Notes to Consolidated Financial Statements
(unaudited)
NOTE 1 - ORGANIZATION AND OPERATIONS
The Company was incorporated, as Bare Metal
Standard, Inc., (the Company) on November 12, 2015 under the laws of the State of Idaho. Bare Metal Standard provides management
services for franchisees who perform fire prevention and mitigation services to commercial kitchens by cleaning their exhaust systems
on a mandated schedule enforced by insurance and fire and safety prevention codes.
On March 1, 2017, Bare Metal Standard,
Inc. entered into a Management Agreement with Taylor Brothers Holdings, Inc. which is an operating company and has common
majority shareholders and directors. The officers and directors of Bare Metal Standard were officers and directors of Taylor Brothers.
James Bedal and Mike Taylor have resigned their positions with Taylor Brothers and work full time for Bare Metal Standard. The
agreement term has no expiration and can be terminated by the Company at any time with written notice to the other partner. As
a result of the management agreement, Bare Metal is to provide, on behalf of Taylor Brothers, certain management services, having
full authorization, on behalf of Taylor Brothers to provide all the services and all the activities, normally provided by Taylor
Brothers, under the Taylor Brothers franchise agreements, previously entered into by Taylor Brothers and the franchisees Bare Metal
became responsible for servicing franchisee agreements and receiving 100% of the revenues associated with those agreements assumed
for the support and maintenance of the preexisting franchise agreements of Taylor Brothers Holdings franchisees as Taylor
Brothers Holdings has ceased selling franchises. Bare Metal is due all collections from franchisees. Bare Metal Standard assumed
the business operations of the existing franchise agreements while potential liabilities arising from said agreements will remain
with Taylor Brothers. Additionally, on November 1, 2017 Bare Metal, entered into a royalty fee license agreement with Taylor Brothers
Holdings Inc. with the right to sublease, the use of Trade Name Bare Metal Standard and related industry know-how including proprietary
software in exchange for a monthly fee of $2,000 paid in arrears.
Bare Metal Standard is currently seeking
the same management opportunities in other industries. The Company intends to sell franchises in the commercial kitchen fire prevention
and mitigation services environment, but, in addition, is looking for the same opportunities in other disciplines.
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated
financial statements of Bare Metal Standard, Inc. have been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with
the audited financial statements and notes thereto for the period ended October 31, 2018 contained in the Company’s Form
10K originally filed with the Securities and Exchange Commission on August 16, 2019. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations
for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily
indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate
the disclosure contained in the audited financial statements for the period ended October 31, 2018, as reported in the Company’s
Form 10K, have been omitted.
Principles of Consolidation
The Company prepares its consolidated financial
statements on the accrual basis of accounting based on an October 31 fiscal year end. The accompanying consolidated financial statements
include the accounts of the Company and its single subsidiary, which has a fiscal year end of December 31. All intercompany accounts,
balances and transactions have been eliminated in the consolidation. In March 2018, the Company formed BRMT Franchising, LLC, a
Texas limited liability company that is a wholly-owned subsidiary of the Company.
Use of Estimates
The preparation of the financial statements
in conformity with U.S. 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 revenue and expenses during the reporting period. Actual results could differ from
those estimates. The more significant estimates and assumptions made by management include allowance for doubtful accounts,
inventory valuation, and provision for excess or expired inventory, depreciation of property and equipment, realization of long-lived
assets and fair market value of equity instruments issued for goods or services.
Inventories and Provision for Excess
or Expired Inventory
Inventory consists of finished goods and
consumables held for resale to franchisees and is valued on an average cost basis. Provisions for excess inventory are included
in cost of goods sold and have historically been immaterial but adequate to provide for losses. Inventory is reviewed, at least,
quarterly. The Company has determined that there was no need to reserve for obsolescence as of April 30, 2019 and October 31, 2018.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic
606, Revenue from Contracts with Customers, which was adopted on November 1, 2018 using the modified retrospective method, with
no impact to the Company’s comparative financial statements.
Revenue is recognized in accordance with a five-step revenue
model, as follows: identifying the contract with the customer; identifying the performance obligations in the contract; determining
the transaction price; allocating the transaction price to the performance obligations; and recognizing revenue when (or as) the
entity satisfies a performance obligation.
