NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 2019 AND 2018
NOTE 1 – ORGANIZATION AND OPERATIONS
Jubilant Flame International, Ltd. (the “Company”), was formed on September 29, 2009 under the name Liberty Vision, Inc. The Company provided web development and marketing services for clients. On August 18, 2015, the Company changed its name to Jubilant Flame International, Ltd.
From the fourth quarter of the fiscal year ended February 28, 2018, the Company started to market and sell cosmetics products imported from Asia, Acropass Series products, in the United States market. The Company purchased the inventory from a related party company in China. The Company contracted with a third party to operate the online shopping platform and marketing campaign in the United States.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates and Assumptions
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 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. Management bases its estimates on historical experience and on various assumptions that are believed 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 are not readily apparent from other sources.
The Company’s significant estimates include income tax provisions and valuation allowances of deferred tax assets; the fair value of financial instruments and the assumption that the company will continue as a going concern. Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less to be cash and cash equivalents.
Receivables
Receivables are stated at their carrying values, net of a reserve for doubtful accounts. Receivables consist primarily of amounts due from Amazon reserve holding balance
Inventories
The Company values inventories at the lower of cost or market as determined primarily by the retail inventory method of accounting, using the first-in, first-out (“FIFO”) method.
Website and Amortization
Website development costs are capitalized and stated at cost, less accumulated amortization. Amortization is provided using the straight-line method over the estimated useful life of three years.
Carrying Value, Recoverability and Impairment of Long-Lived Assets
The Company has adopted paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets. The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.
The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.
The impairment charges, if any, are included in operating expense in the accompanying statements of income and comprehensive income (loss).
Recent Accounting Pronouncements
Pronouncements Adopted in Fiscal 2018
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
This ASU represents a single comprehensive model to recognize revenue to depict the transfer of promised goods or services to a customer at an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. The Company adopted this ASU from the interim period ending May 31, 2018, under the modified retrospective approach. The implementation of this ASU didn’t result in no adjustment to retained earnings and current financial statements.
On December 22, 2017, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(“SAB 118”), in response to the Tax Cuts and Jobs Act of 2017 (“Tax Act”). The Company has elected to record provisional amounts, as allowed by SAB 118, during a measurement period not to extend beyond one year of the enactment date. The company adopted it from the fourth quarter of Fiscal 2017.
Original Issuance Discount
For certain convertible debt issued, the Company provides the debt holder with an original issue discount. The original issue discount is recorded as a debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Derivative Financial Instruments
Fair value accounting requires bifurcation of embedded derivative instruments such as convertible features in convertible debts or equity instruments, and measurement of their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the binomial option-pricing model. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt, the Company will continue its evaluation process of these instruments as derivative financial instruments.
Fair Value of Financial Instruments
The Company measures assets and liabilities at fair value based on expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale date of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
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·
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Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
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·
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Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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·
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Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
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The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, accounts payable, due to related party and loan payable, approximate their fair values because of the current nature of these instruments. .
The company converted and paid off its convertible note in full in August 2017. The fair value of derivatives liability is Zero as of February 28, 2019 and 2018 respectively.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Income Taxes
Deferred income tax assets and liabilities are provided for based upon differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.
Revenue Recognition
Sales
The Company recognizes eCommerce sales revenue, net of sales taxes and estimated sales returns, upon delivery to the customer. Additionally, estimated sales returns are calculated using historical experience of actual returns as a percent of sales. The company started to market and sell cosmetics products from the fourth quarter of the fiscal year ended February 28, 2018 and collected all receivable from customers by the year end. No estimated sales returns were recorded by the year end February 28, 2019.
Cost of Sales
Cost of sales includes actual product cost, the cost of transportation to the Company’s distribution facilities.
Operating, Selling, General and Administrative Expenses
Operating, selling, general and administrative expenses include all operating costs of the Company, except cost of sales, as described above.
