NOTE 11 – STOCKHOLDERS’ DEFICIT
All outstanding shares of Common Stock are of the same class and have equal rights and attributes. The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders of the Company. All shareholders are entitled to share equally in dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available. In the event of liquidation, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of all liabilities. The shareholders do not have cumulative or preemptive rights.
The Company’s Articles of Incorporation authorizes the issuance of Preferred Stock with designations, rights and preferences determined from time to time by our Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the Common Stock.
Shares Issued in Lieu of Promissory Notes
In March 2006, the Company’s Board of Directors authorized the Company to sell and issue common shares 3,998 common shares at $8.1298 per share (or 162,500 shares at $0.20 per share prior to the reverse stock-split on June 30, 2008 and the reverse stock-split on June 11, 2010) for an aggregate amount of $32,500. Those shares were issued to nine of the Company’s officers and employees at that time, including 738 shares (or 30,000 shares prior to the reverse stock-split on June 30, 2008 and the reverse stock-split on June 11, 2010) to the Secretary of the Company. The purpose of those stock issuances was primarily to motivate employees and increase their loyalty to the Company by inviting them to participate into the Company’s equity and become shareholders. The Company obtained three-year full recourse promissory notes bearing interest at 8.0% as consideration for the common shares issued which have been reflected as a stock subscription receivable at December 31, 2008. As of December 31, 2008, no principal payments had been received on the promissory notes. As of March 2009, except for the Secretary of the Company, the other eight employees were no longer with the Company. After performing collection efforts, and even though the notes state that the undersigned parties of the notes agreed to remain bound notwithstanding any extension, modification, waiver, or other indulgence or discharge or release of any obligor hereunder, due to the high uncertainty of payment collection from the eight former employees, the balance of $26,500 was written off and recorded as other expense for the year ended December 31, 2008. In July 2009, the promissory note with the Secretary of the Company in the amount of $6,000 was renewed in writing and extended to March 1, 2012, and was recorded as subscription receivable as of June 30, 2011 and December 31, 2010.
In February 2009, the Company entered into a written service agreement with Mr. Hsun-Ching Chuang, the major shareholder of Max Fung Trading Co., Ltd., for services of searching new investors and funding resources for the Company during the period from February 2009 to February 2012. Compensation for such service was agreed at $100,000 which shall be paid in the Company’s common shares upon entering into the agreement. Both parties agreed that the shares issued should be returned to the Company without recourse for nonperformance of the services. On February 11, 2009, the Company issued 125,000 shares at $0.80 per share (or 5,000,000 shares at $0.02 per share prior to the reverse stock-split on June 11, 2010), the fair market value on the date of performance commitment, upon entering into the agreement. As agreed, 50,000 shares (or 2,000,000 shares prior to the reverse stock-split on June 11, 2010) should be returned to the Company if the amount of new funding through such service is less than $150,000 by the end of the service period, whereas all 5,000,000 shares should be returned to the Company if less than $120,000. Immediately after the above two share issuances, Mr. Chuang owned 11.59% of the Company’s common shares. The $100,000 was initially recorded as prepaid expense, of which $8,333 was expensed during the six months ended June 30, 2011 and 2010. As of June 30, 2011 and December 31, 2010, the remaining balances were $19,449 and $36,112, respectively.
On February 22, 2011, the Company entered into a written Debt Conversion Agreement with Ms. Hazel Chu, the President and Chief Executive Officer of the Company to repay $100,000 of loan from Ms. Chu by issuing 8,333,333 shares of the Company’s common stock. The number of shares to be issued for such conversion was determined based on the average closing price of $0.012 per share during the 3-month period prior to February 22, 2011. The Debt Conversion Agreement was approved by the Company’s Board of Directors and executed immediately. After the share issuance for debt repayment, Ms. Chu holds 9,008,465 shares of the Company's common stock, which accounted for approximately 91.174% of total outstanding number of common stock.
On June 11, 2010, the Company’s Board of Directors approved a 1 for 40 reverse stock-split for its common stocks as deemed for the best interests of the Company. The total number of common shares outstanding became 1,547,162 shares after the effectiveness of the reverse split. The FINRA had processed and effectuated the reverse split at the open of business on July 12, 2010.
Common stocks, additional paid-in capital, number of shares and per share data for prior periods have been restated to reflect the stock splits as if they had occurred at the beginning of the earliest period presented.
In October 2008, to ensure that the two stock-splits in 2008 did not affect the shareholder stake, management conducted an analysis by comparing the numbers of shares of the original thirteen shareholders subsequent to the July 24, 2008 forward stock-split with their numbers of shares prior to the June 30, 2008 reverse stock-split, noting that an additional 842,403 shares (or 33,696,125 shares prior to the reverse stock-split on June 11, 2010) were added to the thirteen shareholders. These additional shares were primarily resulting from the 878,761 shares issued to the thirteen shareholders at $0.00016 per share on July 24, 2008 (or 3,572 shares at $0.039 per share prior to the forward stock-split on July 24, 2008 and the reverse stock-split on June 11, 2010). The 3,572 shares were the number of shares initially intended to be issued immediately after the forward stock-split, but were processed and issued by our transfer agent prior to the split. As a result, the 3,572 shares issued to the thirteen shareholders were affected by the forward stocks-split turning into 878,761 shares.
On October 1, 2008, the Company’s President & CEO sent out letters to those thirteen shareholders requesting that they return their corresponding numbers of shares to the Company, aggregating to the 842,403 shares (or 33,696,125 shares prior to the reverse stock-split on June 11, 2010) as stated above, including 610,481 shares (or 24,419,225 shares prior to the reverse stock-split on June 11, 2010) with our President & CEO. On October 27, 2008, eight of the thirteen original shareholders cancelled and returned a total of 192,913 shares (or 7,716,538 shares prior to the reverse stock-split on June 11, 2010) to the Company without consideration being exchanged. Our President & CEO cancelled and returned 546,663 shares (or 21,866,527 shares prior to the reverse stock-split on June 11, 2010) to the Company on July 30, 2009 and additional 63,818 shares (or 2,552,698 shares prior to the reverse stock-split on June 11, 2010) on May 11, 2010 with no consideration being exchanged. The remaining 39,009 shares (or 1,560,362 shares prior to the reverse stock-split on June 11, 2010) are still unreturned from other shareholders. Our President & CEO will continue to remind and communicate with those shareholders for them to notify the transfer agent of share cancellation.