UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20182019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No.:000-54624
CRUZANI, INC. |
(Exact name of registrant as specified in its charter) |
Nevada | 26-4144571 | |
(State or other jurisdiction of incorporation) | (IRS Employer Identification No.) |
(Address of principal executive offices) |
(Registrant’s telephone number, including area code) |
Former name, former address and former fiscal year, if changed since last report |
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 and Section 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 files such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes.Yes ☒ No.No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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.Yes ☒ No.No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☐ | Large accelerated filer | ☐ | Accelerated filer | ||
☒ | Non-accelerated filer | ☒ | Smaller reporting company | ||
☐ | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act). Yes.Yes ☐ No.No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock | CZNI | OTC Markets - Pink |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 9, 2018,March 2, 2020, there were 1,147,638,116297,041,945 shares of Common Stock, par value $0.00001 per shares outstanding.
Table of Contents
PART I | |||
Item 1. | Condensed Financial Statements | 1 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 | |
Item 4. | Controls and Procedures | 15 | |
| |||
Item | |||
Item 1A. | Risk Factors | 16 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||
Item 3. | Defaults Upon Senior Securities | 16 | |
Item 4. | Mining Safety Disclosures | 16 | |
Item 5. | Other Information | 17 | |
Item 6. | Exhibits | 17 | |
Signatures | |||
i
PART I – FINANCIAL INFORMATION
1
Cruzani, Inc. and Subsidiaries
(formerly US Highland, Inc.)
Condensed Consolidated Condensed Balance Sheets
September 30, 2018 | December 31, 2017 | June 30, 2019 | December 31, 2018 | |||||||||||||
(unaudited) | (Unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash | $ | 8,070 | $ | 3,066 | $ | 478 | $ | 1,579 | ||||||||
Accounts receivable | 29,128 | |||||||||||||||
Other current assets | 13,278 | - | 339,813 | |||||||||||||
Deposits on acquisition | 35,500 | 75,000 | - | 85,392 | ||||||||||||
Total Current Assets | 85,976 | 78,066 | 478 | 426,784 | ||||||||||||
Intangible assets | 154,829 | - | ||||||||||||||
Property and equipment, net | 6,208,046 | - | ||||||||||||||
Other assets | 106,411 | - | ||||||||||||||
Total Assets | $ | 6,555,262 | $ | 78,066 | $ | 478 | $ | 426,784 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable | $ | 381,038 | $ | 350,465 | $ | 296,817 | $ | 407,768 | ||||||||
Accrued liabilities | 783,097 | 704,987 | 625,512 | 780,031 | ||||||||||||
Convertible Notes, net of discounts of $434,143 and $0, respectively | 1,078,456 | 818,753 | ||||||||||||||
Accrued officer compensation | 112,000 | 68,000 | ||||||||||||||
Convertible Notes, net of discounts of $0 and $209,029, respectively | 1,625,395 | 1,451,739 | ||||||||||||||
Derivative liabilities | 1,380,791 | 409,948 | 638,699 | 433,924 | ||||||||||||
Loans payable | 364,875 | 431,000 | 254,500 | 224,400 | ||||||||||||
Other liabilities | 6,367,227 | - | ||||||||||||||
Total Current Liabilities | 3,552,923 | 3,365,862 | ||||||||||||||
Total Liabilities | 10,355,484 | 2,715,153 | 3,552,923 | 3,365,862 | ||||||||||||
Commitments and Contingencies | - | - | ||||||||||||||
Commitments and Contingencies (Note 9) | - | - | ||||||||||||||
MEZZANINE EQUITY | ||||||||||||||||
Series C Preferred stock, 10,000,000 shares authorized, par value $0.01; 5,000,000 and no shares issued and outstanding, respectively | 120,000 | - | ||||||||||||||
Series D Preferred stock, 125,000 shares authorized, par value $0.0001; 125,000 and no shares issued and outstanding, respectively | 18,750 | - | ||||||||||||||
Series E Preferred stock, 500,000 shares authorized, par value $0.01; 86,785 and 53,000 shares issued and outstanding; respectively | 86,785 | 53,000 | ||||||||||||||
Series E Preferred stock to be issued | 166,331 | 140,831 | ||||||||||||||
Total mezzanine equity | 138,750 | - | 253,116 | 193,831 | ||||||||||||
Stockholders’ Equity (Deficit): | ||||||||||||||||
Series A Preferred stock, 3,500,000 shares authorized, par value $0.01; 3,381,520 and 3,381,520 shares issued and outstanding, respectively | 33,815 | 33,815 | ||||||||||||||
Series B Preferred stock, 10,000 shares authorized, par value $0.01; 5,000 and 5,000 shares issued and outstanding, respectively | 50 | 50 | ||||||||||||||
Preferred Stock, 1,365,000, shares authorized, par value $0.0001; no shares issued and outstanding | - | - | ||||||||||||||
Common stock, 3,000,000,000 shares authorized, $0.00001 par value; 1,049,638,116 and 345,450,049 shares issued and outstanding, respectively | 10,497 | 3,455 | ||||||||||||||
Treasury stock, at cost – 58,333 shares | (773,500 | ) | (773,500 | ) | ||||||||||||
Series A Preferred stock, 3,500,000 shares authorized, par value $0.01; 3,381,520 shares issued and outstanding | 33,815 | 33,815 | ||||||||||||||
Series B Preferred stock, 10,000 shares authorized, par value $0.01; 5,000 shares issued and outstanding | 50 | 50 | ||||||||||||||
Series C Preferred stock, 10,000,000 shares authorized, par value $0.01; 5,000,000 shares issued and outstanding | 50,000 | 50,000 | ||||||||||||||
Series D Preferred stock, 125,000 shares authorized, par value $0.0001; 125,000 shares issued and outstanding | 12 | 12 | ||||||||||||||
Preferred Stock, 865,000, shares authorized, par value $0.01; no shares issued and outstanding | - | - | ||||||||||||||
Common stock 3,000,000,000 shares authorized, $0.00001 par value; 168,934,487 and 73,442,239 shares issued and outstanding, respectively | 1,689 | 734 | ||||||||||||||
Treasury stock, at cost – 2,917 shares | (773,500 | ) | (773,500 | ) | ||||||||||||
Additional paid in capital | 74,845,612 | 73,343,205 | 75,834,555 | 75,544,112 | ||||||||||||
Accumulated other comprehensive income | 73 | - | ||||||||||||||
Accumulated deficit | (78,055,519 | ) | (75,244,112 | ) | (78,952,182 | ) | (77,988,132 | ) | ||||||||
Total Stockholders’ Deficit | (3,800,222 | ) | (2,637,087 | ) | (3,805,561 | ) | (3,132,909 | ) | ||||||||
Total Liabilities and Stockholders’ Deficit | $ | 6,555,262 | $ | 78,066 | $ | 478 | $ | 426,784 |
The accompanying notes are an integral part of these unaudited condensed consolidated condensed financial statements.
Cruzani, Inc. and Subsidiaries
(formerly US Highland, Inc.)
