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CARDIFF INTERNATIONAL INC - 10-Q - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements including the related notes, and the other financial information included in this report. For ease of reference, "we," "us" or "our" refer to Cardiff International, Inc., and Legacy Card Company, Inc. unless otherwise stated. Cautionary Statement Concerning Forward-Looking Information This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for stock of Cardiff International, Inc. and other matters. Statements in this report that are not historical facts are hereby identified as "forward-looking statements" for the purpose of the safe harbor provided by Section 21E of the Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Such forward-looking statements, including, without limitation, those relating to the future business prospects, revenue and income of Cardiff International, Inc., wherever they occur, are necessarily estimates reflecting the best judgment of the senior management of Cardiff International, Inc. on the date on which they were made, or if no date is stated, as of the date of this report. These forward-looking statements are subject to risks, uncertainties and assumptions, including those described in the "Risk Factors" in Item 1A of Part I of our most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC"), that may affect the operations, performance, development and results of our business. Because the factors discussed in this report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The Company assumes no obligation and does not intend to update these forward looking statements, except as required by law. Operating History. We have not commenced active business operations. We anticipate we will commence active operations during the third quarter of 2011. Potential investors should be aware that there is only a limited basis upon which to evaluate our prospects for achieving our intended business objectives. We have limited resources and have had no revenues since our formation. Possibility of Total Loss of Investment. An investment in Cardiff is a high risk investment, and should not be made unless the investor has no need for current income from the invested funds and unless the investor can afford a total loss of his or her investment. Additional Financing Requirements. We will likely be required to seek additional financing in order to fund our operations and carry out our business plan. In order to fund our operations and effect additional acquisitions, we will be required to obtain additional capital. There can be no assurance that such financing will be available on acceptable terms, or at all. We do not have any arrangements with any bank or financial institution to secure additional financing and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in our best interest. No Public Market for Securities. There is no active public market for our common stock and we can give no assurance that an active market will develop, or if developed, that it will be sustained. Auditor's Opinion has a Going Concern Qualification. Our auditor's report dated June 20, 2011, for the years ended December 31, 2009 and 2008 and from August 29, 2001 (date of inception) through December 31, 2009 includes a going concern qualification which states that our significant recurring operating losses and negative working capital raise substantial doubt about our ability to continue as a going concern. 20 --------------------------------------------------------------------------------We do not anticipate paying any dividends and any gains from your investment in our stock will have to come from increases in the price of such stock. We currently intend to retain any future earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future. We Operate in a Limited Market. The Educational Rewards program is one of three national programs available to families. We cannot guarantee that we will compete successfully against our potential competitors, especially those with significantly greater financial resources or brand name recognition. Overview Cardiff International, Inc. ("Cardiff") acquired Legacy Card Company, Inc. ("Legacy") in a merger transaction in November 2005. The transaction was accounted for as a reverse merger transaction whereby Legacy, although a subsidiary of Cardiff, was deemed to be the surviving entity for accounting purposes. In January 2006, Cardiff changed its fiscal year end to December 31st from September 30th to have the same year end as Legacy. Cardiff International, Inc., a tech company who has developed a proprietary software system to track and manage consumer purchases from unlimited businesses: service companies, retailers, merchants, health industry, insurance industry, most consumer orientated businesses. Our software infrastructure tracks all commissions, rebates, discounts providing the public the ability to track all savings regardless of what program they participate in as long as the program utilizes the Cardiff technology. Cardiff's first national program will be ready to launch during the third quarter 2011 is "Mission Tuition" a rewards program that helps solve a real need for families - saving for education. The Mission Tuition program is easy to understand and use, and is emotionally positioned to appeal to all consumers. The Mission Tuition Rewards program will become the rewards program of preference for every day spending for families with young children. The program leverages the two biggest economic forces in