A contract with commercial substance exists once the Company
executes a franchise agreement with the franchisee. The initial license fee is due at the execution of the agreement. If collectability
is not probable, the sale is deferred and not recognized until collection is probable or payment is received. Net revenues comprise
gross revenues less customer discounts and allowances, actual and expected returns. Shipping charges billed to members are included
in net sales. Various taxes on the sale of products and enrollment packages to members are collected by the Company as an agent
and remitted to the respective taxing authority. These taxes are presented on a net basis and recorded as a liability until remitted
to the respective taxing authority.
The Company generates revenue from franchise fees and royalty
income, advertising fees and sales of supplies and other products as follows:
Franchise fees and royalty income
The Company sells individual franchises as well as territory
agreements in the form of franchise agreements that grant the right to develop the business in designated areas. The franchise
agreements typically require the franchisee to pay initial nonrefundable franchise fees prior to opening the business and continuing
fees, or royalty income, on a monthly basis based upon a percentage of franchisee gross sales. The initial term of domestic franchise
agreements is typically 10 years. Prior to the end of the franchise term or as otherwise provided by the Company, The Company may
offer a renewal term of a franchise agreement and, if approved, the franchisee will typically pay a renewal fee upon execution
of the renewal term. If approved, a franchisee may transfer a franchise agreement to a new or existing franchisee, at which point
a transfer fee is paid.
Generally, the franchise license granted for each individual
restaurant within an arrangement represents a single performance obligation. Therefore, initial franchise fees and market entry
fees for each arrangement are allocated to each individual business and recognized over the term of the respective franchise agreement
from the date of the restaurant opening. Royalty income is also recognized over the term of the respective franchise agreement
based on the royalties earned each period as the underlying sales occur. Renewal fees are generally recognized over the renewal
term for the respective restaurant from the start of the renewal period. Transfer fees are recognized over the remaining term of
the franchise agreement beginning at the time of transfer.
Advertising fees
Franchise agreements typically require the franchisee to pay
continuing advertising fees on a monthly basis based on a percentage of franchisee gross sales, which represents a portion of the
consideration received for the single performance obligation of the franchise license. Continuing advertising fees are recognized
over the term of the respective franchise agreement based on the fees earned each period as the underlying sales occur.
Sales of supplies and other products
We distribute supplies and other products to franchisees and
licensees. Revenue from the sale of supplies and other products is recognized when title and risk of loss transfers to the buyer,
which is generally upon delivery. Payment for supplies and other products is generally due within a relatively short period of
time subsequent to delivery.
The following table presents disaggregated revenue for the three
and six months ended April 30, 2019:
|
|
Three months ended
April 30, 2019
|
|
|
Six months ended
April 30, 2019
|
|
|
|
|
|
|
|
|
Royalty revenue
|
|
$
|
134,742
|
|
|
$
|
285,062
|
|
Training and consulting
|
|
|
63,446
|
|
|
|
184,535
|
|
Equipment and truck sales
|
|
|
20,442
|
|
|
|
97,313
|
|
Other service revenue
|
|
|
18,325
|
|
|
|
37,756
|
|
Total revenue
|
|
$
|
236,955
|
|
|
$
|
604,666
|
|
Contract Costs
Costs incurred to obtain a customer contract are not material
to the Company. The Company elected to apply the practical expedient to not capitalize contract costs to obtain contracts with
a duration of one year or less, which are expensed and included within cost of goods and services.
Contract Liabilities
The Company receives payment up front for the sale of a franchise.
The franchise fee is considered to be a contract liability to provide support and services over the period of the license agreement,
and are recorded as deferred revenue, with the revenue being recognized ratably over the license period. As of April 30, 2019,
the Company had a total of $4,750 in deferred revenue, with $500 included in accounts payable and accrued expenses and $4,250 included
in deferred revenue on the consolidated balance sheet. The Company expects to recognize $500 in revenue related to unsatisfied
performance obligations over the next 12 months.
Cost of Revenues
Cost of sales includes all of the costs to service the franchise
agreements, and costs to purchase the supplies and products sold to franchisees. Additionally, shipping costs are included in Cost
of Revenues in the Unaudited Consolidated Statements of Operations.