Condensed Consolidated Condensed Statements of Operations
(Unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenue | $ | 81,016 | $ | - | $ | 81,016 | $ | - | ||||||||
Cost of revenue | 56,711 | 56,711 | ||||||||||||||
Gross margin | 24,304 | 24,304 | ||||||||||||||
Operating Expenses: | ||||||||||||||||
Compensation expense | 159,126 | - | 176,126 | - | ||||||||||||
General and administrative | 332,154 | 336 | 383,399 | 1,025 | ||||||||||||
Depreciation expense | 159,181 | - | 159,181 | - | ||||||||||||
Professional fees | 80,812 | 6,000 | 180,412 | 60,600 | ||||||||||||
Total operating expenses | 731,273 | 6,336 | 899,118 | 61,625 | ||||||||||||
Loss from operations | (706,969 | ) | (6,336 | ) | (874,813 | ) | (61,625 | ) | ||||||||
Other Income (Expense): | ||||||||||||||||
Interest expense | (232,998 | ) | (27,197 | ) | (326,193 | ) | (262,167 | ) | ||||||||
Change in fair value of derivatives | (751,858 | ) | 780,165 | (238,204 | ) | (94,539 | ) | |||||||||
Loss on convertible notes | (743,611 | ) | (250,149 | ) | (1,372,197 | ) | (250,149 | ) | ||||||||
Total other income (expense) | (1,728,467 | ) | 502,819 | (1,936,594 | ) | (606,855 | ) | |||||||||
Income (Loss) before provision for income taxes | (2,435,436 | ) | 496,483 | (2,811,407 | ) | (668,480 | ) | |||||||||
Provision for income taxes | - | - | - | - | ||||||||||||
Net Income (Loss) | $ | (2,435,436 | ) | $ | 496,483 | $ | (2,811,407 | ) | $ | (668,480 | ) | |||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustment | 73 | - | 73 | - | ||||||||||||
Comprehensive income (loss) | $ | (2,435,363 | ) | $ | 496,483 | $ | (2,811,334 | ) | $ | (668,480 | ) | |||||
Basic income (loss) per share | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | |||||
Diluted income (loss) per share | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | (0.00 | ) | |||||
Basic weighted average shares outstanding | 799,578,816 | 332,174,525 | 569,604,836 | 321,226,043 | ||||||||||||
Diluted weighted average shares outstanding | 799,578,816 | 885,135,636 | 569,604,836 | 321,226,043 |
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue | $ | - | $ | - | $ | - | $ | - | ||||||||
Operating Expenses: | ||||||||||||||||
Officer compensation | 30,000 | - | 60,000 | - | ||||||||||||
General and administrative | 27,257 | 42,822 | 57,376 | 68,245 | ||||||||||||
Professional fees | 17,700 | 62,600 | 89,748 | 99,600 | ||||||||||||
Total operating expenses | 74,957 | 105,422 | 207,124 | 167,845 | ||||||||||||
Loss from operations | (74,957 | ) | (105,422 | ) | (207,124 | ) | (167,845 | ) | ||||||||
Other Income (Expense): | ||||||||||||||||
Interest expense | (138,496 | ) | (53,453 | ) | (392,218 | ) | (93,195 | ) | ||||||||
Change in fair value of derivatives | (136,556 | ) | 318,920 | (173,562 | ) | 513,654 | ||||||||||
Loss on convertible notes | - | (592,281 | ) | (46,250 | ) | (628,586 | ) | |||||||||
Loss on receivables | (442,365 | ) | - | (442,365 | ) | - | ||||||||||
Loss on issuance of convertible preferred stock | (40,045 | ) | - | (194,547 | ) | - | ||||||||||
Gain on extinguishment of debt | - | - | 492,016 | - | ||||||||||||
Total other expense | (757,462 | ) | (326,814 | ) | (756,926 | ) | (208,127 | ) | ||||||||
Loss before provision for income taxes | (832,419 | ) | (432,236 | ) | (964,050 | ) | (375,972 | ) | ||||||||
Provision for income taxes | - | - | - | - | ||||||||||||
Net Loss | $ | (832,419 | ) | $ | (432,236 | ) | $ | (964,050 | ) | $ | (375,972 | ) | ||||
Loss per share, basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | ||||
Weighted average shares outstanding, basic and diluted | 142,732,373 | 449,366,834 | 117,040,325 | 406,209,838 |
The accompanying notes are an integral part of these unaudited condensed consolidated condensed financial statements.
(formerly US Highland, Inc.)
Consolidated Condensed StatementsStatement of Cash FlowsChanges in Stockholders’ Deficit
For the six Months Ended June 30, 2018
(Unaudited)
For the Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (2,811,407 | ) | $ | (668,480 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Accretion expense | - | 180,716 | ||||||
Depreciation expense | 159,181 | - | ||||||
Change in fair value of derivatives | 238,204 | 94,539 | ||||||
Loss on convertible debt | 1,372,197 | 250,149 | ||||||
Debt discount amortization | 240,550 | - | ||||||
Common stock issued for officer compensation | 120,000 | - | ||||||
Common stock issued for services | 18,750 | - | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts receivable | (29,128 | ) | - | |||||
Prepaids expenses and deposits | 39,500 | - | ||||||
Other assets | (54,002 | ) | - | |||||
Accounts payable and accrued liabilities | 108,682 | 142,816 | ||||||
Net Cash Used in Operating Activities | (597,473 | ) | (260 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of intangible asset | (154,829 | ) | - | |||||
Net Cash Used in Investing Activities | (154,829 | ) | - | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from convertible debt | 621,830 | - | ||||||
Proceeds from loans | 154,829 | - | ||||||
Payment on note payable | (19,353 | ) | - | |||||
Net Cash Provided by Financing Activities | 757,306 | - | ||||||
Net Increase (Decrease) in Cash | 5,004 | (260 | ) | |||||
Cash at Beginning of Period | 3,066 | 260 | ||||||
Cash at End of Period | $ | 8,070 | $ | - | ||||
Cash paid during the period for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | $ | - | $ | - | ||||
Supplemental disclosure of non-cash activity: | ||||||||
Common stock issued for conversion of debt | $ | 269,418 | $ | 10,724 | ||||
Warrants issued in conjunction with convertible debt | $ | 280,483 | $ | - | ||||
Liability incurred for asset purchase | $ | 6,367,227 | $ | - |
Series A Preferred Stock | Series B Preferred Stock | Common Stock | Additional Paid-In | Treasury | Accumulated | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Total | |||||||||||||||||||||||||||||||
Balance, December 31, 2017 | 3,381,520 | $ | 33,815 | 5,000 | $ | 50 | 17,272,502 | $ | 173 | $ | 73,346,487 | $ | (773,500 | ) | $ | (75,244,112 | ) | $ | (2,637,087 | ) | ||||||||||||||||||||
Shares issued for convertible debt | - | - | - | - | 2,797,090 | 28 | 9,670 | - | - | 9,698 | ||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | - | 56,264 | 56,264 | ||||||||||||||||||||||||||||||
Balance, March 31, 2018 | 3,381,520 | 33,815 | 5,000 | 50 | 20,069,592 | 201 | 73,356,157 | (773,500 | ) | (75,187,848 | ) | (2,571,125 | ) | |||||||||||||||||||||||||||
Shares issued for convertible debt | - | - | - | - | 5,722,353 | 57 | 374,632 | - | - | 374,689 | ||||||||||||||||||||||||||||||
Warrants issued | - | - | - | - | - | - | 57,499 | - | - | 57,499 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | (423,236 | ) | (423,236 | ) | ||||||||||||||||||||||||||||
Balance, June 30, 2018 | 3,381,520 | $ | 33,815 | 5,000 | $ | 50 | 25,791,945 | $ | 258 | $ | 73,788,288 | $ | (773,500 | ) | $ | (75,620,084 | ) | $ | (2,571,173 | ) |
Cruzani, Inc.and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Deficit
For the six Months Ended June 30, 2019
(Unaudited)
Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Series D Preferred Stock | Common Stock | Additional Paid-In | Treasury | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | 3,381,520 | $ | 33,815 | 5,000 | $ | 50 | 5,000,000 | $ | 50,000 | 125,000 | $ | 12 | 73,442,239 | $ | 734 | $ | 75,544,112 | $ | (773,500 | ) | $ | (77,988,132 | ) | $ | (3,132,909 | ) | ||||||||||||||||||||||||||||||
Shares issued for convertible debt | - | - | - | - | - | - | - | - | 29,160,864 | 292 | 154,840 | - | - | 155,132 | ||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | - | - | - | (131,631 | ) | (131,631 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2019 | 3,381,520 | 33,815 | 5,000 | 50 | 5,000,000 | 50,000 | 125,000 | 12 | 102,603,103 | 1,026 | 75,698,952 | (773,500 | ) | (78,119,763 | ) | (3,109,408 | ) | |||||||||||||||||||||||||||||||||||||||
Preferred shares converted to common | - | - | - | - | - | - | - | - | 66,331,384 | 663 | 135,603 | - | - | 136,266 | ||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | - | - | - | (832,419 | ) | (832,419 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2019 | 3,381,520 | $ | 33,815 | 5,000 | $ | 50 | 5,000,000 | $ | 50,000 | 125,000 | $ | 12 | 168,934,487 | $ | 1,689 | $ | 75,834,555 | $ | (773,500 | ) | $ | (78,952,182 | ) | $ | (3,805,561 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated condensed financial statements.
