ITEM 1. DESCRIPTION OF BUSINESS
On November 10, 2005, Cardiff International, Inc. (“Cardiff”), a Colorado corporation, acquired Legacy Card Company, Inc. (“Legacy”), a privately held Nevada corporation in a triangular merger transaction (the “Merger”). The effective date of the Merger was November 10, 2005. As a result of the Merger, Legacy is now a wholly owned subsidiary of Cardiff.
Legacy was formed as a California limited liability company in August 2001. In April 2005, Legacy was converted into a Nevada corporation.
The Plan of Merger provided for the issuance by Cardiff to the stockholders of Legacy of an aggregate of 18,000,000 shares of Cardiff common stock, no par value per share in connection with the Merger. As a result of the Merger, the former stockholders of Legacy are now the controlling stockholders of Cardiff. As part of the Merger, the officers and directors of Cardiff, resigned from their positions as officers and directors of Cardiff and the officers and directors of Legacy were appointed as officers and directors of Cardiff at the effective time of the Merger.
As a result of the Merger described above, on November 1, 2005 Legacy became a subsidiary of Cardiff. Cardiff International, Inc. is the parent company for the Mission Tuition Rewards program, which is targeted to families focused on saving money for educational needs.
In January 2006, Cardiff changed its fiscal year end to December 31st from September 30th.
Description of Business
Cardiff International, Inc., a tech company who has developed a proprietary software system to track and manage consumer purchases from unlimited businesses: service companies, retailers, merchants, health industry, insurance industry, most consumer orientated businesses. Our software infrastructure tracks all commissions, rebates, discounts providing the public the ability to track all savings regardless of what program they participate in as long as the program utilizes the Cardiff technology.
Cardiff’s first national program will be ready to launch in the third quarter of 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 a cash rebate on total purchases between 1% to 30% to our member’s educational savings account. The retailer contribution can be supplemented by additional cash rebates by using the Mission Tuition MasterCard. This issuing bank contribution is applicable no matter where the cardholder shops, therefore encouraging regular and daily usage of the Mission Tuition MasterCard.
The Mission Tuition program is expected to launch during the third quarter 2011.
What Is Mission Tuition
Mission Tuition is building one of the largest on-line shopping malls in America consisting of all the top name merchants; offering in-store savings and coupon savings with local, regional and national merchants throughout America. Each merchant providing savings and/or a cash rebate to our members educational account. Thousands of leading retailers are part of the rewards program. Our tax-free educational savings program provides a platform for “educational savings” which encourages regular and daily use of the program. Cardiff’s Mission Tuition program helps families save for college. Mission Tuition encourages members to contribute to their educational savings with contributions generated by on-line and in-store purchases. Mission Tuition also offers zip code shopping with proprietary software allowing the member to see what stores are offering the best cash-rebates and discounts within 10, 25 or 50 miles radius of their location.
The Mission Tuition MasterCard
The Mission Tuition MasterCard is a unique credit card that provides the user the opportunity to earn additional cash contributions anywhere MasterCard is honored. Regardless a Mission Tuition merchant or not the user earns additional cash rewards on total spending. Thousands leading retailers are part of our tuition rewards program. Contributions range from 1% to 30% on total purchases plus with the use of the Mission Tuition MasterCard users can earn additional cash rebates.
The Mission Tuition Card is the result of years of development, focus groups and other market research studies. Our brand, image, programming, sales and marketing have been carefully crafted to appeal to virtually every concerned American parent and grandparent, since our card addresses every family’s critical need -- saving for college -- and every family's fear -- not having enough when the time comes, to send junior to college.
Wells Fargo Bank
The Omnibus account will reside at Wells Fargo Bank. Cardholders who elect not to activate a 529 immediately will have the option to participate in Higher Educational Omnibus Savings program managed by Wells Fargo Bank. Once the cardholder reaches the required amount ($250 minimum in most states) Cardiff will notify Mission Tuition members they now qualify for their state’s 529 program providing them the necessary information to designate a State Fund Manager.
Omnibus Account
Cardiff opened an account with Wells Fargo Bank so all cash rebates will go directly into this account prior to any transfer to a 529 State Managed account.
State Managed 529 Plans
Each state has entered into a contractual agreement with accredited fund managers (i.e.) Alliance Bernstein, JP Morgan, CIAA-CREF, Wells Fargo, etc. to manage and administer their 529 programs.
Description of Section 529 Plans
Section 529 plans were authorized by congress to provide tax incentives savings for qualified higher education expenses (QHEE). Earnings in 529 plans are tax-free if withdrawals are made for QHEE, otherwise there is a 10% penalty on the earnings, which are taxed at ordinary rates. Although nonqualified withdrawals are subject to a 10% penalty on the earnings, taxes on the earnings are deferred until withdrawal. Federal legislation passed in 1996 allows states to create section 529 plans.
Section 529 plans are of two types. One is a tuition credit plan and the other is a savings plan. Section 529 provides that qualified state tuition programs shall be exempt from taxation. Such plans must be established and maintained by a State agency or instrumentality thereof. Most states have outsourced the management of their programs to investment advisory or financial service firms. While each state has its own specific requirements, the salient requirements applicable to all plans are:
1. Only cash contributions are allowed.
2. There must be separate accounting for each designated beneficiary.
3. There may be no investment direction by any contributor to, or designated beneficiary under, such program. The account owner may choose among several broad-based investment options once per year.
4. No interest in the program may be used as security for a loan.
5. The program must provide adequate safeguards to prevent contributions on behalf of a designated beneficiary in excess of those necessary to provide for the QHEE of the beneficiary.
6. There must be a penalty imposed on distributions from an account that are not used for QHEE, except death or disability of the designated beneficiary, or to the extent the designated beneficiary receives a scholarship.
Launching Mission Tuition
Cardiff International, Inc. is poised to achieve spectacular success. With over five years of investment, hard work, and hard learning, we believe that our company has the contractual arrangements, functional abilities, and most significantly, the revolutionary “best widget” that has ever been actualized in our sphere. Tying together these factors, we are pleased to offer our partners an undeniable business model.
