Attached files
file | filename |
---|---|
8-K/A - CURRENT REPORT - Environmental Packaging Technologies Holdings, Inc. | epti8ka_jun92017.htm |
Exhibit 99.2
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
-1-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONTENTS
|
Page
|
|
|
Consolidated
Financial Statements
|
3
|
Consolidated
Balance Sheets
|
3
|
Consolidated
Statements of Operations and Comprehensive
(Loss)/Income
|
4
|
Consolidated
Statements of Changes in Stockholders’ Deficit
|
5
|
Consolidated
Statements of Cash Flows
|
6
|
|
|
Notes
to the Consolidated Financial Statements
|
7-21
|
Management
Discussion and Analysis
|
|
|
22-23
|
-2-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
March 31,
|
December 31,
|
|
2017
|
2016
|
|
|
|
Assets
|
|
|
Cash
|
$300,127
|
$814,778
|
Accounts
receivable, net
|
4,150,729
|
2,878,469
|
Inventories,
net
|
1,619,444
|
2,217,674
|
Prepaid expense and
other current assets
|
390,048
|
92,163
|
Total
Current Assets
|
6,460,348
|
6,003,084
|
Fixed Assets,
net
|
115,988
|
-
|
Total
Assets
|
$6,576,336
|
$6,003,084
|
|
|
|
Liabilities
and Stockholders' Deficit
|
|
|
Current
liabilities
|
|
|
Accounts
payable
|
$3,404,407
|
$3,026,480
|
Accounts payable -
related parties
|
137,227
|
130,552
|
Accrued
liabilities
|
1,372,864
|
1,141,849
|
Short-term
notes
|
4,805,000
|
4,720,000
|
Advance from
customer
|
497,689
|
497,689
|
Other short-term
liabilities
|
996,220
|
418,500
|
Short-term
investment loan
|
13,964,664
|
13,964,664
|
Total
Current Liabilities
|
25,178,071
|
23,899,734
|
Long-term
investment loan
|
-
|
-
|
Other long-term
liabilities
|
77,971
|
48,333
|
Total
Liabilities
|
25,256,042
|
23,948,067
|
|
|
|
Commitments and
Contingencies (Note 15)
|
|
|
|
|
|
Stockholders'
Deficit
|
|
|
Preferred stock,
$.001 par value; authorized shares - 1,000,000; no shares issued or
outstanding at March 31, 2017; no shares issued and outstanding at
March 31, 2016
|
-
|
-
|
Additional paid-in
capital - Preferred Stock
|
-
|
-
|
Common stock, $.001
par value; authorized shares - 9,000,000; 2,994,526 shares issued
and outstanding at March 31, 2017 and 2,919,526 shares issued and
outstanding at December 31, 2016
|
40,307
|
40,232
|
Additional paid-in
capital - Common Stock
|
25,422,750
|
25,422,750
|
Accumulated
deficit
|
(44,151,925)
|
(43,460,290)
|
Accumulated other
comprehensive income
|
9,162
|
52,325
|
Total
Stockholders' Deficit
|
(18,679,706)
|
(17,944,983)
|
Total
Liabilities and Stockholders' Deficit
|
$6,576,336
|
$6,003,084
|
The accompanying
notes are an integral part of these consolidated financial
statements.
-3-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) /
INCOME
|
For
the three months ended March 31,
|
|
|
2017
|
2016
|
|
|
|
Revenues
|
$4,963,314
|
$3,937,153
|
|
|
|
Cost of goods
sold
|
(4,288,277)
|
(758,663)
|
|
|
|
Gross
profit
|
675,037
|
3,178,490
|
|
|
|
Selling, general
and administrative expenses
|
(1,030,829)
|
(1,019,235)
|
|
|
|
Operating
(loss) income
|
(355,792)
|
2,159,255
|
|
|
|
Interest and
finance expense, net
|
(310,968)
|
(142,495)
|
Amortization
expense
|
(5,007)
|
(116,010)
|
Other
income
|
48,727
|
-
|
Other
expenses
|
17,571
|
28,790
|
Other
taxes
|
(47,545)
|
(12,020)
|
(Loss)
Income before income taxes
|
(653,014)
|
1,917,520
|
|
|
|
Income tax benefit
(expense)
|
21,731
|
(221,563)
|
|
|
|
Net
(loss) / income
|
$(631,283)
|
$1,695,957
|
|
|
|
Comprehensive
(loss) / income
|
|
|
Net (loss) /
income
|
$(631,283)
|
$1,695,957
|
Foreign currency
translation adjustments
|
43,163
|
(69,743)
|
|
|
|
Comprehensive
(loss) / income
|
$(588,120)
|
$1,626,214
|
|
|
|
Weighted
average shares outstanding (basic)
|
2,945,650
|
2,734,526
|
Weighted
average shares outstanding (dilutive)
|
3,283,363
|
2,884,526
|
|
|
|
Earnings
(loss) per share (primary)
|
$(0.21)
|
$0.62
|
Earnings
(loss) per share (dilutive)
|
$(0.19)
|
$0.59
|
The accompanying
notes are an integral part of these consolidated financial
statements.
-4-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
DEFICIT
|
Preferred
Stock
|
Additional
Paid-in Capital
|
Common
Stock
|
Additional
Paid-in Capital - Common Stock
|
Obligation
to issue Shares
|
Accumulated
Deficit
|
Accumulated
Other Comprehensive Income
|
Total
Stockholders' Deficit
|
||
|
Shares
|
Amount
|
|
Shares
|
Amount
|
|
|
|
|
|
Balance as of
December 31, 2015
|
189,920
|
$190
|
$18,991,834
|
376,897
|
$37,690
|
$6,430,726
|
$2,418
|
$(43,280,632)
|
$72,574
|
$(17,745,200)
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
preferred shares to common shares
|
(189,920)
|
(190)
|
(18,991,834)
|
1,899,183
|
1,899
|
18,992,024
|
(1,899)
|
-
|
-
|
-
|
Issuance of shares
under short-term debt agreement
|
-
|
-
|
-
|
318,446
|
318
|
-
|
(318)
|
-
|
-
|
-
|
Issuance of shares
for payment of expenses
|
-
|
-
|
-
|
325,000
|
325
|
-
|
(201)
|
-
|
-
|
124
|
Foreign currency
translation
|
-
|
-
|
|
-
|
-
|
-
|
-
|
-
|
(20,249)
|
(20,249)
|
Net (loss) for the
year ended December 31, 2016
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(179,658)
|
-
|
(179,658)
|
|
|
|
|
|
|
|
|
|
|
-
|
Balance as of
December 31, 2016
|
-
|
$-
|
$-
|
2,919,526
|
$40,232
|
$25,422,750
|
$-
|
$(43,460,290)
|
$52,325
|
$(17,944,983)
|
Issuance of shares
for payment of expenses
|
-
|
-
|
-
|
75,000
|
75
|
-
|
-
|
-
|
-
|
75
|
Foreign currency
translation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(43,163)
|
(43,163)
|
Prior Period
Adjustments
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(60,352)(1)
|
-
|
(60,352)
|
Net loss for the
quarter ended March 31, 2017
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(631,283)
|
-
|
(631,283)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March
31, 2017
|
-
|
$-
|
$-
|
2,994,526
|
$40,307
|
$25,422,750
|
$-
|
$(44,151,925)
|
$9,162
|
$(18,679,706)
|
(1) Due to U.S.