Cruzani, Inc. and Subsidiaries
(formerly US Highland,Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | (964,050 | ) | $ | (375,972 | ) | ||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Change in fair value of derivatives | 173,562 | (513,654 | ) | |||||
Loss on receivables | 442,365 | |||||||
Loss on convertible debt | 46,250 | 628,586 | ||||||
Loss on issuance of convertible preferred stock | 194,547 | - | ||||||
Debt discount amortization | 231,805 | 31,977 | ||||||
Gain on extinguishment of debt | (492,016 | ) | - | |||||
Changes in Operating Assets and Liabilities: | ||||||||
Prepaids expenses and deposits | - | (49,000 | ) | |||||
Other assets | (17,161 | ) | - | |||||
Accounts payable and accrued liabilities | 227,597 | 29,330 | ||||||
Accrued liabilities – related party | 44,000 | 38,232 | ||||||
Net Cash Used in Operating Activities | (113,101 | ) | (210,501 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | - | - | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from convertible debt | 25,500 | 210,000 | ||||||
Preferred stock sold for cash | 86,500 | - | ||||||
Net Cash Provided by Financing Activities | 112,000 | 210,000 | ||||||
Net Increase (Decrease) in Cash | (1,101 | ) | (501 | ) | ||||
Cash at Beginning of Period | 1,579 | 3,066 | ||||||
Cash at End of Period | $ | 478 | $ | 2,565 | ||||
Cash paid during the period for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | $ | - | $ | - | ||||
Supplemental disclosure of non-cash activity: | ||||||||
Common stock issued for conversion of debt | $ | 43,899 | $ | 107,442 | ||||
Promissory note issued for intangible assets | $ | - | $ | 151,80 | ||||
Liability incurred for asset purchase | $ | - | $ | 6,367,227 | ||||
Warrants issued | $ | - | $ | 57,499 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Cruzani, Inc.) and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
SeptemberJune 30, 20182019
(Unaudited)
NOTE 1 – SUMMARY OF BUSINESS AND BASIS OF PRESENTATION
Organization and Business
Cruzani, Inc. (“Cruzani” or the “Company”) is a franchise development company that builds and represents popular franchise concepts, and other related businesses, throughout the United States as well as international markets. Cruzani, Inc.The Company was originally formed as a limited liability company on February 5, 1999 under the name The Powerhouse, L.L.C. pursuant to the laws of the State of Oklahoma. On November 9, 2006, Powerhouse Productions, L.L.C. filed Articles of Conversion changing the entity from a limited liability company to a corporation under the name Harcom Productions, Inc. On January 25, 2010, Articles of Merger were filed with the State of Oklahoma merging U.S. Highland, Inc., an Oklahoma corporation into Harcom Productions, Inc. and the name of the corporation was changed to US Highland, Inc. US Highland, Inc. was a recreational power sports Original Equipment Manufacturer (“OEM”), developing motorcycles, quads, single cylinder engines, and v-twin engines under its own brand and for other OEMs. During 2017, the Company exited the recreational power sports OEM and leisure activity vehicles markets.
On June 29, 2018, the Company filed Amended and Restated Articles of Incorporation with the State of Nevada to change its name to Cruzani, Inc. Consistent with the Company’s new name, the Company changed the composition of its business direction.
On June 30, 2018, Supreme Sweets Acquisition Corp. (n/k/a Oventa, Inc.), a subsidiary of the Company, was renamedand the Company (collectively, the “Company”) entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Supreme Sweets Inc. and 2498411 Ontario, Inc., as sellers (collectively, the “Seller”), pursuant to which in exchange for CAD $200,000 and a twenty percent (20%) interest in Oventa, Inc. (“Oventa”). Oventa operates, the Company agreed to acquire the trade secret assets of Seller upon the terms and subject to the conditions set forth in a 39,000 sq. foot, commercial bakery located in Toronto, Ontario, Canada,the Asset Purchase Agreement. A second closing occurred on July 31, 2018, pursuant to which was established in March 2015 by Mario Parravano and Barbara Parravano (collectively, the “Founders”). Oventa operates in west-end Toronto atCompany acquired the junction of two major Toronto highways, fronting the Q.E.W. corridor, 10 minutes from downtown Toronto, and only 10 minutes from Pearson International Airport. Oventa’s high speed bread, pastry and donut lines, spiral and walk-in coolers and freezers, tunnel, revolving, and deck ovens,furniture, fixtures and equipment of Seller in exchange for CAD $100,000. Seller is engaged in the business of preparing delicious snacks, pastries and baked goods with high quality ingredients for exceptional taste, including low calorie and gluten-free alternatives. The Asset Purchase Agreement included a provision, pursuant to produce virtually any bakery or snack product arewhich the Company could unwind the transaction if certain milestones were not achieved. The milestones contemplated in placethe Asset Purchase Agreement were not met, and operational. There is considerable roomaccordingly,on February 7, 2019, effective as of December 31, 2018, the Company terminated the Asset Purchase Agreement with Supreme Sweets Inc. and 2498411 Ontario, Inc, by written notice to expand on the property. Oventa services local coffee shops and manufactures private label products for customers in CanadaSeller, and the U.S.
Ovanta will beCompany unwound the second, major operational focustransaction. The capital injected into Oventa, Inc., however, has been secured pursuant to financing statements filed on behalf of the Company. The acquisitionCompany, and the Company expects to receive a return of Oventaits injected capital of approximately US $339,813 during the calendar year 2019. Collectability is in addition to the acquisition of TruFood Provisions Co., which is being rebranded and will launch in 2019.based on claims filed for cash that was paid.
On September 27, 2017,2018, the Company entered into a stock purchase agreement for the acquisition of a majority interest in Recipe Food Co. of Toronto (“Recipe Food Co.”(the “Stock Purchase Agreement”). The Company believes that this arrangement will provide a stronger basis for growth and innovation. Recipe Food Co. will operate with Sandrea Gibson, as a majority owned subsidiary of Cruzani,seller (the “Seller”), and Recipe Food Co. will continue, as the target (the “Target”), pursuant to be led by its founder, Dee Gibson. Thewhich in exchange for up to CAD $237,000, the Company formally completed the closingagreed to acquire 80% of the asset purchase agreementissued and outstanding stock of the Target from the Seller upon the terms and subject to the conditions set forth in the Stock Purchase Agreement. Seller is engaged in the business of preparing and serving delicious, healthy meals on October 2, 2018, completinga counter-service basis with high quality ingredients, including low calorie alternatives. Difficulties integrating the Target into the Company group, which forced the Company to cease injecting additional capital into the Target. The Target is currently on the market for disposition to a third-party buyer on an arms-length basis., which the Company can undertake due to its acquisition of a majority interest in Recipe Food.supermajority ownership.
Basis of Presentation
The Company’saccompanying unaudited interim consolidated condensed financial statements arehave been prepared in accordance with accounting principles generally accepted in the United States of America.America (“U.S. GAAP”). These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, USH Distribution Corp., Powersports Brand Alliance, Inc., and Supreme Sweets Acquisition Corp. All significant intercompany transactions and balances have been eliminated.
The unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and reflect all adjustments (consisting of normal recurring adjustments unless otherwise indicated) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Certain prior year amounts have been reclassified to conform to current year presentation.
Certain information in footnote disclosures normally included in the financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and have been condensed or omitted pursuant to such principles and the financial results for the periods presented may not be indicative of the full year’s results. The Company believes the disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the Company’s audited financial statements and the notes theretofootnotes for the fiscal year ended December 31, 20172018 included on the Company’s Form 10-K. The results of the six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.
In the opinion of management, all adjustments necessary to present fairly the financial position as of June 30, 2019 and the results of operations and cash flows presented herein have been included in the Company’s Annual Report on Form 10-K filed withfinancial statements. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results of operations for the SEC on April 4, 2018full year.
Cruzani, Inc. and as amended on October 17, 2018 (the “2017 Annual Report”).Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
June 30, 2019
NOTE 1 – SUMMARY OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
We maintain our cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. We continually monitor our banking relationships and consequently have not experienced any losses in our accounts. We believe we are not exposed to any significant credit risk on cash. As of June 30, 2019, all of the Company’s other current asset and deposits on acquisition are expected to be returned to the Company.
Reclassifications
Certain reclassifications have been made to the prior year financial information to conform to the presentation used in the financial statements for the yearthree and six months ended SeptemberJune 30, 2018.2019. There is no effect on the accumulated deficit as the result of these reclassifications.
Principles of Consolidation
The accompanying unaudited interim consolidated condensed financial statements include the accounts of the Company and its wholly-ownedwholly owned subsidiaries, Oventa, Inc.Supreme Sweets Acquisition Corp. and TruFood Provisions Co. All financial information has been prepared in conformity with accounting principles generally accepted in the United States of America. All significant intercompany transactions and balances have been eliminated.The subsidiaries have had no significant net activity.
Revenue RecognitionReceivables
Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that an entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Oncehad other current assets of $339,813 as a contract is determined to be within the scoperesult of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations the Company must deliverit’s now terminated purchase agreement with Supreme Sweets Acquisition Corp, and whichdeposits on acquisition of these performance obligations are distinct.$102,552 from its stock purchase agreement with Recipe Food Co. (see above). The Company recognizeshas evaluated the collectability of both assets and concluded that it was highly unlikely that either receivable was collectible; therefore, as revenuesof June 30, 2019, both receivables have fully been written off
Fair value of financial instruments
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level 1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3: Pricing inputs that are generally unobservable inputs and not corroborated by market data.
