ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Securities
Our shares are quoted on the over-the-counter market, however to date there has been no active trading. In order for our common stock to continue to be eligible for trading on the Over-the-Counter Bulletin Board we must remain current in our quarterly and annual filings with the SEC. If we are not able to pay the expenses associated with our reporting obligations, we will not be able to continue the quotation on the OTC Bulletin Board. There can be no assurance that any market for our stock will develop.
Holders of our Common Stock
As of August 24, 2018, there were 34 registered stockholders, holding 5,085,000 shares of our issued and outstanding common stock.
Dividend Policy
There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:
|
1.
|
We would not be able to pay our debts as they become due in the usual course of business; or
|
|
|
|
|
2.
|
Our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.
|
We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.
Recent Sales of Unregistered Securities
Information regarding any equity securities we have sold during the period covered by this Report that were not registered under the Securities Act of 1933, as amended, is set forth below. Each such transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D promulgated by the SEC, unless otherwise noted. Unless stated otherwise: (i) the securities were offered and sold only to accredited investors; (ii) there was no general solicitation or general advertising related to the offerings; (iii) each of the persons who received these unregistered securities had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risk of the receipt of these securities, and that they were knowledgeable about our operations and financial condition; (iv) no underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with the transactions; (v) each certificate issued for these unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities.
We did not have any sale of unregistered securities within the past three years.
Pursuant to the SEA entered on January 15, 2018, we will, upon closing of the SEA, issue an aggregate of 200,000,000 shares of our common stock to five individuals pursuant to the exemption from registration available under Section 4(a)(2) of the Securities Act and Regulation S promulgated thereunder.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our shares of common stock or other securities during our fiscal year ended May 31, 2018.
Securities Authorized for Issuance Under Equity Compensation Plans
We do not have any equity compensation plans.
Penny Stock Rules
The Securities and Exchange Commission has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).
A purchaser is purchasing penny stock which limits the ability to sell the stock. Our shares constitute penny stock under the Securities and Exchange Act. The shares will remain penny stocks for the foreseeable future. The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, which makes it more difficult for a purchaser to liquidate his/her investment. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in us will be subject to Rules 15g-1 through 15g-10 of the Securities and Exchange Act. Rather than creating a need to comply with those rules, some broker-dealers will refuse to attempt to sell penny stock.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document, which:
|
·
|
contains a description of the nature and level of risk in the market for penny stock in both public offerings and secondary trading;
|
|
|
|
|
·
|
contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the Securities Act of 1934, as amended;
|
|
|
|
|
·
|
contains a brief, clear, narrative description of a dealer market, including "bid" and "ask" price for the penny stock and the significance of the spread between the bid and ask price;
|
|
|
|
|
·
|
contains a toll-free telephone number for inquiries on disciplinary actions;
|
|
|
|
|
·
|
defines significant terms in the disclosure document or in the conduct of trading penny stocks; and
|
|
|
|
|
·
|
contains such other information and is in such form (including language, type, size and format) as the Securities and Exchange Commission shall require by rule or regulation;
|
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, to the customer:
|
·
|
the bid and offer quotations for the penny stock;
|
|
|
|
|
·
|
the compensation of the broker-dealer and its salesperson in the transaction;
|
|
|
|
|
·
|
the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and
|
|
|
|
|
·
|
monthly account statements showing the market value of each penny stock held in the customer's account.
|
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling their securities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capstone Systems Inc. was incorporated in the State of Nevada on April 1, 2015 and established a fiscal year end of May 31. From inception to October 19, 2017, we were a development-stage company formed to sell kitchen sinks and kitchen cabinets in the USA. On October 19, 2017, the Company and its sole director and executive officer, Jure Perko, entered into a stock purchase agreement (the “SPA”) with a group of individual purchasers, pursuant to which, the control block of voting stock of the Company, represented by 4,000,000 shares of common stock (the “Shares”), approximately 78.7% of all outstanding common stock of the Company, was transferred to the purchasers. The consideration paid for the Shares was $0.0902 per share, for a total of $360,775 in cash. The source of the cash consideration for the Shares was personal funds of the Purchasers. In connection with the SPA, Jure Perko entered into an assignment agreement with the Company whereby all assets of the Company were transferred to him, all liabilities were assumed by him and the net difference was treated as a reduction in additional paid in capital. Subsequently, the Company ceased all operations, and became a shell company without any significant assets or operations.