Cardiff Merchant Coalition
As of December 31, 2009, approximately 11,000 businesses were part of the Cardiff Merchant Coalition, with multiple locations throughout America.
Issuer of the Mission Tuition MasterCard
Currently in negotiations with 2 issuing banks.
Various Agreements
In connection with the activities related to the Mission Tuition Rewards program Cardiff has entered into two agreements with merchant providers. It is intended that each of these providers will continue to provide services to Cardiff which will aid in the marketing of the Mission Tuition.
Employees
Cardiff currently has three employees but anticipates it will hire additional personnel as the Mission Tuition program is launched.
Overview of Cardiff Prior to the Merger
Prior to the Merger Cardiff was an inactive, publicly held, SEC reporting company. Cardiff was incorporated under the laws of the State of Colorado under the name “Cardiff Financial, Inc.,” on October 14, 1986. Effective April 1989, Cardiff completed an acquisition transaction with, and changed its name to, United American, Inc. The transaction was subsequently rescinded and on December 4, 1989, Cardiff changed its name from United American, Inc., to Cardiff International, Inc. Since that time, Cardiff has been a shell corporation seeking to commence active business operations by acquiring a business opportunity.
Immediately prior to the Merger with Legacy, there were approximately 725,000 shares of Cardiff common stock issued and outstanding. Following the Merger, there were approximately 19,900,000 shares of Cardiff common stock issued and outstanding.
Legacy Acquisition Corp. (“LAC”) was a Nevada corporation, which prior to the Merger, was a wholly-owned subsidiary of Cardiff. LAC was formed solely to facilitate the Merger. As a result of the Merger, LAC was merged into Legacy and no longer exists as of the effective time of the Merger.
ITEM 1A.
ITEM 1A. Risk Factors
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 an extremely 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 June 20, 2011 for the years ended December 31, 2009 and 2008 and for the period from August 29, 2001 (date of inception) through December 31, 2009 includes a going concern qualification which states that our significant recurring operating losses and negative working capital raise substantial doubt about our ability to continue as a going concern.
We do not anticipate paying any dividends and any gains from your investment in our stock will have to come from increases in the price of such stock: We currently intend to retain any future earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future.
We Operate in a Competitive Market: The credit card industry is competitive and new offerings and technologies are becoming available regularly. We cannot guarantee that we will compete successfully against our potential competitors, especially those with significantly greater financial resources or brand name recognition.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
Not Applicable.
ITEM 2.
ITEM 2. PROPERTIES
Currently, Cardiff has not entered into any lease agreement for office facilities. Cardiff is currently using facilities in Encino, California, Las Vegas, Nevada and Chicago, Illinois.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There have been no events under any bankruptcy act, no criminal proceedings, and no judgment or injunction material to the evaluation of the ability and integrity of any director or executive officer during the last five years.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to Cardiff’s shareholders for a vote during the year ended December 31, 2009
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Our common stock is quoted on the OTC “Bulletin Board” under the symbol “CDIF”. During the last three years, there has only been limited trading in our common stock.
As of December 31, 2009 there were 55,799,517 shares of common stock outstanding and approximately 717 stockholders of record of common stock.
Shares Issued in Unregistered Transactions
We issued shares of our common stock in unregistered transactions during 2005. All of the shares of common stock issued were issued in non-registered transactions in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). As a result of the Merger, Cardiff issued 18,000,000 shares of its common stock to the shareholders of Legacy pursuant to the terms of the Plan of Merger.
No underwriter or placement agent was involved in the above referenced transactions. Cardiff is relying on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, (the “Securities Act”), and Rule 506 of Regulation D promulgated by the Securities Act.
Dividends
We have not paid cash dividends since our inception and do not anticipate paying dividends in the foreseeable future.
Recent Purchases of Securities
None
Limitation on Directors’ Liability, Charter Provisions and Other Matters
Colorado law authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of directors’ fiduciary duty of care. The duty of care requires that, when acting on behalf of the corporation, directors must exercise an informed business judgment based on all material information reasonably available to them. Absent the limitations authorized by Colorado law, directors are accountable to corporations and their stockholders for monetary damages for conduct constituting gross negligence in the exercise of their duty of care. Colorado law enables corporations to limit available relief to equitable remedies such as injunction or rescission. Our Certificate of Incorporation limits the liability of our directors to us or to our stockholders (in their capacity as directors but not in their capacity as officers) to the fullest extent permitted by Colorado law.
The inclusion of this provision in the Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited the Company and its stockholders.
Our Bylaws provide indemnification to our officers and directors and certain other persons with respect to certain matters. Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to our directors and officers, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable.
Transfer Agent and Registrar
Our transfer agent is Standard Registrar and Transfer, 12528 South 1840 East, Draper, Utah 84020; Tel: (801) 571-8844.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-K. All statements contained herein that are not historical facts, including, but not limited to, statements regarding anticipated future capital requirements, our future plan of operations, our ability to obtain debt, equity or other financing, and our ability to generate cash from operations, are based on current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties that may cause the Company’s actual results in future periods to differ materially from forecasted results.
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.
Critical Accounting Policies
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 require 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 related to income taxes, share-based compensation expense, and estimation of the fair value of derivative liabilities involve our most significant judgments and estimates that are material to our consolidated financial statements. They are discussed further below.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, to the extent that we believe that the deferred tax asset is not likely to be recovered, a valuation allowance is provided. In making this determination, we consider estimated future taxable income and taxable timing differences expected to reverse in the future. Actual results may differ from those estimates.
Share-based Compensation Expense
Commencing January 1, 2006, we implemented changes that the FASB issued related to the accounting for employee stock options, on a modified-prospective basis, to recognize share-based compensation for employee stock option awards in our statements of operations. We account for the issuance of stock, stock options and warrants for services based on the estimated fair value of options and warrants 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 based on the subjective assumptions used in the pricing model.
We account for the issuance of stock, stock options and warrants for services from 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.
Derivative Liabilities
In determining the appropriate fair value, the Company uses the Black-Scholes pricing model.
