KES Science & Technology, Inc. and JJS Technologies, LLC
Combined Financial Statements for the
Years Ended October 31, 2020 and 2019
| 1 |
| Independent Auditor’s Report | 3 | |||
| Combined Balance Sheets – Years Ended October 31, 2020 and 2019 | 4 | |||
| Combined Statements of Operations and Stockholders Equity – Years Ended October 31, 2020 and 2019 | 5 | |||
| Combined Statements of Cash Flows – Years Ended October 31, 2020 and 2019 | 6 | |||
| Notes to Combined Financial Statements | 7 |
| 2 |
October 15, 2021
To the Board of Directors and Members KES Science & Technology, Inc.
Report on the Financial Statements
We have audited the accompanying financial statements of KES Science & Technology, Inc. which comprise the statements of financial position as of October 31, 2020 and 2019, and the related statements of activities, changes in members’ capital and cash flows for the years then ended and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of KES Science & Technology, Inc. as of October 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ B. F. Borgers CPA PC
Certified Public Accountants Lakewood, CO
| 3 |
Balance Sheets
| October 31, | ||||||||
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 32,540 | $ | 6,994 | ||||
| Accounts receivable, net of allowance of $2,543 | 391,652 | 596,597 | ||||||
| Inventory | 537,736 | 400,086 | ||||||
| Prepaid Commissions | 67,069 | 35,978 | ||||||
| Total Current Assets | 1,028,997 | 1,039,655 | ||||||
| Property and equipment, net (Note 3) | 322,474 | 422,157 | ||||||
| Other Non-Current Assets | ||||||||
| Notes receivable – related party | 541,818 | 540,248 | ||||||
| Notes receivable – stockholder | 89,810 | 86,674 | ||||||
| Deferred tax asset | 2,556 | 19,303 | ||||||
| Trademark | 5,000 | 5,000 | ||||||
| Total Other Non-current Assets | 639,184 | 651,225 | ||||||
| Total Assets | $ | 1,990,655 | $ | 2,113,037 | ||||
| Liabilities and Stockholder's Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 239,439 | $ | 173,240 | ||||
| Line of Credit | — | 376,550 | ||||||
| Accrued expenses | 132,269 | 105,009 | ||||||
| Current maturities of long-term debt (Note 5) | 65,657 | 65,303 | ||||||
| Paycheck Protection Program | 247,012 | — | ||||||
| Total Current Liabilities | 684,377 | 720,102 | ||||||
| Non-Current Liabilities | ||||||||
| Long term debt, net of current maturities (Note 5) | 503,927 | 569,585 | ||||||
| Total Non-Current Liabilities | 503,927 | 569,585 | ||||||
| Total Liabilities | $ | 1,188,304 | $ | 1,289,687 | ||||
| Stockholder’s Equity | ||||||||
| Common stock, $1 par value; 500 shares authorized; | 500 | 500 | ||||||
| 500 shares issued and outstanding including shares held in treasury | ||||||||
| Treasury Stock, 250 shares at cost | ||||||||
| -200,000 | -200,000 | |||||||
| Retained earnings | 1,001,851 | 1,022,850 | ||||||
| Total Members' Equity | 802,351 | 823,350 | ||||||
| Total Liabilities and Stockholder’s Equity | $ | 1,990,655 | $ | 2,113,037 | ||||
The accompanying notes are an integral part of these financial statements
| 4 |
Combined Statements of Income and Changes in Stockholder’s’ Capital
| For the Year Ended October 31, | ||||||||
| 2020 | 2019 | |||||||
| Sales | $ | 4,524,542 | $ | 3,937,376 | ||||
| Cost of Sales | 2,045,800 | 1,417,438 | ||||||
| Gross Profit | 2,478,742 | 2,519,938 | ||||||
| General and administrative expenses | 2,475,769 | 2,799,300 | ||||||
| Operating income | 2,973 | -279,362 | ||||||
| Other Income (Expense) Gain on sale of equipment | — | 14,213 | ||||||
| Interest Expense | (40,701 | ) | (49,275 | ) | ||||
| Interest Income | 8,583 | 12,932 | ||||||
| Miscellaneous Income | 24,893 | 2,767 | ||||||
| Income tax expense | (16,747 | ) | (14,418 | ) | ||||
| Total Other Income (Expense) | (23,972 | ) | (33,781 | ) | ||||
| Net Income (Loss) | (20,999 | ) | (313,143 | ) | ||||
| Stockholder’s Equity, Beginning of year | 823,350 | 1,136,493 | ||||||
| Stockholder’s Equity, End of year | $ | 802,351 | $ | 823,350 | ||||
The accompanying notes are an integral part of these financial statements.