Net Income (Loss) Per Share
Basic net income (loss) per share is calculated
by dividing net income (loss) by the weighted-average common shares outstanding. Diluted net income per share is calculated by
dividing net income by the weighted-average common shares outstanding during the period using the treasury stock method. no potentially
dilutive securities were included in the calculation of diluted earnings per share as the impact would have been anti-dilutive
for the three and six months ended April 30, 2019 and 2018. Therefore, basic and dilutive net income (loss) per share were the
same.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842) (ASU 2016-02). Under ASU No. 2016-2, an entity will be required to recognize right-of-use assets and
lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific
accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative
and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing
and uncertainty of cash flows arising from leases. For public companies, ASU No. 2016-02 is effective for annual reporting periods
beginning after December 15, 2018, including interim reporting periods within that reporting period, and requires a modified retrospective
adoption, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on
the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition
of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen
requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single
identifiable asset or a group of similar identifiable assets, the set is not a business. The Company adopted this standard on November
1, 2018 and there was no material impact to the Company’s financial statements.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which aligns the
accounting for share-based payment awards issued to employees and nonemployees. Under ASU No. 2018-07, the existing employee guidance
will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the
exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to
be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used
in lieu of an expected term in the option-pricing model for nonemployee awards. This standard will be effective for the Company
on November 1, 2019and the Company is currently evaluating the potential impact on its financial statements.
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new
pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 3 – GOING CONCERN
The accompanying financial statements have
been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of
assets and satisfaction of liabilities in the normal course of business. The Company has reoccurring losses and limited cash flows
from operations. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern.
While the Company is attempting to increase
sales and generate additional revenues, the Company's cash position may not be significant enough to support the Company's daily
operations. If the Company is unable to obtain additional financing through the issuance of debt or equity, the Company may be
unable to continue as a going concern. While the Company believes in the viability of its strategy to generate additional revenues
and in its ability to raise additional funds, there can be no assurances to that effect. The financial statements do not include
any adjustments relating to the recoverability and classification of assets or the amounts and classifications of liabilities that
may result should the Company be unable to continue as a going concern.
NOTE 4 – MAJOR CUSTOMERS AND
ACCOUNTS RECEIVABLE
Bare Metal Standard
has unrelated customers and one related party customer, whose revenue, during the three and six months ended April 30, 2019 and
2018 represented in excess of 10% of the total revenue and in excess of 10% of total accounts receivable.
Concentration
of revenue and related party revenue-
During the three
months ended April 30, 2019, Bare Metal Standard invoiced royalties and sold product and services, including freight, totaling
$135,458 or 57% of total revenue to one related company, Taylor Brothers, Inc. and had one non-related party that accounted for
19% of total revenue. During the six months ended April 30, 2019, Bare Metal Standard invoiced royalties and sold product and services,
including freight, totaling $358,383 or 59% of total revenue to one related company, Taylor Brothers, Inc. and had one non-related
party that accounted for 15% of total revenue.
During the three
months ended April 30, 2018 Bare Metal Standard (successor) invoiced royalties and sold product and services, including freight,
totaling $51,543 or 29% of its total revenue, to one related company, Taylor Brothers Inc. and $127,554 of non-related party revenue
or 41%, 28%, 11% to three non-related parties. During the six months ended April 30, 2018 Bare Metal Standard invoiced royalties
and sold product and services, including freight, totaling $118,539 or 27% of its total revenue Taylor Brothers Inc. and $322,711
of non-related party revenue or 41% 18%, 14% and 11%, to four non-related parties.
Concentration
of accounts receivable and related party accounts receivable-
Receivables arising
from sales of the Company's products are not collateralized. As of April 30, 2019, total accounts receivable was $121,317 of which
$80,889 or 67% was owed by a related party. As of October 31, 2018, total accounts receivable was $85,243 of which $51,538
or 60% was owed by Taylor Brothers.