The carrying amount of the transaction priceCompany’s financial assets and liabilities, such as cash, prepaid expenses and accrued expenses approximate their fair value because of the short maturity of those instruments. The Company’s notes payable approximates the fair value of such instruments based upon management’s best estimate of interest rates that is allocatedwould be available to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred to customersCompany for similar financial arrangements at a point in time, typically upon delivery.June 30, 2019 and December 31, 2018.
Recently issued accounting pronouncements
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Cruzani, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
June 30, 2019
NOTE 2 – GOING CONCERN
The accompanying unaudited interim consolidated condensed financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company on a going-concern basis. The going concern basis assumes that assets are realized, and liabilities are extinguished in the ordinary course of business at amounts disclosed in the consolidated financial statements. The Company has incurred recurring losses from operations and has an accumulated deficit of $78,055,519.$78,952,182. The Company’s ability to continue as a going concern depends upon its ability to obtain adequate funding to support its operations through continuing investments of debt and/or equity by qualified investors/creditors, internally generated working capital and monetization of intellectual property assets. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company’s development and marketing efforts.
The Company is pursuing additional debt and equity financing in order to fund its operations. In addition, revenue and cash from operating activities continue to increase as operations increase for both Oventa and TruFoods.
NOTE 3 – DEPOSITS ON ACQUISITION
On September 27, 2018, the Company entered into a stock purchase agreement with 2603088 Ontario Inc. o/a Recipe Food Co., (“Recipe Food”), a corporation organized under the laws of the Province of Ontario, Canada. The Company will purchase stock of Recipe Food resulting in an 80% ownership. As of September 30, 2018, the Company has paid $35,500 related to this acquisition. The Company believes that this arrangement will provide a stronger basis for growth and innovation. Recipe Food will operate as a majority owned subsidiary of Cruzani, and Recipe Food will continue to be led by its founder, Dee Gibson. The Company formally completed the closing of the asset purchase agreement on October 2, 2018.
NOTE 4 – ASSET ACQUISITIONS
On March 8, 2018, the Company entered into a share exchange agreement with TruFood Provisions Co (“TruFood”). Pursuant to an amendment to the share exchange agreement dated March 8, 2018, the Company will exchange 1 billion shares of the Company, and cash, for 100% of the equity of TruFood. It is expected that all other debt related to the operation of TruFood will be retired at or prior to the closing date. As of September 30, 2018, the Company has paid $124,000 related to this acquisition.
On June 30, 2018, Supreme Sweets Acquisition Corp. (n/k/a Oventa, Inc.), a subsidiary of the Company, and the Company (collectively, the “Company”) entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Supreme Sweets Inc. and 2498411 Ontario, Inc., as sellers (collectively, the “Seller”), pursuant to which in exchange for CAD $200,000 and a twenty percent (20%) interest in Oventa, Inc., the Company agreed to acquire the trade secret assets of Seller upon the terms and subject to the conditions set forth in the Asset Purchase Agreement. The value of the assets recorded of $6,367,227 is currently an estimate based upon the estimated fair value of the assets acquired under ASC 805-50-25-1. There has been no goodwill or a loss recorded related to the acquisition. The compensation amount to be paid to Supreme Sweets Inc. is currently recorded as other liabilities. A second closing occurred on July 31, 2018, pursuant to which the Company acquired the furniture, fixtures and equipment of Seller in exchange for CAD $100,000. Seller is engaged in the business of preparing delicious snacks, pastries and baked goods with high quality ingredients for exceptional taste, including low calorie and gluten-free alternatives.
NOTE 5 – LOANS PAYABLE
The loan payable balances are as follows:
Rate | September 30, 2018 | December 31, 2017 | Rate | June 30, 2019 | December 31, 2018 | |||||||||||||||||||
Loan 1 | 1 | % | $ | 27,000 | $ | 27,000 | (1) | 1 | % | $ | 27,000 | $ | 27,000 | |||||||||||
Loan 2 | 1 | % | 3,000 | 3,000 | (1) | 1 | % | 3,000 | 3,000 | |||||||||||||||
Loan 3 | 8 | % | 64,000 | 39,000 | ||||||||||||||||||||
Loan 4 | 8 | % | 35,000 | 111,000 | (1) | 8 | % | 160,500 | 155,400 | |||||||||||||||
Loan 5 | 8 | % | 164,400 | 190,000 | ||||||||||||||||||||
Loan 6 | 5 | % | - | 100,000 | ||||||||||||||||||||
Loan 7 | 5 | % | 135,475 | - | (1) | |||||||||||||||||||
Total | $ | 364,875 | $ | 431,000 | $ | 254,500 | $ | 224,400 |
(1) TheseAbove notes are currently past due.due as of the issuance of these financial statements.
NOTE 64 – CONVERTIBLE NOTES
A summaryOn January 18, 2019, the Company executed a promissory note with Travel Data Solutions LLC for $35,000, of which it has received $25,000. The note bears interest at 10% and matures on January 31, 2020. The specific terms of conversion are still being negotiated. Commencing on January 31, 2019 and on the Company’slast day of each month thereafter, the Company shall pay to the Holder Three Thousand Two Hundred Eight dollars and Thirty-Three cents ($3,208.33) of which Two Thousand Nine Hundred Sixteen Dollars and Sixty-Six cents ($2,916.66) represents payment towards the outstanding Principal Amount and Two Hundred Nineteen Dollars and Sixty-Six cents ($219.66) represents accrued interest thereon.
The following table summarizes the convertible notes payable is as follows:of June 30, 2019:
Note Holder | Date | Maturity Date | Interest | Balance December 31, 2018 | Additions | Conversions / Transfers | Balance June 30, 2019 | |||||||||||||||||
Third party individual | 7/25/13 | 12/31/16 | 12 | % | $ | 500,000 | $ | - | $ | - | $ | 500,000 | ||||||||||||
Adar Bays, LLC | 2/11/16 | 2/11/17 | 24 | % | 68,004 | - | - | 68,004 | ||||||||||||||||
GW Holdings Group, LLC | 5/17/16 | 5/17/17 | 24 | % | 24,000 | - | - | 24,000 | ||||||||||||||||
Travel Data Solutions | 11/18/17 | 11/30/19 | 10 | % | 150,000 | - | (50,000 | ) | 100,000 | |||||||||||||||
GW Holdings Group, LLC | 3/16/18 | 3/15/19 | 24 | % | 36,750 | - | - | 36,750 | ||||||||||||||||
Travel Data Solutions | 1/18/2019 | 1/31/20 | 10 | % | 25,000 | 25,000 | ||||||||||||||||||
L2 Capital, LLC | various | various | 24 | % | 882,014 | 22,776 | (33,149 | ) | 871,641 | |||||||||||||||
Total | $ | 1,660,768 | $ | 47,776 | $ | (83,149 | ) | $ | 1,625,395 | |||||||||||||||
Less debt discount | (209,029 | ) | - | |||||||||||||||||||||
$ | 1,451,739 | $ | 1,625,395 |
Rate | September 30, 2018 | December 31, 2017 | ||||||||||
Loan 1 | 12% | $ | 500,000 | $ | 500,000 | This note is currently past due. | ||||||
Loan 2 | 10% | 150,000 | 75,000 | Various maturity dates. No amounts are past due. | ||||||||
Loan 3 | 1% | 52,832 | - | Various maturity dates. No amounts are past due. | ||||||||
Loan 4 | 8% | 68,004 | 71,996 | This note is currently past due. | ||||||||
Loan 5 | 8% | 60,750 | 55,000 | $24,000 of this balance is past due. | ||||||||
Loan 6 | 8% | - | 72,100 | |||||||||
Loan 7 | 8% | - | 40,657 | |||||||||
Loan 8 | 5% | 677,013 | - | Various maturity dates. No amounts are past due. | ||||||||
Total Notes | 1,508,599 | - | ||||||||||
Less Debt Discount | (434,143 | ) | - | |||||||||
Total | $ | 1,074,456 | $ | 814,753 |
Cruzani, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
June 30, 2019
NOTE 75 – DERIVATIVE LIABILITIES
The embedded conversion options of the Company’s convertible debentures summarized in Note 64, and its convertible preferred Series E stock. contain conversion features that qualify for embedded derivative classification. The fair value of these liabilities are re-measured at the end of every reporting period and the change in fair value is reported in the statement of operations as a gain or loss on derivative financial instruments.