F/X adjustment as a result of 2016 audit and Korea prior period
adjustments made as result of expenses/AP, sales/AR, and inventory
count updates arising from Q1 2017 accounting system
implementation/review.
The accompanying
notes are an integral part of these consolidated financial
statements.
-5-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For
the three months ended March 31,
|
|
|
2017
|
2016
|
|
|
|
Operating
Activities
|
|
|
Net (loss) /
income
|
$(631,283)
|
$1,695,957
|
Adjustment to
reconcile net (loss) / income to net cash used in operating
activities
|
|
|
Depreciation
|
5,043
|
-
|
Amortization of
debt issuance costs
|
-
|
116,010
|
Recovery of bad
debt
|
486
|
-
|
Inventory
obsolescence
|
10,174
|
(28)
|
Provision for
warranty cost
|
4,688
|
(473)
|
Changes in assets
and liabilities
|
|
|
Accounts
receivable
|
(1,035,506)
|
(362,675)
|
Inventories
|
372,149
|
(2,216,987)
|
Prepaid expense and
other current assets
|
(297,885)
|
2,925
|
Fixed
Assets
|
(121,031)
|
-
|
Accounts
payable
|
187,445
|
(26,315)
|
Accrued
expenses
|
279,358
|
(198,374)
|
Other short-term
liabilities
|
240,208
|
(10,971)
|
Other long-term
liabilities
|
-
|
284,305
|
Net cash used in
operating activities
|
(986,154)
|
(716,626)
|
|
|
|
Financing
Activities
|
|
|
Proceeds from
short-term borrowings
|
250,000
|
26,686
|
Proceeds from other
short-term liabilities
|
705,000
|
425,000
|
Repayments of
short-term borrowings
|
(165,000)
|
(300,000)
|
Repayments of other
short-term liabilities
|
(367,488)
|
(9,167)
|
Net cash provided
by financing activities
|
422,512
|
142,519
|
|
|
|
Effect of exchange
rate fluctuations on cash
|
48,991
|
69,742
|
|
|
|
Net decrease in
cash
|
(514,651)
|
(504,365)
|
|
|
|
Cash at beginning
of period
|
814,778
|
1,022,716
|
|
|
|
Cash at end of
period
|
$300,127
|
$518,350
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Cash paid during
the period for:
|
|
|
Interest
|
$236,656
|
$131,482
|
Income
taxes
|
$(21,731)
|
$221,563
|
Non-cash financing
activities:
|
|
|
Conversion of
preferred shares to common shares
|
$-
|
$18,993,923
|
Issuance of shares
under short-term debt agreement
|
$-
|
$318
|
Issuance of shares
for payment of expenses
|
$75
|
$140
|
The accompanying
notes are an integral part of these consolidated financial
statements.
-6-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
1. ORGANIZATION AND NATURE OF BUSINESS
Environmental
Packaging Technologies, Inc. (the “Company” and, or
“EPT”) is a Delaware corporation incorporated August 8,
2011 with operations in Holland, Michigan, and is currently
headquartered in Houston, Texas. The Company engages in the
manufacturing and sale of flexitanks, a specialty product that is
being used for the transport of bulk liquid cargo. The Company
conducts its business primarily through its U.S. operation in
Michigan, and its subsidiaries in Korea and the Netherlands. The
Company’s main products include Big Red Flexitanks and
Liquirides; and they are sold in various countries around the
world.
2.
GOING CONCERN
The
Company has an accumulated deficit as of March 31, 2017 of
($44,951,925). This accumulated deficit is primarily the result of
non-cash write-off of impaired assets of $29,272,766. At March 31,
2017, the Company’s total current liabilities of $25.2
million exceeded its total current assets of $6.5 million,
resulting in a working capital deficit of $18.7 million, while at
December 31, 2016, the Company’s total current liabilities of
$23.9 million exceeded its total current assets of $6 million,
resulting in a working capital deficit of $17.9 million. The $0.8
million increase in the working capital deficit is primarily
related to increases in current liabilities as of March 31, 2017
due to cash used under our issuance of debt offset by increases in
current assets, primarily accounts receivable.
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern,
however, the above conditions raise substantial doubt about the
Company’s ability to do so. The consolidated financial
statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result
should the Company be unable to continue as a going
concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis
of Presentation
The
consolidated financial statements are unaudited; however, in the
opinion of management, they contain all the adjustments (consisting
of those of a normal recurring nature) considered necessary to
present fairly the financial position, results of operations and
cash flows for the periods presented in conformity with U.S.
generally accepted accounting principles (“GAAP”)
applicable to interim periods. The consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements of EPT included in the
Company’s Annual Report on Form 8-K for the year ended
December 31, 2016.
(b)
Organization
and principals of Consolidation
The
consolidated financial statements include the accounts of the
Company and its subsidiaries. The 100% owned subsidiaries include
Environmental Packaging Latin America South S.R.L located in Buenos
Aires, Argentina, EPT Packaging Europe B.V. located in Rotterdam,
The Netherlands, and EPTPAC Korea Co. Ltd., located in Seoul,
Korea.
For all
periods presented, all significant inter-company accounts and
transactions have been eliminated in the consolidated financial
statements. In the opinion of management, all adjustments
considered necessary to give a fair presentation have been
included.
-7-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
(c)
Fair
Value of Financial Instruments
The
Company follows the provisions of ASC 820, Fair Value Measurements
and Disclosures, which clarifies the definition of fair value,
prescribes methods for measuring fair value, and establishes a fair
value hierarchy to classify the inputs used in measuring fair value
as follows:
●
Level 1: Observable
inputs such as unadjusted quoted prices in active markets for
identical assets or liabilities available at the measurement
date.
●
Level 2: Inputs
other than quoted prices that are observable for the asset or
liability in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, inputs other
than quoted prices that are observable, and inputs derived from or
corroborated by observable market data.
●
Level 3:
Unobservable inputs that reflect management’s assumptions
based on the best available information.
The
carrying value of accounts receivable, inventories, prepaid
expenses and other current assets, accounts payable, accrued
liabilities, advance from customer, other short-term liabilities,
and short-term investment loan approximate their fair values
because of the short-term nature of these instruments. The carrying
value of the long-term investment loan and other long-term
liabilities approximates fair value based on market rates and terms
currently available to the Company. The Company did not identify
any assets or liabilities that are required to be re-measured at
fair value at a recurring basis in accordance with ASC
820.
(d)
Use
of Estimates and Assumptions
The preparation of the consolidated financial statements in
conformity with US GAAP 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 consolidated financial statements and the reported
amounts of revenues and expenses during the reporting
periods. Estimates are adjusted to reflect actual experience
when necessary. Significant accounting estimates reflected in the
Company’s consolidated financial statements include allowance
for doubtful accounts, provision for income taxes, product
warranty, and valuation of deferred tax assets. Since the use of estimates is an integral
component of the financial reporting process, actual results could
differ from those estimates.
(e)
Translation
of Foreign Currency
The
accounts of the Company and its subsidiaries are measured using the
currency of the primary economic environment in which the entity
operates (the “functional currency”). The
Company’s functional currency is the U.S. dollars
(“USD”) and the accompanying consolidated financial
statements are presented in USD. Foreign currency transactions are
translated into USD using the fixed exchange rates in effect at the
time of the transaction. Generally, foreign exchange gains and
losses resulting from the settlement of such transactions are
recognized in the consolidated statements of operations. The
Company translates foreign currency financial statements of its
subsidiaries in accordance with ASC 830-10, “Foreign Currency
Matters”. Assets and liabilities are translated at current
exchange rates quoted by the US Treasury at the balance sheet dates
and revenues and expenses are translated at average exchange rates
in effect during the year. Resulting translation adjustments are
recorded as other comprehensive income (loss) and accumulated as a
separate component of equity of the Company.
