

At June 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, ESCROW DEPOSIT & LOAN FEES

 

Legacy Investors, LLC

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

 

During 2004, Legacy Card Company received $451,428, assumed $106,572 of fees, and the balance of $442,000 was deposited in an escrow account.  In May 2005, $382,000 was paid back to Legacy Investors, LLC and $60,000 of fees was left with the escrow agent. During 2008, an additional $100,000 was repaid by an officer on behalf of the Company.  The balance on the note payable was $518,000 at June 30, 20212 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.

 

12
 

 

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 June 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.

 

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 June 30, 2012 and December 31, 2011 was $50,000.

 

Note Payable – Unrelated Party

On June 2, 2009, the Company entered into a Loan Agreement with an unrelated party for $50,000. The note is non-interest bearing and matured on September 2, 2009. In conjunction with the Loan, the Company issued 1,500,000 warrants to purchase its common stock, exercisable at $0.20 per share and expire June 2, 2014. As a result of the warrants issued, the Company recorded $13,639 debt discount during 2009. The Company is in default on this Preferred Debenture and as of November 10, 2011, the warrants have not been exercised.

 

On February 8, 2011, the Company entered into an unsecured Promissory Note agreement with an unrelated party for $200,000. The Note bears interest at 8% per year and matures on February 8, 2016. Interest is payable annually on the anniversary of the Note, and the principal and any unpaid interest will be due upon maturity. In conjunction with the Note, the Company issued 10,000,000 shares of its common stock to the lender. As a result of the shares issued with the Note, the Company recorded a $200,000 debt discount during 2011. As of June 30, 2012, the Company has not distributed these shares to the lender due to the fact that the Company does not have enough authorized shares to fulfill this issuance, therefore these shares are not in equity and have been included in the calculation of the derivative liability at June 30, 2012. The balance of the note, net of discount was $55,600 and $35,600 at June 30, 2012 and December 31, 2011, respectively.

 

13
 

 

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. As of November 10, 2011, the Company has not distributed these shares to the lender due to the fact that the Company does not have enough authorized shares to fulfill this issuance, therefore these shares are not in equity and have been included in the calculation of the derivative liability at June 30, 2012. The balance of the note, net of discount was $5,700 and $3,700 at June 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. As June 30, 2012, the Company has not distributed these shares to the lender due to the fact that the Company does not have enough authorized shares to fulfill this issuance, therefore, these shares are not in equity and have been included in the calculation of the derivative liability. The balance of the note, net of discount was $3,750 and $1,250 at June 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. As of June 30, 2012, the Company has not distributed these shares to the lender due to the fact that the Company does not have enough authorized shares to fulfill this issuance, therefore, these shares are not in equity and have been included in the calculation of the derivative liability. The Balance of the note, net of discount was $8,692 and $1,192 at June 30, 2012 and December 31, 2011, respectively.

 

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 matures on June 3, 2011. The Note is convertible into the Company’s common shares at $0.08 per share. In conjunction with this loan, the Company issued warrants to purchase 5,000,000 shares of its common stock, exercisable at $0.08 per share, which expires on June 3, 2015. As a result of issued warrants, the Company recorded a $250,000 debt discount during 2009. As of June 30, 2012, the Company is in default on this Preferred Debenture and the warrants have not been exercised.

 

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. The shares included in this Note have been included in the derivative liability.

 

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, 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. The shares included in this Note have been included in the derivative liability. 

14
 

 

CARDIFF INTERNATIONAL, INC.

dba: Legacy Card Company

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)

 

 

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 matures on September 29, 2012. In conjunction with the Loan, the Company agreed to issue 1,250,000 shares of common stock.  The shares included in this Note have been included in the derivative liability.

