UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____.
Commission File Number 000-54307
| AXIOM CORP. |
| (Exact name of registrant as specified in its charter) |
| Colorado | N/A | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
| 380
Vansickle Road, Unit 600, St. Catharine’s, ON Canada L2S 0B5 |
N/A | |
| (Address of principal executive offices) | (Zip Code) |
| (905) 646-8787 |
| (Registrant’s telephone number, including area code) |
| N/A |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Name of each exchange on which registered: | |
| None | None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.00001
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of Common Stock held by non-affiliates of the Registrant on June 30, 2015 was $11,894,995 based on a $0.45 average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
| Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: | 67,397,975 common shares as of March 22, 2016 |
AXIOM CORP.
TABLE OF CONTENTS
Axiom Corp.
Form 10-K
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “intends”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements speak only as of the date of this Current Report and are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks listed under the section entitled “Risk Factors” commencing on page 8 of this report, which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
In this report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares in our capital stock.
As used in this report and unless otherwise indicated, the terms “we”, “us” and “our” refer to Axiom Corp.
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Corporate History
Axiom Corp was incorporated under the laws of the State of Colorado on April 2, 2012. Our business office is located at 380 Vansickle Road, Unit 600, St. Catharines, ON, Canada L2S 0B5. On April 2, 2012, Kranti Kumar Kotni was appointed as our sole director, Chief Executive Officer, Chief Financial Officer, President, Secretary and Treasurer. During 2012, Mr. Kotni purchased 30,000,000 shares of our common stock at a price of $0.0002 per share for gross proceeds of $6,000.
On April 2, 2012, we acquired Acton Holdings Limited, a Kenyan company, which was then our wholly owned subsidiary, by acquiring the two ordinary shares of Acton that represented all of the issued and outstanding shares of Acton. As a Kenyan company was required to have at least two shareholders, one share was registered in our company’s name and the other share was held by Kranti Kumar Kotni, in trust for our company. Acton was incorporated under the laws of the Republic of Kenya on September 6, 2011 and carried on all of our business activities in Kenya. Since we were in our startup stage, Acton was predominately involved in administrative activities such as setting up bank accounts, establishing relationships with government offices and establishing our office facilities.
Share Exchange Transaction
On February 23, 2015, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Papernuts Corporation, a corporation established under the laws of the Province of Ontario, Canada (“Papernuts Canada”), the shareholders of Papernuts Canada (the “Papernuts Canada Shareholders”), and Kranti Kumar Kotni, the controlling stockholder of the Company (the “Controlling Stockholder”). Pursuant to the Share Exchange Agreement, the Company agreed to acquire up to 1,220,165 shares, which represents 100% shares of common stock of Papernuts Canada, from the Papernuts Canada Shareholders (the “Papernuts Canada Shares”) in exchange for up to Fifty Two Million (52,000,000) restricted shares of the Company’s common stock (the “Company Shares”).
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On February 26, 2015, the Company closed on the Share Exchange Agreement, with 95.6% of the Papernuts Canada Shareholders exchanging a total of 1,166,540 Papernuts Canada Shares (the “Papernuts Exchanged Shares”) for a total of 49,714,642 Company Shares (the “Company Exchanged Shares”). Each Papernuts Exchanged Shares was converted into the number of Papernuts Exchanged Shares at an exchange ratio of 42.617187019 (the “Exchange Ratio”), rounded, if necessary, up to the nearest whole share (the “Share Exchange”). After the Share Exchange, Papernuts Canada becomes a majority-owned subsidiary of the Company.
Pursuant to the Share Exchange Agreement, the Company also issued warrants to purchase an aggregate of 5,650,000 shares of the Company’s common stock at exercise prices ranging from $0.056 to $0.075 per share to replace warrants previously held by Papernuts Canada warrant holders (the “Warrants”). The Warrants are currently exercisable and may be exercised for a period of 24 months from the date of issuance, February 26, 2015.
The Share Exchange Agreement contains customary representations and warranties.
Additionally, as required by the Share Exchange Agreement, the Company and Mr. Kotni entered into a Share Transfer & Assignment Agreement dated February 26, 2015, pursuant to which the Company, following the Closing of the Share Exchange Agreement, transferred to Mr. Kotni all of the issued and outstanding shares of the Company’s formerly wholly-owned subsidiary, Acton Holdings Limited, a Kenyan company. Mr. Kotni assumes all the liabilities of Acton Holdings Limited.
As a result of the Share Exchange Agreement, (i) we have discontinued all prior operations, and our principal business has become the business of Papernuts Canada, and (ii) Papernuts became a majority owned subsidiary of the Company. As the Papernuts Canada Shareholders obtained the majority of the outstanding shares of the Company through the acquisition, the acquisition is accounted for as a reverse merger or recapitalization of the Company. As such, Papernuts Canada is considered the acquirer for accounting purposes.