society - consumer spending and consumer savings -to create the most unique value-added rewards program in decades. The potential success of the Mission Tuition program involves the participation of three groups: (i) Cardiff as the marketer, (ii) The merchant coalition, (iii) the member. As a result of our merchant coalition and cash rebate program we expect that the member will become loyal customers of the coalition merchants and participating banks. Participating merchants will provide both a member discount and a cash rebate on total purchases between 1% to 30% to our member's educational savings account. The retailer contribution can be supplemented by additional cash rebates by using the Mission Tuition MasterCard. This issuing bank contribution is applicable no matter where the cardholder shops, therefore encouraging regular and daily usage of the Mission Tuition MasterCard. The Mission Tuition program is expected to launch during the third quarter 2011.The auditors' report for the years ended December 31, 2009 and 2008 include a going concern qualification. Liquidity and Capital Resources At June 30, 2010 Since inception, the principal sources of cash have been funds raised from the sale of common stock, advances from shareholders, and loans in the form of debentures and convertible notes. At June 30, 2010, we had $ 177,936 of cash and cash equivalents and total assets amounted to $184,437. At December 31, 2009 we had $ 6,900 of cash and cash equivalents, and total assets amounted to $ 10,591, which include fixed assets and other assets. 21 --------------------------------------------------------------------------------Net cash used in operating activities was $79,464 and $379,719 for the six months June 30, 2010 and 2009, respectively. The increase in the amount of net cash used in operating activities during the period ended June 30, 2010 compared to the same period last year was attributable to the increase in net loss to $1,596,595 for the six months ended June 30, 2010, compared to $600,276 for the same period last year. The current period loss was primarily offset by the following non-cash transactions: an increase in accrued officers' salaries of $340,000, interest payable of $73,037, change in value of derivative liability of $520,780, stock-based compensation of $288,000, issuance of warrants for services of $254,800, and amortization of loan costs of $33,33. Net cash provided by financing activities was $253,712 and $36,011 for the six months ended June 30, 2010 and 2009, respectively. The cash flows from financing activities during the six months ended June 30, 2010 was attributable to proceeds from the sale of common stock of $151,000, and proceeds from notes payable of $280,000, net of repayments of notes payable of $19,705. In addition, we repaid $179,883 of officer's advances and received $22,300 in officer advances during the six months ended June 30, 2010. We have incurred operating losses since inception and at June 30, 2010, we had an accumulated deficit of $ 12,216,641. Current liabilities at June 30, 2010 consisted primarily of accounts payable and accrued expenses of $663,843, accounts payable to related party of $135,348, payroll tax payable of $272,623, amounts due to officers of $639,067, accured officers' salaries of $90,000, convertible and non-convertible notes in the amount of $928,823, derivative liabilities in the amount of $1,815,857, and accrued interest in the amount of $562,632. Current liabilities at December 31, 2009 consisted primarily of accounts payable of $687,264, accounts payable to related party of $135,348, payroll tax payable of $245,423, amounts due to officers of $546,650, convertible and non-convertible notes in the amount of $907,990, derivative liabilities in the amount of $135,705, and accrued interest in the amount of $489,595. There can be no assurance that we will be able to obtain sufficient capital from debt or equity transactions or from operations in the necessary time frame or on terms acceptable to us. Should we be unable to raise sufficient funds, we may be required to curtail our operating plans and possibly relinquish rights to portions of our technology or products. In addition, increases in expenses or delays in product development may adversely impact our cash position and may require cost reductions. No assurance can be given that we will be able to operate profitably on a consistent basis, or at all, in the future. In order to continue our operations, development of our products, and implementation of our business plan, we need additional financing. We are currently attempting to obtain additional working capital in a term loan transaction. Additionally, we anticipate that our credit card will be launched in the third quarter of 2011 thereby commencing the generation of revenues shortly thereafter. In addition, we also anticipate that we will continue to operate at a loss for the foreseeable future. Results of Operations For the Six Months Ended June 30, 2010 and 2009 We had $302 in operating revenues for the six months ended June 30, 2010 and no operating revenue for the six months ended June 30, 2009. We had operating expenses of $967,819 and $407,666 for the six months ended June 30, 2010 and 2009, respectively, representing an increase of $506,153. The increase was primarily due to increases in consulting and outside services, officers' salaries, and accounting expenses and stock based compensation, both of which are included in other operating expenses. 