NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
INTERIM
FINANCIAL STATEMENTS
The
interim Condensed Consolidated Financial Statements of
Environmental Packaging Technologies Holdings, Inc. and its
subsidiaries ("EPTI" or the "Company") have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information
and disclosures necessary for a presentation of the Company's
financial position, results of operations, and cash flows in
conformity with accounting principles generally accepted in the
United States of America. In the opinion of management, these
financial statements reflect all normal recurring adjustments and
accruals necessary for a fair statement of the Company's financial
position, results of operations, and cash flows for such periods.
The results of operations for any interim period are not
necessarily indicative of the results for the full year. The
December 31, 2016 Consolidated Balance Sheet data were derived from
audited financial statements, but do not include all disclosures
required by accounting principles generally accepted in the United
States of America. These financial statements should be read in
conjunction with the financial statements and notes thereto
contained in the Company’s Annual Report within Form 8-K for
the year ended December 31, 2016.
The
Company has an accumulated deficit as of September 30, 2017 of
($47,017,959). This accumulated deficit is primarily the result of
a non-cash write-off of impaired assets of $29,272,766. At
September 30, 2017, the Company’s total current liabilities
of $9.0 million exceeded its total current assets of $7.2 million,
resulting in a working capital deficit of approximately $1.7
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 $16.3 million increase in the working capital
deficit is primarily related to decreases in current liabilities as
of September 30, 2017 due to the conversion of a subordinated note
to shares of common stock and by increases in current assets,
primarily other assets.
The
Company’s continuation as a going concern is dependent on
management’s ability to develop profitable operations and/or
obtain additional financing from shareholders and/or other third
parties. In order to address the need to satisfy continuing
obligations and realize its long-term strategy, management’s
plans include continuing to fund operations with cash received from
financing activities, however, there are no guarantees that any of
future financings will close.
The
accompanying condensed 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.
4.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis
of Presentation
The
condensed 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
condensed 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 condensed consolidated
financial statements. In the opinion of management, all adjustments
considered necessary to give a fair presentation have been
included.
(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 condensed 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 condensed 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 condensed 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.
(f)
Cash and Cash
Equivalents
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 September 30,
2017, and December 31, 2016, cash balances of $747,217 and
$814,778, respectively, are not insured by the Federal Deposit
Insurance Corporation or other programs. As of September 30, 2017,
and December 31, 2016 the Company did not have any cash
equivalents.
As of
September 30, 2017, the Company had a balance of $35,000 designated
as restricted cash, which are held in an escrow
account.
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 September 30,
2017, and December 31, 2016, the allowance for doubtful accounts
totaled $28,554 and $20,773, respectively.
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 $72,130 and $88,959 at September 30, 2017
and December 31, 2016, respectively.
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.
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 $69,978 and $65,593 as of September
30, 2017 and December 31, 2016, respectively, within accrued
liabilities in the accompanying consolidated balance
sheet.
|
Nine
months ended September 30, 2017
|
Year
ended
December
31, 2016
|
Product warranty
liability:
|
|
|
Opening
balance
|
$
65,593
|
$
64,195
|
Accruals for
product warranties issued in the period
|
4,385
|
1,398
|
Ending
liability
|
$
69,978
|
$
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.
“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
45,308,191
and 24,939,097
for the nine months ended September
30, 2017 and 2016, respectively. On a dilutive basis, the average
outstanding dilutive shares was 46,832,868 and 29,490,151 for the
nine months ended September 30, 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.
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 September 30, 2017 and December 31, 2016,
respectively.
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.
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 September 30, 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.
5.
ACCOUNTS
RECEIVABLE, NET
The
Company’s net accounts receivable is as follows:
|
|
|
|
|
|
Trade accounts
receivable
|
$
2,954,824
|
$
2,899,242
|
Less: allowance for
doubtful accounts
|
(28,554
)
|
(20,773
)
|
Total accounts
receivable, net
|
$
2,926,270
|
$
2,878,469
|
The
Company’s inventories are as follows:
|
|
|
|
|
|
Raw
materials
|
$
416,081
|
$
533,132
|
Finished
goods
|
2,051,911
|
1,773,501
|
Less: allowance for
slow-moving inventories
|
(72,130
)
|
(88,959
)
|
Total inventories,
net
|
$
2,395,862
|
$
2,217,674
|
The
Company’s accrued liabilities are comprised of the
following:
|
|
|
|
|
|
|
|
|
Warranty
reserve
|
$
69,978
|
$
65,593
|
Accrued
taxes
|
592,873
|
73,991
|
Accrued
interest
|
-
|
71,182
|
Accrued legal
settlement
|
95,000
|
661,667
|
Accrued
professional fees
|
31,843
|
42,125
|
Other accrued
liabilities
|
21,997
|
31,556
|
Accrued Big Red
Resources invoices
|
174,158
|
195,735
|
Equity Issuance
Cost Liability
|
192,600
|
-
|
Total
|
$
1,178,449
|
$
1,141,849
|
8. 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 $712,237 and $716,238 for the nine
months ended September 30, 2017 and 2016, respectively. As of
September 30, 2017, and December 31, 2016, the Company had
outstanding payables to Zipline of $101,575 and $130,552,
respectively. Also, as of December 31, 2016, the Company had an
outstanding payable to David Skriloff of $15,000, which was paid
off during the nine months ended September 30, 2017.
