Metavesco, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND NOTES CONTENTS: PAGE # Report of Independent Registered Public Accounting Firm 29 Balance Sheets as of June 30, 2017 and 2016 30 Statements of Operations for the years ended June 30, 2017 and 2016 31 Statements of Stockholders’ Equity (Deficit) for the years ended June 30, 2017 and 2016 32 Statements of Cash Flows for the years ended June 30, 2017 and 2016 33 Notes to the Financial Statements 34 28 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Waterside Capital Corporation We have audited the balance sheets of Waterside Capital Corporation (the “Company”) as of June 30, 2017 and 2016 and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Waterside Capital Corporation as of June 30, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced liquidity issues and has no working capital. Further, the Company has no active business to generate cash flows to repay its current and future obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this uncertainty are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ HASKELL & WHITE LLP Irvine, California April 12, 2018 29 WATERSIDE CAPITAL CORPORATION Balance Sheets June 30, 2017 and 2016 20 17 20 16 ASSETS Current Assets Cash $ $ 458,485 Total Current Assets — 458,485 Fixed Assets, net of accumulated depreciation — 438 Equity Investments — 110,000 Notes Receivable — 150,000 Other Assets — 4,000 Total Other Assets — 264,000 TOTAL ASSETS $ 0.00 $ 722,923 LIABILITIES & STOCKHOLDERS EQUITY (DEFICIT) Liabilities Current Liabilities Accrued Interest Payable -SBA $ 147,569 $ 222,567 Judgment Owed to SBA 10,427,300 10,701,304 Total Current Liabilities 10,574,869 10,923,871 Equity Common Stock par value $1.00, 10,000,000 shares authorized, 1,915,548 shares issued and outstanding 1,915,548 1,915,548 Additional Paid-In Capital 15,479,680 15,479,680 Accumulated deficit (27,970,097 ) (27,596,176 ) Total Equity (Deficit) (10,574,869 ) (10,200,948 ) TOTAL LIABILITIES & STOCKHOLDERS EQUITY (DEFICIT) $ — $ 722,923 The accompanying Notes are an integral part of these Financial Statements. See report of Independent Registered Public Accounting Firm. 30 WATERSIDE CAPITAL CORPORATION Statements of Operations For the years ended June 30, 2017 and 2016 20 17 20 16 Income Interest Income $ 192 $ 34,743 Total Income 192 34,743 Expense Realized and Unrealized Loss on Investments 100,425 1,508,895 Administrative Expenses 273,688 209,087 Total Expenses 374,113 1,717,982 Net Loss $ (373,921 ) $ (1,683,239 ) Weighted Average Number of Common Shares Outstanding – Basic and Diluted 1,915,548 1,915,548 Net Loss Per Share $ (0.20 ) $ (0.88 ) The accompanying Notes are an integral part of these Financial Statements. See report of Independent Registered Public Accounting Firm. 31 WATERSIDE CAPITAL CORPORATION Statements of Stockholders’ Equity (Deficit) For the years ended June 30, 2017 and 2016 Common Stock ($1 Par Value) Additional Par Paid-In Accumulated Shares Value Capital Deficit Total 7/1/2015 Balance $ 1,915,548 1,915,548 15,479,680 (25,912,937 ) (8,517,709 ) 6/30/2016 Net Loss for the year — — — (1,683,239 ) (1,683,239 ) 6/30/2016 Balance 1,915,548 1,915,548 15,479,680 (27,596,176 ) (10,200,948 ) 6/30/2017 Net Loss for the year — — — (373,921 ) (373,921 ) 6/30/2017 Balance $ 1,915,548 1,915,548 15,479,680 (27,970,097 ) (10,574,869 ) The accompanying Notes are an integral part of these Financial Statements. See report of Independent Registered Public Accounting Firm. 32 WATERSIDE CAPITAL CORPORATION Statements of Cash Flows For the years ended June 30, 2017 and 2016 2017 2016 Cash flows from operating activities: Net loss $ (373,921 ) $ (1,683,239 ) Adjustments to reconcile net loss to net cash used in operating activities: L oss on investments and other assets 104,000 1,508,895 Depreciation and amortization expense 438 131 Net cash used in operating activities (269,483 ) (174,213 ) Cash flows from investing activities: Proceeds from sale/settlement of investments 85,000 1,416,587 Net cash provided by investing activities 85,000 1,416,587 Cash flows from financing activities: Payments on SBA judgment (274,002 ) (998,696 ) Net cash used in financing activities (274,002 ) (998,696 ) Net (decrease) increase in cash (458,485 ) 243,678 Cash, beginning of year 458,485 214,807 Cash, end of year $ - $ 458,485 Supplemental disclosure of non-cash investing activity Conversion of investment into notes receivable $ - $ 150,000 Transfer of note receivable to SBA to settle part of accrued interest $ 75,000 $ - The accompanying Notes are an integral part of these Financial Statements. See report of Independent Registered Public Accounting Firm. 33 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2017 Note 1 – Organization and Operations Waterside Capital Corporation (the “Company”) was incorporated in the Commonwealth of Virginia on July 13, 1993 and was a closed-end investment company licensed by the Small Business Administration (the “SBA”) as a Small Business Investment Corporation (“SBIC”). The Company previously made equity investments in, and provided loans to, small businesses to finance their growth, expansion, and development. Under applicable SBA regulations, the Company was restricted to investing only in qualified small businesses as contemplated by the Small Business Investment Act of 1958. As a registered investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”), the Company’s investment objective was to provide its shareholders with a high level of income, with capital appreciation as a secondary objective. The Company made its first investment in a small business in October 1996. On May 28, 2014, with the Company’s consent, the court having jurisdiction over the action filed by the SBA (the “ Court ”) entered a Consent Order and Judgment Dismissing Counterclaim, Appointing Receiver, Granting Permanent Injunctive Relief