Cash
and cash equivalents consist of cash on hand, and other highly
liquid investments which are unrestricted as to withdrawal or use,
and which have maturities of three months or less when purchased.
The Company maintains cash with various financial institutions
mainly in the U.S., Korea and the Netherlands. As of March 31,
2017, and December 31, 2016, cash balances of $300,127 and
$814,778, respectively, are not insured by the Federal Deposit
Insurance Corporation or other programs. As of March 31, 2017, and
December 31, 2016 the Company did not have any cash
equivalents.
-8-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
(g)
Accounts
Receivable
Accounts
receivable are presented at net realizable value. The Company
maintains allowances for doubtful accounts for estimated losses.
The Company reviews its accounts receivable on a periodic basis and
makes general and specific allowances when there is doubt as to the
collectability of individual balances. In evaluating the
collectability of individual receivable balances, the Company
considers many factors, including the age of the balances,
customers’ historical payment history, their current
credit-worthiness and current economic trends. Accounts are written
off after exhaustive efforts at collection. As of March 31, 2017,
and December 31, 2016, the allowance for doubtful accounts totaled
$21,260 and $20,773, respectively.
(h)
Inventories
Inventories,
consisting of raw materials and finished goods, are stated at the
lower of cost or market, with cost determined under the weighted
average method. An allowance is established when management
determines that certain inventories may not be saleable. If
inventory costs exceed expected market value due to obsolescence or
slow-moving or quantities in excess of expected demand, the Company
will record reserves for the difference between the cost and the
market value. These reserves are recorded based on estimates and
reflected in cost of revenues. The Company recorded a reserve for
slow-moving inventory of $99,133 and $88,959 at March 31, 2017 and
December 31, 2016, respectively.
(i)
Revenue
Recognition
The
Company generates revenue primarily from the sales of flexitanks
and delivery of related services. The Company recognizes revenue
from product sales when persuasive evidence of a sale exists: that
is, a product is shipped under an agreement with a customer, risk
of loss and title has passed to the customer; the fee is fixed or
determinable; and collection of the resulting receivable is
reasonably assured. Sales allowances are estimated based upon
historical experience of sales returns.
Advance
payments and deposits received from customers prior to the
provision of services and recognition of the related revenues are
presented as advance from customer in the accompanying consolidated
balance sheet.
(j)
Product
Warranty
The
Company provides warranty on sales of its flexitanks; in general,
the warranty is effective one-year from the date of shipment. The
Company records a liability for an estimate of costs that it may
incur under its basic limited warranty when product revenue is
recognized. Factors affecting the Company’s warranty
liability include the number of flexitanks sold and historical and
anticipated rates of claims and costs per claim. The Company
periodically assesses the adequacy of its warranty liability based
on changes in these factors. Based upon historical trends and
warranties provided by the Company’s suppliers and
sub-contractor’s the company has made provision for warranty
cost based on .75% of product sales. The Company has made a
provision for warranty cost of $70,281 and $65,593 as of March 31,
2017 and December 31, 2016, respectively, within accrued
liabilities in the accompanying consolidated balance
sheet.
|
Three
months ended
March
31, 2017
|
Year
ended
December
31, 2016
|
|
Product warranty
liability:
|
|
|
|
Opening
balance
|
$65,593
|
$64,195
|
|
Accruals for
product warranties issued in the period
|
4,688
|
1,398
|
|
Ending
liability
|
$70,281
|
$65,593
|
|
|
|
|
|
(k)
Shipping
and Handling
In
accordance with FASB ASC 605-45 (Emerging Issues Task Force (EITF)
Issue No. 00-10, “Accounting for Shipping and Handling Fees
and Costs”), the Company includes shipping and handling fees
billed to customers in net revenues. Amounts incurred by the
Company for freight are included in cost of goods
sold.
-9-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
(l)
Segment
Reporting
“Disclosure About Segments of an Enterprise and Related
Information” requires use of the “management
approach” model for segment reporting. The management
approach model is based on the way a company’s management
organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based
on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a
company. The Company’s management considers its business to
comprise three segments for reporting purposes. (See Note
15)
(m)
Computation
of Earnings (Loss) per Share
Basic net income (loss) per common share is computed by dividing
net income (loss) attributable to common stockholders by the
weighted average number of shares of common stock outstanding
during the period. Average outstanding primary shares was
2,945,650 and 2,734,526 for the quarterly periods ended March
31, 2017 and 2016, respectively. On a dilutive basis, the average
outstanding dilutive shares was 3,283,363 and 2,884,526 for first
quarter 2017 and 2016, respectively. Net income (loss) per common share attributable to
common stockholders assuming dilution is computed by dividing net
income by the weighted average number of shares of common stock
outstanding plus the number of additional common shares that
would have been outstanding if all
dilutive potential common shares had been
issued.
(n)
Taxation
Because
the Company and its subsidiaries are incorporated in different
jurisdictions, they file separate income tax returns. The Company
uses the liability method of accounting for income taxes in
accordance with US GAAP. Deferred taxes, if any, are recognized for
the future tax consequences of temporary differences between the
tax basis of assets and liabilities and their reported amounts in
the consolidated financial statements. A valuation allowance is
provided against deferred tax assets if it is more likely than not
that the asset will not be utilized in the future.
The
Company recognizes 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 Company recognizes interest
and penalties, if any, related to unrecognized tax benefits as
income tax expense. The Company had no uncertain tax positions as
of March 31, 2017 and December 31, 2016,
respectively.
(o)
Comprehensive
Income
The
Company reports comprehensive income in accordance with the FASB
issued authoritative guidance that establishes standards for
reporting comprehensive income and its component in consolidated
financial statements. Comprehensive income, as defined, includes
all changes in equity during a period from non-owner
sources.
(p)
Derivative
Financial Instruments
When the Company issues debt that contains a conversion feature,
the Company first evaluates whether the conversion feature meets
the requirements to be treated as a derivative: a) one or more
underlying’s, typically the price of the Company's stock; b)
one or more notional amounts or payment provisions or both,
generally the number of shares upon conversion; c) no initial net
investment, which typically excludes the amount borrowed; and d)
net settlement provisions, which in the case of convertible debt
generally means the stock received upon conversion can be readily
sold for cash. There are certain scope exceptions from derivative
treatment, but these typically exclude conversion features that
provide for a variable number of shares.
When the Company issues warrants to purchase our common stock, we
must evaluate whether they meet the requirements to be treated as a
derivative. Generally, warrants would be treated as a derivative if
the provisions of the warrant agreement create uncertainty as to a)
the number of shares to be issued upon exercise; or b) whether
shares may be issued upon exercise.
-10-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
If the conversion feature within convertible debt or warrants meet
the requirements to be treated as a derivative, we estimate the
fair value of the derivative liability using the Black-Scholes
Option Pricing Model upon the date of issuance. If the fair value
of the derivative liability is higher than the face value of the
convertible debt, the excess is immediately recognized as interest
expense. Otherwise, the fair value of the derivative liability is
recorded as a liability with an offsetting amount recorded as a
debt discount, which offsets the carrying amount of the debt. The
derivative liability is revalued at the end of each reporting
period and any change in fair value is recorded as a change in fair
value in the consolidated statement of operations. The debt
discount is amortized through interest expense over the life of the
debt. Derivative instrument liabilities and the host debt agreement
are classified on the balance sheet as current or non-current based
on whether settlement of the derivative instrument could be
required within twelve months of the balance sheet
date.