| 5 |
Cash Flows
| For the Year Ended October 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash Flows From Operating Activities Net Income | $ | (20,999 | ) | (313,143 | ) | |||
| Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization | 111,187 | 4,003,187 | ||||||
| Gain on sale of equipment | — | 15,287 | ||||||
| Deferred income taxes Changes in operating assets and liabilities: Accounts receivable | 16,747 204,945 | 14,391 (235,805) | ||||||
| Inventory | (137,650 | ) | (12,875 | ) | ||||
| Prepaid expenses | (31,091 | ) | (18,906 | ) | ||||
| Accounts payable | 66,199 | (3,634 | ) | |||||
| Accrued expenses | 27,260 | 47,720 | ||||||
| Net cash provided by (used in) operating activities | 236,598 | (103,778 | ) | |||||
| Cash Flows from Investing Activities Purchases and disposal of property and equipment | (11,504 | ) | (24,163 | ) | ||||
| Net change in note receivable –stockholder | (3,136 | ) | (1,523 | ) | ||||
| Net change in note receivable – related party Proceeds from sale of equipment Net cash provided by (used in investing activities) | (1,570) - (16,210) | (14,263) - (39,949) | ||||||
| Cash Flows from Financing Activities Net borrowings (payments) on line of credit | (376,550 | ) | 226,257 | |||||
| Principle payments on long term notes payable | (65,304 | ) | (76,912 | ) | ||||
| Net barrowings on Paycheck Protection Program | 247,012 | — | ||||||
| Net cash provided by (used in) financing activities | (194,842 | ) | 149,345 | |||||
| Net change in cash | 25,546 | 5,618 | ||||||
| Cash, beginning of year | 6,994 | 1,376 | ||||||
| Cash, end of year | $ | 32,540 | $ | 6,994 | ||||
The accompanying notes are an integral part of these financial statements
| 6 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - KES Science & Technology, Inc. (the "Company") is principally engaged in the manufacturing of misting systems. The Company extends credit to many of its customers, substantially allof whom are in the food services industry. The Company sells its products throughout the United States, Canada, and Europe.
Financial Estimates - 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 date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cost of Sales Recognition - Cost related to sales are recorded when control is transferred to the customer.
Concentrations - Financial instruments that potentially subject the Company to credit risk consist principally of sales and trade account receivables. At October 31, 2020 and 2019, one customer accounted for 10% and 13% of sales. At October 31, 2020 and 2019, one customer accounted for 10% and 12% of accounts receivable.
Inventory - Inventory is valued at the lower of cost (first-in, first-out method) or net realizable value with estimates of quantities and prices used in some cases.
Accounts Receivable - An allowance for doubtful accounts has been established for possible losses on the collection of accounts based upon periodic review of credit risks. Customers not making paymentsin accordance with terms offered, or historical practices, are determined to be past due. Accounts are written off against the allowance when management determines that probability of collection is remote. Management deems an account to be uncollectible when all collection efforts have failed or the customer is bankrupt.
Property and Equipment - Property and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method and accelerated method. Routine repairs and maintenance are charged to expense when incurred. When property and equipment are retired or sold,the related cost and accumulated depreciation are removed from the respective accounts, and the resulting gains and losses are included in income.
The Company reviews for impairment of long-lived assets in accordance with accounting standards. These standards require companies to determine if changes in circumstances indicate that the carrying amount of its long-lived assets may not be recoverable. If a change in circumstances warrants such an evaluation, undiscounted future cash flows from the use and ultimate disposition of the asset, as well as respective market values, are estimated to determine if an impairment exists. Management believes that there has been no impairment of the carrying value of its long-lived assets at October 31, 2020.
Variable Interest Entities - The Company has elected not to consolidate a Variable Interest Entity under the simplified accounting treatment allowable by generally accepted accounting principles in the United States of America.
Advertising - Advertising costs are expensed as incurred. Advertising expense was $66,898 and
$81,087 for the years 2020 and 2019.
| 7 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Shipping and Handling Costs - Shipping and handling costs for purchases are included in cost of sales on the statements of income and retained earnings.
