NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017
NOTE 1 – Organization and Basis of Presentation
Capstone Systems Inc. (the “Company”) is a for profit corporation established under the Corporation Laws of the State of Nevada on April 1, 2015. The address of our business office is 25/F, First Trade Building, 985 Dong Fang Road, Pudong Xinqu, Shanghai, China, 200000. We maintain our statutory registered agent’s office at 525 Swallow Cove, Boulder City, NV 89005. We plan to expand our business in the wholesale distribution of kitchen cabinets in the USA. The Company is subject to all risks inherent to the establishment of a start-up business enterprise.
Our financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in U.S. dollars. All transactions including purchases, sales and current financing is in U.S. dollars. The Company’s fiscal year-end is May 31st.
NOTE 2 – Significant Accounting Policies and Recent Accounting Pronouncements
Interim Financial Statements
The accompanying unaudited financial statements have been prepared in accordance with Regulation S-X and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim period(s), and to make the financial statements not misleading, have been made and are of a recurring nature unless otherwise disclosed herein. The results of operations for such interim period(s) are not necessarily indicative of operations for a full year.
Condensed Financial Statements
Certain information and footnote disclosures normally included in the condensed financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s May 31, 2017 audited financial statements as filed in the most recent Form 10-K. The results of operations for the period ended February 28, 2018 are not necessarily indicative of the operating results for the full year.
Use of Estimates and Assumptions
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 period. Actual results could differ from those estimates.
Due to the limited level of operations, the Company has not had to make material assumptions or estimates other than the assumption that the Company is a going concern.
CAPSTONE SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
ASC 825, “Disclosures about Fair Value of Financial Instruments”, requires disclosure of fair value information about financial instruments. ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of February 28, 2018.
The respective carrying values of certain on-balance-sheet financial instruments approximate their fair values. These financial instruments include cash, accrued liabilities and notes payable. Fair values were assumed to approximate carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair value.
Basic and Diluted Loss Per Share
The Company computes earnings (loss) per share in accordance with ASC 260-10-45 “Earnings per Share”, which requires presentation of both basic and diluted earnings per share on the face of the statement of operations. Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted earnings (loss) per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive earnings (loss) per share excludes all potential common shares if their effect is anti-dilutive. The Company has no potential dilutive instruments, and therefore, basic and diluted earnings (loss) per share are equal.
Revenue Recognition
The Company’s office is currently based in Shanghai, PRC, but we utilize the U.S. dollar as our functional currency.
The company follows the guidelines of ASC 605-15 for revenue recognition. Revenue is recognized when all the following conditions have been met:
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Pervasive evidence of an arrangement exists: an order has been placed and the customer has prepaid for the product;
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Delivery has occurred or services have been rendered: the product has been shipped from either the Company or one of our suppliers; the product has been delivered and signed for by the customer as evidenced by the shipping company.
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Seller’s price to the buyer is fixed or determinable: the price is fixed at the time of the order and the customer has prepaid prior to shipping; and
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Collectability is reasonable assured: the customer has prepaid for the product prior to shipping.
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CAPSTONE SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017
Customers are allowed to return the products within 30 days for exchange or refund if defects in manufacturing are identified. Prior to the expiration of the 30 day exchange or refund period the cash received is recorded as unrecognized revenue.
Deferred revenue and deferred cost of goods sold result from transactions where the Company has accepted prepayment for the product but all revenue recognition criteria have not yet been met, such as shipped product from the supplier has not arrived at the client for delivery. Deferred cost of goods sold related to deferred product revenues includes direct product costs. Once all revenue recognition criteria have been met, the deferred revenues and associated cost of goods sold are recognized.
Advertising
Advertising expenses for the nine months periods ended February 28, 2018 and 2017 were $0 and $0, respectively.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued recently. As of February 28, 2018, none of these pronouncements is expected to have a material effect on the financial position, results of operations or cash flows of the Company.