Results of Operations
The following table sets forth certain selected condensed consolidated statement of operations data for the years ended December 31, 2009 and 2008:
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
The Company had no operating revenues for the years ended December 31, 2009 or 2008.
The Company had operating expenses of $896,698 for the year ended December 31, 2009 compared to $1,884,353 for the year ended December 31, 2008, representing a decrease of $987,655. This decrease was primarily a result of decreases in advertising and consulting/outside services, legal services and rent, and offset by increases in officers’ salaries. These factors resulted in a net loss of $1,135,283 for the year ended December 31, 2009 compared to $1,896,782 for the year ended December 31, 2008, representing a decrease of $761,499.
Other income (expenses) increased $226,156 from 2008 to 2009 primarily because the company incurred a gain from the change in value of derivative liability of $192,628 during 2008 which was $28,352 during 2009.
Liquidity and Capital Resources
Since inception, the principal sources of cash have been funds raised from the sale of common stock, advances from shareholders, and loans in the form of debentures and convertible notes. At December 31, 2009 and 2008, we had $6,900 and $994 of cash and cash equivalents, and total assets amounted to $10,591 and $4,657, respectively.
Net cash used in operating activities was $210,009 and $176,980 for the years ended December 31, 2009 and 2008, respectively. The increase in the amount of net cash used in operating activities during these periods was attributable to the increase in accrual of officers’ salaries and offset by the decrease in change in value on the derivative liability and decrease in net loss compared to 2008.
Net cash used in investing activities was $1,562 and $0 for the years ended December 31, 2009 and 2008, respectively. The cash flows from investing activities during the year end December 31, 2009 was attributable to the acquisition of property and equipment.
Net cash provided by financing activities was $217,477 and $177,974 for the years ended December 31, 2009 and 2008, respectively. The cash flows from financing activities during the year end December 31, 2009 was attributable to proceeds from the sale of common stock of $34,925 and proceeds from notes payable of $374,990. In addition, we received $14,629 and repaid $242,778 of shareholder advances during the year ended December 31, 2009.
Since inception, we have incurred operating losses and, at December 31, 2009 we had an accumulated deficit of $10,620,046.
Current liabilities at December 31, 2009 consisted primarily of accounts payable, accrued expenses and accrued payroll of $1,068,035, amounts due to officers of $546,650, derivative liability of $135,705, convertible and non-convertible promissory notes net of loan discount in the amount of $907,990, and accrued interest in the amount of $489,595. Current liabilities at December 31, 2008 consisted primarily of accounts payable and accrued payroll $968,963, amounts due to officers of $172,473, derivative liability of $29,947, convertible and non-convertible promissory notes net of loan discount in the amount of $768,000, and accrued interest in the amount of $360,780.
Gary R. Teel and Daniel Thompson, the officers and directors of the Company, have each entered into employment agreements for a monthly salary of $25,000 ($300,000 annually); however, both have waived their unpaid salaries through September 30, 2009. Commencing October 1, 2009, the Company began accruing for these salaries at a rate of $50,000 per month. This waiver of salary, when in effect, not only reduced our operating expenses and net loss, it reduced the amount of capital needed to fund operations. During the year ended December 31, 2009, $110,475 was repaid to Mr. Teel and $132,304 was repaid to Mr. Thompson on outstanding advances, which includes their accrued salaries. In addition, Mr. Teel advanced the Company $1,200 and Mr. Thompson advanced the Company $13,429 during the year ended December 31, 2009.
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. Additionally, we anticipate that our credit card will launch in the third quarter of 2011, thereby commencing the generation of revenues shortly thereafter. Finally, we also anticipate that we will continue to operate at a loss for the foreseeable future.
Plan of Operation
Our current business plan is described in “Item 1 - Description of Business”.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
13-14
Consolidated Statements of Shareholders’ Equity
Notes to Financial Statements
16-26
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors
Cardiff International, Inc. dba Legacy Card Company
We have audited the accompanying consolidated balance sheets of Cardiff International, Inc. dba Legacy Card Company (a development stage Company) (the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for the years then ended and for the period from August 29, 2001 (date of inception) through December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cardiff International, Inc. dba Legacy Card Company as of December 31, 2009 and 2008, and the results of its operations and cash flows for the years then ended and for the period from August 29, 2001 (date of inception) through December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is in the development stage and has sustained operating losses since its inception and has negative working capital and an accumulated deficit during the years ended December 31, 2009 and 2008. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Rose, Snyder & Jacobs
A Corporation of Public Accountants
Encino, California
June 20, 2011
CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
See report of independent registered public accounting firm
The accompanying notes are an integral part of these financial statements
See report of independent registered public accounting firm
The accompanying notes are an integral part of these financial statements
See report of independent registered public accounting firm
The accompanying notes are an integral part of these financial statements
CARDIFF INTERNATIONAL, INC. dba LEGACY CARD COMPANY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 AND THE PERIOD
AUGUST 29, 2001 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2009
NON-CASH ACTIVITIES
During the year ended December 31, 2009, the Company converted $35,711 owed to an officer into equity.
During the year ended December 31, 2008, the Company issued 1,154,380 shares of common stock for the settlement of $139,945 payable to a related party. As a result the company recorded a gain on settlement of accounts payable of $23,435.
Accrued interest in the amounts of $2,326, $9,581 and $158,261 were capitalized to amounts due to officers for the years ended December 31, 2009 and 2008, and for the period from August 29, 2001 (inception) through December 31, 2009, respectively. Repayments of amounts due to officers includes payments of capitalized interest.
During the year ended December 31, 2005, convertible debt in the amount of $1,098,699 plus the related accrued interest of $39,330 was converted into 998,635 shares of common stock.
Out of the $1,000,000 debentures from Legacy Investors, $106,572 was used to pay loan related fees, and $442,000 remained in an escrow account at December 31, 2004. During the year ended December 31, 2005, the escrow funds were returned to Legacy Investors.