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:
September 30, 2018 | December 31, 2017 | |||||||
Balance at the beginning of the period | $ | 409,948 | $ | 402,881 | ||||
Addition of new derivative liabilities | 1,127,281 | - | ||||||
Change in fair value of embedded conversion option | 305,886 | 44,084 | ||||||
Derecognition of derivatives upon settlement of convertible notes | (462,324 | ) | (37,017 | ) | ||||
Balance at the end of the period | $ | 1,380,791 | $ | 409,948 |
Balance at December 31, 2017 | $ | 409,948 | ||
Addition of new derivative liabilities | 1,127,281 | |||
Change in fair value of embedded conversion option | (708,663 | ) | ||
Derecognition of derivatives upon settlement of convertible notes | (394,642 | ) | ||
Balance at December 31, 2018 | 433,924 | |||
Addition of new derivative liabilities | 194,547 | |||
Change in fair value of embedded conversion option | 235,940 | |||
Derecognition of derivatives upon settlement of convertible preferred stock | (145,929 | ) | ||
Derecognition of derivatives upon settlement of convertible notes | (79,783 | ) | ||
Balance at June 30, 2019 | $ | 638,699 |
The Company uses Level 3 inputs for its valuation methodology for its conversion option liabilities as their fair values were determined by using the Binomial option pricing model based on various assumptions. The model incorporates the price of a share of the Company’s common stock (as quoted on the Over the Counter Bulletin Board), volatility, risk free rate, dividend rate and estimated life. Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As, required, these are classified based on the lowest level of input that is significant to the fair value measurement.
The following table shows the assumptions used in the calculations:calculations of its derivatives:
Expected Volatility | Risk-free Interest Rate | Expected Dividend Yield | Expected Life (in years) | |||||
At December 31, 2017 | 335% | 1.39% | 0% | 0.25 – 2.50 | ||||
At September 30, 2018 | 209.47%- 261.9% | 2.14%-2.36% | 0% | 0.25 – .50 |
Expected Volatility | Risk-free Interest Rate | Expected Dividend Yield | Expected Life (in years) | |||||||||
At December 31, 2018 | 335.58% | 2.45 | % | 0 | % | 0.25 – 0.45 | ||||||
At June 30, 2019 | 254.61% - 261.36% | 2.09 | % | 0 | % | 0.25 – 0.63 |
NOTE 86 – WARRANTS
In connection with the issuance of the convertible note (the “Note”) with L2 Capital, LLC (“L2”) and funding of the initial tranche of $50,000 on the Note, the Company also issued a common stock purchase warrant to purchase up to 7,638,092381,905 shares of the Company’s common stock pursuant to the terms therein as a commitment fee. At the time that each subsequent tranche under the Note is funded by L2 in cash, then on such funding date, the warrant shares shall immediately and automatically be increased by the quotient of 100% of the face value of the respective tranche and 110% of the VWAP of the common stock on the Trading Day (as defined in the Note) immediately prior to the funding date of the respective tranche. As of September 30,December 31, 2018, the Company had received multiple tranches for which it issued warrants to purchase shares of the Company’s common stock.
These warrants have a variable exercise price per the above and expire in five years. The aggregate fair value of the warrants, which was allocated against the debt proceeds totaled $280,437$280,438 based on the Black Scholes Merton pricing model.model using the following estimates: exercise price ranging from $0.001 – 0.0071, 2.80% – 2.94% risk free rate, 252.42 – 258.24% volatility and expected life of the warrants of 5 years. The fair value was credited to additional paid in capital and debited to debt discount to be amortized over the term of the loan.
A summary of the status of the Company’s outstanding stock warrants and changes during the periods is presented below:
Range of Exercise Prices | Number Outstanding 6/30/2019 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | |||||||
$0.001 – 0.0071 | 22,669,092 | 4.19 years | $ | 0.0011 |
Shares available to purchase with warrants | Weighted Average Price | Weighted Average Fair Value | ||||||||||
Outstanding, December 31, 2017 | - | $ | - | $ | - | |||||||
Issued | 453,381,835 | $ | 0.0011 | $ | 0.0014 | |||||||
Exercised | - | $ | - | $ | - | |||||||
Forfeited | - | $ | - | $ | - | |||||||
Expired | - | $ | - | $ | - | |||||||
Outstanding, September 30, 2018 | 453,381,835 | $ | 0.0011 | $ | 0.0014 | |||||||
Exercisable, September 30, 2018 | 453,381,835 | $ | 0.0011 | $ | 0.0014 |
Range of Exercise Prices | Number Outstanding 9/30/2018 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | |||
$0.001 – 0.0071 | 453,381,835 | 4.94 years | $0.0011 |
Cruzani, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
June 30, 2019
The Company uses Level 3 inputs for its valuation methodology for its conversion option liabilities as their fair values were determined by using the Binomial option pricing model based on various assumptions. The model incorporates the price of a share of the Company’s common stock (as quoted on the Over the Counter Bulletin Board), volatility, risk free rate, dividend rate and estimated life. Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As, required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:
Expected Volatility | Risk-free Interest Rate | Expected Dividend Yield | Expected Life (in years) | |||||||||
At September 30, 2018 | 252.42% – 258.24% | 2.80%-2.94% | 0 | % | 5 |
NOTE 97 – COMMON STOCK
During the nine months ended September 30,In November 20, 2018, the Company issued 704,188,067and its stockholders approved a 1 for 20 reverse stock split. The reverse stock split was deemed effective by the Financial Industry Regulatory Authority (“FINRA”) on January 10, 2019. All shares throughout these financial statements have been retroactively adjusted to reflect the reverse stock split.
During the six months ended June 30, 2019, L2 Capital, LLC converted $33,149 of principal into 16,660,864 shares of common stock to settle $250,547stock.
During the six months ended June 30, 2019, Device Corp. converted $9,700 and $1,050 of principal and $18,870interest, respectively, into 12,500,000 shares of accrued interestcommon stock. The loans from Device Corp have no specific terms of conversion and have therefore not been classified as convertible. The shares were valued on its convertible notes.the date of conversion at the closing stock price, for a loss on conversion of debt of $46,250.
During the six months ended June 30, 2019, Geneva Roth Remark Holdings converted 52,715 Series E preferred shares into 66,381,384 shares of common stock.
During the six months ended June 30, 2019, Geneva Roth Remark Holdings purchased 33,500 shares of Series E preferred stock for total cash proceeds of $33,500.
NOTE 108 – PREFERRED STOCK
Series A Convertible Preferred Stock, has a par value of $0.01, may be converted at the holder’s election into shares of common stock at the conversion rate of ten shares of common stock for one share of Series A Preferred Stock. Each share is entitled to 10 votes, voting with the common stock as a single class, has liquidation rights of $2.00 per share and is not entitled to receive dividends. As of June 30, 2019 and December 31, 2018, there are 3,381,520 and 3,381,520 shares of Series A preferred stock outstanding, respectively.
Series B Convertible Preferred Stock, has a par value of $0.01, may be converted at the holder’s election into shares of common stock at the conversion rate of 4,000 shares of common stock for one share of Series B Preferred Stock. Each share is entitled to 4,000 votes, voting with the common stock as a single class, has liquidation rights of $0.01 per share and is not entitled to receive dividends. As of June 30, 2019 and December 31, 2018, there are 5,000 and 5,000 shares of Series B preferred stock outstanding, respectively.
Series C Convertible Preferred Stock, has a par value of $0.01, may be converted at the holder’s election into shares of common stock at the conversion rate of 400 shares of common stock for one share of Series C Preferred Stock. Each share is entitled to 400 votes, voting with the common stock as a single class, has liquidation rights of $0.01 per share and is entitled to receive four hundred times the dividends declared and paid with respect to each share of Common Stock. See Note 11 for related partyAs of June 30, 2019 and December 31, 2018, there are 5,000,000 and 5,000,000 shares of Series C preferred stock issuance.outstanding, respectively.
Series D Convertible Preferred Stock, has a par value of $0.0001, may be converted at a ratio of the Stated Value plus dividends accrued but unpaid divided by the fixed conversion price of $0.0015, which conversion price is subject to adjustment. Series D is non-voting, has liquidation rights to be paid in cash, before any payment to common or junior stock, 140% of the Stated Value ($2.00) per share plus any dividends accrued but unpaid thereon and is entitled to 8% cumulative dividends. As of June 30, 2019 and December 31, 2018, there are 125,000 and 125,000 shares of Series D preferred stock outstanding, respectively.
Series E Convertible Preferred Stock, has a par value of $0.001, and a stated value of $1.00 per share, subject to adjustment. The shares of Series E Convertible Preferred Stock can convert at a conversion price that is equal to the amount that is 61% of the lowest trading price of the Company’s common stock during the 20 trading days immediately preceding such conversion. The shares of Series E Convertible Preferred Stock are subject to redemption by the Company at its option from the date of issuance until the date that is 180 days therefrom, subject to premium that ranges from 120% to 145%, increasing by 5% during each 30-day period following issuance. Series E carries a 12% cumulative dividend, which will increase to 22% upon an event of default, is non-voting, and has liquidation rights to be paid in cash, before any payment to common or junior stock. The Series E are mandatorily redeemable after twelve months, and therefore have been classified as mezzanine equity.