Uncertainty in Tax Positions - The Company has adopted accounting rules that prescribe when to recognize, and how to measure, the financial statement effects of income tax positions taken, or expectedto be taken, on its income tax returns. These rules require management to evaluate the likelihood that, upon examination by relevant taxing jurisdictions, those income tax positions would be sustained. Based on that evaluation, the Company only recognizes the maximum benefit of each income tax position that ismore than 50% likely of being sustained. To the extent that all, or a portion of, the benefits of an income tax position are not recorded, a liability would be recorded for the uncertain tax position, along with any interest and penalties that would result from disallowance of the position. Should any such penalties and interest be incurred, they would be recorded as operating expenses.
Based on the results of management's evaluation, no liability has been recorded in the accompanyingbalance sheets for uncertain tax positions.
Reclassifications - Certain amounts in the 2019 financial statements have been reclassified to conformto the 2020 financial statement presentation.
Recently Issued Accounting Standards Not Yet Adopted - In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), which will require the recognition of right-to-use assets and lease liabilities for leases previously classified as operating leases by lessees.
Since the issuance of this standard, there have been several additional standards issued relative to this topic. These standards will be effective for the calendar year ending December 31, 2021. Early
application will be permitted. The Company is currently in the process of evaluating the impact of adoptionof these standards on the financial statements.
NOTE 2 - REVENUE RECOGNITION
The Financial Accounting Standards Board (FASB) issued new guidance that created Topic 606, Revenue from Contracts with Customers, in the Accounting Standards Codification (ASC). Topic 606 supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount
that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidance also added Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers, to the ASC to require the deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to the new Topic 606 and Subtopic 340-40 as the "new guidance."
The Company adopted the requirements of the new guidance as of November 1, 2019, utilizing the modified retrospective method of transition. Adoption of the new guidance did not require any significant changes to the Company’s accounting policies for revenue recognition, trade and other receivables, contract costs, contract liabilities, or deferred costs. Accordingly, there has been no adjustment to retained earnings or any other balance sheet accounts as of November 1, 2019, to reflect adoption of the new guidance.
The Company derives its revenue primarily from the sale of misting systems. Revenue is recognized when control of these products is transferred to its customers, in an amount that reflects the considerationthe
| 8 |
NOTE 2 - REVENUE RECOGNITION (CONTINUED)
Company expects to be entitled to in exchange for those products. Sales and other taxes the Company collects concurrent with the revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue. Incidental items that are immaterialin the context of the contract are recognized as expense. Costs incurred to obtain a contract are expensed as incurred when the amortization period is less than a year.
The Company’s contracts are cancelable at any time by either party. The Company’s standard terms are 30 days, but may vary based on specific contract terms negotiated, and the accounts are aged based on invoice date. The Company does not have any significant financing components.
Revenue from performance obligations satisfied at a point in time consists of sales of misting systems. These goods are sold to end customers which include produce grocers, convenience stores, nurseries and other plant and produce watering companies. For performance obligations related to sales of misting systems, control transfers to the customer at a point in time. The Company’s principal terms of sale are FOB Shipping Point, and the Company transfers control and records revenue for product sales upon shipment to the customer.
NOTE 3 - PROPERTY AND EQUIPMENT
| 2020 | 2019 | |||||||
| Buildings and improvements | $ | 355,377 | $ | 355,377 | ||||
| Land | 60,000 | 60,000 | ||||||
| Computer equipment | 134,082 | 122,449 | ||||||
| Furniture and fixtures | 139,291 | 139,291 | ||||||
| Machinery and equipment | 91,614 | 80,254 | ||||||
| Vehicles | 475,544 | 487,011 | ||||||
| Total cost | 1,255,908 | 1,244,382 | ||||||
| Less accumulated depreciation | 933,434 | 822,225 | ||||||
| $ | 322,474 | $ | 422,157 | |||||
Depreciation expense for the years 2020 and 2019 was $66,544 and $69,969.
NOTE 4 - LINE OF CREDIT
As of October 31, 2020, the Company had a $600,000 line of credit available with a financial institution. Interest was payable at the bank's prime rate (3.25% at October 31, 2020). The line of credit is collateralized by substantially all assets of the Company and is guaranteed by the Company's stockholder and two related companies. The line of credit was renewed on June 20, 2020 under substantially the same terms and matures on June 20, 2021. Outstanding borrowings on the line of credit at October 31, 2020 and 2019 were $0 and $376,550.