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
|
|
|
|
|
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 September 30, 2017
|
|
|
|
|
|
GPB
Debt Holding II, LLCC
|
Senior
Lender
|
|
$
-
|
4.8
%
|
|
David
Belding
|
Director
|
|
$
150,000
|
14.3
%
|
|
Joseph
Kowal
|
Director
|
|
$
-
|
13.1
%
|
|
MKM
Opportunity Master Fund, Ltd.
|
Shareholder/debtor
|
|
$
-
|
12.4
%
|
|
OMB
Acquisition Corp, LLC
|
Shareholder/debtor
|
|
$
375,000
|
0.0
%
|
|
Ranmor,
LLC
|
Shareholder/debtor
|
|
$
-
|
0.0
%
|
|
(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 nine months ended September 30, 2017 and 2016, the Company
incurred $187,500 and $158,481 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.
The
Company’s short-term notes payable are as
follows:
|
|
|
|
|
|
|
|
|
Senior secured
notes (A)
|
$
-
|
$
3,200,000
|
Secured convertible
notes (B)
|
-
|
795,000
|
Preferred note
(C)
|
375,000
|
375,000
|
Subordinated
convertible note (D)
|
-
|
200,000
|
Promissory notes
(E)
|
150,000
|
150,000
|
|
|
|
Total
|
$
525,000
|
$
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
months of April 2017 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 (E) below for
promissory notes. 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 $.50 per share and
carries a dividend of 6% that can be accrued at the Company’s
option.
ii.
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 the nine months ended September 30, 2017, $305,000 was paid
and financing of an additional $50,000 was received 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. In addition, during the months of April 2017 and
May 2017, the accredited investors of the six month Secured
Convertible Note made their decisions to convert $540,000 of unpaid
principal and $24,000 of unpaid interest into 1,116,000 shares of
common stock and the obligation to issue 6,000 shares of common
stock.
iii.
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.
iv.
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. During April 2017,
$200,000 was converted to 900,000 shares of common
stock.
v.
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.
vi.
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 was October 15, 2017. Interest on the
loan was waived by the lender. On April 17, 2017, OMB converted
$13,964,664 of its Subordinated notes into 9,879,740 shares of
common stock.
Interest
expense for the short-term notes was $1,269,039 and $421,143 for
the nine months ended September 30, 2017 and 2016,
respectively.
10.
SHORT-TERM
LINE OF CREDIT
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. In addition to
the initial drawdown of $3,639,033, the Company borrowed an
additional $2,805,100, of which $2,791,085 was repaid during the
nine months ended September 30, 2017. Amortization of debt issuance
costs was $199,967 for the nine months ended September 30,
2017.
11.
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 $1,455,000, and repaid 1,439,051,
leaving a remaining balance of $437,500 at September 30,
2017.
During
the nine months ended September 30, 2017 and 2016, the interest
expense that was incurred and paid on these advances was $372,063
and $59,254, respectively.
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 750,000 shares of
pre-split $0.001 par value common stock. As of September 30, 2017
and December 31, 2016, the Company did not have any Stock Option
Plans.
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 1,010,000 shares of common
stock at $.001 per share. Proceeds were $1,010 from the exercising
of the warrants.
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.
In June
2017, EPT completed an additional equity financing where there is
an obligation to issue 5,104,000 shares of common stock at $0.50
per share for a total $2,552,000. 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.
In
August 2017, EPT issued 4,859,000 shares of common stock at $0.50
per share for a total of $2,429,500 with an obligation to issue
245,000 shares of common stock at $0.50 per share for a total of
$122,500.
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.
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.
|
|
|
Net income
(loss)
|
$
(3,536,305
)
|
$
728,068
|
Weighted average
shares outstanding:
|
|
|
Basic
|
45,308,191
|
24,939,097
|
Diluted
|
46,832,868
|
29,490,151
|
|
|
|
Basic
EPS
|
(0.08
)
|
$
0.03
|
Diluted
EPS
|
(0.08
)
|
$
0.02
|
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
|
|
|
|
|
|
United
States
|
$
7,186,750
|
$
6,371,295
|
Korea
|
5,156,886
|
5,301,878
|
Rest of the
World
|
1,156,597
|
1,369,281
|
Total
|
$
13,500,233
|
$
13,042,454
|
The
following table shows assets held at each of the Company’s
locations:
Location
|
|
|
|
|
|
United
States
|
$
3,298,558
|
$
2,817,173
|
Korea
|
3,002,610
|
2,925,785
|
Europe
|
1,044,301
|
1,212,057
|
Rest of the
World
|
17,839
|
13,096
|
Total
|
$
7,363,308
|
$
6,968,111
|
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:
|
|
Twelve months
ending December 31,
|
|
2017
|
$
100,387
|
2018
|
79,489
|
2019
|
66,437
|
Thereafter
|
—
|
|
$
246,313
|
Rent
expense for the nine months ended September 30, 2017 and 2016 was
$111,026 and $70,095, 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 and a additional payments in the amount of $325,000 leaving
a balance of $95,000, which is accrued as of September 30, 2017
within accrued liabilities in the accompanying consolidated balance
The Company is working to facilitate a remaining payment
schedule.