22 --------------------------------------------------------------------------------We had a net loss of $1,596,595 for the six months ended June 30, 2010 compared to a net loss of $600,276 for the six months June 30, 2009, representing an increase of $996,319. The increase was primarily due to increases in operating expenses compounded by loss recorded from and the change in the fair value of the derivative liability. For the Three Months Ended June 30, 2010 and 2009 We had $139 in operating revenues for the three months ended June 30, 2010 and no operating revenues for the three months ended June 30, 2009. We had operating expenses of $200,652 and $223,409 for the three months ended June 30, 2010 and 2009, respectively, representing an decrease of $22,757. The decrease was primarily due to decreases in officers' salaries and advertising costs during the period. We had a net loss of $226,137 for the three months ended June 30, 2010 compared to a net loss of $342,713 for the three months ended June 30, 2009, representing an decrease of $116,576. The decrease was primarily due to decreases in operating expenses, compounded by a gain recorded from the change in the fair value of the derivative liability which amounted to a gain for the three months ended June 30, 2010. Inflation We do not believe that inflation will negatively impact our business plans. Plan of Operation Our current business plan is described in "Item 1 - Description of Business" of Form 10-K for the year ended December 31, 2009. Critical Accounting Estimates The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. Our actual results may differ from these estimates. We consider our critical accounting estimates to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different results when using different assumptions. We have discussed these critical accounting estimates, the basis for their underlying assumptions and estimates and the nature of our related disclosures herein with the audit committee of our Board of Directors. We believe our accounting policies specific to share-based compensation expense and estimation of the fair value of derivative liability involve our most significant judgments and estimates that are material to our consolidated financial statements. They are discussed further below. 23 --------------------------------------------------------------------------------Derivative Liability We have issued warrants of our common stock, and the amended these warrants. The warrant agreements include provisions that require us to record them as a liability, at fair value, pursuant to FASB accounting rules, including the requirement to deliver registered shares upon exercise, which is considered outside of our control. The warrant liabilities are marked-to-market each reporting period and changes in fair value are recorded as a non-operating gain or loss in our statement of operations, until they are completely settled or expire. The fair value of the warrants is determined each reporting period using the Black-Scholes option pricing model, and is affected by changes in inputs to that model including our stock price, expected stock price volatility, interest rates and expected term. The change in fair value of the derivative liability amounted to a net loss of $520,780 and $36,864 for the six months ended June 30, 2010 and 2009, respectively. The losses resulted mainly from a slight increase in the Company's stock price. We will continue to re-measure the derivative liability at fair value each quarter-end until they are completely settled or expire. Share-based compensation expense We account for the issuance of stock, stock options and warrants for services from employees and non-employees based on an estimate of the fair value of options and warrants issued using the Black-Scholes pricing model. This model's calculations include the exercise price, the market price of shares on grant date, weighted average assumptions for risk-free interest rates, expected life of the option or warrant, expected volatility of our stock and expected dividend yield. The amounts recorded in the financial statements for share-based expense could vary significantly if we were to use different assumptions. For example, the assumptions we have made for the expected volatility of our stock price have been based on the historical volatility of our stock, measured over a period generally commensurate with the expected term. If we were to use a different volatility than the actual volatility of our stock price, there may be a significant variance in the amounts of share-based compensation expense from the amounts reported. Off Balance Sheet Arrangements As of June 30, 2010, we had no off balance sheet arrangements. Recent Accounting Pronouncements In September 2006, the FASB issued SFAS 157 (ASC Topic 820), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. In February 2009, FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 to fiscal years and interim periods within those fiscal years beginning after November 15, 2009 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We elected to defer the adoption of the Standard for these non-financial assets and liabilities, and are currently evaluating the impact, if any, that the deferred provisions of the Standard will have on our consolidated financial statements. Because we did not elect to apply the fair value accounting option, the adoption of SFAS 157 for our financial assets and liabilities did not have an impact on our financial position or operating results. 