| 9 |
| NOTE 5 - NOTES PAYABLE | ||||||||
| 2020 | 2019 | |||||||
| Note payable to a bank requiring
monthly installments of $3,449 including interest at a rate of 4.35%. A balloon payment of the balance and any accrued interest is due upon maturity in May 2034. The loan is | ||||||||
| secured by land, a building, and the personal guarantee of two related companies. | $ | 422,325 | $ | 444,502 | ||||
| Note payable to a bank in monthly installments of $863 including interest | ||||||||
| at a rate of 4.54% through August 2023. A vehicle is pledged as collateral for the note. | 27,470 | 36,354 | ||||||
| Note payable to a bank in monthly installments of $881 including interest | ||||||||
| at a rate of 3.99% through April 2025. A vehicle is pledged as collateral for the note. | 42,574 | 51,266 | ||||||
| Note payable to a bank in monthly installments of $511 including interest | ||||||||
| at a rate of 2.90% though June 2023. A vehicle is pledged as collateral for the note. | 21,293 | 26,718 | ||||||
| Note payable to a bank in monthly installments of $1,119 including | ||||||||
| interest at a rate of 4.49% through December 2023. A vehicle is pledged as collateral for the note. | 39,482 | 50,861 | ||||||
| Note payable to bank in monthly installments of $542 including interest | ||||||||
| at a rate of 2.99% through March 2020. A vehicle is pledged as collateral for the note. | — | 2,689 | ||||||
| Note payable to a bank in monthly installments of $582 including interest | ||||||||
| at a rate of 4.69% through April 2023. A vehicle is pledged as collateral for the note. | 16,440 | 22,498 | ||||||
| 569,584 | 634,888 | |||||||
| Current maturities of long-term notes payable | 65,657 | 65,303 | ||||||
| $ | 503,927 | $ | 569,585 | |||||
Maturities of long-term notes payable over the subsequent five years and thereafter are as follows:
| 2021 | $ | 65,657 | |||
| 2022 | 68,180 | ||||
| 2023 | 68,149 | ||||
| 2024 | 40,700 | ||||
| 2025 | 31,895 | ||||
| Thereafter | 295,002 | ||||
| $ | 569,584 |
| 10 |
NOTE 6 - PAYCHECK PROTECTION PROGRAM LOAN
In April 2020, the Company received loan proceeds in the amount of $247,012 under the Paycheck Protection Program (“PPP”) which was established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). PPP loans and accrued interest are forgivable after a “covered period” as long as the borrower meets certain criteria. Any unforgiven portion of the PPP loan is payable over two or five years at an interest rate of 1%, with a deferral of payments for 10 months after the end of the covered period. The Company intends to apply for forgiveness within the required time allowed which is 10 months after the end of the covered period.
To the extent that the Company is not granted forgiveness, the Company will be required to pay interest on the PPP loan at a rate of 1% per annum. If the application for forgiveness is not made within 10 months of the end of the covered period, payments of principal and interest will be required through thematurity date of April 2022. The terms of the loan provide for customary events of default, including payment defaults, breach of representation of warranties, and insolvency events. The PPP loan may be accelerated upon the occurrence of a default event.
| NOTE 7 - INCOME TAXES | ||||||||
| The provision for income taxes consist of the following components: | ||||||||
| 2020 | 2019 | |||||||
Current tax | $ | — | $ | 27 | ||||
| Deferred tax | 16,747 | 14,391 | ||||||
| Total | $ | 16,747 | $ | 14,418 |
Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The deferred tax assets are primarily attributable to a net operating loss created by the change in tax basis in accordance with the Tax Cuts and Jobs Act (TCJA) of 2017 and accrued trade expenses that are deductible when paid. The deferred tax liabilities are primarily attributable to the use of accelerated methods of depreciation of property and equipment and trade receivables that are not taxable until collected. The tax provision differs from the expense that would result from applying statutory rates to income before income taxes. The primary difference results from permanent differences in deducting certain business expenses for financial reporting, but not for income tax purposes.
As of October 31, 2020, the Company has federal operating loss carry forwards totaling $163,771 that may be offset against future taxable income. Under the TCJA, these loss carry forwards do not expire.
Net deferred income taxes recognized as noncurrent assets (liabilities) in the balance sheet as of October 31, 2020 and 2019 were as follows:
| 2020 | 2019 | |||||||
Total deferred tax asset | $ | 138,146 | $ | 208,755 | ||||
| Total deferred tax liability | (135,590 | ) | (189,452 | ) | ||||
| Net deferred tax asset | $ | 2,556 | $ | 19,303 | ||||
| 11 |
NOTE 7 - INCOME TAXES - CONTINUED
Both federal and state deferred tax amounts reflected in the table above were net assets at October 31,2020 and 2019. Management has determined that no valuation allowance related to deferred tax assetsis necessary at October 31, 2020 and 2019.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company paid royalties to a related party in the amount of $65,000 and $55,000 during the years ended October 31, 2020 and 2019. The Company had sales of $397,827 and $129,909 to a related party during the years ended October 31, 2020 and 2019. Amounts due from this related party that are includedin trade accounts receivable were $20,459 and $41,245 at October 31, 2020 and 2019.