See report of independent registered public accounting firm
The accompanying notes are an integral part of these financial statements
See report of independent registered public accounting firm
The accompanying notes are an integral part of these financial statements
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Legacy Card Company was formed as a Limited Liability Company on August 29, 2001. On April 18, 2005, the Company converted from a California Limited Liability Company to a Nevada Corporation. On November 10, 2005, the Company merged with Cardiff International, Inc. (“Cardiff”), a publicly held corporation. The purpose of the Company is to develop a co-marketing agreement with a premier national bank to offer an integrated financial program to consumers. Cardiff International, Inc., is a tech company who has developed a proprietary software system to track and manage consumer purchases from unlimited businesses: service companies, retailers, merchants, health industry, insurance industry, most consumer orientated businesses. Our software infrastructure tracks all commissions, rebates, discounts providing the public the ability to track all savings regardless of what program they participate in as long as the program utilizes the Cardiff technology.
The Company will derive its revenues from merchant commissions, interest earned on member’s savings accounts as well as credit card activation fees, commission earned on all transactions, renewal fee and interest earned on revolving credit balances. The Company expects to commence the launch of Mission Tuition in the fall of 2011.
Development Stage Activities
The Company is focusing its efforts in two areas during the development stage. First, the Company is devoting substantial time to the development of credit card technology software, which will be used to capture information at the credit card transaction level. Second, the Company is working to contract with merchants to participate in the program and add incentives for consumers to both use the credit card and make purchases from these merchants.
Going Concern
The accompanying financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The Company is in the development stage and as such has sustained operating losses since its inception and has negative working capital and an accumulated deficit. These factors raise substantial doubts about the Company’s ability to continue as a going concern. The accompanying financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might result if the Company is unable to continue as a going concern. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusions. Management has prospective investors and believes the raising of capital will allow the Company to pursue the development of its credit card business. Should the Company not be able to raise sufficient funds, they may cease their 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 Costs
Advertising costs are charged to expense when incurred. During the years ended December 31, 2009 and 2008, the amount charged to expense was $21,159 and $180,000, respectively. From inception through December 31, 2009, advertising costs was $564,959.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Management uses its historical records and knowledge of its business in making estimates. Accordingly, actual results could differ from those estimates.
Valuation of Derivative Instruments
FASB ASC 815-10, Derivatives and Hedging, requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date and in accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” to determine whether they would be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes pricing model. At December 31, 2009 and 2008, the Company adjusted its derivative liability to its fair value and reflected the decrease in fair value of $28,352 and $192,628, respectively, as other income on the Consolidated Statement of Operations.
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
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:
The following table summarizes fair value measurements by level at December 31, 2009 and 2008 for assets and liabilities measured at fair value on a recurring basis:
The carrying amounts reported on the balance sheet of accounts payable and other accrued expenses approximate fair value due to their relatively short maturity. The carrying amount of notes payable and advances from shareholders approximate fair value based on prevailing interest rates.
Derivative liability was valued under the Black-Scholes model using the following assumptions at December 31, 2009 and 2008:
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
The following is a reconciliation of the value of the derivative liability:
Stock Based Compensation
The Company accounts for stock options in accordance with guidance issued by the FASB using the modified prospective method. Under this method, compensation cost recognized during fiscal years 2009 and 2008 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with guidance issued by the FASB amortized over the options' vesting period, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with guidance issued by the FASB amortized on a straight-line basis over the options' vesting period.
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:
During the years ended December 31, 2009 and 2008, depreciation expense was $130 and $699, respectively.
Income Taxes
The Company was treated as a partnership for federal income tax purposes up to April 18, 2005, when it converted to a Nevada Corporation. Consequently, federal income taxes were not payable by, or provided for, the Company. Members were taxed individually on their shares of the Company’s earnings. The Company’s net income or loss was allocated among the members in accordance with the regulations of the Company since April 18, 2005, when the Company was incorporated, the Company accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes, if any, represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.
Earnings (Loss) per Share
The Company reports its earnings (loss) per share in accordance with guidance issued by the FASB. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
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.
Reclassifications
The Company reclassified certain amounts from 2008 to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS 157 (ASC Topic 820), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. In February 2009, FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 to fiscal years and interim periods within those fiscal years beginning after November 15, 2009 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We elected to defer the adoption of the Standard for these non-financial assets and liabilities, and are currently evaluating the impact, if any, that the deferred provisions of the Standard will have on our consolidated financial statements. Because we did not elect to apply the fair value accounting option, the adoption of SFAS 157 for our financial assets and liabilities did not have an impact on our financial position or operating results.
In December 2008, the FASB issued SFAS No. 141(R) (ASC Topic 805), Business Combinations, and SFAS No. 160 (ASC Topic 810), Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. These new standards will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements. SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2009. Early adoption is prohibited. We do not anticipate that the adoption of this accounting pronouncement will have a material effect on our consolidated financial statements.
In February 2008, the FASB issued SFAS No. 159 (ASC Topic 825), The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115, which is effective for us in fiscal years beginning after July 1, 2009. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We do not anticipate that the adoption of this accounting pronouncement will have a material effect on our consolidated financial statements.
In March 2009, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 161 (ASC Topic 815), Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about a company's derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect a company's financial position, results of operations and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2009, with earlier adoption allowed. We do not anticipate that the adoption of this accounting pronouncement will have a material effect on our consolidated financial statements.
In June 2009 the FASB established the Accounting Standards Codification ("Codification" or "ASC") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change will not impact our financial statements. The ASC does change the way the guidance is organized and presented.
In February 2010, the FASB issued ASU 2010-09, “Subsequent Events, Amendments to Certain Recognition and Disclosure Requirements” which made a number of changes to the existing requirements to the FASB Accounting Standards Codification 855 Subsequent Events. The amended guidance was effective upon issuance and as a result of the amendments, SEC filers that file financial statements after February 24, 2010 are not required to disclose the date through which subsequent events have been evaluated.
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements” which is intended to enhance the usefulness of fair value measurements by requiring both the disaggregation of the information in certain existing disclosures, as well as the inclusion of more robust disclosures about valuation techniques and inputs to recurring and non-recurring fair value measurements. The amended guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disaggregation requirement for the reconciliation disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 31, 2010 and for interim periods within those years. This ASU is not expected to have a material impact on our consolidated financial statements.
