LZG INTERNATIONAL, INC. - Quarter Report: 2022 February (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended February 28, 2022

For the transition period from ___ to ___

Commission file number: 000-53994

LZG INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 917-310-3978

2157 S. Lincoln Street, Suite 401, Salt Lake City, Utah 84106

(Former address)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares outstanding of the registrant’s common stock as of April 14, 2022 was 10,250,556.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LZG INTERNATIONAL, INC.

For the Three and Nine Months Ended

February 28, 2022

(Unaudited)

LZG International, Inc.

Condensed Balance Sheets

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

LZG International, Inc.

Condensed Statements of Operations

(Unaudited) 

The accompanying notes are an integral part of these unaudited condensed financial statements.

LZG International, Inc.

Condensed Statements of Stockholders’ Equity (Deficit)

For the nine months ended February 28, 2022 and 2021

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

LZG International, Inc.

Condensed Statements of Cash Flows

(Unaudited) 

The accompanying notes are an integral part of these unaudited condensed financial statements.

LZG International, Inc.

Notes to the Condensed Financial Statements

February 28, 2022

(Unaudited)

NOTE 1 – BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING POLICIES

The accompanying unaudited condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its May 31, 2021 Annual Report on Form 10-K. As a result of acquiring the Fat Brain technology, the Company is launching business operations. Operating results for the nine months ended February 28, 2022 are not necessarily indicative of the results to be expected for year ending May 31, 2022.

Revenue Recognition – The Company's sources of revenue are from the sale of intellectual property licenses and technology, including services to configure, test and deploy FatBrain solutions on client servers, and providing training and support to a client’s staff. Revenues are reported net of returns.

In accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue upon the transfer of promised technologies or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised technologies or services. The Company applies the following five-step revenue recognition model in accounting for its revenue arrangements:

The ASC 606 criteria the Company uses to recognize revenue comprise of the following:

1.  Contract with the customer – The Company acquired the contractual rights to the Angelina Agreement, dated May 10, 2021. This agreement comprises a subsisting, identifiable contract between Tempus Inc. (an unrelated entity) and the Company, reflecting that the parties have approved the agreement and are committed to fulfilling their obligations. Each party's rights are identifiable and the payment terms are quarterly subscriptions fees and transactions revenues.

2.  Performance obligations – The Company builds the software solution called Angelina FX which logs into a customer's general ledger, such as QuickBooks, and automatically determines the amount of savings a customer would enjoy if using the Angelina FX rate versus what they actually paid, as reflected in an FX Fair Value Report.

3.  Transaction price – The economic considerations are clearly spelled out in the Angelina Agreement

comprising estimated annual subscription revenue, plus a share of the transaction revenue earned from the application.

4.  Allocation of transaction price – The quarterly payment earned under the subscription obligation for using our service is $43,447.

5.  Revenue recognition – The revenue is recognized when the subscription obligation of providing, hosting and operating the software has been performed. The Company recognized revenue of $86,894 during the nine months ended February 28, 2022. Costs of revenue consist of amortization of the underlying software utilized in the Angelina Agreement. During the nine months ended February 28, 2022, the Company recognized software amortization of $16,416.

Basic and Diluted Loss Per Share – Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period.  Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares and dilutive potential common shares outstanding during the period. There are no potentially dilutive securities outstanding, so basic and diluted loss per share is the same.

Intangible Assets – The Company relies on guidance under ASC 350, Intangibles – Goodwill and Other, to account for intangible assets. Intangible assets are either amortized over their finite lives as determined by management or their contractual lives, or analyzed periodically for impairment if indefinite-lived. A periodic review is made of the assets for impairment.

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.

NOTE 2 – GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses since inception, has limited cash flows from operations, and has only recently launched revenue-generating activities. Its activities have been limited for the past several years and it is dependent upon financing to continue operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. It is management’s plan to further develop and market our technology.

In addition, the COVID-19 pandemic could have an impact on our ability to obtain financing to fund our operations.  The Company is unable to predict the ultimate impact at this time.

NOTE 3 – RELATED PARTY TRANSACTIONS

The financial statements include related party transactions, which as of February 28, 2022 and May 31, 2021, included loans from an officer of the Company totaling $23,500. The loans had an original due date of June 30, 2014, but principal and interest maturities have been extended to June 30, 2022. The loans are not collateralized, and bear interest at 8% per annum. Interest expense was $1,410 for the nine months ended February 28, 2022, resulting in accrued interest of $22,627 and $21,217 at February 28, 2022 and May 31, 2021, respectively.

