The accompanying notes are an integral part of these unaudited consolidated financial statements.
The accompanying notes are an integral part of these unaudited consolidated financial statements
The accompanying notes are an integral part of these unaudited consolidated financial statements
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our Company
Our business address is 312 S. Beverly Drive #3102, Beverly Hills, California 90212. 1PM Industries ("1PM", "we", "us", "our", the "Company" or the "Registrant") was originally incorporated in the State of Colorado on March 26, 1990 under the name of Southshore Corporationand changed our name to Torrent Energy Corp. on July 15, 2004 and changed our name to 1PM Industries on February 19, 2015. On June 5, 2014, the Company executed a merger with Embarr Farms, Inc. On June 5, 2014, the Company entered into an Agreement whereby the Company acquired 100% of Embarr Farms, Inc. Embarr Farms was the surviving Company and became a wholly owned subsidiary of the Company and changed the name of the Company to 1PM Industries. At the time of the merger, the Company had no operations, assets or liabilities. The Company selected February 28 as its fiscal year end. In September 2015, the Company launched a medical marijuana edible line under the brand name "Von Baron Farms". Von Baron Farms is wholly owned (100%) subsidiary of the Company.
Business of The Registrant
Von Baron Farms: In September 2015, the Company launched a medical marijuana edible line under the brand name "Von Baron Farms". The Company performed test marketing at 3 HempCon conventions and in dispensaries in Northern California.
The company began distributing product at www.vonbaronfarms.com in November 2015. In November 2015 entered into distribution contracts for its products in dispensaries. In March 2016, the Company begun selling product to dispensaries.
The Company is also in the process of selling its Von Baron Farms product line in non-medical marijuana product line through Amazon and eBay. As such, the Company has terminated its previous agreement to sell 3
rd
part products to solely focus on its own products.
In January 2016, the Company has begun development of a CBD product line that will be capable of being sold nationwide.
NewGenica Brand: In March 2015, the Company developed a line health and wellness products under the "NewGenica" brand. The Company developed 4 products under this brand which are: AquaTrim, DreamTrim, Eat & Trim and D-Tox 15. The Company purchases the products from a 3rd party manufacturer who private labels health and wellness products. The Company has not begun selling products under the NewGenica brand as it has focused primarily on its Von Baron product line.
Resell/Private Label: During the period, the Company entered into an agreement with Nate's Food Co. to be the exclusive online distributor of products under the brand Nate's Homemade. The products were available under the Company's website www.nateshomemadestore.com. The Company terminated its relationship as online distributor for Nate's Food Co. and closed the online store on November 20, 2015.
Basis of Presentation of Interim Financial Statements
The accompanying unaudited consolidated financial statements of 1PM Industries, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company's annual report filed with the SEC on Form 10-K, on June 20, 2016. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the most recent fiscal year 2016 as reported in Form 10-K on June 20, 2016, have been omitted.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation.
Accounts Receivable and Allowance for Uncollectible Accounts
Substantially all of the Company's accounts receivable balance is related to trade receivables. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in its existing accounts receivable. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments for products. Accounts with known financial issues are first reviewed and specific estimates are recorded. The remaining accounts receivable balances are then grouped in categories by the number of days the balance is past due, and the estimated loss is calculated as a percentage of the total category based upon past history. Account balances are charged against the allowance when it is probable that the receivable will not be recovered. As of August 31, 2016 and February 29, 2016, the Company had no valuation allowance for the Company's accounts receivable.
Inventory
Inventories, consisting of products available for sale, are primarily accounted for using the first-in first-out ("FIFO") method, and are valued at the lower of cost or market value. This valuation requires us to make judgments, based on currently-available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category. These assumptions about future disposition of inventory are inherently uncertain and changes in our estimates and assumptions may cause us to realize material write-downs in the future.
NOTE 2 – GOING CONCERN
The Company's consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern that contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has nominal revenue to cover its operating costs, and it does not have sufficient cash flow to maintain its operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The Company expects to develop its business and thereby increase its revenue. However, the Company would require sufficient capital to be invested into the Company to acquire the properties to begin generating sufficient revenue to cover the monthly expenses of the Company. Until the Company is able to generate revenue, the Company would be required to raise capital through the sale of its stock or through debt financing. Management may raise additional capital through future public or private offerings of the Company's stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company's failure to do so could have a material and adverse effect upon it and its shareholders. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
To this date the Company has relied on loans from related parties, mainly from its officers and directors, to finance its operations and growth. The Company expects to continue to fund the Company through debt and securities sales and issuances until the Company generates enough revenues through the operations. These transactions will initially be through related parties, such as the Company's officers and directors.
NOTE 3 – RELATED PARTY TRANSACTIONS
Related party note payable
In conjunction with the process of product development, the Company borrowed from WB Partners, LLC, which is owned by an officer of the Company. The note is a non-interest bearing promissory note that is payable on December 31, 2018. The Company used 20% to impute interest on the non-interest bearing note. The discount is being amortized over the term of the note.