In January 2010, the FASB issued ASU 2010-02, “Accounting and Reporting for Decreases in Ownership of a Subsidiary - Scope Clarification” which is intended to clarify which transactions require a decrease in ownership provisions particularly for non-controlling interests in consolidated financial statements. In addition, it requires increased disclosures about deconsolidation of a subsidiary. It requires retrospective application and is effective for the first interim or annual periods ending on or after December 15, 2009. Adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
In January 2010, the FASB issued ASU 2020-01 “Accounting for Distributions to Shareholders with Components of Stock and Cash” which is intended to clarify the accounting treatment for a stock portion of a shareholder distribution that (1) contains both cash and stock components, (2) allows shareholders to select their preferred form of distribution, and (3) limits the total amount of cash to be distributed. It defines a stock dividend as a dividend that takes nothing from the property of an entity and adds nothing to the interests of an entity’s shareholders because the proportional interest of each shareholder remains the same. The stock portion of the distribution must be treated as a stock issuance and be reflected in the EPS calculation prospectively. It requires retrospective application and is effective for annual periods ending on or after December 15, 2009. Adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
In August 2009, the FASB issued ASU 2009-15, which changes the fair value accounting for liabilities. These changes clarify existing guidance that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using either a valuation technique that uses a quoted price of either a similar liability or a quoted price of an identical or similar liability when traded as an asset, or another valuation technique that is consistent with the principles of fair value measurements, such as an income approach (e.g., present value technique). This guidance also states that both a quoted price in an active market for the identical liability and a quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This ASU will be adopted effective on January 1, 2010 and we do not expect it will have a material impact on our consolidated financial statements.
2.
RELATED PARTY TRANSACTIONS
Due to Officers
The Company borrows funds from Daniel Thompson and Gary Teel; both of whom are Shareholders and Officers of the Company. The terms of repayment stipulate the loans are due twenty-four (24) months after the launch of the Legacy Tuition Card (or prior to such date) at an annual interest rate of six (6) percent. In addition, the Company has employment agreements with these officers (see Employment Agreements). The total balance due to Daniel Thompson and Gary Teel for accrued salaries, advances, and accrued interest, at December 31, 2009 and 2008, was $546,650 and $172,473, respectively.
Employment Agreements
The employment agreements that both Daniel Thompson and Gary Teel have with the Company provides for their compensation to be $25,000 each, per month. Both Daniel Thompson and Gary Teel have waived their right to receive any unpaid balances through September 30, 2009. Effective October 1, 2009, both Daniel Thompson and Gary Teel have cancelled their waiver and the Company has accrued these salaries in accordance with the terms of the employment agreements. At December 31, 2009 and 2008, $750,000 and $150,000 has been accrued in connection with their employment agreements, respectively. These amounts are included as amounts Due to Officers on the balance sheet. In September, 2010 the Company entered into a severance agreement with Mr. Teel (see note 8).
Accounts Payable- Related Party
During the year ended December 31, 2009, the Company issued 1,154,380 shares of common stock for the settlement of $139,945 payable to a related party. At December 31, 2009 and 2008 the Company had amounts payable to this related party of $135,348 and $73,087, respectively, for professional services rendered.
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Notes Payable- Related Party
During the year ended December 31, 2009, the Company entered into several loan agreements (convertible and non- convertible) 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, the 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 December 31, 2009 and 2008, of which a portion is convertible into shares of the Company’s common stock.
Under an event of default, the interest rate on both debentures increases to 18% and the terms of repayment and the maturity dates are subject to change. The Company is in default under the terms of the loan agreement as of December 31, 2009 and continues to accrue interest on the outstanding principal balance.
Maricopa Equity Management Corporation
On October 27, 2005, the Company entered into a loan agreement in the amount of $100,000 with Maricopa Equity Management Corporation. The loan bears interest at 8% per annum and became due at the closing of the merger with Cardiff International, Inc. In connection with the loan, the Company issued 100,000 shares of common stock in 2005. The balance on the loan was $100,000 at December 31, 2009 and 2008. At December 31, 2009, the Company was in default on this loan agreement.
International Card Establishment, Inc.
The Company entered into an agreement with International Card Establishment, Inc. (“ICE”) on April 19, 2007 whereby ICE will be the exclusive provider for the rewards and loyalty programs related to merchant contributions to a 529 College Savings Plan.
In connection with the agreement, the Company received a $50,000 advance from ICE during the second quarter of 2008. This advance is to be repaid within 120 days of written notice by ICE if the Company launches the card in a test market and the results of that test launch prove to be unsuccessful. If the Company fails to make the required payment within 120 days, the Company will be granted an additional 30 day period to remedy the default. If the Company does not remedy the default within this 30 day period, ICE may, at its discretion, convert the $50,000 debt to equity equaling 10% of the outstanding stock of the Company on a fully diluted basis.
Also, if ICE determines that the test launch was successful, ICE shall obtain up to three (3) $500,000 loan facilities for the Company within five (5) business days of the successful completion of the test launch. The Company will be required to repay the $50,000 advance directly from the loan proceeds. Upon receipt of each of the $500,000 loan facilities, the Company shall issue ICE a warrant to purchase three and one-third percent (3 1/3%) of the Company’s outstanding common stock on a fully diluted basis as of the date of issuance. Each warrant shall have an exercise price equal to $200,000 and shall have a five (5) year term from the issuance date.
All warrants will have a cashless exercise provision and shall entitle ICE to one (1) demand registration right for each warrant, at the Company’s expense.
The balance outstanding on the advance from ICE at December 31, 2009 and 2008 was $50,000.
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Convertible Notes 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 April 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 2009. As of December 31, 2009 and June 20, 2011, the Company is in default on this Convertible Debenture and 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 on March 11, 2014, and is unsecured. All principal and unpaid accrued interest is due at maturity.
On April 29, 2009, the Company entered into an unsecured Convertible Debenture agreement with a shareholder in the amount of $35,000. The Debenture is convertible into common shares of the Company at $0.08 per share at the option of the holder no earlier than August 21, 2009. The Debenture bears interest at 12% per year, matures on April 29, 2011, and is unsecured. All principal and unpaid accrued interest is due at maturity. Subsequent to year-end, the Company defaulted on this Convertible Debenture.
