BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING POLICIES (Policies)

3 Months Ended

Aug. 31, 2022

BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING POLICIES

LZG International, Inc. (“the Company”) is a Florida company that was incorporated on May 22, 2000. To date, the Company has not paid any dividends and does not anticipate dividends to be paid in the foreseeable future.

On June 17, 2022, the Company entered into a Master Stock Purchase Agreement with two individuals, Yevgeniy Chsherbinin and Victor Nazarov through its wholly owned subsidiary, FB Prime Source Acquisition, LLC to acquire Prime Source, a Kazakhstani corporation and Prime Source’s affiliates consisting of Prime Source Innovation, Prime Source – Analytical Systems, Digitalism, and InFin-IT Solution (together with Prime Source, the “Prime Source Companies”). The agreed upon purchase price of $18,000,000 is payable on a payment schedule.

Fiscal year

The Company’s fiscal year ends on May 31.

Revenue Recognition

Substantially all the Company’s revenue is derived from contracts with customers for subscription services over a period of time. Contracts with customers are considered to be short-term when the time between signed agreements and satisfaction of the performance obligations is equal to or less than one year, and virtually all of the Company’s contracts are short-term. The Company recognizes revenue when services are provided to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. The Company typically satisfies its performance obligations in contracts with customers upon delivery of the services. The Company does not have any contract assets since the Company has an unconditional right to consideration when the Company has satisfied its performance obligation and payment from customers is not contingent on a future event. Generally, payment is due from customers immediately at the invoice date, and the contracts do not have significant financing components nor variable consideration. There are no returns and there are no allowances. All of the Company’s contracts have a single performance obligation satisfied at a point in time and the transaction price is stated in the contract, usually as a price per unit. All estimates are based on the Company’s historical experience, complete satisfaction of the performance obligation, and the Company’s best judgment at the time the estimate is made.

Cost of revenue

Cost of Revenues primarily include expenses incurred by the Company to host and deliver products through the marketplace and payroll expenses directly to the production of market ready products. Related platform and payment processing fees are recorded in the period incurred. Payroll costs are recognized in the period they were incurred.

Cash equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

Accounts Receivable

Accounts receivables are recorded at the amount due from customers and do not bear interest. Amounts collected on accounts receivable are included in net cash provided by operating activities on the Statement of Cash Flows. The Company does not have any off-balance-sheet credit exposure related to its customers. The Company evaluates the collectability of its accounts receivables based on collection risks and historical experience. Estimated losses are recorded to the allowance for doubtful accounts and as a general expense. There were no anticipated losses in 2022 and therefore, no allowance for doubtful accounts is deemed necessary.

Inventory

Inventories consist of raw materials, work-in-process, and finished goods. Raw materials and finished goods are valued at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method. Work-in-process and finished goods includes the cost of materials, freight and duty, direct labor and overhead. The Company writes down inventory for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. On August 31, 2022, there is no reserve for inventory obsolescence is deemed necessary.

Fair Value Measurement

The fair value hierarchy categorizes the inputs used to measure fair value into three levels, which are described as follows:

	·	Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
	·	Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly
	·	Level 3: Inputs for the asset or liability that are not based on observable market data

It is not practicable to estimate the fair value of related party loans because there is no established market for these loans and it is inappropriate to estimate future cash flows, which are largely dependent on the Company establishing or acquiring operations at some future point. No financial instruments are held for trading purposes.

Goodwill and Intangible Assets

The Company relies on guidance under ASC 350, Intangibles – Goodwill and Other, to account for intangible assets. Estimated useful lives of amortizable intangible assets are determined by management based on an assessment of the period over which the asset is expected to contribute to future cash flows.

In accordance with U.S. GAAP for goodwill and other indefinite-lived intangibles, the Company tests these assets for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred. For the purposes of that assessment, the Company has determined to assign assets acquired in business combinations to a single reporting unit including all goodwill and indefinite-lived intangible assets acquired in business combinations.

The estimated useful lives for each intangible asset class are as follows:

		Estimated Useful Lives
AI Technology (Angelina FX)		5 years
Intellagents IT Platform and ecosystem		5 years
FatBrain IT		5 years
IP Technology, Prime Source		5 years

Impairment Assessment

The Company evaluates intangible assets and long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This includes but is not limited to significant adverse changes in business climate, market conditions or other events that indicate an asset's carrying amount may not be recoverable. Recoverability of these assets is measured by comparing the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate. If the undiscounted cash flows used in the test for recoverability are less than the carrying amount of these assets, the carrying amount of such assets is reduced to fair value. For the year period ended August 31, 2022, the Company recorded no impairments to intangible assets or long-lived assets.

Sales and Marketing

Sales and marketing expenses are expensed and incurred and primarily consist of costs associated with acquiring new clients or selling new products. Expenses include salaries, commissions, online advertising costs as well as outsourced marketing strategy.

General and Administrative

General and administrative expenses consist of costs primarily related to finance operations, human resources, executive management, legal, corporate technology, corporate development, amortization, and certain other administrative costs that are not directly attributed to a product or service.

Research and Development Costs

Research and development costs are expensed as incurred. Research and development costs include external costs of outside vendors engaged to design, test and program IT Technologies. Other research and development activities include salaries and related payroll expenses related to the Company’s research and development activities.

Costs for certain development activities are estimated based on an evaluation of the progress to completion of specific tasks using data such vendor representation. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred.

Use Of Estimates

In preparing financial statements, management is required 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 revenues and expenses during the reporting period. Actual results may differ from these estimates.

Basic and Diluted Loss Per Share

In accordance with ASC 260, Earnings Per Share (“ASC 260”) the computations of basic loss per share of common stock are based on the weighted average number of common shares outstanding during the periods presented in the financial statements.

The computations of basic and fully diluted loss per share of common stock are based on the weighted average number of common shares outstanding during the periods presented in the financial statements, plus the common stock equivalents, which would arise from the exercise of stock options and warrants outstanding during the period, or the exercise of convertible debentures. As of August 31, 2022, all common stock activity has been included and there were no items considered to be anti-dilutive.

Software Costs

The Company follows ASC 985-20, Costs of Computer Software to be Sold, Leased, or Marketed, whereby costs incurred during the period of planning and design, prior to the period determining technological feasibility, for all software developed to be sold to external users, has been charged to operations in the period incurred as research and development costs. Additionally, costs incurred after determination of readiness for market have been expensed as research and development. Purchased software that has reached technological feasibility and that has no alternative use, other than existing licenses or contracts for which it is being utilized, is capitalized at cost and amortized ratably over the term of the underlying contract.

Stock -based compensation

The Company accounts for stock-based compensation to employees and non-employees in conformity with the provisions of ASC 718, Stock Based Compensation. The Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards. The Company accounts for forfeitures as they occur. Stock-based awards are recognized on a straight-line basis over the requisite service period.

Common shares issued to third parties for services provided are valued based on the estimated fair value of the Company’s common shares. All stock-based compensation costs are recorded in expenses in the condensed consolidated statements of operations.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash. Cash balances are maintained in accounts held by major banks and financial institutions located in the United States. The Company may at times have balances in financial institutions that are more than the federally insured limit of $250,000.

Major Customers

For the three months ended 08/31/22, the Company had two customers that accounted for $1,204,305 and and 49.5% of total sales. The Company expects to maintain this relationship with these customers.

LZG INTERNATIONAL, INC. 10-Q