On July 23,1, 2018, the Company granted 125,000 shares ofentered into a Stock Purchase Agreement with Device Corp. (“Device”) whereby Device will purchase up to $250,000 Series DE preferred stock to L2. The stock was issued as commitment shares in connection tofor $1 per share. As of June 30, 2019, the Equity Purchase Agreement dated July 23, 2018. The stock is not effective untilCompany has received $166,331 for the full commitment amount has been met orpurchase of the agreement is terminated.Series E. The shares were valued at $0.15, based upon estimated loan fees, for total non-cash expense of $18,750. Thehave not yet been issued and are classified as Series D has been classified on the balance sheetE preferred to be issued as mezzanine equity.
On September 19, 2018,January 15, 2019, the Company entered into a Stock Purchase Agreement with Geneva Roth Remark Holdings, Inc. (“Geneva”) whereby Geneva will purchase 53,000 shares of Series E preferred stock for $53,000. This transaction was completed in October when theAs of June 30, 2019, and December 31, 2018, there are 86,785 and 53,000 shares of Series E designation was completed, andpreferred stock outstanding, respectively. As of June 30, 2019, the funds were received.Company fair valued its Series E preferred stock derivative liability at $164,937.
AsDuring the six months ended June 30, 2019, Geneva Roth Remark Holdings converted 52,715 Series E preferred shares into 66,381,384 shares of Septembercommon stock.
Cruzani, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
June 30, 2018, there was an insufficient amount of the Company’s authorized common stock to satisfy the potential number of shares that would be required to satisfy the outstanding convertible preferred, convertible debt and the potential 1 billion shares to be issued to TruFoods, into common stock. In accordance with ASC 815, derivative and hedging, the Company analyzed which contracts could be classified as equity through the following sequencing methodology: contracts with no maturity date (convertible preferred shares) then contracts with the earliest maturity date first. Under this methodology management determined that both the Series C and Series D convertible preferred stock, being among the last to be issued, should be allocated to mezzanine equity. This allocation leaves sufficient common shares for our other convertible contracts. Management believes that no further consideration is needed.2019
NOTE 119 – RELATED PARTY TRANSACTIONTRANSACTIONS
Per the terms of Mr. Dickson’s employment agreement, he is to be compensated $120,000 per year. For the year ended December 31, 2018, he was paid $52,000, and $68,000 has been credited to accrued compensation. For the six months ended June 30, 2019, he was paid $16,000. As of June 30, 2019, $112,000 has been credited to accrued compensation.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
During the nine months ended Septembernormal course of business, the Company may be exposed to litigation. When the Company becomes aware of potential litigation, it evaluates the merits of the case in accordance with FASB ASC 450-20-50, Contingencies. The Company evaluates its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals. As ofJune 30, 2019, the Company is not aware of any additional contingent liabilities that should be reflected in the financial statements.
On February 13, 2017, Baum Glass & Jayne PLLC (“Plaintiff”) obtained a default judgment against the Company in the amount of $27,083.74. Plaintiff has not attempted enforced collection. The amount was included in accounts payable as ofJune 30, 2019 and December 31, 2018.
On June 20, 2018, GW Holdings Group, Inc. (“GW”) filed a lawsuit against the Company, in which GW alleges that the Company breached two Stock Purchase Agreements that GW entered into with the Company. On July 11, 2018, the Company issued 5,000,000 sharesfiled a motion to dismiss which was granted by the court on March 13, 2019. A notice of its Series C Preferred stockappeal filed by GW is pending. As ofJune 30, 2019, the Company has a note payable balance of $60,750 due to Everett Dickson, the Company’s CEO for services rendered. The stock was valued based on the services performed for total non-cash expense of $120,000. The Series CGW. Since GW’s original complaint has been classified on the balance sheet as mezzanine equity.The Series Cdismissed and no further action has been classified ontaken by the balance sheet as mezzanine equity.court, no additional liability has been accrued.
On September 21, 2018, Pro Drive Outboards, LLC (“Pro-Drive”) filed a lawsuit against the Company, in which Pro-Drive alleges that the Company breached a contract that Pro-Drive entered into with the Company. Pro-Drive is seeking damages in excess of $500,000. The Company has filed an answer, including the defenses of defective service of process and statute of limitations, and the case is currently pending. Because this case has not progressed beyond a motion to dismiss and any pending outcome is currently unknown the Company has not accrued any amount related to this lawsuit.
NOTE 1211 – SUBSEQUENT EVENTS
In accordance withManagement has evaluated subsequent events pursuant to the requirements of ASC 855-140,Subsequent Events,Topic 855, from the Company analyzed its operations subsequent to September 30, 2018,balance sheet date through the date the financial statements were available to be issued and has determined that there are no material subsequent events to disclose in these financial statementsexist other than the following.
On October 2, 2018, the Company announced that it has formally completed the closingSubsequent toJune 30, 2019, Geneva Roth Remark Holdings converted 51,800 shares of a definitive asset purchase agreement, completing the acquisition of a majority interest in Recipe Food.
On October 5, 2018, the Company received $50,000 for the sale of its Series E preferred stock to Geneva (See Note 10).into 128,107,458 shares of common stock.
On October 15, 2018, the CompanyJuly 8, 2019, Mr. Dickson entered into a letterSecurities Purchase Agreement (“Purchase Agreement”) with Conrad Huss to sell 5,000,000 shares of intent (the “LOI”) concerningSeries C Preferred and 5,000 shares of Series B preferred Stock held by Mr. Dickson. As a result, Mr. Huss acquired the Company’s potential acquisition of intellectual property assets pertainingright to “VitaminFIZZ.” Pursuant to the termsvote 99.06 % of the LOI,voting control of the closingCompany. The Series B Preferred Stock is also convertible into common stock which, in the aggregate, would represent up to .01% of such transactionthe outstanding common stock after the conversion. The Series B Preferred Stock is expectedalso convertible into common stock which, in the aggregate, would represent up to occur no later than November 30, 2018, and99.05% of the purchase price will be $60,000 payable in cash. Additionally, in connection with such closing,outstanding common stock after the seller of such assets will enter into a confidentiality, non-competition and non-solicitation agreement having a term of five years. Pursuant to the LOI, the definitive agreement is to contain customary representations, warranties and conditions to closing.conversion.
Subsequent to September 30, 2018, L2 converted $21,560 into 98,000,000On July 8, 2019, Everett Dickson, who had been the sole officer of the Company, resigned as an officer of the Company, and Conrad Huss was appointed the Interim President and Chief Executive Officer of the Company. Mr. Huss is the sole beneficial owner of 5,000,000 and 5,000 shares of common stock.Series B and C Preferred Stocks, respectively. Mr. Dickson also resigned as a director of the Company, effective on July 8th, 2019. Mr. Dickson’s resignation was not the result of any disagreement with the management of the Company.
1011
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking information includes statements relating to future actions, prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other matters. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “continue” and similar expressions or the negative of these similar terms. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as that information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information.
These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash, which are explained below under “Liquidity and Capital Resources”. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable federal securities laws. Unless stated otherwise, terms such as the “Company,” “Cruzani,” “we,” “us,” “our,” and similar terms shall refer to Cruzani, Inc., an Oklahomaa Nevada corporation, and its subsidiaries.
Plan of Operations
Cruzani, Inc. was originally formedis a restaurant development company that builds and represents the quick-service food industry utilizing quality menu items of value in modern dining rooms, and other related businesses, throughout the United States as a limited liability companywell as international markets, with an emphasis on February 5, 1999 underfood and wellness. Our Management team picks up and coming concepts with growth potential. With little territory available for the name The Powerhouse, L.L.C. pursuantolder brands we bring fresh innovative brands to our consumers that have great potential. All of our brands are unique in nature as we focus on niche markets that are still in need of developing.
Cruzani’s core value proposition relates to the lawsplatform of the State of Oklahoma. On November 9, 2006, Powerhouse Productions, L.L.C. filed Articles of Conversion changing the entity from a limited liability companyservices it offers to a corporation under the name Harcom Productions, Inc. On January 25, 2010, Articles of Merger were filed with the State of Oklahoma merging U.S. Highland, Inc., an Oklahoma corporation into Harcom Productions, Inc. and the name of the corporation was changedpotential food entrepreneurs. Cruzani’s goal is to US Highland, Inc. US Highland, Inc. (the “Company”) was a recreational power sports Original Equipment Manufacturer (“OEM”), developing motorcycles, quads, single cylinder engines, and v-twin engines under its own brand and for other OEMs. During 2017, the Company exited the recreational power sports OEM and leisure activity vehicles markets. On June 29, 2018, the Company filed Amended and Restated Articles of Incorporation with the State of Nevada to change its name to Cruzani, Inc.
