NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017 AND 2016
NOTE 1 - ORGANIZATION AND OPERATIONS
Metwood, Inc. ("The Company", “we”, “us”) was organized under the laws of the Commonwealth of Virginia on April 7, 1993. On June 30, 2000, Metwood entered into an Agreement and Plan of Reorganization in which the majority of its outstanding common stock was acquired by a publicly held Nevada shell corporation. The acquisition was a tax-free exchange for federal and state income tax purposes and was accounted for as a reverse merger. Upon acquisition, the name of the shell corporation was changed to Metwood, Inc. and Metwood, Inc., the Virginia corporation, became a wholly owned subsidiary of Metwood, Inc., the Nevada corporation. The publicly traded shell corporation had not had a material operating history for several years prior to the merger.
The Company provides construction-related products and engineering services to residential customers and contractors, commercial contractors, developers and retail enterprises, primarily in southwestern Virginia
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
Going Concern
The consolidated financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have sustained significant operating losses which raises substantial doubt about the Company’s ability to continue as a going concern. During the year ended June 30, 2017, The Company incurred a loss from operations of $434,612 and has an accumulated deficit of $1,671,189. Management will continue its ongoing efforts to increase the customer base and seek lower cost suppliers to generate future profits.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty. The basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.
Basis of Presentation
- The financial statements include the accounts of Metwood, Inc. (a Nevada corporation) and its wholly owned subsidiary, Metwood Inc. (a Virginia corporation) prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany balances and transactions have been eliminated.
Management's Use of Estimates
- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
- For certain of the Company financial instruments, none of which are held for trading, including cash, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities.
Cash and Cash Equivalents
– For purposes of the Consolidated Statements of Cash Flows, the Company considers liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash in bank deposit accounts, which, at times, may exceed the federally insured limit of $250,000. The Company has not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on cash and cash equivalents.
Accounts Receivable
– The Company grants credit in the form of unsecured accounts receivable to its customers based on an evaluation of their financial condition. We perform ongoing credit evaluations of customers. The estimate of the allowance for doubtful accounts, which is charged off to bad debt expense, is based on management’s assessment of current economic conditions and historical collection experience with each customer. At June 30, 2017 and 2016, the allowance for doubtful accounts was $8,362 and $8,362 respectively, specific customer receivables are considered past due when they are outstanding beyond their contractual terms and are charged off to the allowance for doubtful accounts when determined uncollectible. For the years ended June 30, 2017 and 2016, the bad debt expense was $(47) and $1,202, respectively.
Inventory
– Raw material inventory, consisting primarily of metal and wood raw materials, is located on our premises and is stated at the lower of cost or market using the first-in, first-out method, comparative inventory values are shown below:
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
433,637
|
|
|
$
|
390,473
|
|
Work in process
|
|
|
84,364
|
|
|
|
88,730
|
|
Total inventory
|
|
$
|
518,001
|
|
|
$
|
479,203
|
|
The Company recorded an inventory reserve of $25,788 and $33,702 during the years ended June 30, 2017 and 2016, respectively.
Property and Equipment
- Property and equipment are stated at cost less accumulated depreciation and are depreciated over their estimated useful lives using the straight-line method. Recovery periods range from three to thirty-nine years. Upon retirement or sale, the cost and related accumulated depreciation are removed from the consolidatedbalance sheet, and the resulting gain or loss is reflected in other income and expense. Maintenance and repairs are charged to operations as incurred.