Note receivable - stockholder represents an unsecured demand note from the Company's stockholder. Interest is imputed at the Company's borrowing rate and capitalized (1.00% at October 31, 2020).
Interestincome related to this note was $769 and $1,523 for the years 2020 and 2019.
Note receivable - related party represents an unsecured demand note to a company of which the stockholder is the majority owner. Interest is imputed at the Company's borrowing rate and capitalized (1.00% at October 31, 2020). Interest income related to this note was $1,569 and $14,263 for the years2020 and 2019.
NOTE 9 - LEASE COMMITMENTS
The Company leases certain office equipment under agreements that expire in 2020. Rental expenseunder these agreements was $6,867 and $7,730 for the years 2020 and 2019. Future minimum leasepayments for the year 2020 total $1,740.
NOTE 10 - VARIABLE INTEREST ENTITY
Management has determined that KES Air Technologies is a variable interest entity in which the Company holds a variable interest in the form of a note receivable and is the primary beneficiary of such variable interest. Carrying amounts classified as an asset on the Company's balance sheet totals $541,818 and
$540,248 resulting from its involvement with KES Air Technologies under common control at October 31, 2020 and 2019. The maximum exposure to loss resulting from involvement with KES Air Technologies is $541,818 and $540,248 at October 31, 2020 and 2019.
NOTE 11 - UNCERTAINTIES
The COVID-19 pandemic, whose effects first became known in early 2020, is having a substantial impacton the economy and the normal operations of many businesses. The extent of the future impact of COVID-19 on the Company’s operations, financial performance and financial condition will depend on certain developments, including the availability and distribution of the vaccine and the duration and spread of the outbreak, which at present cannot be determined.
| 12 |
NOTE 12: BASIS OF CONSOLIDATION
KES Science & Technology, Inc. and JJS Technologies, LLC financial statements are consolidated together in the combined financial statements.
NOTE 13: SUBSEQUENT EVENTS
No subsequent events occurred that would change the financials as of the issuance date of these financials.
| 13 |
KES Science & Technology, Inc. and JJS Technologies, LLC
Combined Financial Statements for the
Quarter Ended July 31, 2021
| 14 |
Index to Financial Statements
| Combined Balance Sheets – 9 months ended period July 31, 2020 and July 31, 2021 | 16 | |||
| Combined Statements of Operations and Stockholders Equity – 9 months ended period July 31, 2020 and July 31, 2021 | 17 | |||
| Combined Statements of Cash Flows – 9 months ended period July 31, 2020 and July 31, 2021 | 18 | |||
| Notes to Combined Financial Statements | 19 |
| 15 |
Combined Balance Sheets
| For the Period Ended | ||||||||
| July 31, 2020 | July 31, 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | — | $ | — | ||||
| Accounts receivable, net of allowance of $2,543 | 365,040 | 263,548 | ||||||
| Inventory | 631,784 | 622,359 | ||||||
| Prepaid Commissions | 71,241 | 74,178 | ||||||
| Total Current Assets | 1,068,064 | 960,085 | ||||||
| Property and equipment, net (Note 3) | 380,997 | 347,510 | ||||||
| Other Non-Current Assets | ||||||||
| Notes receivable – related party | 535,810 | 546,429 | ||||||
| Notes receivable – stockholder | 76,891 | 78,421 | ||||||
| Deferred tax asset | 1,302 | 2,556 | ||||||
| Total Other Non-current Assets | 614,003 | 627,406 | ||||||
| Total Assets | $ | 2,063,065 | $ | 1,935,002 | ||||
| Liabilities and Stockholder's Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 203,019 | $ | 192,228 | ||||
| Outstanding Checks | 4,413 | 24,869 | ||||||
| Line of Credit | 57,361 | 111,650 | ||||||
| Accrued expenses | 41,992 | 47,720 | ||||||
| Current maturities of long-term debt (Note 5) | 63,698 | 65,657 | ||||||
| Paycheck Protection Program | 247,012 | — | ||||||
| Total Current Liabilities | 617,494 | 442,124 | ||||||
| Non-Current Liabilities | ||||||||
| Long term debt, net of current maturities (Note 5) | 520,482 | 458,978 | ||||||