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.
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
nine months ended September 30, 2017 and 2016 the Company incurred
$413,678 and $130,613, respectively for legal costs associated with
these loss contingencies.
The
Company is subject to U.S. federal, state, and foreign income
taxes. The Company’s income tax (benefit) expense for the
nine months ended September 30, are as follows:
|
|
|
Current
|
|
|
Federal
|
$
—
|
$
—
|
State
|
293
|
223
|
Foreign
|
25,701
|
201,999
|
Total
|
$
25,994
|
$
202,222
|
The
Company's effective tax rate was .71 and 21.74% for the nine months
ended September 30, 2017 and 2016, respectively. The Company's
effective tax rate for the nine months ended September 30, 2017 was
positively impacted by operating losses incurred in both domestic
and foreign jurisdictions giving rise to a net tax expense of
$25,994. The Company's effective tax rate for the nine months ended
September 30, 2016 was negatively impacted by operating profits
earned in foreign jurisdictions resulting in net tax expenses of
$202,222.
17.
CONCENTRATION
OF RISK
Major Customer
For the
nine months ended September 30, 2017 and 2016, seven customers
accounted for approximately 54% of the Company’s revenues and
eight customers accounted for approximately 54% of the
Company’s revenues, respectively. As of September 30, 2017,
and December 31, 2016, one customer accounted for approximately 46%
and 41%, of the Company’s accounts,
respectively.
Our
largest customer is based out of Korea and accounted for 36% and
25% of sales for the nine months ended September 30, 2017 and 2016,
respectively. Total revenue for this customer was $4,905,351and
$4,251,630 for the nine months ended September 30, 2017 and 2016,
respectively.
Major Suppliers
For the
nine months ended September 30, 2017 and 2016, seven suppliers
accounted for 44% and 39% of the total cost of revenues,
respectively.
Major Lenders
For the
nine months ended September 30, 2017 and year ended December 31,
2016, three lenders accounted for $3,932,965 and $17,539,664,
respectively, of the Company’s total debt of $3,932,965 and
$19,103,164, respectively.
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:
|
|
June 30, 2017
|
December 31, 2016
|
|
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|
Level
|
Value
|
Value
|
Value
|
Value
|
Cash
|
1
|
$
747,217
|
$
747,217
|
$
814,778
|
$
814,778
|
Cash in
Escrow
|
1
|
$
35,000
|
35,000
|
$
--
|
--
|
Accounts
receivable
|
2
|
$
2,926,270
|
$
2,926,270
|
$
2,878,469
|
$
2,878,469
|
Short-term
deposits
|
1
|
$
245,250
|
245,250
|
--
|
--
|
Accounts
payable
|
2
|
$
3,425,012
|
$
3,425,012
|
$
3,157,032
|
$
3,157,032
|
Accrued
liabilities
|
2
|
$
1,178,449
|
$
1,178,449
|
$
1,141,849
|
$
1,141,849
|
Short-term
notes
|
2
|
$
525,000
|
$
525,000
|
$
4,720,000
|
$
4,720,000
|
Short-term line of
credit
|
2
|
$
3,407,966
|
$
3,407,966
|
$
--
|
$
--
|
Advance from
customer
|
2
|
$
--
|
$
--
|
$
497,689
|
$
497,689
|
Other short-term
liabilities
|
2
|
$
437,500
|
$
437,500
|
$
418,500
|
$
418,500
|
Short-term investment
loan
|
2
|
$
--
|
$
--
|
$
13,964,664
|
$
13,964,664
|
Other long-term
liabilities
|
2
|
$
63,665
|
$
63,665
|
$
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 for the
nine months ended September 30, 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 nine months ended
September 30, 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 nine months ended September 30, 2017 and year ended
December 31, 2016, respectively.
The
carrying amount of level 1 and level 2 financial instruments
approximates fair value because of the short maturity of the
instruments. There
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.
iv.
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.
1)
In December 2017,
the Company completed the financing of $400,000 of 10% convertible
notes with warrants to purchase 1.5 shares for every dollar
invested. The Notes convert at $0.50 per share and the warrants
have a strike price of $0.50 and an expiration date of 18 months
from issuance. In January 2018, the Company sold an additional
$200,000 of the same convertible notes.