and Granting Money Judgment (the “ Order ”). The Order appointed the SBA receiver of the Company for the purpose of marshaling and liquidating in an orderly manner all of the Company’s assets and entered judgment in favor of the United States of America, on behalf of the SBA, against the Company in the amount of $11,770,722. The Court assumed jurisdiction over the Company and the SBA was appointed receiver effective May 28, 2014. The Company effectively stopped conducting an active business upon the appointment of the SBA as receiver and the commencement of the court ordered receivership (the “ Receivership ”). Over the course of the Receivership the activity of the Company was limited to the liquidation of the Company’s assets by the receiver and the payment of the proceeds therefrom to the SBA and for the expenses of the Receivership. On June 28, 2017 the Receivership was terminated with the entry of a Final Order by the Court. The Final Order specifically stated that “Control of Waterside shall be unconditionally transferred and returned to its shareholders c/o Roran Capital, LLC (“Roran”) upon notification of entry of this Order”. Upon termination of the Receivership Roran took possession of all books and records made available to it by the SBA, and Roran expended, and has continued to expend, its own funds to maintain the viability of the Company. The Company has no assets of any value, and the Company no longer has the SBIC license from the SBA. The Company is clearly no longer operating as a registered investment company under the Investment Company Act. The Company will now seek to either (i) enter into a new business; or, (ii) merge with, or otherwise acquire, an active business which would benefit from operating as a public entity, and has undertaken a search to identify the best possible candidate(s) in order to provide value to the shareholders of the Company. Going Concern The accompanying financial statements of our Company have been prepared in accordance with accounting principles generally accepted in the United States. The Company effectively ceased operations and it has net losses through the date of these financial statements. Our financial statements have been presented on the basis that our business is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We are subject to the risks and uncertainties associated with a business with no operating business or assets and no revenue, as well as limitations on our operating capital resources. We have incurred operating losses and negative operating cash flows since the Receivership, and we expect to continue to incur operating losses and negative operating cash flows at least through the near future. Roran, which is a related party to the Company, has agreed to advance our Company funding in order to partially meet our most critical cash requirements. For further discussion of the advances made by Roran, see the section titled “Subsequent Events”. 34 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2017 As a result of the aforementioned factors, management has concluded that there is substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm, in its report on our 2017 financial statements, raised substantial doubt about our ability to continue as a going concern. Our financial statements as of and for the year ended June 30, 2017 do not contain any adjustments for this uncertainty. Note 2 – Significant Accounting Policies Fiscal Year-End The Company elected 30 June as its fiscal year-end date. Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions The preparation of 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 disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. 35 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2017 These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Related Parties The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions. Pursuant to section 850-10-20 the related parties include (a) affiliates (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act) of the Company; (b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of section 825–10–15, to be accounted for by the equity method by the investing entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; (d) principal owners of the Company; e) management of the Company; (f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. 36 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2017 The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: (a) the nature of the relationship(s) involved; (b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and, (d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. Commitments and Contingencies The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Deferred Tax Assets and Income Taxes Provision The Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13 which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13. 37 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2017 The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. T ax years that remain subject to examination by major tax jurisdictions are generally the prior three (3) years for federal purposes, and the prior four (4) years for state purposes; however, as a result of the Company’s operating losses, all tax years remain subject to examination by tax authorities. Net Loss Per Common Share The Company computes net income or loss per share in accordance with ASC 260 Earnings Per Share. Under the provisions of the Earnings per Share Topic ASC, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive. 38 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2017 Recently Issued Accounting Pronouncements From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption. Note 3 – Investments and Notes Receivable The Company’s legacy assets primarily consisted of prior investments that were composed of equity and debt securities. During the years