The accounting treatment of derivative financial instruments
requires that the Company record the embedded conversion option and
warrants at their fair values as of the inception date of the
agreement and at fair value as of each subsequent balance sheet
date. Any change in fair value is recorded as non-operating,
non-cash income or expense for each reporting period at each
balance sheet date. The Company reassesses the classification of
its derivative instruments at each balance sheet date. If the
classification changes as a result of events during the period, the
contract is reclassified as of the date of the event that caused
the reclassification.
As of March 31, 2017, the Company does not consider any of the
convertible debt and related warrants issued in 2017 to be
considered derivatives and therefore there is no requirement to
record the convertible debt and related warrants at their estimated
fair values.
(q)
Recent
Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the
“FASB”) issued Accounting Standards Update No. 2014-09
(ASU 2014-09), Revenue from Contracts with
Customers. ASU 2014-09 will
eliminate transaction- and industry-specific revenue recognition
guidance under current GAAP and replace it with a principle based
approach for determining revenue recognition. ASU 2014-09 will
require that companies recognize revenue based on the value of
transferred goods or services as they occur in the contract. ASU
2014-09 also will require additional disclosure about the nature,
amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and
changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. Based on the FASB’s Exposure
Draft Update issued on April 29, 2015, and approved in July 2015,
Revenue from Contracts With Customers (Topic 606): Deferral of the
Effective Date, ASU 2014-09 is now effective for reporting periods
beginning after December 15, 2017, with early adoption permitted
only as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within that reporting
period. Entities will be able to transition to the standard either
retrospectively or as a cumulative-effect adjustment as of the date
of adoption. The adoption of ASU 2014-09 is not expected to have
any impact on the Company’s consolidated financial statement
presentation or disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, among other things, requires
the recognition of lease assets and lease liabilities on the
balance sheets of lessees, along with the disclosure of key
information about leasing arrangements. When effective, the ASU
will supersede, and add Topic to the FASB ASC. In addition to
replacing with FASB ASC 842, it also amends and supersedes a number
of other paragraphs throughout the FASB ASC. The ASU is effective
for public business entities for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years.
Early adoption is permitted. The Company is still evaluating the
impact ASU 2016-02 will have on its consolidated
financial statements.
Management does not believe that any other recently issued, but not
yet effective, authoritative guidance, if currently adopted, would
have a material impact on the Company’s consolidated
financial statement presentation or disclosures.
-11-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
4. ACCOUNTS RECEIVABLE, NET
The
Company’s net accounts receivable is as follows:
|
March
31,
|
December
31,
|
|
2017
|
2016
|
Trade accounts
receivable
|
$4,171,988
|
$2,899,242
|
Less: allowance for
doubtful accounts
|
(21,260)
|
(20,773)
|
Total accounts
receivable, net
|
$4,150,728
|
$2,878,469
|
5. INVENTORIES, NET
The
Company’s inventories are as follows:
|
March
31,
|
December
31,
|
|
2017
|
2016
|
Raw
materials
|
$501,576
|
$533,132
|
Finished
goods
|
1,217,001
|
1,773,501
|
Less: allowance for
slow-moving inventories
|
(99,133)
|
(88,959)
|
Total inventories,
net
|
$1,619,444
|
$2,217,674
|
6. ACCRUED LIABILITIES
The
Company’s accrued liabilities are comprised of the
following:
|
March
31,
|
December
31,
|
|
2017
|
2016
|
|
|
|
Warranty
reserve
|
$70,281
|
$65,593
|
Accrued
taxes
|
210,259
|
73,991
|
Accrued
interest
|
139,784
|
71,182
|
Accrued legal
settlement
|
697,917
|
661,667
|
Accrued
professional fees
|
11,507
|
42,125
|
Other accrued
liabilities
|
43,973
|
31,556
|
Accrued Big Red
Resources invoices
|
199,143
|
195,735
|
Total
|
$1,372,864
|
$1,141,849
|
7. RELATED PARTY TRANSACTIONS
Transactions
with related parties not disclosed elsewhere in these consolidated
financial statements are described below.
The
Company does business with Zip Line Transportation, LLC which is
owned by the Company’s President. Zipline is a local
transportation company based in Houston that is used to move
product from the Houston location. The Company paid Zipline for
trucking services in the amounts $256,842 and $201,200 for first
quarter 2017 and 2016, respectively. As of March 31, 2017, and
December 31, 2016, the Company had outstanding payables to Zipline
of $137,227 and $130,552, respectively. Also, as of December 31,
2016, the Company had outstanding payable to David Skriloff of
$15,000 which was paid off during Q1 2017.
-12-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
In
addition, several of the Company’s lenders are also large
shareholders. The table below provides a listing of such investors
including percentage ownership and amount owed. It also provides a
list of the Company’s directors who were also lenders to the
Company.
Investor
|
Relationship
|
Debt Held
|
Percentage Ownership
|
|
As of December 31, 2016
|
|
|
|
|
GPB
Debt Holding II, LLCC
|
Senior
Lender
|
$2,911,818
|
9.8%
|
|
David
Belding
|
Director
|
$150,000
|
17.7%
|
|
Joseph
Kowal
|
Director
|
$-
|
14.4%
|
|
MKM
Opportunity Master Fund, Ltd.
|
Shareholder/debtor
(1)
|
$-
|
17.7%
|
|
OMB
Acquisition Corp, LLC
|
Shareholder/debtor
|
$14,339,664
|
7.7%
|
(2)
|
Ranmor,
LLC
|
Shareholder/debtor
|
$200,000
|
2.8%
|
(3)
|
|
|
|
|
|
As of March 31, 2017
|
|
|
|
|
GPB
Debt Holding II, LLCC
|
Senior
Lender
|
$2,911,818
|
9.8%
|
|
David
Belding
|
Director
|
$150,000
|
17.7%
|
|
Joseph
Kowal
|
Director
|
$-
|
14.4%
|
|
MKM
Opportunity Master Fund, Ltd.
|
Shareholder/debtor
|
$-
|
17.7%
|
|
OMB
Acquisition Corp, LLC
|
Shareholder/debtor
|
$14,339,664
|
7.7%
|
|
Ranmor,
LLC
|
Shareholder/debtor
|
$200,000
|
2.8%
|
|
(1) In January, 2016 David Skriloff, a member at MKM
Opportunity Master Fund joined the board and in June, 2016 became
interim CEO, and then in April, 2017 became
CEO.(2)
OMB Acquisition Corp is 1/3 owned by David Belding, 1/3 owned by
Joseph Kowal and 1/3 owned by MKM Opportunity Master
fund.
(3) Assumes the conversion of Ranmor's convertible
note.
During
the quarterly periods ended March 31, 2017 and 2016, the Company
incurred $102,833 and $96,750 respectively as compensation for all
directors and officers.
All
related party transactions involving provision of services or
tangible assets were recorded at the exchange amount, which is the
value established and agreed to by the related
parties.