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. As of December 31, 2009, the Company was in default on this debenture and the warrants have not been exercised. Subsequent to year end, 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 April 27, 2009, the Company entered into a Preferred Debenture agreement with a shareholder for $20,000. The note bears interest at 12% per year and matured on October 27, 2009. In conjunction with the Preferred Debenture, the Company issued 2,000,000 warrants to purchase its common stock, exercisable at $0.10 per share and expire on April 27, 2014. As a result of the warrants issued, the Company recorded a $19,990 debt discount during 2009. The Company assigned all of its receivables from consumer activations of the rewards program as collateral on this debenture. As of December 31, 2009 and subsequent to year end, as of June 20, 2011, the Company is in default on this Preferred Debenture and the warrants have not been exercised.
On May 27, 2009, the Company entered into an unsecured Promissory Note with a shareholder for $15,000. The Note bears interest at 10% per year and matured on August 26, 2009. In conjunction with the Note, the Company issued 1,500,000 shares of its common stock to the lender. As of December 31, 2009, the Company was in default on this note. Subsequent to year end, in April 2011, the Company repaid the principal and interest balance due under this Note.
On October 8, 2009, the Company entered into a Preferred Debenture agreement with an individual who is a shareholder and officer of the Company for $250,000. As of December 31, 2009, the Company has received $220,000 in connection with this preferred debenture. The Debenture bears interest at 7% per year, matures on October 8, 2014, and is unsecured. Monthly interest-only payments are due from November 1, 2009 through October 1, 2014. The principal and accrued and unpaid interest balances are due upon maturity. In conjunction with the Debenture, the Company issued 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. Subsequent to year-end, as of June 20, 2011, the Company has distributed 500,000 shares and is due to distribute the remaining 2,000,000 shares of its common stock to the lender.
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, which expire on June 2, 2014. As a result of the warrants issued, the Company recorded a $13,639 debt discount during 2009. As of December 31, 2009 and subsequent to year end, as of June 20, 2011, the Company is in default on this Preferred Debenture and the warrants have not been exercised.
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
4. COMMITMENTS AND CONTINGENCIES
Operating Leases
Lease expense for the years ended December 31, 2009 and 2008 was $0 and $48,390, respectively. From inception through December 31, 2009, rent expense was $514,936.
Litigation
On June 2, 2005, the Company went to trial for a complaint filed by a prior officer of the Company, alleging that his employment was not terminated in January 2002, and claiming back wages. The Court issued a ruling and order that found that the officer was entitled to back pay. On September 15, 2006, the Company reached a settlement with the prior officer of the Company in the amount of $225,000, payable in monthly installments of $25,000, which resulted in a gain of $36,958. The unpaid amount balance amounted to $156,250 at December 31, 2006. The remaining balance due was paid in 2008.
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 December 31, 2009, management was unable to estimate the amount of penalties that the Company would incur as a result of these unpaid taxes.
Employment Agreement
On October 8, 2009, the Company entered into a five-year Employment Agreement for the Company’s new President. The employment agreement calls for a salary of $180,000 per year. In conjunction with the employment agreement, the Company granted stock options for 2,500,000 shares of its common stock with an option price of $0.10 per share. The options vest on the anniversary date of the Employment Agreement at a rate of 500,000 shares each year for five years.
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 December 31, 2009.
5. RECAPITALIZATION
In November 2005, Legacy Card consummated a transaction, pursuant to which Cardiff International, Inc. acquired all the outstanding shares of Legacy Card, with Legacy Card surviving as a wholly-owned subsidiary of Cardiff International. Legacy Card recorded this transaction as a recapitalization followed by the issuance of shares to the shareholders of Cardiff International. Prior to the recapitalization transaction, Cardiff International was not an operating company, and had no assets. Under the terms of the transaction, Cardiff International issued 18,000,000 shares of Cardiff International common stock to the former shareholders of Legacy Card in exchange for all the outstanding shares of Legacy Card.
6. INCOME TAXES
At December 31, 2009, the Company has net operating loss carryforwards available for federal tax purposes. Because of statutory “ownership changes” the amount of net operating losses which may be utilized in future years are subject to significant annual limitations. The Company also has operating loss carryforwards available for state tax purposes. As of December 31, 2009 management is still determining the amount of net operating loss carryforwards that are available to offset federal and state taxable income and their respective expiration dates.
As of December 31, 2009 and 2008, total deferred income tax assets consist principally of net operating loss carryforwards which have been fully reduced by a valuation allowance due to the uncertainty surrounding their ultimate realization.
The Company has adopted guidance issued by the Financial Accounting Standards Board (“FASB”) that clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. There were no interest and penalties for the years ended December 31, 2009 and 2008, respectively. The Company files income tax returns with the Internal Revenue Service (“IRS”) and various states. For jurisdictions in which tax filings are prepared, the Company is no longer subject to income tax examinations by state tax authorities for tax years through 2004, and by the IRS for tax years through 2005. The Company’s net operating loss carryforwards are subject to IRS examination until they are fully utilized and such tax years are closed. As of December 31, 2009 the Company has not filed all statutory filings.
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
7. STOCK OPTIONS AND WARRANTS
Stock Options
The Company has granted no stock options to consultants or employees between 2005 through 2008. During 2009, the Company granted 2,500,000 stock options to an employee. Stock based compensation expense related to an employee for the year ended December 31, 2009 and 2008 amounted to $5,558 and $0, respectively, and $128,298 from August 1, 2001 (date of inception) through December 31, 2009.
The following is a schedule summarizing stock option activity for the years ended December 31, 2009 and 2008:
The estimated weighted-average fair value of options granted during 2009 was $0.05 per share and was calculated using Black-Scholes pricing model based on the following assumptions:
As of December 31, 2009, the total unrecognized fair value compensation cost related to non-vested stock options was $81,750 which is expected to be recognized over 4.77 years.