ended June 30, 2016 and 2017, the investments were either in default or distressed in nature. The Receiver liquidated the assets through negotiations and the investments are written down to their estimated net realizable value through recognizing other-than-temporary impairment losses. The activity in the investment account is as follows: Equity Debt Securities Securities Total Balance at June 30, 2015 $ 174,701 $ 3,010,781 $ 3,185,482 Cash proceeds collected - (1,416,587 ) (1,416,587 ) Exchange for Note Receivable - (150,000 ) (150,000 ) Impairment recognized (64,701 ) (1,444,194 ) (1,508,895 ) Balance at June 30, 2016 110,000 - 110,000 Cash proceeds collected (10,000 ) 0 (10,000 ) Impairment recognized (100,000 ) 0 (100,000 ) Balance at June 30, 2017 $ - $ - $ - As part of a settlement on an investment, during the year ended June 30, 2016 the Receiver exchanged part of an investment for two $75,000 notes receivable with consecutive 1 year terms. The first note receivable was repaid in fiscal 2017. The other $75,000 note receivable was transferred to the SBA to settle part of the accrued interest outstanding on the SBA judgment. Note 4 – Notes Payable On March 30, 2010, the SBA notified the Company that its account had been transferred to liquidation status and that the then outstanding debentures of $16.1 million plus accrued interest (the “Debentures”) were due and payable within fifteen days of the date of the letter. The Company did not possess adequate liquid assets to make this payment. The Company negotiated terms of a settlement agreement with the SBA effective September 1, 2010, which allowed the Company’s management to liquidate the portfolio so long as there are no events of default. The Debentures were repurchased by the SBA in September 2010, represented by a Note Agreement between the SBA and the Company. The Note Agreement had a maturity of March 31, 2013. In the event of a default, the SBA had the ability to seek receivership. On May 24, 2012 the SBA delivered to the Company a notice of an event of default for failure to meet the principal repayment schedule under the Note Agreement (the “ Notice ”). Under the terms of the Notice and the Note Agreement the SBA maintained a continuing right to terminate the Note Agreement and appoint a receiver to manage the Company’s assets. 39 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2017 On November 20, 2013 the SBA filed a complaint in the United States District Court for the Eastern District of Virginia seeking, among other things, receivership for the Company and a judgment in the amount outstanding under the Note Agreement plus continuing interest. The complaint alleged that as of October 31, 2013 there remained an outstanding balance of $11,762,634 under the Note Agreement, including interest, which continued to accrue at the rate of $2,021 per day. The SBA, in filing the complaint, requested that the court take exclusive jurisdiction of the Company and all of its assets wherever located and appoint the SBA as permanent receiver of the Company for the purpose of liquidating all of the Company’s assets and satisfying the claims of its creditors in the order of priority as determined by the court. The Company initially took steps to contest the legal action initiated by the SBA and to oppose the receivership action. On April 29, 2014 the Board of Directors of the Company, as then constituted (the “ Board ”), met to reconsider the decision to contest the SBA’s legal action. In light of developments occurring since December of 2013, including projections of its portfolio companies and discussions with the SBA, the Board determined, after consultation with and advice of its counsel, that it was not in the best interests of the Company and its shareholders to continue to contest the legal action. The SBA was informed of this determination. The Board also decided to consent to the receivership process. On May 28, 2014, with the Company’s consent, the court having jurisdiction over the action filed by the SBA (the “ Court ”) entered a Consent Order and Judgment Dismissing Counterclaim, Appointing Receiver, Granting Permanent Injunctive Relief and Granting Money Judgment (the “ Order ”). The Order appointed the SBA receiver of the Company for the purpose of marshaling and liquidating in an orderly manner all of the Company’s assets and entered judgment in favor of the United States of America, on behalf of the SBA, against the Company in the amount of $11,770,722. Such amount represents $11,700,000 in principal and $70,722 in accrued interest. The Court assumed jurisdiction over the Company and the SBA was appointed receiver effective May 28, 2014. Note 5 – Subsequent Events The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. On September 19, 2017 the Company entered into a Convertible Loan Agreement with Roran (the “Loan Agreement”). Pursuant to the Loan Agreement, Roran agreed to loan to the Company an amount not to exceed a total of $150,000 in principal over 18-months. Each advance under the Loan Agreement will be documented under a Convertible Promissory Note issued by the Company in favor Roran (the “Note”). The Note bears interest at the rate of 12% per annum and is due in 18-months. Roran has the right to convert all or any portion of the Note into shares of the Company’s common stock at a conversion price equal to 60% of the share price. 40 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with our accountants on accounting or financial disclosure matters during 2017 and 2016, respectively. In the past the Company was not required to engage an independent registered public accounting firm due to its status as a registered investment company. Since the Company is no longer a registered investment company, it engaged the services of Haskell & White, LLP in January 2018 to serve as the Company’s independent registered public accounting firm.