NOTE 3 – Going Concern
The accompanying financial statements and notes have been prepared assuming that the Company will continue as a going concern.
For the period from inception to February 28, 2018, the Company had a net loss of $70,323. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to generate sufficient revenues to operate profitably or raise additional capital through debt financing and/or through sales of common stock.
Management has funded operations from sales and through the proceeds from an offering pursuant to a Registration Statement on Form S-1 or private placements of restricted securities or the issuance of stock in lieu of cash for payment of services until such a time as profitable operations are achieved. Directors and related parties may from time to lend funds to the Company to fund operations. There are no written agreements in place for such funding or issuance of securities and there can be no assurance that such will be available in the future. Management believes that this plan provides an opportunity for the Company to continue as a going concern.
The failure to achieve the necessary levels of profitability or obtain the additional funding would be detrimental to the Company.
CAPSTONE SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017
NOTE 4 – Debt
In April 2015, the former director and president of the Company made the initial deposit to the Company’s bank account in the amount $100, which was being carried as a loan payable. The loan was non-interest bearing, unsecured and due upon demand.
On September 19, 2017, the former shareholder, Mr. Jure Perko, entered into an assignment agreement with the Company whereby all assets were transferred to him, and liabilities were assumed by him, and the net difference were treated as a reduction in additional paid in capital. As a result, the Company is no longer liable for the payable to related party.
NOTE 5 – Capital Stock
The Company has 75,000,000 shares of common stock with a par value of $0.001 per share.
On May 11, 2015 the Company issued 4,000,000 shares of common stock for a purchase price of $0.001 per share to its sole director. The Company received aggregate gross proceeds of $4,000.
In May 2016, the Company, pursuant to a Registration Statement on Form S-1, sold 1,085,000 shares to 31 independent shareholders for total proceeds of $43,400.
As of February 28, 2018, there were no outstanding stock options or warrants.
NOTE 6 – Income Taxes
We use the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. 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 results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
CAPSTONE SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
Our effective tax rate for fiscal year 2018 will be 21%, which we expect to be fairly consistent in the near term. Our tax rate may also be affected by discrete items that may occur in any given year, but are not consistent from year to year. Income taxes are calculated and accrued for U.S. taxes only. We are not required to pay corporate taxes in Slovenia until our 3
rd
year in business.
The Company over accrued $2,089 in Income Taxes Payable for the year ended May 31, 2015. The Company has reversed the over accrual during the nine months ended February 28, 2018.
NOTE 7 – Fixed Assets
In April 2015, the Company purchased for $6,515 a small office located at 242 Dolenjska cesta, Ljubljana, Slovenia, 10001. The Company utilizes the space as a primary office. The price of the building was $4,000 and the land was $2,515.
Fixed assets are stated at cost. The Company utilizes straight-line depreciation over the estimated useful life of the asset.
Buildings – 15 years
Office Equipment – 7 years
Depreciation expense for the building for the years ended May 31, 2017 and 2016 was $0 and $133, respectively.
On September 19, 2017, the former shareholder, Mr. Jure Perko, entered into an assignment agreement with the Company whereby all assets were transferred to him, and liabilities were assumed by him. Accordingly, the Company has waived its rights and title to aforementioned fixed assets.
NOTE 8 – Related Party Transactions
The Company has a related party transaction involving the Company’s director. The nature and details of the transaction are described in Note 4 and Note 5.
CAPSTONE SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2018 AND 2017
NOTE 9 – Concentration Risk
The Company had only one customer and the Company ordered from only one vendor. As we grow we expect to increase the number of customers and vendors we have, however; at this time there is a risk to the company if we lose either our customer or vendor.
NOTE 10 – Research and Development
All expenses related to our brand are recorded as Research and Development expenses in accordance with GAAP and are expensed as incurred.
NOTE 11 – Subsequent Events
On March 28, 2018, the Company filed an amendment to its annual report on Form 10-K for the year ended May 31, 2016 to include the sale of equity securities.