| Total Non-Current Liabilities | 520,482 | 458,978 | ||||||
| Total Liabilities | $ | 1,137,976 | $ | 901,103 | ||||
| Stockholder’s Equity | ||||||||
| Common stock, $1 par value; 500 shares authorized; | 500 | 500 | ||||||
| 500 shares issued and outstanding including shares held in treasury | ||||||||
| Treasury Stock, 250 shares at cost | ||||||||
| (200,000 | ) | (200,000 | ) | |||||
| Retained earnings | 1,124,589 | 1,233,399 | ||||||
| Total Stockholder’s Equity | 925,089 | 1,033,899 | ||||||
| Total Liabilities and Stockholder’s Equity | $ | 2,063,065 | $ | 1,935,002 | ||||
| 16 |
Combined Statements of Income and Changes in Stockholder’s’ Capital
| For the 9 Months Period Ended | ||||||||
| July 31, 2020 | July 31, 2021 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Sales | $ | 3,287,142 | $ | 4,043,343 | ||||
| Cost of Sales | 1,292,597 | 1,731,609 | ||||||
Gross Profit | 1,994,545 | 2,311,734 | ||||||
| General and administrative expenses | 1,989,846 | 2,340,487 | ||||||
| Operating income | 4,699 | (28,753 | ) | |||||
Other Income (Expense) Gain on sale of equipment | — | — | ||||||
| Interest Expense | (33,184 | ) | (19,470 | ) | ||||
| Miscellaneous Income | 18,054 | 261,781 | ||||||
| Income tax expense | (750 | ) | — | |||||
| Total Other Income (Expense) | 15,879 | 242,311 | ||||||
| Net Income (Loss) | (11,180 | ) | 213,558 | |||||
| Stockholder’s Equity, Beginning of year 10/31/2020 | 936,269 | 820,341 | ||||||
| Stockholder’s Equity, End of year | $ | 925,089 | $ | 1,033,899 | ||||
The accompanying notes are an integral part of these financial statements.
| 17 |
Combined Cash Flows
| For the 9 Month Period Ended | ||||
| July 31, 2021 | ||||
| (Unaudited) | ||||
| Cash Flows From Operating Activities | 213,558 | |||
| Net Income | (104,749 | ) | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||
| Depreciation and amortization | 67,816 | |||
| Gain on sale of equipment | — | |||
| Deferred income taxes | (1,254 | ) | ||
| Changes in operating assets and liabilities: | ||||
| Accounts receivable | 101,492 | |||
| Inventory | 9,425 | |||
| Prepaid expenses | (2,937 | ) | ||
| Accounts payable | (10,791 | ) | ||
| Outstanding Checks | 20,456 | |||
| Accrued expenses | 5,728 | |||
| Net cash provided by (used in) operating activities | 298,744 | |||
| Cash Flows from Investing Activities | ||||
| Purchases and disposal of property and equipment | (34,329 | ) | ||
| Net change in note receivable –stockholder | (1,530 | ) | ||
| Net change in note receivable – related party | (10,618 | ) | ||
| Net cash provided by (used in investing activities) | (46,477 | ) | ||
| Cash Flows from Financing Activities | ||||
| Net borrowings (payments) on line of credit | 54,289 | |||
| Principle payments on long term notes payable | (247,012 | ) | ||
| Net barrowings on Paycheck Protection Program | (59,545 | ) | ||
| Net cash provided by (used in) financing activities | (252,267 | ) | ||
| Net change in cash | — | |||
| Cash, beginning of year | — | |||
| Cash, end of year | — | |||
| 18 |
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - KES Science & Technology, Inc. (the "Company") is principally engaged in the manufacturing of misting systems. The Company extends credit to many of its customers, substantially all of whom are in the food services industry. The Company sells its products throughout the United States, Canada, and Europe.
Financial Estimates - 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 assetsand liabilities at the date of the financial statements, and the reported amounts of revenue and expensesduring the reporting period. Actual results could differ from those estimates.
Cost of Sales Recognition - Cost related to sales are recorded when control is transferred to the customer.
Concentrations - Financial instruments that potentially subject the Company to credit risk consist principally of sales and trade account receivables. At July 31, 2020 and July 31, 2021, one customer accounted for 10% and 13% of sales. At July 31, 2020 and July 31, 2021, one customer accounted for 10%and 12% of accounts receivable.