 

Convertible Note Payable – Related Party

On April 21, 2008, the Company entered into a Convertible Debenture with a shareholder in the amount of $150,000. The Debenture is convertible into common shares of the Company at $0.03 per share at the option of the holder no earlier than August 21, 2008.  The Debenture bears interest at 12% per year, matures in August 2009, and is unsecured. All principal and unpaid accrued interest is due at maturity. In conjunction with the Convertible Debenture, the company also issued warrants to purchase 5,000,000 shares of the Company’s common stock at $0.03 per share. The warrants expire on April 20, 2013. As a result of issued warrants, the Company recorded a $150,000 debt discount during 2008.The Company is in default on this Convertible Debenture and as of November 10, 2011, the warrants have not been exercised.

 

On March 11, 2009, the Company entered into a Convertible Debenture with a shareholder in the amount of $15,000. The Debenture is convertible into common shares of the Company at $0.03 per share at the option of the holder.  The Debenture bears interest at 12% per year, matures March 11, 2014, and is unsecured. All principal and unpaid accrued interest is due at maturity. As of June 30, 2012, the Company is in default on this Debenture Agreement.

 

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

 

Note Payable – Related Party

On March 12, 2009, the Company entered into a Preferred Debenture agreement with a shareholder for $20,000. The note bears interest at 12% per year and matures on September 12, 2009. In conjunction with the Preferred Debenture, the Company issued 2,000,000 warrants to purchase its common stock, exercisable at $0.10 per share and expire March 12, 2014. As a result of the warrants issued, the Company recorded a $20,000 debt discount during 2009. The Company assigned all of its receivables from consumer activations of the rewards program as collateral on this debenture. On March 24, 2011, the Company amended the note and the principal balance was reduced to $15,000. The Company is due to pay annual principal payments of $5,000 plus accrued interest beginning March 12, 2012. As of June 30, 2012, the warrants have not been exercised. As of June 30, 2012, the Company is in default on this Debenture Agreement.

 

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 as of November 10, 2011, the warrants have not been exercised.

 

15
 

 

CARDIFF INTERNATIONAL, INC.

dba: Legacy Card Company

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)

 

On October 8, 2009, the Company entered into a Preferred Debenture agreement with an individual who is a shareholder and employee of the Company for $250,000. The Debenture bears interest at 7% per year and matures on October 1, 2014, and is unsecured. Monthly interest-only payments are due from November 1, 2009 through October 1, 2014. The principal and interest balances are due upon maturity, however, prepayments are allowed. As of June 30, 2012 and December 31, 2011, the balance of this note net of discount was $106,840 and $94,340, respectively. In conjunction with the Debenture, the Company will issue 2,500,000 shares of its common stock to this lender, to be distributed at 500,000 shares per year for five years commencing October 1, 2009. As of June 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.

 

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 $6,550 and $4,050 at June 30, 2012 and December 31, 2011, respectively.

 

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. As of June 30, 2012, the Company has not distributed these shares to the lender due to the fact that the Company does not have enough authorized shares to fulfill this issuance, therefore, these shares are not in equity and have been included in the calculation of the derivative liability at June 30, 2012. The balance of the note, net of discount was $9,956 and $4,790 at June 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 $8,130 and $3,130 at June 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. As of March 30, 2012, the Company has not distributed these shares to the lender due to the fact that the Company does not have enough authorized shares to fulfill this issuance, therefore, these shares are not in equity and have been included in the calculation of the derivative liability at June 30, 2012. The balance of the note, net of discount was $5,795 and $795 at June 30, 2012 and December 31, 2011, respectively.

 

16
 

 

 

CARDIFF INTERNATIONAL, INC.

dba: Legacy Card Company

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)

 

4.         COMMITMENTS AND CONTINGENCIES

 

Operating Leases

Rent expense for the three and six months ended June 30, 2012 and 2011 was $0 and $0, respectively. From inception (August 29, 2001) through June 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 June 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 $355,023.

 

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 June 30, 2012.

 

5.         CAPITAL STOCK

 

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, however due to a lack of authorized shares, the Company has yet to issue the shares as of June 30, 2012.