During the nine months ended February 28, 2022, a stockholder paid for administrative and professional services totaling $4,500, resulting in amounts payable to the stockholder of $10,500 and $6,000 as of February 28, 2022 and May 31, 2021, respectively. On May 31, 2018 the stockholder converted $92,500 of its accounts payable to a promissory note, which bears interest at 8% per annum and is due on demand. Due to subsequent additional advances, the promissory note totaled $119,200 at February 28, 2022 and May 31, 2021. Interest expense was $7,152 for the nine months ended February 28, 2022, resulting in accrued interest of $31,897 and $24,745 at February 28, 2022 and May 31, 2021, respectively.

NOTE 4 – NOTES PAYABLE

During the nine months ended February 28, 2022 and 2021, the Company borrowed $38,500 and $5,000, respectively, from a third party, resulting in notes payable of $108,300 and $69,800 at February 28, 2022 and May 31, 2021, respectively. The notes are due on demand, are not collateralized, and bear interest at 8% per annum. Interest expense was $4,941 for the nine months ended February 28, 2022, resulting in accrued interest of $34,989 and $30,048 at February 28, 2022 and May 31, 2021, respectively.

NOTE 5 – SUBSCRIPTION AGREEMENTS

Beginning on October 26, 2021, the Company entered into private subscription agreements with investors under the Securities Act. The subscription agreement provided that the issuance of the common shares was conditioned upon the Company increasing the number of authorized shares of common stock to at least 250,000,000, pursuant to Florida law. Any proceeds received for a subscription would be delivered to the Company and would be held in escrow with the Company’s attorney, without interest, until closing, which is the later of the Company’s first trade or the increase in authorized shares becomes effective. Upon closing, the proceeds currently held in escrow will become the property of the Company. As of February 28, 2022, closing has not occurred, and the Company has agreed to sell an aggregate of 22,990,000 shares to nine investors totaling $10,450,000, held in escrow.

NOTE 6 – INTANGIBLE ASSET ACQUISITION

On October 23, 2021, the Company executed an “IT Asset Contribution Agreement” with FatBrain, LLC, an unrelated entity, for certain intellectual properties, including patents pending, proprietary technology, licenses, software, development plans and contractual rights. The intellectual property is comprised of an AI Technology with many commercial applications, the first being “Angelina FX”. As consideration, the Company issued 10,000,000 shares of common stock to FatBrain, LLC’s material non-controlling member, Peter B. Ritz. The mutually-agreed upon asset fair market value of $348,000 was allocated 100% to the Angelina FX software due to the assignment of contractual rights to the Company of a licensing agreement previously entered into on May 7, 2021 between FatBrain and a non-related party, Tempus, Inc. This transaction resulted in a change in control of the Company, whereby Mr. Ritz is the owner of 97.6% of the Company’s issued and outstanding common stock.

The estimated term of the licensing agreement is 60 months from the agreement’s inception on May 7, 2021. During the period of October 23, 2021 (the date of the IT Asset Contribution Agreement) through February 28, 2022, the Company recorded $16,416 of software amortization expense as cost of sales. The remaining carrying value of the software of $331,584 at February 28, 2022 is being amortized ratably over the remainder of the license term as follows:

On February 25, 2022, LZG International entered into the Intellagents, LLC Asset Purchase Agreement. LZG agreed to purchase Intellagents’ assets for three million dollars ($3,000,000), subject to adjustments and the assumption of certain liabilities. At the Closing Date, LZG will pay two hundred thousand dollars ($200,000) in cash and will issue 2,800,000 shares of common stock to Intellagents. The shares will be valued at two million eight hundred thousand dollars ($2,800,000), $1.00 per share. The amount of shares may be adjusted if the LZG common stock is trading under $1.00 on the Closing Date. Post-closing adjustments may be used based upon a working capital statement to be provided by LZG based upon the current assets, less current liabilities, determined as of the Closing Date.

NOTE 7 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and has determined that there are no such events that would have a material impact on the financial statements.

In this report references to “LZG International,” “LZG,” “the Company,” “we,” “us,” and “our” refer to LZG International, Inc.

FORWARD LOOKING STATEMENTS

The U.S. Securities and Exchange Commission (“SEC”) encourages reporting companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions. This report contains these types of statements. Words such as “may,” “intend,” “expect,” “believe,” “anticipate,” “estimate,” “project,” or “continue” or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

As a result of LZG International, Inc.’s acquisition of the FatBrain technology pursuant to the IT Asset Contribution Agreement (“IT Contribution Agreement”), dated October 23, 2021, we currently hold intellectual property assets, including patents pending, patents in preparation, proprietary technology, development plans, and contractual rights (“IT Assets”). On April 4, 2022, the Company changed its corporate address to 54 West 40^th Street, Suite 1123, New York, New York 10018.