During the six months ended August 31, 2016, the Company borrowed a total amount of $186,563 from WB Partners, LLC and repaid $140,094 for the above note. Additionally, the Company recorded a discount of $9,279 for the six months ended August 31, 2016, for the imputed interest of 20%.
As of August 31, 2016 and February 29, 2016, the Company owed a note payable – related party of $147,549 net of a $30,932 debt discount and $103,699 net of a $28,313 debt discount, respectively. During the six months ended August 31, 2016 and 2015, the Company recognized amortization of debt discount of $6,660 and $1,760, respectively.
NOTE 4 – CONVERTIBLE NOTES PAYABLE ISSUED WITH WARRANTS – DERIVATIVE LIABILITIES
The Company had the following convertible note payable outstanding as of August 31, 2016 and February 29, 2016:
|
|
August 31,
|
|
|
February 29,
|
|
|
|
2016
|
|
|
2016
|
|
Promissory Note - Issued December 10, 2015
|
|
$
|
80,488
|
|
|
$
|
60,000
|
|
Promissory Notes - Issued in fiscal year 2017
|
|
|
140,000
|
|
|
|
-
|
|
Total convertible notes payable
|
|
|
220,488
|
|
|
|
60,000
|
|
Less: debt discount and deferred financing fees
|
|
|
(88,241
|
)
|
|
|
(49,337
|
)
|
|
|
|
132,247
|
|
|
|
10,663
|
|
Less: current portion of convertible notes payable
|
|
|
131,456
|
|
|
|
-
|
|
Long-term convertible notes payable
|
|
$
|
791
|
|
|
$
|
10,663
|
|
During the six months ended August 31, 2016 and 2015, the Company recognized amortization of discount of $83,146 and $0, respectively.
Promissory Note – December 10, 2015
On December 10, 2015, the Company entered into a Securities Purchase Agreement pursuant to which the Company issued a convertible note in the amount of $170,000, which included an original issue discount ("OID") of $20,000, for net proceeds to be provided of $150,000. Pursuant to the terms of the note, net proceeds of $45,000 upon closure of the agreement, on which the Company recognized a pro-rated OID of $15,000 in addition to the cash proceeds and two investor notes for $50,000 each. The debt is convertible upon effective date of the note, debt holder can convert into common stock at $0.30 per share unless market capitalization falls below $10M at any time in which the conversion rate is reset to lower of conversion price and market price with a true-up provision. In addition to the convertible note, the Company granted to the same investor the right to purchase, at any time, three five−year 100,000 fully paid and non-assessable cashless warrants of Company's common stock. The exercise price of the cashless warrants are $0.30 unless, while warrant is outstanding, the Company sells any common stock, debt, warrants, options, preferred shares or other instruments or securities which are convertible into or exercisable for shares of common stock, at an effective price per share less than the exercise price then such price shall become the exercise price.
During six months ended August 31, 2016, the Company issued a convertible note of $79,750 with 132,917 warrants according to the Securities Purchase Agreement on December 10, 2015 and the Company received cash of $67,500 and recognized pro-rated OID of $12,250.
The Company identified conversion features embedded within convertible debt and warrants issued during 2016 and 2015. The Company has determined that the conversion feature of the Notes represents an embedded derivative since the Notes include a reset provision which could cause adjustments upon conversion. Accordingly, the Notes are not considered to be conventional debt and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The warrants are exercisable into 232,917 shares of common stock, for a period of five years from issuance, at a price of $0.30 per share. On June 6, 2016 the Company issued another convertible note to third party, as a result of the reset features the warrants became exercisable into 232,917 shares of common stock at $0.10 per share. The reset feature of warrants associated with this convertible note was effective at the time that a separate convertible note with lower exercise price was issued. Per the terms of the warrants, once this separate convertible note was issued the reset feature was effective.
The Company determined that the conversion feature met the definition of a liability in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity's Own Stock and therefore bifurcated the embedded conversion option once the note becomes convertible and accounted for it as a derivative liability. The fair value of the conversion feature was recorded as a debt discount and amortized to interest expense over the term of the note.
The Company valued the conversion feature using the Black Scholes valuation model. The fair value of the derivative liability for all the note and warrants that became convertible during the six months ended August 31, 2016 amounted to $88,894. $67,500 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $21,394 was recognized as a “day 1” derivative loss.
During the six months ended August 31, 2016, the Company repaid notes with principal amounts totaling to $21,442 and converted notes with principal amounts of $37,820 into 1,927,112 shares of common stock. The corresponding derivative liability at the date of conversion of $52,283 was credited to additional paid in capital.