8. ADVANCE FROM CUSTOMER
The
Company received an advance payment of $500,000 from a customer in
connection with flexitanks purchase in 2015. In June 2015, the
Company shipped an order based on this advance in the amount of
$2,311 and recognized that as revenues. The Company has not
received any orders since. Consequently, the remaining $497,689 is
still recorded as an advance from customer as at March 31,
2017.
-13-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
9. SHORT-TERM NOTES
The Company’s short-term notes payable are as
follows:
|
March
31,
|
December
31,
|
|
2017
|
2016
|
|
|
|
Senior secured
notes (A)
|
$3,200,000
|
$3,200,000
|
Secured convertible
notes (B)
|
680,000
|
795,000
|
Preferred note
(C)
|
375,000
|
375,000
|
Subordinated
convertible note (D)
|
200,000
|
200,000
|
Promissory notes
(E)
|
350,000
|
150,000
|
Total
|
$4,805,000
|
$4,720,000
|
(A)
Pursuant to a
Securities Purchase Agreement dated October 15, 2015, the Company
sold an aggregate of $3,500,000 in principal amount of 12% senior
secured one- year notes secured by all assets of the Company, and
318,446 post-split common shares of the Company’s common
stock to GBP Debt Holdings II, LLC and Riverside Merchant Partners,
Inc. (“GBP/Riverside”). The Senior Secured Notes were
sold at a price of approximately $943 for each $1,000 of principal
amount and as a consequence net proceeds before other expenses was
$3,300,000; and the Company recognized an upfront interest charge
of $200,000. In conjunction with this financing, the Company paid
its agent Aegis Capital Corp. (“Aegis”), $280,000 and
140,000 common shares.
Effective October
15, 2016 the Company’s $3,841,183 senior secured notes with
GPB Holdings II, LLC (“GBP”) and Riverside Merchant
Partners, LLC (“Riverside”) became due and payable but
were not repaid. Effective October 19, 2016, GPB and Riverside
agreed to forbear from taking any remedial action.
In the
month of April and May 2017, the Company has repaid the majority of
the loan and refinanced the remaining amount of the
note.
i.
In May 2017, the
remaining amounts of the GPB Debt Holdings II, LLC and Riverside
Merchant Partners principal, accrued interest and default interest
that was not repaid during the ExWorks initial drawdown was
restructured in the following manner:
a.
The Company entered
into short-term promissory note agreements with GPB Debt Holdings
II, LLC, Riverside Merchant Partners, and Aegis Capital Corporation
(as the placement agent) for the amounts of $143,158, $10,206,
$50,000, respectively, totaling $203,364. Interest on each of the
notes is 1.15% per annum and is compounded monthly. The notes
mature on the earlier of June 26, 2017 or the date on which the
Company completes a financing generating aggregate gross proceeds
equal to or exceeding $750,000. See subsection (F) below for
promissory notes.
b.
The Company issued
998 shares of Series B Convertible Preferred Stock, $.001 par
value, to GPB Debt Holdings II, LLC and Riverside Merchant
Partners, which are convertible into shares of Common Stock, $.001
par value, as payment of all default interest and payment premiums
remaining. The preferred stock is convertible at $.50 per share and
carries a dividend of 6% that can be accrued at the Company’s
option.
(B)
In November 2016,
the Company closed a financing of $795,000 in six month Secured
Convertible Notes with select accredited investors. The notes
mature six months from date of issuance, carry a 12% interest rate,
and are convertible into common stock at any time prior to maturity
at the option of the holder at a price of $5 per share. In
addition, the notes carry a warrant to purchase 79,500 shares at an
exercise price of $0.01 per share. The notes are secured by a
second-priority secured interest in all assets of the Company.
During February and March of 2017, $165,000 of the outstanding
balance was paid and financing of an additional $50,000 was
received in February 2017 from an accredited investor with the same
terms noted previously. The note carries a warrant to purchase
50,000 shares at an exercise price of $0.001 per
share.
-14-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
(C)
On October 15,
2015, the Company issued a preferred note to OMB Acquisition Corp.,
LLC (“OMB”) with a principal sum of $375,000. Interest
on the note has been waived by the lender. The note matured on
November 15, 2016 and was automatically extended for one year as
elected by the Company.
(D)
On November 15,
2015, the Company issued a subordinated convertible note with a
principal sum of $200,000 to Ranmor, LLC. Interest on the note is
8% per annum. The note will mature on November 20, 2017 and it is
convertible at any time at the holder’s election prior to its
maturity into 90,000 post-split common shares of the Company. If
the note is repaid in cash the Company will pay Ranmor 22,500
post-split common shares of the Company.
(E)
In June 2016, David
Belding, a member of the Company’s Board of Directors and a
major shareholder loaned the Company $150,000 pursuant to a
one-year unsecured promissory note with automatic one year renewals
at the Company’s option. Interest rate is stated at 10% per
annum at a simple rate.
On
March 21, 2017, the Company issued a $200,000 six month unsecured
promissory note. Interest rate is stated at 10% per annum at a
simple rate. The notes mature on the earlier of September 21, 2017
or the date on which the Company completes a financing generating
aggregate gross proceeds equal to or exceeding $250,000. The note
is convertible into common stock at any time prior to maturity at
the option of the holder at a price of $.50 per share. In addition,
the notes carry a warrant to purchase 200,000 shares at an exercise
price of $0.001 per share. In May 2017, the Company repaid the
$200,000 principal amount of the note.
Interest
expense for the short-term notes was $176,532 and $139,228 for the
quarterly periods ended March 31, 2017 and 2016,
respectively.
10. OTHER SHORT-TERM LIABILITIES
During
2016 and 2017, the Company entered into various agreements with
multiple parties to receive advances on future receivables. The
balance of these advances at December 31, 2016 was $418,500. During
the months of January, February, and March 2017, the Company
received additional advances of $705,000, and repaid 367,488,
leaving a remaining balance of $756,012 at March 31, 2017.
Additionally, the Company’s Korean subsidiary borrowed
$240,208 from multiple parties with maturity dates of less than
three months.
During
the three months ended March 31, 2017 and 2016, the interest
expense that was incurred and paid on these advances was $133,690
and $3,208, respectively.
11. SHORT-TERM INVESTMENT LOAN
Effective
October 16, 2015, the Company’s major shareholder, EDP EPT,
LLC (“EDP”) assigned its investment loans to OMB and
the Company issued a subordinated Promissory Note to OMB in the
principal amount of $13,964,664 (the “Note”). The
maturity date of the Note is October 15, 2017. Interest on the loan
has been waived by the lender.
12. STOCKHOLDERS’ DEFICIT
In
October 2016, the Company entered into a strategic relationship
with The Vedder Group (“Vedders”), one of the largest
Canadian logistics and shipping company focusing exclusively on the
shipping of liquids. The agreement calls for Vedders to sell and
install EPT’s flexitanks as part of their respective product
offerings to their clients in addition to providing strategic
advice and consulting services. In February 2017, under the terms
of the agreement, the Company issued to Vedders 75,000 shares of
pre-split $0.001 par value common stock.
As of
March 31, 2017, and December 31, 2017, the Company did not have any
Stock Option Plans.