The FatBrain IT Assets include software that uses artificial intelligence to help companies automate enterprise decision cycles to learn, explain and intervene for better outcomes across all business interactions. The software continuously learns from historical transactions, incumbent models and in-house expert teams to deliver a unified framework binding structured and unstructured data in text, numerical, network/graph and video formats. The FatBrain software leverages modern advances in machine learning and cloud economics to enable sustained operational advantages of (i) simplicity with smaller, denser models using vector embeddings, (ii) auditability with explainable, trusted quantification and de-biasing using blockchain, (iii) quality work with noisy, sparse, imbalances or missing date using generative autoencoders, and (iv) technology using transfer and active learning. The Company has initiated the commercialization of the technology and we have spoken to several potential clients.

Our strength is in the uniqueness of our technology offering. Our success will come from navigating the various challenges that drive technology globally. As we initially see marketing success in these various product offerings, we will continue to refine and adjust our business model and operations until we achieve the profit margins that this technology and our product offering deserves.

The Company will market our products directly and through distribution with value added resellers and strategic partners. Direct marketing efforts include internet and email campaigns, tele-sales and virtual and in person follow ups. We anticipate having ten sales people able to work from anywhere. Distribution efforts include relationships with global and regional systems integrators (“SIs”), value added resellers (“VARs”), independent software vendors (“ISVs”), vertical software application developers and combinations of the above.

In November of 2021, the Company announced the launch of the FatBrain product Angelina AI Solution for Foreign Exchange (“Angelina FX”), part of our coached business wellness service (“BWS”) to tackle discriminatory pricing in the $6.6 trillion-dollar daily foreign exchange market. Previously, FatBrain LLC had entered into a licensing agreement for our software with a non-related party, Tempus, Inc., a District of Columbia corporation owned by Monex S.A.B. (“Angelina Agreement”). After LZG acquired ownership of Angelina FX and the contractual rights to the licensing agreement, LZG and Tempus are using the FatBrain AI automation software to grow and improve Tempus’ foreign exchange and global payments solutions based upon the prior licensing agreement. As a result, LZG earned $86,894 in AI subscription revenue for the Angelina Agreement for the nine-month period ended February 28, 2022.

Our product development moving forward includes new enhancements for self-service and quick reporting, as well as, simplified integration of Angelina FX into any affiliated website. Our agreement with Tempus includes integrating the Foreign Exchange Fair Value Report into 80-plus daily calls per day work-flow for each member of the Tempus customer account team. The marketing efforts include tuning messaging and developing new content for Tempus’ thousands of existing and prospective clients, comprising importers, exporters, SME’s and multinationals.

Intellagents Agreement

LZG International entered into the Intellagents, LLC Asset Purchase Agreement (“Asset Purchase Agreement”), dated February 25, 2022. Subject to satisfaction or waiver of each party’s conditions and obligations as outlined in the Asset Purchase Agreement, the parties will close this transaction at a future date (“Closing Date”). Management is currently taking the necessary steps to close the Asset Purchase Agreement.

Intellagents, LLC is engaged in the business of creating, orchestrating and selling software as a service, and software as a business, within the larger insurance ecosystem services market. Intellagents agreed to sell and assign substantially all of its assets, properties and rights to LZG, except for certain excluded assets and liabilities.

LZG agreed to purchase Intellagents’ assets for three million dollars ($3,000,000), subject to adjustments and the assumption of certain liabilities. At the Closing Date, LZG will pay two hundred thousand dollars ($200,000) in cash and will issue 2,800,000 shares of common stock to Intellagents. The shares will be valued at two million eight hundred thousand dollars ($2,800,000), $1.00 per share. The amount of shares may be adjusted if the LZG common stock is trading under $1.00 on the Closing Date. Currently, the Company’s shares are not trading. Post-closing adjustments may be used based upon a working capital statement to be provided by LZG based upon the current assets, less current liabilities, determined as of the Closing Date. Within sixty (60) days after the Closing Date, LZG shall prepare and deliver to Intellagents a statement setting forth its calculation of the working capital.

The Asset Purchase Agreement provides that Intellagents will assign certain contracts and IP agreements to LZG, including Intellagents Division employment agreements with its officers Eric Hall, CEO; Mark Stender, President; and Michael Cocca, CTO.

Material Changes in Financial Condition

Since we are in the initial phases of marketing the FatBrain technology, we may not record significant revenues and may lack funding to cover our operating costs. These conditions raise substantial doubt about our ability to continue as a going concern. We are currently devoting our efforts to obtain capital from management, significant stockholders and/or third parties to cover minimal expenses; however, there is no assurance that additional funding will be available. Our ability to continue as a going concern during the long term is dependent upon our ability to produce and market the FatBrain technology.