On January 15, 2018, the Company entered into a share exchange agreement (the “SEA”) with Yunguhui Group Limited (“Yunguhui”) and five stockholders of Yunguhui, together holding 100% of the issued and capital stock of Yunguhui (“Yunguhui Stockholders”). Pursuant to the SEA, in exchange for all of the issued and outstanding capital stock of Yunguhui, the Company will, upon the closing of the SEA, issue to the Yunguhui Stockholders an aggregate amount of 200,000,000 shares of the Company’s common stock. The SEA has not closed as of August 24, 2018.
Currently, we are a shell company and have not generated any revenues since October 19, 2017; we also have none to minimal assets. Since becoming a shell company, the Company's activities concentrated on maintaining its corporate existence and looking for other opportunities for the Company. We maintain our statutory registered agent's office at 525 Swallow Cv, Boulder City, NV 89005. Our business office is located at Yun Gu Hui, International Financial Center, 42nd FL, Hanzhong Str 1, Qinhuai District, Nanjing, Jiangsu Province, China. Our telephone number is (86) 025-57625881.
At this time, pending the closing of the SEA, our management still is analyzing the various alternatives available to ensure our survival and to preserve our shareholder’s investment in our common stock. This analysis includes sourcing additional forms of financing to carry out our business or mergers and/or acquisitions. At this stage in our operations, we believe either course is acceptable, as our operations have not been profitable and our future prospects for our business are not good without further financing.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 2018 AND MAY 31, 2017
We generated $30,258 and $175,979 in revenue for the years ended May 31, 2018 and 2017, respectively. We incurred $29,549 and $144,728 in cost of goods sold, for the years ended May 31, 2018 and 2017, respectively; and incurred $51,018 and $23,947 in general and administrative expenses for the same periods. Advertising expenses was $nil for the year ended May 31, 2018 and 2017. During the year ended May 31, 2018 and 2017, we incurred $nil and $43,428 in product development costs. We generated net losses of $48,221 and $36,124 for the years ended May 31, 2018 and 2017, respectively.
Cash Flows from Operating Activities
For the fiscal year ended May 31, 2018, net cash flows used in operating activities was $39,727 compared to $39,328 for May 31, 2017.
Cash Flows from Investing Activities
For the fiscal year ended May 31, 2018, net cash flows from investing activities was $nil compared to $nil for May 31, 2017.
Cash Flows from Financing Activities
We have financed our operations primarily from the sale of shares of our common stock or by way of loan from our director. For the fiscal year ended May 31, 2018, net cash flows used in financing activities was $35,432 compared to $43,400 for May 31, 2017.
Liquidity and Capital Resources
We had $nil in cash at May 31, 2018, and there were outstanding liabilities of $46,382. Total assets at May 31, 2018, were $209. At May 31, 2017, we had cash of $4,295 and total outstanding liabilities of $2,189. Total assets at May 31, 2017, were $10,321. The management of the company has verbally agreed to loan the company funds for operating expenses.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. We have a stockholders’ deficit and a working capital deficiency of $46,623 at May 31, 2018 and net loss from operations of $48,221 and $36,124, respectively, for the years ended May 31, 2018 and 2017. These conditions raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Critical Accounting Policies
Our significant accounting policies are summarized in Notes 2 of our financial statements included in this annual report on Form 10-K for the year ended May 31, 2018. Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Off-Balance Sheet Arrangements
At May 31, 2018, we do not have any off-balance sheet arrangements.
ITEM 8. FINANCIAL STATEMENTS
CAPSTONE SYSTEMS, INC.
AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2018 AND 2017
INDEX TO FINANCIAL STATEMENTS
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Capstone Systems Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Capstone Systems Inc. (the “Company”) as of May 31, 2018, and the related statement of operations and comprehensive income, stockholders’ equity, and cash flows for the year ended May 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2018, and the results of its operations and its cash flows for the year ended May 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company had incurred substantial losses in previous years and has a working capital deficit, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 3. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
San Mateo, CA
|
WWC, P.C.
|
August 24, 2018
|
Certified Public Accountants
|
We have served as the Company’s auditor since 2017.
CAPSTONE SYSTEMS, INC.
