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 24 Balance Sheets as of June 30, 2019 and 2018 25 Statements of Operations for the years ended June 30, 2019 and 2018 26 Statements of Stockholders’ Deficit for the years ended June 30, 2019 and 2018 27 Statements of Cash Flows for the years ended June 30, 2019 and 2018 28 Notes to the Financial Statements 29 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Waterside Capital Corporation Opinion on the Financial Statements We have audited the accompanying balance sheets of Waterside Capital Corporation (the “Company”) as of June 30, 2019 and 2018 and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended June 30, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America. Going Concern 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 does not have working capital. The Company’s 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. Further information and 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. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting 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. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ HASKELL & WHITE LLP We have served as the Company’s auditor since 2017. Irvine, California September 30, 2019 24 WATERSIDE CAPITAL CORPORATION Balance Sheets June 30, 2019 and 2018 June 30, 2019 June 30, 2018 ASSETS Cash $ 8,993 $ 4,624 TOTAL ASSETS $ 8,993 $ 4,624 LIABILITIES & EQUITY Liabilities Current Liabilitites Accounts Payable $ 7,308 $ 6,595 Convertible Note Payable - Roran, net of debt discount 161,838 63,055 Accrued Interest Payable 23,042 163,261 Judgment Payable - 10,427,300 Total Current Liabilities 192,188 10,660,211 Total Liabilities 192,188 10,660,211 Equity Common Stock, $1.00 par value, 10,000,000 authorized, 1,915,548 shares issued and outstanding 1,915,548 1,915,548 Additional Paid-In Capital 15,586,480 15,539,813 Accumulated Deficit (17,685,223 ) (28,110,948 ) Total Equity (183,195 ) (10,655,587 ) TOTAL LIABILITIES & EQUITY $ 8,993 $ 4,624 The accompanying Notes are an integral part of these Financial Statements. See report of Independent Registered Public Accounting Firm. 25 WATERSIDE CAPITAL CORPORATION Statements of Operations For the years ended June 30, 2019 and 2018 June 30 2019 2018 Expense Administrative Expenses $ 66,344 $ 101,309 Interest expense 92,185 39,542 Total Expense 158,529 140,851 Net Loss from Operations (158,529 ) (140,851 ) Gain on Extinguishment of Debt 10,584,254 $ - Net Income (Loss) $ 10,425,725 $ (140,851 ) Weighted Average Number of Common Shares Outstanding- Basic and Diluted 1,915,548 1,915,548 Net Income (Loss) Per Share- Basic and Diluted $ 5.44 $ (0.07 ) The accompanying Notes are an integral part of these Financial Statements. See report of Independent Registered Public Accounting Firm. 26 WATERSIDE CAPITAL CORPORATION Statements of Stockholders’ Deficit For the years ended June 30, 2019 and 2018 Common Stock Additional ($1 Par Value) Paid-in Accumulated Shares Par Value Capital Deficit Total Balance at June 30, 2017 1,915,548 $ 1,915,548 $ 15,479,680 $ (27,970,097 ) $ (10,574,869 ) Beneficial conversion feature - - 60,133 - 60,133 Net loss for the period - - - (140,851 ) (140,851 ) Balance at June 30, 2018 1,915,548 1,915,548 15,539,813 (28,110,948 ) (10,655,587 ) Beneficial conversion feature - - 46,667 - 46,667 Net Income for the period - - - 10,425,725 10,425,725 Balance at June 30, 2019 1,915,548 $ 1,915,548 $ 15,586,480 $ (17,685,223 ) $ (183,195 ) The accompanying Notes are an integral part of these Financial Statements. See report of Independent Registered Public Accounting Firm. 27 WATERSIDE CAPITAL CORPORATION Statements of Cash Flows For the years ended June 30, 2019 and 2018 2019 2018 Cash Flow from Operating Activities Net income (loss) $ 10,425,725 $ (140,851 ) Adjustments to reconcile Net income (loss) to net cash used in operations: Amortization of interest 75,450 23,850 Gain on Extinguishment of Debt (10,584,254 ) - Changes in assets and liabilities Accounts Payable 713 6,595 Accrued Interest Payable 16,735 15,692 Net cash used by operating activities (65,631 ) (94,714 ) Cash flow from Financing Activities Proceeds from convertible note payable 70,000 99,338 Net cash provided by financing activities 70,000 99,338 Net cash increase for period 4,369 4,624 Cash at beginning of period 4,624 - Cash at end of period $ 8,993 $ 4,624 Supplemental disclosure of non-cash financing activity Intrinsic value of embedded beneficial conversion feature on convertible note payable $ 46,667 $ - The accompanying Notes are an integral part of these Financial Statements. See report of Independent Registered Public Accounting Firm. 28 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2019 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 operating 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. The Company has filed with the SEC an Application pursuant to Section 8(f) of the Investment Company Act of 1940 for an order declaring that the Company has ceased to be a registered investment company. In response to that filing, the SEC issued to the Company comments in a letter dated May 16, 2018. The Company responded to those comments with the filing of an Amended Application on June 4, 2018 and most recently on August 26, 2019. As of the date of this Annual Statement, the Company was still working through comments from the SEC in regard to the Amended Application. 