Inventory - Inventory is valued at the lower of cost (first-in, first-out method) or net realizable value with estimates of quantities and prices used in some cases.
Accounts Receivable - An allowance for doubtful accounts has been established for possible losses on the collection of accounts based upon periodic review of credit risks. Customers not making paymentsin accordance with terms offered, or historical practices, are determined to be past due. Accounts are written off against the allowance when management determines that probability of collection is remote.
Management deems an account to be uncollectible when all collection efforts have failed or the customer is bankrupt.
Property and Equipment - Property and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method and accelerated method. Routine repairs and maintenance are charged to expense when incurred. When property and equipment are retired or sold, the related cost and accumulated depreciation are removed from the respective accounts, and the resulting gains and losses are included in income.
The Company reviews for impairment of long-lived assets in accordance with accounting standards. These standards require companies to determine if changes in circumstances indicate that the carrying amount of its long-lived assets may not be recoverable. If a change in circumstances warrants such an evaluation, undiscounted future cash flows from the use and ultimate disposition of the asset, as well as respective market values, are estimated to determine if an impairment exists. Management believes thatthere has been no impairment of the carrying value of its long-lived assets at July 31, 2020.
Variable Interest Entities - The Company has elected not to consolidate a Variable Interest Entity under the simplified accounting treatment allowable by generally accepted accounting principles in the United States of America.
| 19 |
Advertising - Advertising costs are expensed as incurred. Advertising expense was $58,758 and $71,409 for the 9 month period July 31, 2020 and July 31, 2021
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Shipping and Handling Costs - Shipping and handling costs for purchases are included in cost of sales on the statements of income and retained earnings.
Uncertainty in Tax Positions - The Company has adopted accounting rules that prescribe when to recognize, and how to measure, the financial statement effects of income tax positions taken, or expectedto be taken, on its income tax returns. These rules require management to evaluate the likelihood that, upon examination by relevant taxing jurisdictions, those income tax positions would be sustained. Based on that evaluation, the Company only recognizes the maximum benefit of each income tax position that ismore than 50% likely of being sustained. To the extent that all, or a portion of, the benefits of an income tax position are not recorded, a liability would be recorded for the uncertain tax position, along with any interest and penalties that would result from disallowance of the position.
Should any such penalties and interest be incurred, they would be recorded as operating expenses.
Based on the results of management's evaluation, no liability has been recorded in the accompanying balance sheets for uncertain tax positions.
Reclassifications - Certain amounts in the July 31, 2021 financial statements have been reclassified to conformto the 2020 financial statement presentation.
Recently Issued Accounting Standards Not Yet Adopted - In February 2016, the Financial AccountingStandards Board ("FASB") issued ASU 2016-02, Leases (Topic 842), which will require the recognition ofright-to-use assets and lease liabilities for leases previously classified as operating leases by lessees.
Since the issuance of this standard, there have been several additional standards issued relative to this topic. These standards will be effective for the calendar year ending December 31, 2021. Early application will be permitted. The Company is currently in the process of evaluating the impact of adoptionof these standards on the financial statements.
NOTE 2 - REVENUE RECOGNITION
The Financial Accounting Standards Board (FASB) issued new guidance that created Topic 606, Revenue from Contracts with Customers, in the Accounting Standards Codification (ASC). Topic 606 supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount
that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The new guidance also added Subtopic 340-40, Other Assets and Deferred Costs— Contractswith Customers, to the ASC to require the deferral of incremental costs of obtaining a contract with a customer. Collectively, we refer to the new Topic 606 and Subtopic 340-40 as the "new guidance."
The Company adopted the requirements of the new guidance as of November 1, 2020, utilizing the modified retrospective method of transition. Adoption of the new guidance did not require any
| 20 |
significantchanges to the Company’s accounting policies for revenue recognition, trade and other receivables, contract costs, contract liabilities, or deferred costs. Accordingly, there has been no adjustment to retained earnings or any other balance sheet accounts as of July 31, 2021, to reflect adoption of the new guidance.
The Company derives its revenue primarily from the sale of misting systems. Revenue is recognized when control of these products is transferred to its customers, in an amount that reflects the considerationthe
NOTE 2 - REVENUE RECOGNITION (CONTINUED)
Company expects to be entitled to in exchange for those products. Sales and other taxes the Company collects concurrent with the revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue. Incidental items that are immaterialin the context of the contract are recognized as expense. Costs incurred to obtain a contract are expensed as incurred when the amortization period is less than a year.
