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 discipline.
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated interim 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, 2019 contained in the Company’s Form 10K originally filed with
the Securities and Exchange Commission on January 22, 2020. 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, 2019, 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 January 31, 2020 and October 31,
2019.
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 January 31, 2020 and 2019:
|
|
Three months ended
January 31, 2020
|
|
|
Three months ended
January 31, 2019
|
|
|
|
|
|
|
|
|
Royalty revenue
|
|
$
|
143,229
|
|
|
$
|
150,320
|
|
Training and consulting
|
|
|
43,355
|
|
|
|
121,089
|
|
Equipment and truck sales
|
|
|
41,565
|
|
|
|
76,871
|
|
Other service revenue
|
|
|
19,453
|
|
|
|
19,431
|
|
Total revenue
|
|
$
|
247,602
|
|
|
$
|
367,711
|
|
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. Additionally, the Company
recognizes a contract liability related to any other unsatisfied performance obligations. As of January 31, 2020, the Company had
a total of $42,875 in deferred revenue, with $39,000 expected to be recognized in revenue over the next 12 months, and $3,875 expected
to be recognized beyond 12 months over the remaining license period of approximately nine years.
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, 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 three months ended January 31, 2020 and 2019. 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 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. 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 months ended January 31, 2020 and 2019
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 January
31, 2020, Bare Metal Standard invoiced royalties and sold product and services, including freight, totaling $132,126 or 53% of
total revenue to one related company, Taylor Brothers, Inc. (a company with common officers and shareholders) and had five non-related
party that accounted for 39%, 17%, 14%, 13%, and 13% of non-related party revenue. One non-related party through the Taylor Brothers
revenue represents approximately 35% of related party revenue for the three months ended January 31, 2020.
During the three months ended January
31, 2019, the Company invoiced royalties and sold product and services, including freight, totaling $222,925 or 61% of its total
revenue, to one related company, Taylor Brothers Inc. and had four non-related parties that accounted for 31%, 26%, 14% and 12%
of non-related party revenue. One non-related party through the Taylor Brothers revenue represents approximately 55% of related
party revenue for the three months ended January 31, 2019.
Concentration
of accounts receivable and related party accounts receivable-
Receivables arising from sales of
the Company's products are not collateralized. As of January 31, 2020, total accounts receivable was $141,428 of which $86,082
was owed by a related party, and four customers represented 27%, 20%, 15% and 14% of non-related party accounts receivable. As
of October 31, 2019, total accounts receivable was $136,964 of which $86,319 or 63% was owed by a related party.
NOTE 5 – NOTES AND LOAN PAYABLE
The Company has the following notes payable
outstanding as of January 31, 2020 and October 31, 2019:
|
|
January 31,
2020
|
|
|
October 31,
2019
|
|
Note payable dated June 13, 2018 in the original principal amount of $100,000, maturing June
13, 2028, bearing interest at 12% per year, 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.
|
|
$
|
90,953
|
|
|
$
|
92,498
|
|
|
|
|
|
|
|
|
|
|
Note payable dated June 20, 2019 in the original principal amount of $10,812, maturing April
1, 2020, bearing interest at 16.24% per year, related to prepaid insurance premium, with
monthly payments of $1,163.
|
|
|
2,722
|
|
|
|
5,357
|
|
|
|
|
|
|
|
|
|
|
Note payable with a related party dated July 10, 2018 in the original principal amount of
$5,000, maturing July 10, 2021, bearing interest at 7% per year, unsecured, with monthly
payments of principal and interest of $154.
|
|
|
2,492
|
|
|
|
2,906
|
|
|
|
|
|
|
|
|
|
|
Note payable with a related party dated December 24, 2018 in the original principal amount
of $21,000, maturing December 20, 2020, bearing interest at 7% per year, unsecured, with
monthly payments of principal and interest of $940.
|
|
|
9,989
|
|
|
|
12,605
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
106,156
|
|
|
|
113,366
|
|
Less: current portion
|
|
|
(21,105
|
)
|
|
|
(24,266
|
)
|
Less: unamortized discount
|
|
|
(41,799
|
)
|
|
|
(43,063
|
)
|
Total notes payable, net of discount and current portion
|
|
$
|
43,252
|
|
|
$
|
46,037
|
|
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 January 31, 2020
and October 31, 2019, there was $25,589 and $27,308 outstanding, respectively.
NOTE 6 - RELATED PARTY 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 three months ended January 31, 2020. 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.
On January 8, 2020, 650,000 shares of common stock of the Company
were returned to the Company and cancelled for no consideration from one shareholder.
NOTE 8 – COMMON STOCK WARRANTS
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 three months ended January 31, 2020 is as follows:
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period – October 31, 2019
|
|
|
200,000
|
|
|
$
|
2.00
|
|
|
|
0.62
|
|
Expired during the three months ended January 31, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at end of period – January 31, 2020
|
|
|
200,000
|
|
|
$
|
2.00
|
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period – January 31, 2020
|
|
|
200,000
|
|
|
$
|
2.00
|
|
|
|
0.37
|
|
The warrants outstanding and exercisable as of January 31, 2020
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.