Information about stock options outstanding at December 31, 2009 is summarized below:
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Warrants
The Company also issued warrants to purchase shares of common stock in 2009 and 2008. As of December 31, 2009, the Company has approximately 22,546,741 warrants outstanding with exercise prices ranging from $0.03 per share to $1.75 per share. These warrants expire through September 2014.
The following table summarizes information about warrants outstanding at December 31, 2009:
8. SUBSEQUENT EVENTS
Notes Payable
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, when the principal and accrued and unpaid interest is due. 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 expire on June 3, 2015. As of June 20, 2011, the Company is in default on this Note.
On February 8, 2011, the Company entered into a 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.
On March 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 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.
On March 24, 2011, the Company amended a note payable to a shareholder in the amount of $20,000. The amendment provided for a reduction in the principal balance to $15,000 and for repayment in annual installments of principal in the amount of $5,000 plus accrued interest, commencing March 12, 2012.
Severance Agreement with Officer
On September 1, 2010, the Company entered into a Severance Agreement with the Gary Teel, the Company’s former CFO. As part of the severance agreement, the Company will pay Mr. Teel $90,000 in 36 monthly installments, commencing on September 1, 2010, and the unpaid accrued salaries at September 1, 2010 ($75,000 at December 31, 2009) are no longer due.
Stock Options and Warrants
On February 3, 2010, the Company issued options to purchase 2,000,000 shares of the Company’s common stock at $0.10 per share to a related party. The options expire on February 3, 2015 and vested immediately. As of June 20, 2011, there have been no options exercised.
On February 3, 2010, the Company issued options to purchase 3,000,000 shares of the Company’s common stock at $0.05 per share to its officer. The options expire on February 3, 2015 and vested immediately. As of June 20, 2011, there have been no options exercised.
CARDIFF INTERNATIONAL, INC.
dba LEGACY CARD COMPANY (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009 AND 2008
Employment Agreement
On June 1, 2011, the Company entered into a five-year Employment Agreement for the Company’s new Chief Operating Officer. The employment agreement calls for a salary of $240,000 per year. In conjunction with the employment agreement, the Company granted stock options for 2,500,000 shares of its common stock with an option price of $0.10 per share. The options vest at a rate of 500,000 shares each year for five years.
Issuance of Common Stock
The Company received $169,000 in exchange for 2,564,891 shares of common stock from January 1, 2010 through June 20, 2011. As of June 20, 2011, 241,667 of these shares were due to be issued to the investors.
The Company issued 60,000 shares of common stock for services with a total value of $3,000 from January 1, 2010 through June 20, 2011.
The Company granted 11,250,000 shares of common stock during 2011 as part of two financing agreements. As of June 20, 2011, 10,000,000 shares were due to be issued.
Total shares of common stock issued from January 1, 2010 through June 20, 2011 totaled 13,874,891. At June 20, 2011, there were 10,241,667 shares due to be issued.
On April 21, 2011, 8,275,000 shares of the Company’s common stock were returned and cancelled.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
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 and Chief Financial Officer have concluded that these disclosure controls and procedures are ineffective.
As described below under Management's Report on Internal Control over Financial Reporting, our management has identified and reported to our audit committee and Rose, Snyder & Jacobs, our independent registered public accounting firm, material weaknesses in our internal control over financial reporting. As a result of these material weaknesses, our CEO and CFO have concluded that, as of December 31, 2009, our internal controls over financial reporting were not effective.
Report of Management on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the company’s internal control over financial reporting was ineffective as of December 31, 2009. There were no significant changes in our internal control over financial reporting during the year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Ineffective controls over the accounting for cash disbursements
Management has not obtained or maintained documentation supporting all cash disbursements. This control deficiency arose during the year ended December 31, 2007 and was identified by management during the annual evaluation of the effectiveness of internal control over financial reporting.
Ineffective controls over the recording of equity transactions
Management does not have an adequate process to ensure that all equity transactions are properly recorded in a timely manner.
Lack of segregation of duties and ineffective review process
Management does not have proper segregation of duties and does not have an effective review process in place.
Lack of oversight by Audit Committee
The Company does not have a functioning audit committee due to a lack of independent members and a lack of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls, approvals and procedures.
Item 9B.
Item 9B. Other Information.
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Identification of Directors and Executive Officers
The directors and officers of Cardiff who will serve until the next annual meeting of shareholders or until their successors are elected or appointed and qualified, are set forth below:
Background information about the Company’s officers and directors is as follows:
Gary Teel: CFO, Chairman, and founder. Mr. Teel has over 20 years experience in national advertising sales, and the provision of product placement services for the entertainment industry. He has launched several co-branded credit cards including special card programs for the cities of Branson MO; Pigeon Forge TN; and Myrtle Beach SC. Gary is past president of Premier Entertainment Services Inc., a product placement company that specialized in generating valuable exposure for branded products on television and in feature films. His major corporate clients included The Coca-Cola Company and General Mills. He later formed Creative Film Promotions, Inc., where he was involved in all aspects of film production. Previously, he was as a partner of Teel-Weir Advertising Agency. Mr. Teel has a BA degree from the University of Nebraska.
Daniel Thompson. Mr. Thompson was appointed CEO/President of Legacy in June 2002. Formerly a television and entertainment industry professional with a 30-year career that embraces network and cable advertising sales programming production and product placement, Mr. Thompson was president of Creative Entertainment Services, which he founded and successfully sold in a transaction worth over $5 million. Mr. Thompson also founded and successfully sold an industry service company - Creative Television Marketing, a producer of short-form advertising concepts: Closed-Captioning Sponsorships, 10-Second Promotional Advertising vehicles, and network Game Show Merchandising. He also oversaw new business for A Creative Group, a full service entertainment marketing company. Mr. Thompson also founded CableRep USA, a media sales firm specializing in local market cable advertising, which he sold to Cox Cable in 1981. Mr. Thompson attended Wayne State University, Bellevue College, and College of Continuing Studies at University of Nebraska at Omaha.
Other Involvement in Certain 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.
Code of Ethics
We adopted a code of ethics that applies to all officers, directors and employees of the Company, a copy of which was filed as Exhibit 14 to this Form 10-K.