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 continues to have 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 previously 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 Notes 3 and 4. 29 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2019 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 2019 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, 2019 do not contain any adjustments for this uncertainty. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES Fiscal Year-End The Company elected June 30 th 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. 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. Convertible Financial Instruments The Company bifurcates conversion options from their host instruments and accounts for them as free standing derivative financial instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under applicable GAAP. When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, discounts are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the instrument. Beneficial conversion feature – The issuance of the convertible debt described in Note 4 generated a beneficial conversion feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is not bifurcated and is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting in a discount on the convertible debt (recorded as a component of additional paid in capital). The BCF is amortized into interest expense over the life of the related debt. Related Parties The Company follows subtopic 850-10 of the FASB Accounting Standards Codification (“ASC”) for the identification of related parties and disclosure of related party transactions. 30 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2019 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 ASC 450-20 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. Management 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, management 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 ASC 740-10-25-13. ASC 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 ASC 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. ASC 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 ASC 740-10-25-13. 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. 31 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2019 Tax 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 Income (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 income (loss) per share is computed by dividing the net income (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 income (loss) per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive. 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. 32 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2019 NOTE 3 – 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. 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. On June 28, 2017, the Receivership was terminated and a final order entered by the Court provided Roran with control of the Company. As of June 30, 2019, the Company’s outstanding judgment payable totaled $0 as the judgment had been satisfied in full. 33 WATERSIDE CAPITAL CORPORATION NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2019 The Company’s outstanding judgment payable owed to the SBA was purchased by Roran from the SBA in July 2017. As such, all amounts due under the outstanding judgment payable were owed to Roran rather than the SBA. Upon purchase, the Company began to accrue interest that was due under the original terms of the judgment payable. The statutory interest rate was 0.094%. The Company satisfied the judgment in full as Roran agreed to forgive the judgment and as of June 30, 2019, recognized a gain on extinguishment of debt of $10,584,254 which is fully offset by NOLs for income tax purposes. 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 of 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. On June 17, 2019, the Company amended its Loan Agreement and Promissory Note with Roran Capital as follows: (i) the total amount to be loaned was increased to $200,000, and (ii) the maturity date was extended to September 19, 2019, and a further extension is being negotiated. As a result of the advances made pursuant to the Loan Agreement, the Company has incurred total obligations of $169,338 as of June 30, 2019. The Company recorded a BCF due the conversion option of $106,800 and the unamortized balance at June 30, 2019 is $7,500. The amount is netted against the note payable balance as a debt discount with the corresponding entry to additional paid-in capital. The debt discount has been amortized as interest expense through the maturity date. NOTE 4 - RELATED PARTY TRANSACTIONS The following individuals and entities have been identified as related parties based on their family affiliation with our CEO and Chairman of the Board: Yitzhak Zelmanovitch Roran Capital LLC The following amounts were owed to related parties, affiliated with the CEO and Chairman of the Board, at the dates indicated: June 30, 2019 Convertible Note Payable $ 161,838 Interest on Convertible Note Payable 23,042 $ 184,880 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. 34 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 2019 and 2018, 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 2017 to serve as the Company’s independent registered public accounting firm.