 

Stock Options

Stock based compensation expense related to an employee for the six months ended June 30, 2012 and 2011. The Company has issued options to purchase shares of common stock. As of June 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 six months ended June 30, 2012

 

Warrants

The Company also issued warrants to purchase shares of common stock. As of June 30, 2012, the Company has 31,564,945 warrants outstanding with exercise prices ranging from $0.01 per share to $1.75 per share. These warrants expire through October 2015

 

During the six months ended June 30, 2012, the Company issued an additional 702,500 warrants in connection with the common stock cash subscriptions.

 

6.         SUBSEQUENT EVENTS

 

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.

 

Due to this amendment, the majority of the Derivative liability as described in Note 1 will be removed during the third quarter of 2012.

 

 

 

17
 

 

 

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.

18
 

 

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 JUNE 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 June 30, 2012, we had $8,304 in cash and cash equivalents and total assets amounted to $37,670. 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.

19
 

 

 

Net cash used in operating activities was $55,771 and $142,373 for the six months June 30, 2012 and 2011, respectively. The decrease in the amount of net cash used in operating activities during the period ended June 30, 2012 compared to the same period last year was attributable to the gain resulting from the change in value of derivative liability of $845,433 during the six months ended June 30, 2011 compared to a gain resulting from the change in value of derivative liability of $1,988,621 for the six months ended June 30, 2012. In addition to the impact of the change in value of derivative liability, the current period income of $1,507,589 was primarily offset by the following non-cash transactions: an increase in accounts payable and accrued expenses of $21,781, accrued officers’ salaries of $231,500, and interest payable of $94,098.

 

Net cash provided by financing activities was $55,201 and $163,051 for the six months ended June 30, 2012 and 2011, respectively. The cash flows from financing activities during the six months ended June 30, 2012 was attributable to proceeds from the sale of common stock of $59,000, and proceeds from notes payable from related parties and unrelated parties of $28,000, which was offset by repayments on related-party notes payable of $31,799.

 

Net cash used in investing activities was $-0- and $22,500, for the six months ended June 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 June 30, 2012, we had an accumulated deficit of $14,236,608.

 

Current liabilities at June 30, 2012 consisted primarily of accounts payable and accrued expenses of $751,979, accounts payable to related party of $273,565, payroll tax payable of $355,023, derivative liability of $2,665,125, amounts due to officer of $1,102,640, convertible and non-convertible promissory notes, net of discount, in the amount of $1,288,990, and accrued interest in the amount of $ 919,897. 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 $32,500, 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 June 30, 2012 and 2011

 

We had operating revenues in the amount of $304 and $84 for the three months ended June 30, 2012 and 2011, respectively. Accordingly, we had operating income of $839 and $84 during the six month period ending June 30, 2012 and 2011, respectively.

 

We had operating expenses of $197,277, and $268,243, for the three months ended and $325,107 and $544,121 for the six months ended June 30, 2012 and 2011, respectively, representing a decrease of $70,966 and $219,014 for the three and six months, respectively.

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We had a net income of $1,841,889 and $1,507,589, for the three months and six months ended June 30, 2012 compared to a net loss of $736,793 and $270,334 for the same six and three months ended June 30, 2011, representing an increase of $2,578,682 and an increase of $1,777,923 for the three and six month comparatives, respectively. The decrease and increase were both primarily due to a gain from the change in value of the derivative liability during the three months ended June 30, 2011.

 

Inflation

 

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

 

Plan of Operation

 

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

 

21
 

 

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 June 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 six months ended June 30, 2012.

 

There has been no change in our internal control over financial reporting during the quarter ended June 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 by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  

     

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

 

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

   

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

       

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*

 

* Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q within the permitted 30-day grace period granted for the first quarterly period in which detailed footnote tagging is required.

 

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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:  August 31, 2012 CARDIFF INTERNATIONAL, INC.
   
  By          /s/ Daniel Thompson
                 Chief Executive Officer
   

 

 

 

 

 

 

 

24

XOTC:CDIF Quarterly Report 10-Q Filling

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XOTC:CDIF Quarterly Report 10-Q Filing - 6/30/2012
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