Advertising Costs
Advertising costs are expensed as incurred, consist primarily of video advertisements and are recorded in operating, selling, general and administrative expenses in the Company’s Statements of Income. Advertising costs $1,599 and $44,472 for fiscal 2019 and 2018, respectively.
Net Loss Per Common Share
Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during each period.
Since the company has incurred losses for all periods, the impact of the common stock equivalents would be anti- dilutive and therefore are not included in the calculation.
NOTE 3 – GOING CONCERN
The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. As of February 28, 2019, the Company had a working capital deficit of $994,608. The Company currently has limited profitable trading activities and has an accumulated deficit of $3,431,889 as of February 28, 2019. This raises substantial doubt about the Company’s ability to continue as a going concern.
The Company may raise additional capital through the sale of its equity securities, through an offering of debt securities, or through borrowings from financial institutions or related parties. By doing so, the Company hopes to generate sufficient capital to execute its new business plan in the medical and cosmetics sector on an ongoing basis. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern. There is no guarantee the Company will be successful in achieving these objectives. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 4 -- CONVERTIBLE DEBT
On December 9, 2015, the Company issued a convertible debenture of $60,000 which was determined to contain embedded conversion features required to be bifurcated from the host contract and reported at fair value. During the second quarter ended at August 31, 2017, the company paid off the remaining outstanding balance of $800 in full plus 40% interest. As a result, the convertible debenture balance net of discount amortization as of February 28, 2018 was zero.
Before the company paid off the remaining balance of $800 in full in year 2018, the holder of the convertible note converted $6,600 of principal into 1,627,777 common shares during the year end February 28, 2018. The following is a summary of the debt conversions:
Date
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|
Principle
Converted
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|
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Shares
issued
|
|
|
Conversion
Price
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|
|
|
|
|
|
|
|
|
|
|
16-Mar-17
|
|
|
2,900
|
|
|
|
805,555
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|
|
|
0.0036
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|
7-Apr-17
|
|
|
3,700
|
|
|
|
822,222
|
|
|
|
0.0045
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|
Total year ended 2-28-18
|
|
$
|
6,600
|
|
|
|
1,627,777
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|
|
|
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|
The following is a detail of convertible debt as of February 28, 2019 and February 28, 2018:
Description
|
|
Feb 28,
2019
|
|
|
Feb 28,
2018
|
|
|
|
|
|
|
|
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One convertible promissory note in the amount of $60,000, with maturity date of December 9, 2018, bearing interest 0% per annum, convertible into common stock at conversion prices equal to 60% of the lowest price in the prior 20 trading days.
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|
$
|
-
|
|
|
$
|
800
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|
Less: debt discount
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|
|
-
|
|
|
|
|
|
Less: debt payoff
|
|
|
-
|
|
|
|
(800
|
)
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Total
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|
|
-
|
|
|
|
-
|
|
Less: current portion
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|
|
-
|
|
|
|
-
|
|
Long-term convertible debt, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Debt Discount
No Debt discount was recorded during the year ended February 28, 2019 and the year ended February 28, 2018.
The Company amortized $0 and $4,238 during the year ended February 28, 2019, and February 28, 2018, respectively, to amortization of debt discount.
Debt discount consisted of the following at February 28, 2019 and February 28, 2018, respectively:
|
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As of
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|
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As of
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|
|
|
February 28,
2019
|
|
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February 28,
2018
|
|
|
|
|
|
|
|
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Debt discount
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$
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-
|
|
|
$
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58,026
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|
Accumulated amortization of debt discount
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|
|
-
|
|
|
|
(58,026
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)
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Debt discount - net
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivative Liabilities
The Company identified the conversion features embedded within its convertible debts as financial derivatives. The Company has determined that the embedded conversion option should be accounted for at fair value.
The following schedule shows the fair value of the derivative liabilities for the years ending February 28, 2018 after the convertible note was paid off in full.