AUDITED BALANCE SHEETS
AS OF MAY 31, 2018 AND 2017
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
4,295
|
|
Prepaid expense
|
|
|
209
|
|
|
|
-
|
|
Total current assets
|
|
|
209
|
|
|
|
4,295
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
-
|
|
|
|
6,026
|
|
Total assets
|
|
$
|
209
|
|
|
$
|
10,321
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable & accrued liabilities
|
|
$
|
11,400
|
|
|
$
|
-
|
|
Loan payable - related party
|
|
|
-
|
|
|
|
100
|
|
Due to related party
|
|
|
35,432
|
|
|
|
-
|
|
Income tax payable
|
|
|
-
|
|
|
|
2,089
|
|
Total liabilities
|
|
|
46,832
|
|
|
|
2,189
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficiency
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 75,000,000 shares authorized, 5,085,000 shares issued and outstanding as of May 31, 2018 and 2017, respectively
|
|
|
5,085
|
|
|
|
5,085
|
|
Additional paid-in capital
|
|
|
35,781
|
|
|
|
42,315
|
|
Accumulated deficit
|
|
|
(87,489
|
)
|
|
|
(39,268
|
)
|
Total stockholders’ equity/(deficiency)
|
|
|
(46,623
|
)
|
|
|
8,132
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficiency
|
|
$
|
209
|
|
|
$
|
10,321
|
|
See accompanying notes to financial statements
CAPSTONE SYSTEMS, INC.
AUDITED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 2018 AND 2017
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
Merchandise Sales
|
|
$
|
30,258
|
|
|
$
|
175,979
|
|
TOTAL REVENUES
|
|
|
30,258
|
|
|
|
175,979
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
29,549
|
|
|
|
144,728
|
|
TOTAL COST OF GOODS SOLD
|
|
|
29,549
|
|
|
|
144,728
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
$
|
709
|
|
|
$
|
31,251
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
51,018
|
|
|
|
23,947
|
|
Product Development
|
|
|
-
|
|
|
|
43,428
|
|
TOTAL OPERATING EXPENSES
|
|
|
51,018
|
|
|
|
67,375
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME/(EXPENSES):
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
2,088
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(48,221
|
)
|
|
|
(36,124
|
)
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAX
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(48,221
|
)
|
|
$
|
(36,124
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS PER BASIC AND DILUTED SHARES
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
5,085,000
|
|
|
|
5,085,000
|
|
See accompanying notes to financial statements
CAPSTONE SYSTEMS, INC.
AUDITED STATEMENT OF CHANGES OF STOCKHOLDERS’ EQUITY/(DEFICIT)
FOR THE YEARS ENDED MAY 31, 2018 AND 2017
|
|
Number
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Common
|
|
|
paid in
|
|
|
Subscription
|
|
|
Accumulated
|
|
|
|
|
|
|
shares
|
|
|
stock
|
|
|
capital
|
|
|
receivable
|
|
|
deficit
|
|
|
Total
|
|
Balance at June 1, 2016
|
|
|
5,085,000
|
|
|
|
5,085
|
|
|
|
42,315
|
|
|
|
(43,400
|
)
|
|
|
(3,144
|
)
|
|
|
856
|
|
Cash received for stock issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,400
|
|
|
|
-
|
|
|
|
43,400
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(36,124
|
)
|
|
|
(36,124
|
)
|
Balance at May 31, 2017
|
|
|
5,085,000
|
|
|
|
5,085
|
|
|
|
42,315
|
|
|
|
-
|
|
|
|
(39,268
|
)
|
|
|
8,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 1, 2017
|
|
|
5,085,000
|
|
|
|
5,085
|
|
|
|
42,315
|
|
|
|
-
|
|
|
|
(39,268
|
)
|
|
|
8,132
|
|
Related party debt conversion
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,534
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,534
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
(48,221
|
)
|
|
|
(48,221
|
)
|
Balance at May 31, 2018
|
|
|
5,085,000
|
|
|
|
5,085
|
|
|
|
35,781
|
|
|
|
-
|
|
|
|
(87,489
|
)
|
|
|
(46,623
|
)
|
See accompanying notes to financial statements
CAPSTONE SYSTEMS, INC.