|
|
Useful Life
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
39
|
|
|
$
|
274,869
|
|
|
$
|
274,869
|
|
Furniture, fixtures and equipment
|
|
5
|
|
|
|
78,222
|
|
|
|
78,222
|
|
Computers and software
|
|
3
|
|
|
|
186,517
|
|
|
|
174,541
|
|
Machinery and equipment
|
|
10
|
|
|
|
741,884
|
|
|
|
720,585
|
|
Vehicles
|
|
5
|
|
|
|
393,887
|
|
|
|
412,917
|
|
Land improvements
|
|
39
|
|
|
|
67,959
|
|
|
|
67,958
|
|
Total property and equipment
|
|
|
|
|
|
1,743,338
|
|
|
|
1,729,092
|
|
Less accumulated depreciation
|
|
|
|
|
|
(1,273,705
|
)
|
|
|
(1,199,154
|
)
|
Total property and equipment
|
|
|
|
|
$
|
469,633
|
|
|
$
|
529,938
|
|
Impairment of Long-lived Assets
– The Company evaluates its long-lived assets for indications of possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amounts to the future net undiscounted cash flows which the assets are expected to generate. Should an impairment exist, the impairment would be measured by the amount by which the carrying amount of the assets exceeds the projected discounted future cash flows arising from the asset. There have been no such impairments of long-lived assets through June 30, 2017 and 2016.
Patents
– The Company has been assigned several key product patents developed by certain Company officers. No value has been recorded in our financial statements because the fair value of the patents was not determinable within reasonable limits at the date of assignment.
Revenue Recognition
- Revenue is recognized when goods are shipped and earned or when services are performed, provided collection of the resulting receivable is probable. If any material contingencies are present, revenue recognition is delayed until all material contingencies are eliminated. Further, no revenue is recognized unless collection of the applicable consideration is probable.
Income Taxes
- Income taxes are accounted for in accordance with FASB ASC 740,
Income Taxes
. A
deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and for net operating loss carryforwards, where applicable. 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 the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.
Research and Development
– The Company performs research and development on our metal/wood products, new product lines, and new patents. Costs, if any, are expensed as they are incurred. For the year ended June 30, 2017, expenses were $52,130 and for the year ended June 30, 2016, expenses were $5,700.
Advertising
– The Company expenses costs as incurred. However, certain expenditures are treated as prepaid (such as trade show fees) if they are for goods or services which will not be received until after the end of the accounting period. These costs are subsequently recognized as expenses in those periods in which the good or services are received.
Earnings Per Common Share
- Basic earnings per share amounts are based on the weighted average shares of common stock outstanding. If applicable, diluted earnings per share would assume the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. This presentation has been adopted for the years presented. There were no adjustments required to net income for the years presented in the computation of diluted earnings per share.
During the future fiscal years the Company may be required to issued up to fifty million shares of common stock to satisfy a convertible note entered into in August 2016. This note expires on June 30, 2019 and 10,000,000 shares of common stock can be issued in any year. When the contract noted in the subsequent events Note 9 is consummated the Company will be required to issue an additional 30,000,000 shares of common stock.
Recent
Accounting
Pronouncements
In February, 2016 the FASB issued ASU 20 16-0 2, “Leases (Topic 842)” requiring lessees to recognize lease assets and lease liabilities for most leases classified as operating leases under previous U.S. GAAP. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company will be required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The adoption of this standard is not expected have a material impact on the Company’s consolidated financial statements.
Accounting Standard Update No. 2014-09, (“ASU 2014-09’) Revenue from Customers (Topic 606), became effective for us in the period ending June 30, 2019. No significant adjustment was required as a result of adopting the new revenue standard. The comparative information has not been restated and continues to be reported under the historic accounting standards in effect for those periods. The impact of the adoption of the new revenue standard is expected to be immaterial to the Company’s net income on an ongoing basis.
