The accompanying notes are an integral part of these consolidated
financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
The accompanying notes are an integral part of these consolidated financial statements
Notes to Consolidated Financial Statements
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 free license agreement with Taylor Brothers
Holdings Inc. with the right to sublease, the use of the 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
audited financial statements and related footnotes have been presented on a comparative basis in
accordance with accounting principles generally accepted in the United States of America (or U.S. GAAP) and with the Securities
and Exchange Commission’s (or SEC) instructions for the Form 10-K.
Principles of Consolidation
The Company prepares its consolidated financial
statements on the accrual basis of accounting. 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 October 31, 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. Advertising fees are included in Other Service Revenue in the presentation of disaggregated revenue data below.
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 years ended October 31, 2019 and 2018:
|
|
October 31, 2019
|
|
|
October 31, 2018
|
|
|
|
|
|
|
|
|
Royalty revenue
|
|
$
|
587,475
|
|
|
$
|
498,282
|
|
Training and consulting
|
|
|
345,185
|
|
|
|
50,604
|
|
Equipment, supply and truck sales
|
|
|
184,728
|
|
|
|
255,925
|
|
Other service revenue
|
|
|
78,072
|
|
|
|
82,378
|
|
Total revenue
|
|
$
|
1,195,460
|
|
|
$
|
887,189
|
|
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 October 31, 2019, the Company had a total of $4,500 in deferred revenue, with $500 included in accounts payable and accrued
expenses and $4,000 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 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, consisting of 200,000 outstanding common stock warrants, were included in the calculation of diluted earnings
per share as the impact would have been anti-dilutive for the years ended October 31, 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. The Company adopted this guidance on November 1, 2019 with no effect to the
Company’s consolidated financial statements, due to the Company not being party to any lease agreements. The new standard
provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’,
which permitted the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification
and initial direct costs; and all of the new standard’s available transition practical expedients. The new standard also
provides practical expedients for a company’s ongoing accounting. The Company elected the short-term lease recognition exemption
for its leases. For those leases with a lease term of 12 months or less, the Company will not recognize ROU assets or lease liabilities.
The Company also made an accounting policy election to combine lease and non-lease components of operating leases for all asset
classes.
In August 2016, the FASB issued Accounting
Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues
Task Force) (“ASU 201615”). The amendments in ASU 2016-15 address eight specific cash flow issues and apply
to all entities that are required to present a statement of cash flows under ASC Topic 230, Statement of Cash Flows. The
Company adopted this guidance on November 1, 2018 with no impact to its consolidated financial statements.
In November 2016, the FASB issued Accounting
Standards Update No. 2016-18, Restricted Cash (a consensus of the FASB Emerging Issue Task Force) (“ASU
2016-18”). This new standard addresses the diversity that exists in the classification and presentation of changes in restricted
cash on the statement of cash flows. The amendments in ASU 2016-18 require that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.
Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The
Company adopted this guidance on November 1, 2018 with no impact to its 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 guidance on November
1, 2018 with no impact to its consolidated financial statements.
In January 2017, the FASB issued Accounting
Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04
simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical
purchase price allocation. ASU 2017-04 is effective and has been adopted by the Company for annual or interim goodwill impairment
tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. The Company does not anticipate
the adoption of ASU 2017-04 will have a material impact on its financial statements for both annual and interim reporting periods,
if applicable. Management also is required to evaluate and disclose whether its plans alleviate that doubt. The Company adopted
this guidance on November 1, 2018 with no impact to its consolidated 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. The Company adopted this guidance on November 1,
2019 with no impact to its consolidated 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 an accumulated deficit, and a history
of net losses. 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 years ended October 31, 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 year
ended October 31, 2019, Bare Metal Standard invoiced royalties and sold product and services, including freight, totaling $698,983
or 58% of total revenue to one related company, Taylor Brothers, Inc. (a company with common officers and shareholders) and had
six non-related party that accounted for 36%, 14%, 13%, 12%, 10% and 10% of of non-related party revenue. One non-related party
through the Taylor Brothers revenue represents approximately 62% of related party revenue for the fiscal year ended October 31,
2019.
During the year
ended October 31, 2018, Bare Metal Standard invoiced royalties and sold product and services, including freight, totaling $368,293
or 41.5% of its total revenue, to Taylor Brothers and $460,068 of non-related party revenue or (43%,16%,16%,and 13%), respectively,
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 October 31, 2019, total accounts receivable was $136,964 of
which $86,319 or 63% 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., and $13,716 or 16% was from one non-related party.