-15-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
13. EARNINGS PER SHARE
The
following table summarizes basic and diluted earnings per share
(EPS). Basic EPS excludes all potentially dilutive securities and
is computed by dividing net income attributable to the Company by
the weighted average number of common shares outstanding during the
period. Diluted EPS includes the effect of stock options and
restricted stock as calculated under the treasury stock
method.
|
March 31, 2017
|
March 31, 2016
|
Net income
(loss)
|
$(631,283)
|
$1,695,957
|
Weighted average
shares outstanding:
|
|
|
Basic
|
2,945,650
|
2,734,526
|
Diluted
|
3,283,363
|
2,884,526
|
Basic
EPS
|
$(0.21)
|
$0.62
|
Diluted
EPS
|
$(0.19)
|
$0.59
|
14. SEGMENTS
When
management examines the business, all analysis is based on
flexitanks sold. All other product sales flow from this one
statistic. It does not break down the business by different
products such as either logistics revenues or ancillary product
sales. Also, management does not analyze the business based on
locations of its subsidiaries. The subsidiaries are primarily
established to minimize tariffs and taxes and operate as a sales
organization as all products are manufactured out of our Michigan
based contract manufacturer. In the case that demand exceeds
production for a specific month, management makes decisions on
where to send product based on margins for specific customers as
opposed to regional breakdowns. Although EPT does not analyze its
business based on geographic breakdowns, the following table shows
gross revenues generated based on locations:
Location
|
March 31, 2017
|
March 31, 2016
|
|
|
|
United
States
|
$2,599,183
|
$1,670,753
|
Korea
|
1,841,558
|
1,720,529
|
Rest of the
World
|
522,573
|
545,871
|
Total
|
$4,963,314
|
$3,937,153
|
The
following table shows assets held at each of the Company’s
locations:
Location
|
March 31, 2017
|
December 31, 2016
|
|
|
|
United
States
|
$2,746,942
|
$2,774,026
|
Korea
|
2,707,882
|
2,181,799
|
Europe
|
1,100,311
|
1,027,955
|
Rest of the
World
|
21,201
|
19,304
|
Total
|
$6,576,336
|
$6,003,084
|
-16-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
15. COMMITMENTS AND CONTINGENCIES
(a) Office leases
The
Company and its subsidiaries lease certain office premises through
October 2016. The lease was subsequently extended through
October 2019. Future minimum lease payments under operating
lease agreements are as follows:
|
Amount
|
Twelve months
ending December 31,
|
|
2017
|
$100,387
|
2018
|
79,489
|
2019
|
66,437
|
Thereafter
|
—
|
|
$246,313
|
Rent
expense for the quarterly periods ended March 31, 2017 and 2016 was
$66,953 and $34,178, respectively.
(b) Litigation
The
Company is a party to various litigation in the normal course of
its business. The Company intends to vigorously pursue and defend
its position in these matters. Management cannot predict or
determine the outcome of this matter or reasonably estimate the
amount or range of amounts of any fines or penalties that might
result from an adverse outcome. It is possible, however, that an
adverse outcome could have a material adverse impact on our
consolidated results of operations, liquidity, and financial
position.
During
2015, a few shareholders initiated legal proceedings for claims
about ownership rights. The parties entered into an agreement in
March 2016 whereby the Company would pay the plaintiffs $445,000.
On November 30, 2016, the Company made an initial payment of
$25,000 leaving a balance of $420,000, which is accrued as of March
31, 2017 within accrued liabilities in the accompanying
consolidated balance sheet. On April 4, 2017, the Company made a
second payment in the amount of $100,000 leaving a balance of
$320,000. The Company is working to facilitate a remaining payment
schedule.
In
April 2014, a former investor filed a suit against the Company
claiming ownership. The Company’s lawyers estimated that the
settlement will be $290,000 and is accrued as of March 31, 2017
within accrued liabilities and other long-term liabilities in the
accompanying consolidated balance sheet. This matter was resolved
and finalized on April 7, 2017 and the Company’s final
settlement will be payment in total of $290,000 to the former
investor. (See Note 21)
In
September 2016, a former director of EPT and the representative of
EDP EPT, LLC pled guilty to two counts of fraud in relationship to
his duties as President of EDP Management. He has had no
involvement in the Company since his resignation on January 5,
2016. The Company does not believe that any of this fraud is
related to his actions as a director.
The
Company expensed the legal fees as they were incurred for these
litigations. During the quarterly periods ended March 31, 2017 and
2016 the Company incurred $36,120 and $57,373, respectively for
legal costs associated with these loss contingencies.
-17-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
16. INCOME TAXES
The
Company is subject to U.S. federal, state, and foreign income
taxes. The Company’s income tax (benefit) expense for the
quarters ended March 31, 2017 and 2016 are as follows:
|
For
the quarters ended
March
31,
|
|
|
2017
|
2016
|
Current
|
|
|
Federal
|
$—
|
$—
|
State
|
113
|
111
|
Foreign
|
(21,844)
|
221,452
|
Total
|
$(21,731)
|
$221,563
|
The
Company's effective tax rate was (3.2%) and 11.6% for the three
months ended March 31, 2017 and 2016, respectively. The Company's
effective tax rate for the three months ended March 31, 2017 was
positively impacted by operating losses incurred in both domestic
and foreign jurisdictions giving rise to a net tax benefit of
$21,731. The Company's effective tax rate for the three months
ended March 31, 2016 was negatively impacted by operating profits
earned in foreign jurisdictions resulting in net tax expenses of
$221,563.
17. CONCENTRATION OF RISK
Major Customer
For the
quarterly periods ended March 31, 2017 and 2016, seven customers
accounted for approximately 58% of the Company’s revenues and
five customers accounted for approximately 55% of the
Company’s revenues, respectively. As of March 31, 2017, and
December 31, 2016, one customer accounted for approximately 36% of
the Company’s accounts receivable and one customer accounted
for approximately 34% of the Company’s accounts receivable,
respectively.
Our
largest customer is based out of Korea and accounted for 35% and
37% of sales for the quarterly periods ended March 31, 2017 and
2016, respectively. Total revenue for this customer was $1,749,889
and $1,435,260 for the quarterly periods ended March 31, 2017 and
2016, respectively.
Major Suppliers
For the
quarterly periods ended March 31, 2017 and 2016, four suppliers
accounted for 28 and 25% of the total cost of revenues,
respectively.
Major Lenders
For the
quarterly period ended March 31, 2017 and year ended December 31,
2016, three lenders accounted for $17,539,664 and $17,539,664,
respectively, of the Company’s total debt of $19,831,772 and
$19,103,164, respectively.
-18-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
18. FINANCIAL INSTRUMENTS
The
FASB ASC topic 820 on fair value measurement and disclosures
establishes three levels of inputs that may be used to measure fair
value: quoted prices in active markets for identical assets or
liabilities (referred to as Level 1), observable inputs other than
Level 1 that are observable for the asset or liability either
directly or indirectly (referred to as Level 2), and unobservable
inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities (referred to as
Level 3).
The
carrying values and fair values of our financial instruments are as
follows:
|
|
March
31, 2017
|
December
31, 2016
|
||
|
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|
Level
|
Value
|
Value
|
Value
|
Value
|
Cash
|
1
|
$300,127
|
$300,127
|
$814,778
|
$814,778
|
Accounts
receivable
|
2
|
$4,150,729
|
$4,150,729
|
$2,878,469
|
$2,878,469
|
Accounts
payable
|
2
|
$3,541,634
|
$3,541,634
|
$3,157,032
|
$3,157,032
|
Accrued
liabilities
|
2
|
$1,372,864
|
$1,372,864
|
$1,141,849
|
$1,141,849
|
Short-term
notes
|
2
|
$4,805,000
|
$4,805,000
|
$4,720,000
|
$4,720,000
|
Advance from
customer
|
2
|
$497,689
|
$497,689
|
$497,689
|
$497,689
|
Other short-term
liabilities
|
2
|
$996,220
|
$996,220
|
$418,500
|
$418,500
|
Short-term
investment loan
|
2
|
$13,964,664
|
$13,964,664
|
$13,964,664
|
$13,964,664
|
Other long-term
liabilities
|
2
|
$77,971
|
$77,971
|
$48,333
|
$48,333
|
The
following method was used to estimate the fair values of our
financial instruments:
The
carrying amount of level 1 and level 2 financial instruments
approximates fair value because of the short maturity of the
instruments. There were no changes in valuation techniques during
the quarterly period ended March 31, 2017 and year ended December
31, 2016.