NOTE 3 - RELATED-PARTY TRANSACTIONS
The Company has executed a demand note with its controlling shareholder, Cahas Mountain, LLC, that Cahas Mountain will make available cash advances from time to time to bridge cash flow shortfalls. These advances are repaid to Cahas Mountain as cash flow allows. The unpaid balance due to Cahas Mountain at the end of each month is subject to an interest rate of 6% per year. At June 30, 2017 and 2016, advances payable to Cahas Mountain Properties of approximately $77,000 and 81,000, respectively. Accrued interest payable to Cahas Mountain Properties total approximately $28,000 and $19,000 for the years ended June 30, 2017 and 2016, respectively. The Company recognized interest expense of approximately $23,000 and $4,000 for the years ended June 30, 2017 and 2016, respectively. Sales to Cahas Mountain, LLC was approximately $12,000 and $19,000. As of June 30, 2017 and 2016, the related accounts receivable totaled approximately $0 and $2,000, respectively.
On August 18, 2016 the Company entered into a convertible note with Cahas Mountain in the amount of $50,000 with an interest rate of 8% per year, this note expires on June 30, 2019. The note is convertible into common shares of Metwood, Inc. at par value of $.001 and if converted in its entirety will dilute the current shareholders by a maximum of 50,000,000 shares of common stock. The maximum conversion in any year is 10,000,000 shares of common stock. A debt discount of $50,000 was recorded at issuance and $14,706 was amortized and included in interest expense during the year ended June 30, 2017.
NOTE 4 - COMMITMENT AND CONTINGENCIES
During the year ended June 30, 2005, the Company entered into a sales and leaseback transaction with a related party. The Company sold various buildings at the corporate headquarters which house its manufacturing plants, executive offices and other buildings for $600,000 in cash. The Company simultaneously entered into a commercial lease agreement with the related party whereby the Company is committed to lease back these same properties for $6,800 per month over a ten-year term expiring December 31, 2014. On July 1, 2015 a new lease was entered into with the related party. This lease terms have a term of five years and the monthly rental is $5,500 in cash, in addition the Company issued common stock as part of the transaction, this portion of the lease is covered in Note 8.
Future annual commitments under the current operating lease are:
|
|
Payments
in cash
|
|
|
Amortization of Contra equity account
|
|
|
|
|
|
|
|
|
Fiscal year end June 30, 2018
|
|
|
66,000
|
|
|
|
312,000
|
|
Fiscal year end June 30, 2019
|
|
|
66,000
|
|
|
|
312,000
|
|
Fiscal year end June 30, 2020
|
|
|
66,000
|
|
|
|
312,000
|
|
Total commitments
|
|
$
|
198,000
|
|
|
$
|
936,000
|
|
At June 30, 2017 and 2016, the Company had the following customer concentrations:
|
|
Sales
|
|
|
Accounts Receivable
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Customer A
|
|
|
14
|
%
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
15
|
%
|
Customer B
|
|
|
12
|
%
|
|
|
11
|
%*
|
|
|
15
|
%
|
|
|
23
|
%
|
Customer C
|
|
*
|
|
|
*
|
|
|
|
16
|
%
|
|
*
|
|
Customer D
|
|
*
|
|
|
*
|
|
|
|
13
|
%
|
|
*
|
|
Customer E
|
|
*
|
|
|
*
|
|
|
*
|
|
|
|
20
|
%
|
*Amounts to less than 10%
NOTE 5 - EQUITY
During the year ended June 30, 2017 the Company did not issue any preferred or common shares. There are 100,000,000 shares of common stock authorized and at the year end there are 17,766,647 shares issued and outstanding. The authorized preferred stock is 40,000,000 shares and there are -0- shares of preferred stock issued and outstanding.
If the convertible note that is covered in the related party transactions (Note 3) is converted into common stock of the Company, an additional 50,000,000 shares of common stock could be issued, resulting in dilution of the current shareholders. When the contract of October 11, 2018 is completed (see Note 8) there will be an additional 30,000,000 shares issued to the principals of Emerge Nutraceuticals, Inc.
NOTE 6 - INCOME TAXES
The Company determined that the future use of a Deferred Tax Asset was no longer appropriate and therefore the Deferred tax Asset previously shown on the Balance Sheet has been expensed during this year as a line item on the Statement of operations. The decision was made that the earnings in the near term would not be sufficient to allow the utilization of the deferred tax asset.