At February 28, 2022, we had cash of $90,584 and total liabilities of $357,403 compared to cash of $4,735 and total liabilities of $294,610 at May 31, 2021. Despite the increase in cash, we have not established ongoing sources of revenue sufficient to cover our operating costs at this time. During the nine-month period ended February 28, 2022 (“2022 nine-month period”) we relied upon revenues, advances and notes payable to cover our operating expenses.

Finalizing long-term, constant revenue generating technology contracts with our existing and other customers remains our greatest challenge because our on-going business is dependent on the types of revenues and cash flows generated by such contracts. Cash flow and cash requirement risks are closely tied to and are dependent upon our ability to attract significant long-term technology contracts

During the next 12 months we anticipate incurring costs related to producing and marketing our FatBrain technology and filing of Exchange Act reports. We believe we will be able to meet these costs through funds provided by management, significant stockholders and third parties until our revenues increase.

Material Changes in Results of Operations

During the 2022 nine-month period, we recorded revenues of $86,894 and relied on related party advances of $4,500 and notes payable of $38,500 to fund our operations. During the nine-months ended February 28, 2021 (“2021 nine-month period), we had no revenues and relied on advances or loans to fund our operations. We recorded net income of $6,640 for the 2022 nine-month period compared to a net loss of $22,960 for the 2021 nine-month period ended.

We recorded net income of $13,767 for our third quarter ended February 28, 2022 (“2022 third quarter”) compared to a net loss of $6,841 for the third quarter ended February 28, 2021 (“2021 third quarter”).

Management expects net income to continue as we increase revenues from the marketing of the FatBrain technology.

Commitments or Obligations

During the 2022 nine-month period, a stockholder paid for administrative and professional services totaling $4,500, resulting in amounts payable to the stockholder of $10,500 and $6,000 as of February 28, 2022 and May 31, 2021, respectively. On May 31, 2018 the stockholder converted $92,500 of its accounts payable to a promissory note, which bears interest at 8% per annum and is due on demand. Due to subsequent additional advances, the promissory note totaled $119,200 at February 28, 2022 and May 31, 2021. Interest expense was $7,152 for the nine months ended February 28, 2022, resulting in accrued interest of $31,897 and $24,745 at February 28, 2022 and May 31, 2021, respectively.

During the 2022 nine-month period the Company borrowed $38,500 from a third party, resulting in notes payable of $108,300 and $69,800 at February 28, 2022 and May 31, 2021, respectively. The notes are due on demand, are not collateralized, and bear interest at 8% per annum. Interest expense was $4,941 for the nine months ended February 28, 2022, resulting in accrued interest of $34,989 and $30,048 at February 28, 2022 and May 31, 2021, respectively.

During the fiscal years ended May 31, 2009 and 2010, our Director and President, Greg L. Popp, loaned an aggregate of $23,500 to the Company. On April 20, 2010, these loans were combined into one promissory note which carries interest at 8% and is not collateralized. The original promissory note had a due date of June 30, 2014; however, Mr. Popp agreed to extend the due date of this note and interest to June 30, 2022. Interest expense was $1,410 for the nine months ended February 28, 2022, resulting in accrued interest of $22,627 and $21,217 at February 28, 2022 and May 31, 2021, respectively.

At February 28, 2022, we owed venders $6,390.

Emerging Growth Company

We qualify as an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). A company qualifies as an emerging growth company if it has total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement. Under the JOBS Act we are permitted to, and intend to, rely on exemptions from certain disclosure requirements

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report, we carried out an evaluation of the effectiveness of our disclosure controls and procedures under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer. Our controls and procedures are designed to allow information required to be disclosed in our reports to be recorded, processed, summarized and reported within the specified periods, and accumulated and communicated to management to allow for timely decisions regarding required disclosure of material information. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based upon the evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures were not effective at that reasonable assurance level as of the end of the nine-month period ended February 28, 2022.

The material weaknesses relate to the limited number of persons responsible for the recording and reporting of financial information, the lack of separation of financial reporting duties, and the limited size of our management team in general. We are in the process of evaluating methods of improving our internal control over financial reporting, including the possible addition of financial reporting staff and the increased separation of financial reporting responsibility, and intend to implement such steps as are necessary and possible to correct these material weaknesses.

Changes to Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Management conducted an evaluation of our internal control over financial reporting and determined that there were no changes made in our internal control over financial reporting during the quarter ended February 28, 2022 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our company.

ITEM 1A.  RISK FACTORS

A smaller reporting company is not required to provide the information required by this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Part I Exhibits

Part II Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LZG INTERNATIONAL, INC.

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