On June 30, 2018, Supreme Sweets Acquisition Corp. (n/k/a Oventa, Inc.), a subsidiary of the Company, and the Company (collectively, the “Company”) entered into an asset purchase agreement (the “Asset Purchase Agreement”) with Supreme Sweets Inc. and 2498411 Ontario, Inc., as sellers (collectively, the “Seller”), pursuant to which in exchange for CAD $200,000 and a twenty percent (20%) interest in Oventa, Inc., the Company agreed to acquire the trade secret assets of Seller upon the terms and subjectpropel those entrepreneurs to the conditions set forth in the Asset Purchase Agreement. A second closing occurred on July 31, 2018, pursuant to which the Company acquired the furniture, fixtures and equipmentnext level of Seller in exchange for CAD $100,000. Seller is engaged in the business of preparing delicious snacks, pastries and baked goods with high quality ingredients for exceptional taste, including low calorie and gluten-free alternatives.success.
Results of Operations
Three Months Ended SeptemberJune 30, 20182019 Compared Toto the Three Months Ended SeptemberJune 30, 20172018
RevenueCompensation Expense
RevenueCompensation expense for the three months ended SeptemberJune 30, 20182019 was $81,016$30,000 compared to $0 for the three months ended SeptemberJune 30, 2017. Revenue2018. Compensation increased for an employment agreement executed in the current period is from the Company’s new subsidiary Oventa, Inc.2018 with our CEO.
Cost of Revenue
Cost of revenue for the three months ended September 30, 2018 was $56,711 compared to $0 for the three months ended September 30, 2017. Cost of revenue in the current period is from the Company’s new subsidiary Oventa, Inc.
Compensation Expense
Compensation Expense for the three months ended September 30, 2018 was $159,126 compared to $0 for the three months ended September 30, 2017. In the current period our CEO received $20,000 and preferred stock for total non-cash expense of $120,000 (Note 11). In addition, Oventa incurred $19,126 of compensation expense.
General and Administrative Expense
General and administrative expense for the three months ended SeptemberJune 30, 20182019 was $332,154$27,257 compared to $336$42,822 for the three months ended SeptemberJune 30, 2017. 2018, a decrease of $15,565, or 36.3%.General and administrative expenses have increased withdecreased as the increased operations of the parent companyCompany looks for new business opportunities and dueattempts to our new operating subsidiary. Some of our larger expenses include $124,000 of acquisition costs, $47,750 for investor relations and transfer agent fees of $6,425.conserve its available cash.
Depreciation Expense
For the three months ended September 30, 2018 we recognized $159,181 for depreciation expense in relation to our newly acquired assets (Note 4). We had no depreciation expense for the three months ended September 30, 2017.
Professional Fees
Professional fees for the three months ended SeptemberJune 30, 20182019 were $80,812$17,700 compared to $6,000$62,600 for the three months ended SeptemberJune 30, 2017.2018, a decrease of $44,900. Professional fees consist mostly of legal, accounting and audit fees. The increasedecrease is primarily due to a decrease in investor relations and legal expense.
Other Expense
Total other expense of $757,462 for thethree months ended June 30, 2019consists of interest expense of $138,496, a loss on change in fair value of derivatives of $136,556, a loss on the issuance of Series E preferred stock of $40,045 and a loss on receivables of $442,365. Total other expense of $326,814 for thethree months ended June 30, 2018consisted of interest expense of $53,453, a gain on change in fair value of derivatives of $318,920 and a loss on convertible notes of $592,281.
Net Loss
The Company had net loss of $832,419 for the three months ended June 30, 2019, as compared to a net loss of $432,236 for the three months ended June 30, 2018.
Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
Compensation Expense
Compensation expense for the six months ended June 30, 2019 was $60,000 compared to $0 for the six months ended June 30, 2018. Compensation increased for an increaseemployment agreement executed in 2018 with our CEO.
General and Administrative Expense
General and administrative expense for the six months ended June 30, 2019 was $57,376 compared to $68,245 for the six months ended June 30, 2018, a decrease of $10,869, or 15.9%.General and administrative expenses have decreased as the Company looks for new business opportunities and attempts to conserve its available cash.
Professional Fees
Professional fees for the six months ended June 30, 2019 were $89,478 compared to $99,600 for the six months ended June 30, 2018, a decrease of $9,852 or 9.8%. Professional fees consist mostly of legal, accounting and audit accountingfees. The decrease is primarily due to a decrease in investor relations and legal expense.
Other Income (Expense)Expense
OtherTotal other expense of $756,926 for the threesix months Septemberended June 30, 2018 2019consists of interest expense of $232,998,$435,104, which includes $208,573$209,029 of debt discount amortization, a loss on change in fair value of derivatives of $751,858, and$173,562, a loss on convertible notes of $743,611. Other$46,250, a loss on the issuance of Series E preferred stock of $194,547, a gain on the extinguishment of debt of $492,016 and loss on receivables of $442,365. Total expense of $208,127 for the threesix months Septemberended June 30, 2017 2018consisted of interest expense of $27,197,$93,195, a gain on change in fair value of derivatives of $780,165$513,654 and a loss on convertible notes of $250,149.$628,586.
Net LossIncome
The Company had a net loss of $2,435,436$964,050 for the threesix months ended SeptemberJune 30, 2018,2019, as compared to net income of $496,483 for the three months ended September 30, 2017. The net income in the prior period was a direct result of the gain in the change of fair value of derivatives. In the current period we had a net loss from operations of $706,969 as all of our operating expenses have increased in conjunction with our new operating subsidiary and increase in overall business activity. Our additional loss of $1,728,467 from other expense was almost all from non-cash expense related to our convertible notes.
Nine Months Ended September 30, 2018 Compared To Nine Months Ended September 30, 2017
Revenue
Revenue for the nine months ended September 30, 2018 was $81,016 compared to $0 for the nine months ended September 30, 2017. Revenue in the current period is from the Company’s new subsidiary Oventa, Inc.
Cost of Revenue
Cost of revenue for the nine months ended September 30, 2018 was $56,711 compared to $0 for the nine months ended September 30, 2017. Cost of revenue in the current period is from the Company’s new subsidiary Oventa, Inc.
Compensation Expense
Compensation Expense for the nine months ended September 30, 2018 was $176,126 compared to $0 for the three months ended September 30, 2017. In the current period our CEO received $37,000 and preferred stock for total non-cash expense of $120,000 (Note 11). In addition, Oventa incurred $19,126 of compensation expense.
General and Administrative Expense
General and administrative expense for the nine months ended September 30, 2018 was $383,399 compared to $1,025 for the nine months ended September 30, 2017. General and administrative expenses have increased with the increased operations of the parent company and due to our new operating subsidiary. Some of our larger expenses include $124,000 of acquisition costs, $86,250 for investor relations, transfer agent fees of $18,350 and license and fee expense of $15,520.
Depreciation Expense
For the nine months ended September 30, 2018 we recognized $159,181 for depreciation expense in relation to our newly acquired assets (Note 4). We had no depreciation expense for the nine months ended September 30, 2017.
Professional Fees
Professional fees for the nine months ended September 30, 2018 were $180,412 compared to $60,600 for the nine months ended September 30, 2017. Professional fees consist mostly of legal, accounting and audit fees. The increase is due to an increase in audit, accounting and legal expense.
Other Income (Expense)
Other expense for the nine months September 30, 2018 consists of interest expense of $326,193, which includes $240,550 of debt discount amortization, a loss on change in fair value of derivatives of $238,204, and a loss on convertible notes of $1,372,197. Other expense for the nine months September 30, 2017 consisted of interest expense of $262,167, a loss on change in fair value of derivatives of $94,539 and a loss on convertible notes of $250,149.
Net Loss
The Company had a net loss of $2,811,407$375,972 for the ninesix months ended SeptemberJune 30, 2018, as compared to $668,480 for the nine months ended September 30, 2017. In the current period we had a net loss from operations of $874,813 as all of our operating expenses have increased in conjunction with our new operating subsidiary and increase in overall business activity. Our additional loss of $1,936,594 from other expense was almost all from non-cash expense related to our convertible notes.2018.
Liquidity and Capital Resources
For the ninefor thesix months ended SeptemberJune 30, 2018,2019, we used $597,473$113,101 in operating activities $154,829 for the purchase of our intangible assets (Note 4) and had net proceeds from financing activities of $757,306.$112,000. To date a majority of our funding has come from the issuance of convertible notes.
We commenced operations of our subsidiary Oventa, Inc. during the third quarter and realized revenue of $81,016. We expect our revenues to increase each month as we continue to invest in and increase those operations. We have already seen a significant increase as revenue for the month of October was approximately $83,800.
The Company currently owes $364,875 on$254,500 of notes payable, all of which are in default, and $1,508,599$1,625,395 for outstanding convertible notes, $592,004notes. Approximately $912,000 of whichthe convertible notes are in default.