The Company’s contracts are cancelable at any time by either party. The Company’s standard termsare 30 days, but may vary based on specific contract terms negotiated, and the accounts are aged based on invoice date. The Company does not have any significant financing components.
Revenue from performance obligations satisfied at a point in time consists of sales of misting systems. These goods are sold to end customers which include produce grocers, convenience stores, nurseries and other plant and produce watering companies. For performance obligations related to sales of mistingsystems, control transfers to the customer at a point in time. The Company’s principal terms of sale are FOB Shipping Point, and the Company transfers control and records revenue for product sales upon shipment to the customer.
| NOTE 3 - PROPERTY AND EQUIPMENT | ||||||||
| July 31, 2020 | July 31, 2021 | |||||||
Buildings and improvements | $ | 357,372 | $ | 365,587 | ||||
| Land | 60,000 | 60,000 | ||||||
| Computer equipment | 128,470 | 133,424 | ||||||
| Furniture and fixtures | 139,948 | 146,814 | ||||||
| Machinery and equipment | 80,254 | 94,548 | ||||||
| Vehicles | 487,011 | 487,011 | ||||||
| Total cost | 1,253,055 | 1,287,384 | ||||||
| Less accumulated depreciation | 872,058 | 939,874 | ||||||
| $ | 380,997 | $ | 347,510 |
Depreciation expense for the 9 month periods July 31, 2020 and July 31, 2021 was $49,811 and $50,193.
| 21 |
NOTE 4 - LINE OF CREDIT
As of July 31, 2020, the Company had a $600,000 line of credit available with a financial institution. Interest was payable at the bank's prime rate (3.25% at July 31, 2020). The line of credit is collateralized by substantially all assets of the Company and is guaranteed by the Company's stockholderand two related companies. The line of credit was renewed on June 20, 2020 under substantially the same terms and matures on June 20, 2021. Outstanding borrowings on the line of credit at July 31, 2020 and July 31, 2021 were $57,361 and $111,650.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company paid royalties to a related party in the amount of $0 and $0 during the years ended July 31, 2020 and July 31, 2021. The Company had sales of $535,811 and $546,429 to a related party during the years ended July 31, 2020 and July 31, 2021. Amounts due from this related party were
$57,802 and $60,739 at July 31, 2020 and July 31, 2021.
Note receivable - stockholder represents an unsecured demand note from the Company's stockholder. Interest is imputed at the Company's borrowing rate and capitalized (1.00% at July 31, 2020). Interest income related to this note was $76,891 and $78,421 for the 9 month periods July 31, 2020 and July 31, 2021.
Note receivable - related party represents an unsecured demand note to a company of which the stockholder is the majority owner. Interest is imputed at the Company's borrowing rate and capitalized (1.00% at July 31, 2020). Interest income related to this note was $0 and $0 for the 9 month periods July 31, 2020 and July 31, 2021.
NOTE 6 - LEASE COMMITMENTS
The Company leases certain office equipment under agreements that expire in 2020. Rental expenseunderthese agreements was $4,667 and $2,890 for the 9 month periods July 31, 2020 and July 31, 2021. Future minimum leasepayments total $0.
NOTE 7 - VARIABLE INTEREST ENTITY
Management has determined that KES Air Technologies is a variable interest entity in which the Company holds a variable interest in the form of a note receivable and is the primary beneficiary of such variable interest. Carrying amounts classified as an asset on the Company's balance sheet totals $535,811 and
$546,429, resulting from its involvement with KES Air Technologies under common control at July 31, 2020 and July 31, 2021. The maximum exposure to loss resulting from involvement with KES Air Technologies is $535,811 and $546,429 at July 31, 2020 and July 31, 2021.
NOTE 8 - UNCERTAINTIES
The COVID-19 pandemic, whose effects first became known in early 2020, is having a substantial impacton the economy and the normal operations of many businesses. The extent of the future impact of COVID-19 on the Company’s operations, financial performance and financial condition will depend on certain developments, including the availability and distribution of the vaccine and the duration and spread of the outbreak, which at present cannot be determined.
| 22 |
NOTE 9: BASIS OF CONSOLIDATION
KES Science & Technology, Inc. and JJS Technologies, LLC financial statements are consolidated together in the combined financial statements.
NOTE 10: SUBSEQUENT EVENTS
No subsequent events occurred that would change the financials as of the issuance date of these financials.
| 23 |