The difference between the expected income tax expense (benefit) and the actual tax expense (benefit) computed by using the Federal statutory rate of 39% is as follows:
|
|
2017
|
|
|
Tax Rate
|
|
|
2016
|
|
|
Tax Rate
|
|
Expected income tax benefit at statutory rate of 39%
|
|
$
|
169,000
|
|
|
|
39
|
%
|
|
$
|
162,000
|
|
|
|
39
|
%
|
Permanent differences
|
|
|
(124,000
|
)
|
|
(30
|
%)
|
|
|
(126,000
|
)
|
|
(30
|
%)
|
Change in estimate
|
|
|
(17,000
|
)
|
|
(4
|
%)
|
|
|
0
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(28,000
|
)
|
|
(6
|
%)
|
|
|
281,000
|
|
|
(68
|
%)
|
Income tax expense (benefit)
|
|
$
|
-0-
|
|
|
|
|
|
|
$
|
245,000
|
|
|
|
59
|
%
|
Deferred tax assets and liabilities are provided for significant income and expense items recognized in different years for tax and financial reporting purposes. Temporary differences, which give rise to a net deferred tax asset, are as follows:
Deferred tax assets:
|
|
2017
|
|
|
2016
|
|
Tax benefit of net operating loss carry-forward
|
|
$
|
465,000
|
|
|
$
|
451,000
|
|
Book and tax difference
|
|
|
89,000
|
|
|
|
75,000
|
|
Less: valuation allowance
|
|
|
(554,000
|
)
|
|
|
(526,000
|
)
|
Net deferred tax asset
|
|
$
|
0
|
|
|
$
|
0
|
|
The Company had a federal net operating tax loss carry-forward of approximately $1,177,000 as of June 30, 2017. The loss carry-forwards are available to offset future taxable income with the federal carry-forwards beginning to expire in 2020. .
At June 30, 2017 the deferred tax valuation allowance increased by $28,000. The realization of the tax benefits is subject to the sufficiency of taxable income in future years. The deferred tax assets represent the amounts expected to be realized before expiration. The Company periodically assesses the likelihood that it will be able to recover its deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As of June 30, 2017 and 2016, the Company established valuation allowances equal to the full amount of the net deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
For the years ended June 30, 2017 and 2016, no amounts have been recognized for uncertain tax positions and no amounts have been recognized related to interest or penalties related to uncertain tax positions. The Company has determined that it is not reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next twelve months. The Company is currently subject to a three-year statute of limitations by major tax jurisdictions.
NOTE 7: LEGAL PROCEEDINGS
On June 27, 2016 a lawsuit was filed alleging breach of contract. The contract in question would have changed the control of the public company to a third party. Management has determined that judgment will be in the favor of the Company, consequently no amounts have been accrued related to this matter.
See Note 9.
NOTE 8 – STOCKHOLDER’S EQUITY
On July 1, 2015, the Company entered into a ten-year commercial operation lease with a company related through common ownership. The related party is Cahas Mountain Properties in which Robert Callahan, our Chief Executive Officer, is a Managing Member. The lease covers various buildings and property which house our manufacturing plant, executive offices and other buildings with a current monthly rental of $5,500.00. As part of the lease agreement the Company issued 2,400,000 of its shares with a fair value of $1,560,000 at the date of the agreement. This amount is recorded on our books as a contra equity account, and is amortized over the five year term of the lease. See note 4 for commitments and contingencies.
NOTE 9 - SUBSEQUENT EVENTS
In October 2017 the legal matter referred to in Note 7 was decided by a court and confirmed on appeal that the Company was not in breach of contract.
On October 11, 2018, the Company entered into a contract with Emerge Nutraceuticals, a Florida corporation. When completed this contract will transfer all of Metwood’s assets and liabilities to its current controlling shareholder and Emerge Nutraceuticals, Inc. will become the reporting entity.