At January 31, 2007, the Company was indebted to an individual (the "consultant"), pursuant to both a patent license agreement and a consulting agreement, in the amount of $222,000 bearing interest at 12% per annum. On March 1, 2007, the Company entered into a Note Purchase Agreement, whereby the Company consented to the sale of this $222,000 debt to a third party (the "investor"). In connection with the Note Purchase Agreement, on March 1, 2007, the Company modified the debt whereby the debt became a convertible note (the "Note") in the amount of $222,000. The Note accrued interest during the first two years and at the beginning of year three, on March 1, 2009, the Note was supposed to begin being amortized with monthly payments of principal and interest required in order to repay the loan in full by February 28, 2011. As of March 1, 2009, the Company became delinquent with regards to the amortizing provision of the Note. On November 24, 2009, the Company and the investor entered into an addendum to the Note whereby the amortizing requirement of the Note was removed effective March 1, 2009, thereby curing the default. The noteholder is entitled, at his option, at any time and in whole or in part, to convert the outstanding principal amount of the Note, or any portion of the principal amount thereof, and any accrued interest, into common shares of the Company. Any amounts the noteholder elects to convert will be converted into common shares at a conversion price which is the higher of (i) $0.00005 per share or (ii) fifty percent (50%) of the five (5) day average closing bid price immediately prior to the delivery of a notice of conversion to the Company. The embedded conversion option did not qualify for derivative treatment and there was no beneficial conversion feature value as the minimum conversion rate of $0.00005 exceeded the fair value of the Company's common stock on the note date. As of January 31, 2015 and January 31, 2014, the remaining principal balance of the convertible note payable was $50,000. During the years ended January 31, 2016 and interest expense of $8,974 and $10,532, respectively, was recognized. In early October 2015, the debt and the related accrued interest were settled for a cash payment in the amount of $5,300. The balance of the accrued interest in the amount of $84,940 and the balance of $44,700 were treated as additional paid-in capital as part of the debt extinguishment because the note was due to a shareholder.
NOTE 6 - STOCKHOLDERS' DEFICIENCY
Contributed Capital
During the year ended January 31, 2016, a note payable and accrued interest in the amount of $134,940 was extinguished for $5,300. Therefore, the difference of $129,640 was treated as paid-in capital because the note was due to a shareholder.
NOTE 7 - INCOME TAXES
Effective January 1, 2007, we adopted the provisions of ASC 740-10 (formerly known as FIN No. 48, Accounting for Uncertainty in Income Taxes). ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements. ASC 740-10 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. The application of income tax law is inherently complex. Laws and regulation in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding the income tax exposures. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in the subjective assumptions and judgments can materially affect amounts recognized in the balance sheets and statements of income.
At the adoption date of January 1, 2007, we had no unrecognized tax benefit, which would affect the effective tax rate if recognized. There has been no significant change in the unrecognized tax benefit during the year ended January 31, 2017.
We classify interest and penalties arising from the underpayment of income taxes in the statement of income under general and administrative expenses. As of January 31, 2017, we had no accrued interest or penalties related to uncertain tax positions. The tax years 2016, 2015 and 2014 federal return remains open to examination.
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The provision (benefit) for income taxes for the years ended January 31, 2017 and 2016 consists of the following:
2017
2016
Federal:
Current
$
$
Deferred
-
State:
Current
-
Deferred
$
$
Net deferred tax assets consist of the following components as of January 31, 2017 and 2016:
2017
2016
Deferred tax assets:
Operating Loss
$1,026,290
$1,017,615
Deferred tax liabilities:
Valuation allowance
(1,026,290)
(1,017,615)
Net deferred tax asset
$
$
The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rate of 34% to pretax income from continuing operations for the years ended January 31, 2017 and 2016.
The Company has unused net operating loss carryforwards for income tax purposes totaling approximately $3,018,501 and $2,992,985 at January 31, 2017 and 2016, respectively, expiring through the year 2036 subject to the Internal Revenue Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. In accordance with certain provisions of the Tax Reform Act of 1986 a change in ownership of greater than fifty (50%) percent of a corporation within a three (3) year period will place an annual limitation on the corporation's ability to utilize its existing tax benefit carryforwards. Such a change in ownership may have occurred in connection with the private placement of securities. Additionally, the Company's utilization of its tax benefit carryforwards may be restricted in the event of possible future changes in the ownership of the Company from the exercise of options or other future issuances of common stock.
