Exhibit 99.2
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND 2016
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 |
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
| | | |
| | | |
| | | |
| 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.
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) / INCOME
| | For the three months ended March 31, |
| | | |
| | | |
| 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.
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
| | Additional Paid-in Capital | | Additional Paid-in Capital - Common Stock | Obligation to issue Shares | | Accumulated Other Comprehensive Income | Total Stockholders' Deficit |
| | | | | | | | | | | |
| 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.
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | For the three months ended March 31, |
| | | |
| | | |
| 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.
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
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.
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.
(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 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.
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND 2016
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.
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.
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 $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 | |
| | | | |
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.
ENVIRONMENTAL PACKAGING TECHNOLOGIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIODS ENDED MARCH 31, 2017 AND 2016
“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.
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.
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.
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.
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:
| | | |
| | | |
| 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:
| | | |
| | | |
| 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:
| | | |
| | | |
| | | |
| 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.
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 | | | |
| 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.
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:
| | | |
| | | |
| | | |
| 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.
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.
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.
| | | |
| 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 | | |
| | | |
| 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 | | |
| | | |
| 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 |
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:
| | |
| 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.
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, |
| | | |
| 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.
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:
| | | | |
| | | | | | |
| | | | | | |
| 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.
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.
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.
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:
| | | | |
| 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.
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:
| | | |
| 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.