For the year ended February 28, 2018
Derivative liabilities - February 28, 2017
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$
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9,156
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|
Add fair value at the commitment date for convertible notes issued during the three months
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|
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-
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Fair value reduction for derivatives due to note conversion
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|
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(12,276
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)
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Fair value mark to market adjustment for derivatives
|
|
|
4,363
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|
Derivatives extinguishment due to debt payoff
|
|
|
(1,243
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)
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Derivative liabilities – February 28, 2018
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|
|
-
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|
Less: current portion
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|
|
-
|
|
Long-term derivative liabilities February 28, 2018
|
|
$
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-
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|
During the year ended February 28, 2018, the Company recorded change in derivatives liability of $4,363 and reduction of derivatives liability of $12,276 due to conversion and derivatives extinguishment of $1,243 due to debt payoff.
The fair value at the commitment and re-measurement dates for the Company’s derivative liabilities were based upon the following management assumptions during the year:
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Commitment
|
|
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Re-measurement
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Assumption
|
|
Date
|
|
|
Date
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|
Expected dividends:
|
|
|
0
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%
|
|
|
0
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%
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Expected volatility:
|
|
|
45
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%
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|
203.7%~245.3
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%
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Expected term (years):
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|
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3
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|
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1.39~1.73
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|
Risk free interest rate:
|
|
|
1.22
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%
|
|
1.19%~1.35
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%
|
NOTE 5 – RELATED PARTY TRANSACTIONS
In support of the Company’s efforts and cash requirements, it must rely on advances from related parties until such time that the Company can support its operations or attains adequate financing through sales of its equity or traditional debt financing. There is no formal written commitment for continued support by shareholders. The advances are considered temporary in nature and have not been formalized by a promissory note.
As of February 28, 2019, the Company had a $443,607 loan outstanding with its CEO, Ms. Yan Li. This compares with the outstanding balance of $390,828 for Ms. Yan Li at February 28, 2018. The loans are non-interest bearing, due upon demand and unsecured.
A related party created a website that was active beginning in August of 2015 and billed the Company $25,000. The expense of this website is being amortized over 36 months at the rate of $694 per month. It was fully amortized by August of 2018.
A related party company is providing accounting service to the company at an estimated annual service fee of $23,000.
From November 2017, the Company started to purchase cosmetic products from a related party controlled by our CEO. The Company purchased a total of $33,093 and $8,842 in inventory from the related party at the end of February 28, 2019 and 2018 respectively.
NOTE 6 – ACCRUED OFFICER COMPENSATION AND STOCK COMPENSATION
On December 15, 2015, the Company entered into employment agreements with its president, Ms. Yan Li, and its former secretary and treasurer, Mr. Robert Ireland. Both agreements were retroactively effective as of December 4, 2015, for a term of 36 months (measured from December 4, 2015). Pursuant to the agreement, both Ms. Yan and Mr. Ireland shall receive an annual salary of $100,500 and 100,000 shares of the Company’s common stock.
On August 30, 2017, Mr. Robert Ireland resigned as Secretary/Treasurer of the company. Additionally, upon his resignation, he surrendered all outstanding equity compensation to the company and agreed to cancel all outstanding debt of the company that was owed to him for past compensation in the amount of $410,715.
On January 15, 2019, the board of the company approved new compensation to its five officers including two new appointed directors. The five directors waived their salary and receives total 500,000 shares each year for a term of three years.
As of February 28, 2019, a total of $535,500 had been accrued as salary compensation payable to its president compared to $460,125 to her at February 28, 2018.
As of February 28, 2019, a total of $159,750 in stock compensation expense had been recorded to five officers compared to a total of $317,625 in stock compensation had been recorded for the same period in the prior year to four officers, including one resigned officer.
NOTE 7 – INCOME TAX
At February 28, 2019, the Company had unused federal and state net operating loss carryforwards available of approximately $900,194, which may be applied against future taxable income, if any, and which expire in various years through 2038.