Promissory Notes - Issued in fiscal year 2017
During the six months ended August 31, 2016, the Company issued a total of $140,000 notes with the following terms:
|
·
|
Terms ranging from 9 months to 2 years.
|
|
|
|
|
·
|
Annual interest rates ranging from 8% to 12%.
|
|
|
|
|
·
|
Convertible at the option of the holders either at issuance or 180 days from issuance. The note dated June 6, 2016 is convertible at September 6, 2016.
|
|
|
|
|
·
|
Conversion prices are typically based on the discounted (55% to 60% discount) lowest trading prices of the Company’s shares during various periods prior to conversion. Certain notes allow for the conversion price to be the lower of the closing sale price or the discounted trading price.
|
Certain notes allow the Company to redeem the notes at rates ranging from 130% to 150% depending on the redemption date provided that no redemption is allowed after the 180th day. Likewise, certain notes include original issue discounts totaling to $17,300 and the Company received cash of $122,700.
The Company identified conversion features embedded within certain notes and warrants issued during 2016. The Company has determined that the conversion feature of the Notes represents an embedded derivative since the Notes include a reset provision which could cause adjustments upon conversion. Accordingly, the Notes are not considered to be conventional debt and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The warrants are exercisable into 1,875,000 shares of common stock, for a period of five years from issuance, at a price of $0.10 per share. We accounted for the issuance of the Warrants as a derivative.
The Company determined that the conversion feature met the definition of a liability in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging - Contracts in Entity's Own Stock and therefore bifurcated the embedded conversion option once the note becomes convertible and accounted for it as a derivative liability. The fair value of the conversion feature was recorded as a debt discount and amortized to interest expense over the term of the note.
The Company valued the conversion feature using the Black Scholes valuation model. The fair value of the derivative liability for all the note and warrants that became convertible during six months ended August 31, 2016 amounted to $111,687. $25,000 of the value assigned to the derivative liability was recognized as a debt discount to the notes while the balance of $86,687 was recognized as a “day 1” derivative loss.
Warrants
A summary of activity during the period ended August 31, 2016 follows:
|
|
Warrants Outstanding
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding, February 29, 2016
|
|
|
100,000
|
|
|
$
|
0.10
|
|
Granted
|
|
|
2,007,917
|
|
|
|
0.10
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited/canceled
|
|
|
-
|
|
|
|
-
|
|
Outstanding, August 31, 2016
|
|
|
2,107,917
|
|
|
$
|
0.10
|
|
The following table summarizes information relating to outstanding and exercisable warrants as of August 31, 2016:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Number of Shares
|
|
|
Weighted Average Remaining
Contractual life (in years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,917
|
|
|
|
4.28
|
|
|
$
|
0.10
|
|
|
|
232,917
|
|
|
$
|
0.10
|
|
|
1,875,000
|
|
|
|
4.95
|
|
|
|
0.10
|
|
|
|
1,875,000
|
|
|
|
0.10
|
|
|
2,107,917
|
|
|
|
4.77
|
|
|
|
0.10
|
|
|
|
2,107,917
|
|
|
|
0.10
|
|
NOTE 5 -
DERIVATIVE LIABILITIES
The Company analyzed the conversion option for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
ASC 815 requires we assess the fair market value of derivative liability at the end of each reporting period and recognize any change in the fair market value as other income or expense item.
The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of August 31, 2016. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in the August 31, 2016 and February 29, 2016 valuations:
|
|
Six Months Ended
|
|
Year Ended
|
|
|
|
August 31, 2016
|
|
February 29, 2016
|
|
Expected life in years
|
|
0.52 - 5.00
|
|
1.03 - 5.01
|
|
Stock price volatility
|
|
244 - 490
|
%
|
304 - 532
|
%
|
Risk free interest rate
|
|
0.44 - 1.42
|
%
|
0.62 - 1.68
|
%
|
Expected dividends
|
|
None
|
|
None
|
|
The following table summarizes the changes in the derivative liabilities during the six months ended August 31, 2016:
Balance - February 29, 2016
|
|
$
|
81,191
|
|
Addition of new derivative recognized as debt discounts
|
|
|
92,500
|
|
Addition of new derivatives recognized as loss on derivatives
|
|
|
108,081
|
|
Derivatives settled upon conversion of debt
|
|
|
(52,283
|
)
|
Re-measurement – August 31, 2016
|
|
|
-
|
|
Gain on change in fair value of the derivative
|
|
|
(3,585
|
)
|
Balance - August 31, 2016
|
|
$
|
225,904
|
|
The net loss on derivatives during the six months ended August 31, 2016 and 2015 was $104,496 and $0, respectively.
NOTE 6 – EQUITY
Series F Preferred Stock
There were no issuances of the Series F Preferred Stock during the six months ended August 31, 2016.
Common Stock
During the six months ended August 31, 2016, the Company issued common stock, as follows;
|
·
|
2,000,000 shares of common stock to employees, with a fair value of $300,000, for work related to the Company's activities in California.
|
|
|
|
|
·
|
1,500,000 shares of common stock to an employee, with a fair value of $540,000, based on the employee agreement.
|
|
|
|
|
·
|
1,927,112 shares of common stock were issued for the conversion of debt of $37,820.
|
NOTE 7 – SUBSEQUENT EVENT
Subsequent to August 31, 2016, a total of $50,000 convertible debt was converted, resulting in the issuance of 7,690,283 common shares.