Quarterly Developments
None.
Subsequent Developments
Change of Control.
On July 8, 2019, Mr. Dickson entered into a Securities Purchase Agreement (“Purchase Agreement”) with Conrad Huss to sell 5,000,000 shares of Series C Preferred and 5,000 shares of Series B preferred Stock held by Mr. Dickson. As a result, Mr. Huss acquired the right to vote 99.06 % of the voting control of the Company. The Series B Preferred Stock is also convertible into common stock which, in the aggregate, would represent up to .01% of the outstanding common stock after the conversion. The Series B Preferred Stock is also convertible into common stock which, in the aggregate, would represent up to 99.05% of the outstanding common stock after the conversion.
Resignation and Appointment of Officer
On July 8, 2019, Everett Dickson, who had been the sole officer of the Company, resigned as an officer of the Company, and Conrad Huss was appointed the Interim President and Chief Executive Officer of the Company. Mr. Huss is the sole beneficial owner of 5,000,000 and 5,000 shares of Series B and C Preferred Stocks, respectively. Mr. Dickson also resigned as a director of the Company, effective on July 8th, 2019. Mr. Dickson’s resignation was not the result of any disagreement with the management of the Company.
Going Concern
The accompanying unaudited interim consolidated condensed financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company ason a going-concern basis. The going concern basis assumes that assets are realized, and liabilities are extinguished in the ordinary course of business at amounts disclosed in the consolidated financial statements. The Company has incurred recurring losses from operations and as of September 30, 2018 currentliabilities exceed current assets by $10,269,508. The Company has an accumulated deficit of $78,055,519.$78,952,182. The Company’s ability to continue as a going concern depends upon its ability to obtain adequate funding to support its operations through continuing investments of debt and/or equity by qualified investors/creditors, internally generated working capital and monetization of intellectual property assets. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company’s development and marketing efforts.
Critical Accounting Estimates and Policies
There
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 to the Financial Statements describes the significant accounting policies and methods used in the preparation of the Financial Statements. Estimates are used for, but not limited to, contingencies and taxes. Actual results could differ materially from those estimates. The following critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Financial Statements.
We are subject to various loss contingencies arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when management concludes that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be no assurancereasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted.
We recognize deferred tax assets (future tax benefits) and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities represent the expected future tax return consequences of those differences, which are expected to be either deductible or taxable when the assets and liabilities are recovered or settled. Future tax benefits have been fully offset by a 100% valuation allowance as management is unable to determine that sufficient funds required during the next year or thereafterit is more likely than not that this deferred tax asset will be generated from operations or available from external sources such as debt or equity financings, or other potential sources. realized.
Recent Accounting Pronouncements
The inability to generate cash flow from operations or to raise capital from external sources will forceCompany has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company to substantially curtail and cease operations, therefore, havingdoes not believe that there are any other new accounting pronouncements that have been issued that might have a material adverse effectimpact on its business. Furthermore, there can be no assurance that any funds, if available, will possess attractive termsfinancial position or not have a significant dilutive effect on the Company’s existing stockholders.results of operations.
Off Balance Sheet Arrangements
The Company has noWe have not entered into any off-balance sheet arrangements.arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.applicable to smaller reporting companies.
Item 4. Controls and Procedures.
Management’s Report onEvaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of ourmaintain disclosure controls and procedures as(as defined in Rules 13a-15(e) and 15d-15(e) underof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures that are designed to ensurebe effective in providing reasonable assurance that information required to be disclosed by an issuer in theour reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2018 in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission rules(the “SEC”), and forms. Thethat such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures andas of the end of the period covered by this report. Based on that evaluation, they concluded that our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures orwere not effective for the quarterly period ended June 30, 2019.
The following aspects of the Company were noted as potential material weaknesses:
1. | We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the period ended June 30, 2019. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
2. | We do not have sufficient resources in our accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner. As a result, as of the date of filing, we have not completed our ASC 606 implementation process and, thus, cannot disclose the quantitative impact of adoption on our financial statements. In addition, due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
3. | We have inadequate controls to ensure that information necessary to properly record transactions is adequately communicated on a timely basis from non-financial personnel to those responsible for financial reporting. Management evaluated the impact of the lack of timely communication between non–financial personnel and financial personnel on our assessment of our reporting controls and procedures and has concluded that the control deficiency represented a material weakness. |
4. | Certain control procedures were unable to be verified due to performance not being sufficiently documented. As an example, some procedures requiring review of certain reports could not be verified due to there being no written documentation of such review. Management evaluated the impact of its failure to maintain proper documentation of the review process on its assessment of its reporting controls and procedures and has concluded deficiencies represented a material weakness. |
In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs.
Changes in Internal Controls
Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that no change occurred in the Company’s internal controls over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended SeptemberJune 30, 20182019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal controlcontrols over financial reporting.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
On February 13, 2017, Baum Glass & Jayne PLLC (“Plaintiff”) obtained a default judgment against the Company in the amount of $27,083.74. Plaintiff has not attempted enforced collection. The amount was included in accounts payable as of SeptemberJune 30, 20182019 and December 31, 2017.2018. The management is having discussions with respect to the timing and structure of the settlement.
On June 20, 2018, GW Holdings Group, Inc. (“GW”), filed a lawsuit against the Company, in which GW alleges that the Company breached two Stock Purchase Agreements that GW entered into with the Company. On July 11, 2018, the Company filed a motion to dismiss which was granted by the court on March 13, 2019. A notice of appeal filed by GW is pending. As of June 30, 2019, the Company has a note payable balance of $60,750 due to GW. Since GW’s original complaint has been dismissed and no further action has been taken by the court, no additional liability has been accrued. Managements view is that the amount to settle this will not materially exceed the balance due and even be slightly less.
On September 21, 2018, Pro Drive Outboards, LLC (“Pro-Drive”) filed a lawsuit against the Company, in which Pro-Drive alleges that the Company breached a contract that Pro-Drive entered into with the Company. Pro-Drive is seeking damages in excess of $500,000. The Company has filed an answer, including the defenses of defective service of process and statute of limitations, and the case is currently pending.
On September 21, 2018, Pro-Drive Outboards, LLC filed Because this case has not progressed beyond a complaint againstmotion to dismiss, and any pending outcome is currently unknown the Company has not accrued any amount related to an alleged breach of contract having alleged damages exceeding $500,000. The Company is asserting its defenses against such claims, which include apparent defects arising out of such plaintiff’s failurethis lawsuit. Management does not view this as being a potential liability. This claim relates to properly serve process onevents in the Company and failure to file within the applicable statute of litigation.
Other than the matters outlined above, we are currently not involved in any litigation2010-2012 timeline, discussions with management at that we believe could have a material adverse effect on our financial condition or results of operations. Theretime, indicates there is no action, suit, proceeding, inquiry or investigation before any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of executive officers of our Company, threatened against or affecting our Company, or our common stock in which an adverse decision could have a material effect.basis for their claims.
There have been no material changesWe are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and, as such, are not required to provide the risk factors discussed in “Risk Factors” in our Registration Statement on Form S-1 which was filed with the SEC on September 20, 2018.information under this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Quarterly Issuances:
During the threesix months ended SeptemberJune 30, 2018, we issued2019, L2 Capital, LLC converted $33,149 of principal into 16,660,864 shares of our common stock that were not registered under the Securities Act, and were not previously disclosed in a Current Report on Form 8-K as follows:stock.
During the threesix months ended SeptemberJune 30, 2018, the Company issued 400,328,1272019, Device Corp converted $9,700 and $1,050 of principal and interest, respectively, into 12,500,000 shares of common stock to settle $121,940stock.
During the six months ended June 30, 2019, Geneva Roth Remark Holdings converted 52,715 Series E preferred shares into 66,381,384 shares of principal and $2,900 of accrued interest on its convertible notes.common stock.
The above securities were issued in reliance on the exemption under Section 4(a)(2) of the Securities Act. These securities qualified for exemption under Section 4(a)(2) since the issuance by us did not involve a public offering. The offerings were not “public offerings” as defined in 4(a)(2) due to the insubstantial number of persons involved in the transactions, manner of the issuance and number of securities issued. We did not undertake an offering in which we sold a high number of securities to a high number of investors. In addition, the investors had the necessary investment intent as required by Section 4(a)(2) since they agreed to and received securities bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act for these transactions.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable.
NoneNone.
* filed herewith
* | filed herewith |
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
CRUZANI, INC. | ||
Date: | By: | |
Name: | ||
Title: | Chief Executive Officer and Interim Chief Financial Officer | |
(Principal Executive Officer) | ||
(Principal Financial and Accounting Officer) |
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