NOTE 5 – NOTES AND LOAN PAYABLE
On November 14, 2017 the Company opened
a line of credit with a bank in the amount of $40,000 bearing interest at the bank prime rate plus 8.5%. The Company is required
to make monthly minimum payments based on the current balance outstanding on the line of credit. On April 30, 2019 and October
31, 2018 there was $30,066 and $32,520 outstanding, respectively.
On June 13, 2018, the Company borrowed
$100,000 from a non-related investor. The note is repayable, in equal monthly installments, over 120 months with payments of $1,438
at an interest cost of 12%. The note is not convertible, but, is collateralized by 200,000 units of the Company’s common
stock, which have been issued. Each common stock unit includes one common share and the right, to purchase, for up to two years,
at a cost of $2, one common share. $50,000 of debt discount was recognized in connection with the note related to the warrants
and is being amortized in equal annual instalments over the life of the note. The $50,000 fair value of the warrants was determined
based on the relative fair value of the warrants and debt, assuming a maximum value based on the most recent sale price of common
stock for cash of $0.50 per share, due to the lack of active trading market for the Company’s common stock. On April 30,
2019 and October 31, 2018, the principal balance was $95,452 and $98,235, respectively. Unamortized discount was $45,591 and $48,077
as of April 30, 2019 and October 31, 2018, respectively.
On July 10, 2018 the Company borrowed $5,000
from a related party. The note is unsecured, bears interest at 7%, and is repayable by 36 equal monthly payments of $154 principal
and interest. On April 30, 2019 and October 31, 2018, the balance was $3,714 and $4,495, respectively.
On December 24, 2018, our chief executive
officer loaned the Company $21,000. The loan has a maturity date of December 20, 2020, and bears interest at 7%, with monthly payments
of $940. On April 30, 2019 the principal balance was $17,700.
NOTE 6 - RELATED PARTY TRANSACTIONS
We consider all who own more than 10% shares
to be related parties and record any transactions between them and the Company to be related party transactions and disclose such
transactions on notes to the Financial Statements.
The Company has revenue transactions with
related parties, and accounts receivable balances from those related parties, and notes payable with related parties. See Note
4 and 5. Additionally, the Company has no written employee agreement with its officers or directors. From time to time, the Company
may award bonuses to those officers or directors for performance.
We entered into an agreement with Taylor
Brothers Inc. (a company with common officers and shareholders) to use three of their offices. The rent will be $5,000 per month,
when Bare Metal Standard completes required funding to support ongoing operations.
NOTE 8 – STOCKHOLDER'S EQUITY
Preferred Stock
The Company is authorized to issue 20,000,000
shares of preferred stock, par value of $0.001. There are none issued.
Common Stock
The Company is authorized to issue 80,000,000
shares of common stock, $0.001 par value. None were issued during the six months ended April 30, 2019 and 2018.
NOTE 9 – COMMON STOCK WARRANTS
A summary of our stock warrant activity
for the six months ended April 30, 2019 is as follows:
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period – October 31, 2018
|
|
|
240,000
|
|
|
$
|
2.00
|
|
|
|
1.37
|
|
Expired during the six months ended April 30, 2019
|
|
|
(40,000
|
)
|
|
$
|
2.00
|
|
|
|
-
|
|
Outstanding at end of period -April 30, 2019
|
|
|
200,000
|
|
|
$
|
2.00
|
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period - April 30, 2019
|
|
|
200,000
|
|
|
$
|
2.00
|
|
|
|
1.12
|
|
The warrants outstanding and exercisable as of April 30, 2019
had no intrinsic value.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Management agreement
On March 1, 2017, the Company entered into
a management agreement with Taylor Brothers Holdings, Inc. (“Taylor Brothers”) to provide all of the services and to
conduct all of the activities that were agreed to be undertaken by Taylor Brothers under the Franchise Agreements for providing
certain administrative support, including Franchisee training, development of operations manuals and other materials for use by
Taylor Brothers’ franchisees; and develop and establish support infrastructures that the Company determines are necessary
and appropriate to satisfy Taylor Brothers obligations under the Franchise Agreements. In consideration of the services provided
Bare Metal shall be responsible to invoice and collect, per the terms of the Franchise Agreements, under management. All fees so
collected will constitute the fees owing under the management agreement. The Agreement does not have a termination date but may
be cancelled by either party with appropriate notice.