NOTE 5 – NOTES PAYABLE
On November 14, 2017, the Company opened
an unsecured 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 October 31, 2019
and 2018, there was $27,308 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 instalments, 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 October 31,
2019 and 2018, the principal balance was $92,498 and $98,235, respectively. As of October 31, 2019, $6,465 of principal was due
within one year. Unamortized discount was $43,063 and $48,077 as of October 31, 2019 and 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 October 31, 2019 and 2018, the balance was $2,906 and $4,495, respectively, with $1,703 due within one year.
On December 24, 2018, our chief executive
officer loaned the Company $21,000. The loan in unsecured, has a maturity date of December 20, 2020, and bears interest at 7%,
with monthly payments of $940. On October 31, 2019, the principal balance was $12,605, with $10,741 due within one year.
In June 2019, the Company financed certain
prepaid insurance expenses. The total amount financed was $10,812, the note bears interest at 16.24%, and the Company made principal
repayments of $5,455 during the year ended October 31, 2019. The balance of this note payable was $5,357 as of October 31, 2019
and is due within one year.
NOTE 6 – RELATED PARTY DEBT AND TRANSACTIONS
The Company follows ASC 850, Related Party
Disclosures, for the identification of related parties and disclosure of related party transactions.
The Company has revenue transactions with
related parties, and accounts receivable balances from those related parties, and notes payable with related parties. See Notes
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 7 – 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 year ended October 31, 2019. On July 13, 2018, the Company
issued 200,000 non-convertible common share units, which included warrants, as collateral, to be exercised upon uncured default
of the note payable described in Note 5.
NOTE 8 – COMMON STOCK WARRANTS
Between March
1, 2017 and October 31, 2018 the Company did not sell any common stock units. Each unit outstanding as of October 31, 2018 consists
of one share of our common stock, and one warrant to purchase one share of common stock within 24 months of issuance, for
$2.00. The warrants vested upon grant date and will expire between February 8, 2018 and June 13, 2020. On July 13, 2018, the Company
issued 200,000 common share units, which included common shares and warrants to be exercised within two years, as collateral for
a $100,000 loan.
A summary of our stock warrant activity
for the period from November 1, 2018 through October 31, 2019 is as follows:
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period - October 31, 2018
|
|
|
515,000
|
|
|
$
|
|
2.00
|
|
|
|
0.73
|
|
Expired during the year ended October 31, 2018
|
|
|
(475,000
|
)
|
|
|
2.00
|
|
|
|
-
|
|
Issued during the year ended October 31, 2018
|
|
|
200,000
|
|
|
|
2.00
|
|
|
|
2.00
|
|
Outstanding at beginning of period - October 31, 2018
|
|
|
240,000
|
|
|
|
2.00
|
|
|
|
1.37
|
|
Expired during the year ended October 31, 2019
|
|
|
(40,000
|
)
|
|
|
2.00
|
|
|
|
-
|
|
Outstanding at end of period - October 31, 2019
|
|
|
200,000
|
|
|
$
|
2.00
|
|
|
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period - October 31, 2019
|
|
|
200,000
|
|
|
$
|
2.00
|
|
|
|
0.62
|
|
The warrants outstanding and exercisable as of October 31, 2019
and 2018 had no intrinsic value.
NOTE 9 – 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.
NOTE 10 – INCOME TAXES
The Company’s
net operating loss carryover of approximately $324,950 as of October 31, 2019, will expire in 2039. Due to the change in ownership
provisions of the Tax Reform Act of 1986, net operating loss carry forward for Federal income tax reporting purposes are subject
to annual limitations. If a change in ownership occurs, net operating loss carry forward may be limited as to its use in future
years. The Company’s tax returns for the years ended October 31, 2016 through October 31, 2019 are open for IRS audit.
On December 22, 2017, the Tax Act was signed
into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate
decrease from 35% to 21%, effective for tax years beginning after December 31, 2017. We use the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35%
to 21% under the Tax Act, we revalued our ending net deferred tax assets at October 31, 2018, which were fully offset by a valuation
allowance.
Future tax benefits for these net operating
loss carry-forwards are recognized to the extent that realization of these benefits is considered more likely than not. To
the extent that we will not realize a future tax benefit, a valuation allowance is established. The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
The cumulative tax effect at the expected
rate of 21% as of October 31, 2019 and 2018 of significant items comprising our net deferred tax amount is as follows:
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net operating loss carry forward
|
|
$
|
68,239
|
|
|
$
|
85,792
|
|
Less: valuation allowance
|
|
|
(68,239
|
)
|
|
|
(85,792
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 11 –
SUBSEQUENT EVENTS
In January 2020,
650,000 shares of common stock of the Company were returned to the Company and cancelled for no consideration from one shareholder.