Financial
assets are considered Level 3 when their fair values are determined
using pricing models, discounted cash flow methodologies, or
similar techniques, and at least one significant model assumption
or input is unobservable. Level 3 financial assets also include
certain investment securities for which there is limited market
activity such that the determination of fair value requires
significant judgment or estimation. During the quarterly period
ended March 31, 2017 and year ended December 31, 2016 the Company
had no Level 3 financial instruments.
The
Company reviews the fair value hierarchy classification on a
quarterly basis. Changes in the ability to observe valuation inputs
may result in a reclassification of levels for certain securities
within the fair value hierarchy. The Company’s policy is to
recognize transfers into and out of levels within the fair value
hierarchy at the end of the fiscal quarter in which the actual
event or change in circumstances that caused the transfer occurs.
There were no significant transfers between Level 1, or Level 2
during the quarterly period ended March 31, 2017 and year ended
December 31, 2016, respectively.
-19-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
19. MERGER AGREEMENT
Merger
Agreement – On December 28, 2016 the Company agreed to
complete a Reverse Merger (the “Merger”) into
Environmental Packaging Technologies Holdings, Inc. (formerly
International Metals Streaming Corp), a Nevada Corporation
(“Pubco”). At the conclusion of the Merger EPT shall be
the surviving corporation and a direct wholly owned subsidiary of
Pubco.
Terms
of the Merger include:
i.
At the effective
date of the Merger EPT shall pay $500,000 to the shareholder of the
controlling block of Pubco common stock for the cancellation of
11,810,830 shares of Parent common stock and for services related
to the completion of the Merger.
ii.
Immediately
prior to the Merger, Pubco shall have issued and outstanding
12,000,000 shares of Pubco Common Stock and no other securities (as
defined under the Securities Act).
iii.
Immediately
following the Merger, Pubco shall have issued and outstanding (i)
52,000,000 shares of Pubco Common Stock of which (a) 40,000,000
such shares will be owned by the former EPT Stockholders, and (b)
12,000,000 shares will be owned by the Pubco shareholders
immediately prior to the Merger, (ii) warrants to purchase
approximately 795,000 shares of Pubco Common Stock issuable upon
exercise of EPT warrants, and (iii) EPT convertible notes
convertible into shares of Pubco Common Stock (consisting of (A)
approximately 1,590,000 shares upon conversion of $795,000
aggregate principal amount of EPT convertible notes, and (B)
approximately 160,000 shares issuable upon conversion of a $200,000
aggregate principal amount of EPT convertible note) shares of Pubco
Common Stock (the “$200,000 EPT Convertible Note”). The
200,000 EPT Convertible Note shall be converted prior to the Merger
and the converted shares shall be included in the 40,000,000 shares
to be issued to EPT Stockholders.
The
Merger Agreement may be terminated after May 31, 2017 if it has not
closed by that date.
20. SUBSEQUENT EVENTS
i.
On April 7, 2017,
the Company settled a lawsuit with a former investor. The parties
reached a complex settlement agreement where the consideration
included payment of monies in the amount of $290,000. On April 4,
2017, the Company made the initial payment of $145,000. Pursuant to
the agreement, the Company has a remaining payment obligation in
the amount of $145,000 to be paid in twelve (12) equal monthly
installments (with a contingency for acceleration). The Company
paid the remaining $145,000 over the course of Q2 2017 and all
obligations have been met.
ii.
On April 17, 2017,
OMB converted $13,964,664 of its Subordinated notes into 1,000,474
shares of common stock.
iii.
During April 2017,
Ranmor LLC made the decision to convert the principal sum of
$200,000 to 900,000 shares of common stock.
iv.
In April 2017, Alan
Doris, EPT Sales Manager, was issued 50,000 shares of common stock
as a bonus.
-20-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
v.
On April 28, 2017,
the Company closed on a $7.5 million joint senior secured line of
credit through the Export/Import Bank and ExWorks Capital Fund I,
LP (“ExWorks”). This agreement allows the Company to
draw from the line of credit against certain domestic and
international accounts receivable and inventory. The loan consists
of two lines of credit. The first is the Export Line of Credit in
the amount of up to $4 million and has an interest rate of prime
plus 4% per annum. The second is the Domestic Line of Credit in the
amount of up to $3.5 million and has an interest of 2% per month.
There is a first priority security interest over all assets of the
Company including receivables and inventory with the exception of
receivables from our Korean subsidiary. The maturity date of loans
under the agreement is one year from the closing date. On the
initial drawdown, the Company borrowed a net total of $3,639,033,
which includes $12,830 paid to ExWorks during the closing. The
initial proceeds were primarily used to repay $2,927,829 of debt
held by GPB Debt Holdings II, LLC and $294,084 of debt held by
Riverside Merchant Partners. The remaining proceeds were paid
to Aegis Capital Corporation or the placement agent fee in the
amount of $250,000, and to ExWorks for various legal and financing
fees in the amount of $179,950. ExWorks charged the Company a
Guaranty Fee of $15,100 in May, and brings the total debt issuance
cost on the line of credit to be $445,050, which is being amortized
over the term of the line of credit.
vi.
In May 2017, a
lawsuit filed by a former shareholder against EPT was dismissed
with prejudice. The legal fees associated with defending the suit
for EPT was $32,100.
vii.
In May 2017, the
remaining amounts of the GPB Debt Holdings II, LLC and Riverside
Merchant Partners principal, accrued interest and default interest
that was not repaid during the ExWorks initial drawdown was
restructured in the following manner:
a.
The Company entered
into short-term promissory note agreements with GPB Debt Holdings
II, LLC, Riverside Merchant Partners, and Aegis Capital Corporation
(as the placement agent) for the amounts of $143,158, $10,206,
$50,000, respectively, totaling $203,364. Interest on each of the
notes is 1.15% per annum and is compounded monthly. The notes
mature on the earlier of June 26, 2017 or the date on which the
Company completes a financing generating aggregate gross proceeds
equal to or exceeding $750,000. The notes with GPB Debt Holdings II
and Riverside Merchant Partners was paid in full on June 29, 2017
and the note with Aegis was paid in full in July 2017.
b.
The Company issued
998 shares of Series B Convertible Preferred Stock, $.001 par
value, to GPB Debt Holdings II, LLC and Riverside Merchant
Partners, which are convertible into shares of Common Stock, $.001
par value, as payment of all default interest and payment premiums
remaining. The preferred stock is convertible at $5.00 per share
and carries a dividend of 6% that can be accrued at the
Company’s option.
viii.
During the months
of April and May 2017, the accredited investors of the six month
Secured Convertible Note made their decisions to convert $540,000
of unpaid principal and $21,000 of unpaid interest into 1,122,000
shares of common stock. The unpaid principal and interest was
converted into common stock at a price of $.50 per
share.
ix.