Committees of the Board of Directors
We do not have any committees established by our Board of Directors. Accordingly we have no audit committee, compensation committee, nominating committee or any other committee. Cardiff’s common stock is currently traded on the OTCBB. If Cardiff were ever to meet the qualifications for listing on a securities exchange or for quotation on NASDAQ, it would be required to have an audit committee and possibly other board committees.
Communications with Board Members
We have not adopted a formal process by which stockholders may communicate with the Board of Directors. Until a formal process occurs, stockholders may contact our CEO/President at dthompson@cardiffusa.com , or (818)783-2100.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the “Commission”). Officers, directors and greater than ten percent stockholders are required by the Commission's regulations to furnish us with copies of all Section 16(a) forms they file. During fiscal 2009, none of our officers, directors or 10% or greater stockholders filed any forms late to the best of our knowledge.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning compensation for services rendered for the past three years to the Company’s Chief Executive Officer and to the Company’s most highly compensated officers other than the CEO, whose annual salary and bonus exceeded $100,000:
Mr. Teel and Mr. Thompson each waived their unpaid salary since the inception of Legacy through September 30, 2009. Effective October 1, 2009, the officers are no longer waiving payment of any salary earned as of October 1, 2009.
Employment Agreements
On June 3, 2002 we entered into employment agreements with each of Gary R. Teel and Daniel Thompson. The terms of the agreements are similar and include the following terms: (1) monthly salaries of $25,000, (ii) annual bonus of 2% pre-tax profits, (iii) five year term; (iv) medical and health benefits; (v) termination without cause results in compensation paid for four years, (vi) the sale of the Company results in compensation paid for three years. Mr. Teel and Mr. Thompson each waived there salary since the inception of Legacy through September 30, 2009. On September 1, 2010 the company entered into a severance agreement with Mr. Teel.
Stock Options Granted in the Last Fiscal Year
No options to purchase shares of common stock granted to officers/ directors during 2009.
Aggregated Option Exercise in Last Fiscal Year and Fiscal Year-end Option Values
No officer/ director of Cardiff were offered any options during 2009.
Equity Compensation Plan Information
We have not adopted any equity compensation plans as of the date of this Form 10-K. It is likely that one or more equity compensation plans may be adopted in the near future.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding shares of our Common Stock beneficially owned as of December 31, 2009 by: (i) each of our officers and directors; (ii) all officers and directors as a group; and (iii) each person known by us to beneficially own five percent or more of the outstanding shares of its common stock.
(1)
For purposes of this table “beneficial ownership” is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, pursuant to which a person or group of persons is deemed to have “beneficial ownership” of any common shares that such person or group has the right to acquire within 60 days after April 13, 2009. For purposes of computing the percentage of outstanding common shares held by each person or group of persons named above, any shares that such person or group has the right to acquire within 60 days after April 13, 2009 are deemed outstanding but are not deemed to be outstanding for purposes of computing the percentage ownership of any other person or group.
(2)
These are the officers and directors of the Company.
(3)
Includes 3,934,848 shares issued in the name of Mr. Teel, 2,400,000 shares owned by the Teel Family Trust.
(4)
Includes 1,478,528 shares issued in the name of Mr. Thompson, 1,600,000 shares owned by the Thompson Family Trust.
Outstanding Options and Warrants
Information about outstanding options and warrants are included in footnote 7 of the financial statements included as Item 8 to this Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In connection with the Merger transaction described in Item 1 of this Form 10-K, our officers and directors exchanged their shares of Legacy for shares of Cardiff. The number of shares issued are described in Item 5 of Form 10-K.
During the year ended December 31, 2009, we repaid loans to officers / directors Gary Teel and Daniel Thompson. A total of $132.304 was repaid to Mr. Teel and $110,475 was repaid to Mr. Thompson.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Auditors
Rose, Snyder & Jacobs have been appointed to audit the consolidated financial statements of Cardiff for the years ended December 31, 2009 and 2008 and to report the results of their audit to the Board of Directors.
Fees billed to Cardiff by Rose, Snyder & Jacobs
(1)
Audit fees billed to Cardiff by Rose, Snyder & Jacobs were for professional services performed in connection with the audit of Cardiff's annual financial statements and for review of the quarterly financial information.
(2)
Tax services generally include fees for services performed related to tax compliance.
(3)
Rose, Snyder & Jacobs did not bill Cardiff for other services during 2009 and 2008.
Audit Committee - Pre-Approval
All services provided to the Company by Rose, Snyder & Jacobs as detailed above, were pre-approved by the Board of Directors and all work of said firm was performed solely by their permanent employees.
The Securities and Exchange Commission adopted rules that require that before Rose Snyder & Jacobs is engaged by us to render any auditing or permitted non-audit related services, the engagement must be:
·
approved by our Audit Committee (our entire Board serves as our audit committee); or
·
entered into pursuant to pre-approval policies and procedures established by the Audit Committee, provided the policies and procedures are detailed as to the particular service, the Audit Committee is informed of each service, and such policies and procedures do not include delegation of the Audit Committee’s responsibilities to management.
Under the direction of our Chairman, Gary Teel, our Board of Directors, acting as our audit committee, pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the Board of Directors either before or after the respective services were rendered. The Board of Directors has considered the nature and amount of fees billed by Rose Snyder & Jacobs and believes that the provision of services for activities unrelated to the audit is compatible with maintaining the firm’s independence.
ITEM 15.
ITEM 15. EXHIBITS
A.
Exhibits
Exhibit
Number
Exhibit
3.1
Article of Incorporation (1)
3.2
Bylaws (1)
10.1
Form Convertible Note (1)
10.2
Form Warrant (1)
10.3
Employee Agreement Herschend (1)
10.4
Employment Agreement Fisher (1)
14.1
Code of Ethics (1)
21.1
Subsidiaries of Registrant - Legacy Card Company, Inc. (1)
31.1
Certification of Chief Executive Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
(1)
Previously filed
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Cardiff International, Inc.
Dated: June 20, 2011
By: /s/ Daniel Thompson
Chairman/Chief Executive Officer
In accordance with the Securities Exchange Act, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ Daniel Thompson
CEO/President
June 20, 2011