24 --------------------------------------------------------------------------------In December 2008, the FASB issued SFAS No. 141(R) (ASC Topic 805), Business Combinations, and SFAS No. 160 (ASC Topic 810), Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. These new standards will significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements. SFAS 141(R) is required to be adopted concurrently with SFAS 160 and is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2009. Early adoption is prohibited. The adoption of this accounting pronouncement did not have a material effect on our consolidated financial statements. In February 2008, the FASB issued SFAS No. 159 (ASC Topic 825), The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115, which is effective for us in fiscal years beginning after July 1, 2009. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The adoption of this accounting pronouncement did not have a material effect on our consolidated financial statements. In March 2009, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 161 (ASC Topic 815), Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about a company's derivative and hedging activities. These enhanced disclosures will discuss (a) how and why a company uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 and its related interpretations and (c) how derivative instruments and related hedged items affect a company's financial position, results of operations and cash flows. SFAS No. 161 is effective for fiscal years beginning on or after November 15, 2009, with earlier adoption allowed. The adoption of this accounting pronouncement did not have a material effect on our consolidated financial statements. In June 2009 the FASB established the Accounting Standards Codification ("Codification" or "ASC") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change will not impact our financial statements. The ASC does change the way the guidance is organized and presented. In February 2010, the FASB issued ASU 2010-09, "Subsequent Events, Amendments to Certain Recognition and Disclosure Requirements" which made a number of changes to the existing requirements to the FASB Accounting Standards Codification 855 Subsequent Events. The amended guidance was effective upon issuance and as a result of the amendments, SEC filers that file financial statements after February 24, 2010 are not required to disclose the date through which subsequent events have been evaluated. In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements" which is intended to enhance the usefulness of fair value measurements by requiring both the disaggregation of the information in certain existing disclosures, as well as the inclusion of more robust disclosures about valuation techniques and inputs to recurring and non-recurring fair value measurements. The amended guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disaggregation requirement for the reconciliation disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 31, 2010 and for interim periods within those years. This ASU is not expected to have a material impact on our consolidated financial statements. 25 --------------------------------------------------------------------------------In January 2010, the FASB issued ASU 2010-02, "Accounting and Reporting for Decreases in Ownership of a Subsidiary - Scope Clarification" which is intended to clarify which transactions require a decrease in ownership provisions particularly for non-controlling interests in consolidated financial statements. In addition, it requires increased disclosures about deconsolidation of a subsidiary. It requires retrospective application and is effective for the first interim or annual periods ending on or after December 15, 2009. The adoption of this ASU did not have a material impact on our consolidated financial statements. In January 2010, the FASB issued ASU 2020-01 "Accounting for Distributions to Shareholders with Components of Stock and Cash" which is intended to clarify the accounting treatment for a stock portion of a shareholder distribution that (1) contains both cash and stock components, (2) allows shareholders to select their preferred form of distribution, and (3) limits the total amount of cash to be distributed. It defines a stock dividend as a dividend that takes nothing from the property of an entity and adds nothing to the interests of an entity's shareholders because the proportional interest of each shareholder remains the same. The stock portion of the distribution must be treated as a stock issuance and be reflected in the EPS calculation prospectively. It requires retrospective application and is effective for annual periods ending on or after December 15, 2009. The adoption of this ASU did not have a material impact on our consolidated financial statements. In August 2009, the FASB issued ASU 2009-15, which changes the fair value accounting for liabilities. These changes clarify existing guidance that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using either a valuation technique that uses a quoted price of either a similar liability or a quoted price of an identical or similar liability when traded as an asset, or another valuation technique that is consistent with the principles of fair value measurements, such as an income approach (e.g., present value technique). This guidance also states that both a quoted price in an active market for the identical liability and a quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This ASU was adopted effective on January 1, 2010 and did do not have a material impact on our consolidated financial statements. |