AUDITED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 2018 AND 2017
|
|
2018
|
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(48,221
|
)
|
|
$
|
(36,124
|
)
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
200
|
|
Increase in Prepaid Expenses
|
|
|
(209
|
)
|
|
|
-
|
|
Increase in Deferred Cost of Goods Sold
|
|
|
-
|
|
|
|
34,801
|
|
Increase in Accounts Payable and Accrued Liabilities
|
|
|
8,703
|
|
|
|
-
|
|
Decreased in Unearned Revenue
|
|
|
-
|
|
|
|
(38,205
|
)
|
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
|
|
(39,727
|
)
|
|
|
(39,328
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of Property
|
|
|
-
|
|
|
|
-
|
|
NET CASH (USED IN) INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Subscription Receivable
|
|
|
-
|
|
|
|
43,400
|
|
Due to related party
|
|
|
35,432
|
|
|
|
-
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
35,432
|
|
|
|
43,400
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE)/INCREASE IN CASH
|
|
$
|
(4,295
|
)
|
|
$
|
4,072
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS – BEGINNING OF YEAR
|
|
$
|
4,295
|
|
|
$
|
223
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS – ENDING OF YEAR
|
|
$
|
-
|
|
|
$
|
4,295
|
|
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Reduction in additional paid in capital as a result of assignment of assets and liabilities to former shareholder
|
|
$
|
6,534
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash received for interest income
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for interest expense
|
|
$
|
-
|
|
|
$
|
-
|
|
See accompanying notes to financial statements.
CAPSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 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 Yun Gu Hui, International Financial Center, 42nd Floor, Hangzhou Street 1, Qinhuai District, Nanjing, Jiangsu Province, China. 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
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.
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 May 31, 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.
CAPSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2018 AND 2017
The following table sets forth the computation of basic earnings (loss) per share, for the year ended May 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(48,221
|
)
|
|
$
|
(36,124
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic and diluted)
|
|
|
5,085,000
|
|
|
|
5,085,000
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Revenue Recognition
The Company’s office is currently based in Nanjing, 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:
|
1.
|
Pervasive evidence of an arrangement exists: an order has been placed and the customer has prepaid for the product;
|
|
|
|
|
2.
|
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.
|
|
|
|
|
3.
|
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
|
|
|
|
|
4.
|
Collectability is reasonable assured: the customer has prepaid for the product prior to shipping.
|
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.
CAPSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2018 AND 2017
Advertising
Advertising expenses for the years ended May 31, 2018 and 2017 were $0 and $0, respectively.
Recent Accounting Pronouncements
In January 2017, the FASB issued guidance which simplifies the accounting for goodwill impairment. The updated guidance eliminates Step 2 of the impairment test, which requires entities to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value, determined in Step 1. The Company is currently evaluating the impact on the financial statements of this guidance.
In January 2017, the FASB amended the existing accounting standards for business combinations. The amendments clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company is currently evaluating the impact on the financial statements of this guidance.
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 May 31, 2018, the Company had accumulated deficit of $87,489. 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.
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.
CAPSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2018 AND 2017
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 May 31, 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.
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.
The corporate 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 year ended May 31, 2018 and recorded the reversal as other income.
CAPSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 2018 AND 2017
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, 2018 and 2017 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 had related party transactions involving the Company’s former director. The nature and details of the transaction are described in Note 4 and Note 5.
As of May 31, 2018, the current director, Mr. Xu, Jiyuan has advanced the Company $35,432 to fund operations. The advances bear no interest, and are due upon demand.
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
The Company evaluates subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) non-recognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures as required under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s chief executive officer and chief financial officer, of the effectiveness of its disclosure controls and procedures. Based on this evaluation, its chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were not effective as of May 31, 2018 because of the material weaknesses set forth below that our management identified in our internal control over financial reporting as of May 31, 2018.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for the Company.
Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect material misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
Under the supervision and with the participation of our president, management conducted an evaluation of the effectiveness of our internal control over financial reporting, as of May 31, 2018, based on the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013). Based on our evaluation under this framework, management concluded that our internal control over financial reporting was not effective as of the evaluation date due to the factors stated below.
Management assessed the effectiveness of the Company's internal control over financial reporting as of evaluation date and identified the following material weaknesses:
Insufficient Resources:
We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting.
Inadequate Segregation of Duties
: We have an inadequate number of personnel to properly implement control procedures.
Lack of Audit Committee & Outside Directors on the Company's Board of Directors:
We do not have a functioning audit committee or outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures.
Management is committed to improving its internal controls and will (1) continue to use third party specialists to address shortfalls in staffing and to assist the Company with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing outside directors and audit committee members in the future.
Management, including our president, has discussed the material weakness noted above with our independent registered public accounting firm. Due to the nature of this material weakness, there is a more than remote likelihood that misstatements which could be material to the annual or interim financial statements could occur that would not be prevented or detected.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the our registered public accounting firm pursuant to applicable rules that permit us to provide only management's report in this annual report.
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter for our fiscal year ended May 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.