During May 2017,
investors from the six month Secured Convertible Note and the six
month unsecured promissory note made the decision to exercise their
warrants to purchase 1,045,000 shares of common stock at $.001 per
share. Proceeds were $1,045 from the exercising of the
warrants.
x.
In June 2017, the
Company completed the merger into the public company, Environmental
Packaging Technologies Holdings Corp (formerly International Metals
Streaming Corp) and began trading under the symbol EPTI. The
Company did an exchange offering of 1 share of the Company for 10
shares of EPTI. As part of the merger, the Company paid a
shareholder of EPTI $550,000 for the retirement of his shares.
After the offering, EPTI shareholders were left with 12 million
shares outstanding, and shareholders of the Company had 40 million
shares for a total of 62 million shares outstanding. See 8k filed
June 12, 2017 for detailed discussion of the merger.
-21-
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND
2016
xi.
In June 2017, EPT
completed an equity financing where it issued 5,620,000 shares of
common stock at $0.50 per share for a total $2,810,000. Colorado
Financial acted as placement agent and was paid a fee of $281,000
and warrants to purchase 281,000 shares of stock at a strike price
of $0.60 per share.
xii.
In June 2017, EPT
completed an additional equity financing where it issued 5,103,040
shares of common stock at $0.50 per share for a total $2,551,520.
Colorado Financial acted as placement agent and was paid a fee of
255,152 and warrants to purchase 255,152 shares of stock at a
strike price of $0.60 per share.
xiii.
Commencing June 28,
2017, the SEC suspended trading in the Company’s common stock
on the OTC Link (previously the Pink Sheets) operated by the OTC
Markets Group, Inc. pursuant to an Order of Suspension of Trading
issued by the Securities and Exchange Commission (the
“SEC”), captioned, In the Matter of Environmental
Packaging Technologies Holdings, Inc., File No. 500-1, dated June
27, 2017 (the “Order”). On July 13, 2017, the
Company’s common stock began trading again on the Grey
Market. According to the Order, such trading suspension was issued
because of concerns regarding: “(i) the accuracy and adequacy
of publicly available information in the marketplace since at least
June 9, 2017 regarding statements in third party stock promotion
materials [(the “3rd Party Promotional Report”)]
pertaining to the Company’s 2016 revenues, projected 2017
revenues, and the Company’s buyout potential; and (ii) recent
trading activity in the common stock that potentially reflects
manipulative or deceptive activities.” The Company believes
such trading suspension resulted in large part from the 3rd Party
Promotional Report believed to be prepared and distributed by a 3rd
party group named “Profit Play Stock”. The Company had
no prior knowledge and did not participate in the preparation
and/or distribution of such 3rd Party Promotional Report. As a
result of the above, no assurances can be given that the SEC and/or
any other governmental and/or regulatory authority will not bring
charges against the Company and/or any of its affiliates for
violations of the Federal Securities Laws. Moreover, trading of
stocks in the Grey Market is highly volatile, unpredictable,
largely unregulated, generally illiquid with limited information
available about the stocks, trading in and the issuer thereof and
Grey Market stocks often have been targets of manipulative
conduct.
xiv.
In August 2017, EPT
settled a lawsuit with former shareholders (Collette suit) for a
total payment of $135,000. To the knowledge of EPT, there are no
lawsuits or threatened lawsuits outstanding.
MANAGEMENT
DISCUSSION AND ANALYSIS FOR THE QUARTERLY PERIODS ENDED MARCH 31,
2017 AND 2016
COMPARISON OF THE QUARTER ENDED MARCH 31, 2017 AND THE QUARTER
ENDED MARCH 31, 2016
The following table summarizes our results of operations for the
quarters ended March 31, 2017 and 2016,
together with the changes in those items in dollars and as a
percentage:
|
2017
|
2016
|
%
Change
|
Revenues
|
$4,963,314
|
$3,937,153
|
26.1%
|
Cost
of Sales
|
4,288,277
|
758,663
|
465.2%
|
Gross
Profit
|
675,037
|
3,178,490
|
(78.8%)
|
SG&A
|
1,030,829
|
1,019,235
|
1.1%
|
Interest
Expense
|
310,968
|
142,495
|
118.2%
|
Net
Income (Loss)
|
$(631,283)
|
$1,695,957
|
n/a
|
Revenues
Consolidated
revenue increased $1.0 million in first quarter 2017 as compared to
first quarter of 2016. This increase was primarily due to the sales
of EPT’s new Liquiride product and primarily for the
refrigerated shipment of fresh juice. In addition, sales of the
traditional flexitanks product also increased with the addition of
several new customers.
Cost of Sales
Cost of
Sales for the quarters ended March 2017 and 2016 increased by
approximately $3.5 million, primarily due to a negative adjustment
of approximately $2.2 million to the Q1 2016 cost of goods sold.
This was as a result of the 2015 year-end audit where inventory was
written off due to the inability of the auditors to perform audit
procedures to verify inventory balances. This inventory was
subsequently recorded during Q1 2016 after the Company performed
procedures to verify the inventory that was written off for the
2015 audit. In addition, cost of sales was higher than usual as a
percentage of revenues for first quarter of 2017 due to some
inventory issues that caused us to run the manufacturing facility
inefficiently. We believe that all of those issues have been
resolved.
SG&A Expenses
Sales,
general and administrative expenses remained essentially the same
as first quarter of 2016 despite higher revenues as we were able to
expand our revenues while maintaining the same staffing levels and
overall costs.
Interest Expenses
Interest
expenses increased from the same quarter in 2016 as we had interest
from the $795,000 bridge loan that was closed in November 2016 and
was repaid and/or converted to common stock in May
2017.
Net Income (Loss)
In
2016, the one-time reduction in cost of sales from inventory of
approximately $2.2 million created gains that were not present for
2017. With normal gross margins, net income remained fairly
constant from first quarter 2016 to 2017.
-22-
MANAGEMENT
DISCUSSION AND ANALYSIS FOR THE QUARTERLY PERIODS ENDED MARCH 31,
2017 AND 2016
COMPARISON OF THE QUARTER ENDED MARCH 31, 2017 AND THE QUARTER
ENDED MARCH 31, 2016
Liquidity and Capital Resources
Sources of Liquidity
In first quarter of 2017, besides cash from operations, we
generated cash from several short term loans similarly to first
quarter of 2016.
Based on our current level of operations along the new A/R and
Inventory based borrowing facility with ExWorks and the
Export/Import Bank and with the proceeds from a financing that we
closed in the second quarter of 2017, we believe these sources will
be adequate to meet our liquidity needs for at least the next 12
months.
Cash Flows
The following table sets forth the significant sources and uses of
cash for the periods set forth below:
|
2017
|
2016
|
Cash
used in Operating Activity
|
$(986,154)
|
$(716,626)
|
Cash
used in Investing Activity
|
-
|
-
|
Cash
provided by Financing Activity
|
422,512
|
142,519
|
Operating Activities
The change in cash from operating activities from first quarter of
2017 as compared to the similar quarter in 2016 was due from
increased cost of sales in 2017 that resulted in additional cash
used for operations.
Investing Activities
For 2015 and 2016 there no cash from investing
activities.
Financing Activities
In first quarter of 2017, we generated cash from financing
activities through several short-term loans similarly to first
quarter of 2016.
-23-