This loss carry-forward expires according to the following schedule:
Year Ending February 28, 2019
|
|
Amount
|
|
|
|
|
|
2034
|
|
$
|
54,197
|
|
2035
|
|
|
-
|
|
2036
|
|
|
539,420
|
|
2037
|
|
|
107,453
|
|
2038
|
|
|
118,828
|
|
2039
|
|
|
80,296
|
|
Total
|
|
$
|
900,194
|
|
The following is a reconciliation of the tax provision as calculated at the statutory tax rate to the provision as recognized for the years ended February 28, 2019 and February 28, 2018:
|
|
2019
|
|
|
2018
|
|
Tax provision at statutory rates
|
|
$
|
(66,381
|
)
|
|
$
|
(207,987
|
)
|
Effect of permanent and Temporary difference(s)
|
|
|
49,519
|
|
|
|
166,397
|
|
Change in valuation allowance
|
|
|
16,862
|
|
|
|
41,590
|
|
Net tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
There were permanent differences and temporary differences to reconcile the tax provision for the years ended February 28, 2019 and 2018, other than the change in valuation allowance of $16,862 and $41,590, respectively. All tax years from inception remain open for examination by the tax authorities.
In addition to tax loss carry forward, unrecognized deferred tax assets as of February 28, 2019 and 2018, primarily related to accrued officer compensation not deductible until paid for income tax purposes amounted to $ 15,829 and $52,763, respectively.
NOTE 8 – STOCKHOLDERS’ DEFICIT
Common Stock
The Company has authorized share capital of 75,000,000 shares of common stock authorized with a par value of $0.001 per share.
As referenced in Note 6, On December 15, 2015, the Company entered into Employment Agreements with its president and its former secretary and treasurer. The Agreements are retroactively effective as of December 4, 2015, for a term of 36 months (measured from December 4, 2015). Pursuant to the Agreement, each officer will receive 100,000 shares of the Company’s common stock as compensation each year. The company valued these shares of stock compensation at $2.10 per share based on the quoted market price of shares of common stock on the effective date of the Agreement.
On August 30, 2017, 175,000 granted shares valued at $367,500 have been canceled as stock compensation to the former Company treasury upon his resignation with the par value of $175 reducing the balance of common stock outstanding. Additionally, upon his resignation, he surrendered all outstanding equity compensation to the company and agreed to cancel all outstanding debt of the company that was owed to him for past compensation in the amount of $410,715.
On August 30, 2017, the company granted its new Chief Financial Officer 200,000 shares of restricted common stock at the time of his appointment, which vests immediately. The restricted stock has a value of $2,100 based on stock market price of $0.0105 per share at stock grant date.
On August 30, 2017, the company granted its new Secretary, Treasurer 50,000 shares of restricted common stock at the time of his appointment. The restricted stock has a value of $525 base on stock market price of $0.0105 per share at stock grant date.
During the year ended February 28, 2018, total 150,000 shares valued at $315,000 stock compensation to its CEO and former secretary and treasurer was recorded based on above Employment Agreements.
During the year ended February 28, 2018, convertible debt of $6,600 was converted into 1,627,777 shares of common stock as provided for in the convertible note agreement. Associated with the note conversion, derivative liability was reduced by $12,276.
On January 15, 2019, Company’s Board of Directors renewed the employment agreement with its CEO and decided to grant its CEO and other four officers and directors, including two new appointed directors, total 500,000 shares as stock compensation each year for a term of three years. The granted restricted stock is valued based on stock market price of $0.036 per share at stock grant date.
During the year ended February 28, 2019, total 137,500 shares valued at $159,750 stock compensation to its CEO and other four officers was recorded based on above Employment Agreements and board meeting resolution.
NOTE 9 – SUBSEQUENT EVENTS
In accordance with ASC 855-10, “Subsequent Events”, the Company has analyzed its operations subsequent to February 28, 2019 to May 17, 2019, the date when the financial statements were issued. The Management of the Company determined that there were no reportable events that occurred during that subsequent period to be disclosed or recorded.