PaperNuts Corporation, is a corporation established under the laws of the Province of Ontario, Canada, We were incorporated on Apil 8, 2010 as “2239794 Ontario, Inc.”. On January 19, 2015, we filed articles of amendment with the Ministry of Government Services in the Province of Ontario to change our name to “Papernuts Corporation”. The Company provides an alternative packaging solution to plastic and corn based loose fill material. We are taking a new approach to the loose-fill packaging industry currently dominated by the polystyrene plastic “peanut” styrofoam fillers, bubble wrap, air pillows, crumpled paper, foam-in-place and corn starch peanut products. The waste and inconvenience of dealing with plastic material is a problem for many end users. It commonly needs to be separated from organic or recyclable waste for proper disposal and lasts for thousands of years in landfills. Plastic and corn-based fillers do a poor job of protecting items as they are smooth and can be easily compressed allowing items to migrate and damage to occur. Our product “PaperNuts” is re-usable whereas many plastic products are not.
Using 100% recycled paper and our PaperNuts machine, PaperNuts interlocks with each other forming a protective matrix around packaged items. The trend towards environmentally friendly packaging solutions is gaining momentum with companies such as Wal-Mart and other industry leaders, adopting new standards for responsible packaging by way of the “Sustainable Packaging Scorecard.” (http://news.walmart.com/news-archive/2006/11/01/wal-mart-unveils-packaging-scorecard-to-suppliers)
The main objection to polystyrene “foam peanuts” and corn fillers, besides their typical higher cost and larger carbon footprint, is that they are not made on site but manufactured in a centrally located manufacturing facility forcing the finished product to be transported with a substantial shipping cost to the purchaser. PaperNuts is now purchased as a finished product but for high volume users we are also planning to have the ability to supply compact PaperNuts “Factories” or machines that require only 10 square feet or less of floor space. Thus, providing the ability to manufacture Papernuts on demand on site, which greatly reduces the shipping and overall storage costs associated with competitive products.
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We currently have a supplier agreement with SP Fiber Technologies, which has the capacity to supply our current raw material needs, as well as our expected future needs. There are other suppliers in the marketplace that we could purchase from, but we do not anticipate a need for any additional suppliers for the foreseeable future. It was announced on August 11, 2015 that Norcross, GA based WestRock Company (NYSE: WRK) had entered into a definitive agreement to acquire SP Fiber Holdings Inc., the parent company of SP Fiber Technologies. It is our intention to continue our relationship with the Dublin, GA mill"s new ownership and expect to continue business as usual.
We are currently selling the finished PaperNuts product to customers and are actively pursuing the needs of high volume end-users. Additionally, we are in negotiations with several large providers of recycled paper to ensure long-term availability. During the year ended 2015, approximately 31% of revenues were derived from one customer. For the year ended 2014, approximately 66% of revenues were derived from this same customer.
Located in a St. Catharines’, Ontario industrial complex, our location serves as corporate office, production facility and storage. The staff is made up of a team of experienced individuals including, management, sales and marketing personnel.
Company Background and Opportunity Summary
On March 1, 2013, we entered into an agreement with Devipack Oy, Finland to purchase its technology and intellectual property. PaperNuts competes favorably on both price and performance with polystyrene plastic peanuts and corn-based products. Supplied as a finished product or manufactured on site, PaperNuts is a new approach to sustainable packaging that provides increased protection and cushioning when shipping items throughout the supply chain.
PaperNuts are made from 100% recycled paper that was destined for landfill and are both biodegradable and fully recyclable after use. PaperNuts are clean and easy to handle, non-polluting and low in particulates. Accordingly, PaperNuts is a cost effective “green alternative” to competitive fillers and is a sustainable product. PaperNuts eliminates the contamination of its customers receiving areas and the problem of collecting, segregating and disposing of plastic waste. Many consumers are demanding a “green” alternative that is in keeping with the movement to cleaner and more environmentally responsible packaging solutions.
Using PaperNuts shows that a company cares about the environment and offers many superior performance benefits as the material expands rather than settles during shipment eliminating product migration and damage as the formation causes interlocking of individual PaperNuts. Available in various grades of paper and lengths depending on the application, we believe that PaperNuts will quickly become the new industry standard. PaperNuts can be shipped as a finished product ready for use or can be manufactured on site.
The Market Opportunity
The North American loose fill market is highly fragmented with many different providers and products servicing this packaging function. Loose fill, biopolymer beads, foam and plastic padding are all competing to be the packaging material of choice. The vast majority of these products are more expensive, environmentally hazardous and offer inferior protection as compared to PaperNuts.
Over 1,000 companies produce, distribute, or manufacture loose fill products. We believe that our strategy to partner with large recyclable paper producers will ensure it is the lowest cost producer of superior loose-fill products.
In North America and around the world, there is a push for increased regulations governing the use of loose-fill packaging material. In California, there has been a movement towards the banning of certain polystyrene products and this represents a large business opportunity for PaperNuts as more and more states adopt “green” guidelines.
Environmental concerns have led to governments throughout Western Europe taking steps to deal with the issue of packaging waste and recycling. Recent packaging directives from the European Commission have led to the imposition of challenging targets for recycling. Many governments are examining new ways to discourage packaging waste with landfill becoming a major political issue. With governments implementing landfill taxes all companies will be seeking alternatives that are cost effective and environmentally friendly.
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While North America represents a significant market opportunity, so do markets where products are being sent to North America. Consumers are now demanding more environmentally sound solutions to packaging issues. Several multi-national companies, including Wal-Mart, now use an industry standard “Sustainable Packaging Scorecard” when selecting many of their supply partners.
Our strategy centers on providing high volume users the ability to produce Papernuts on site, on demand via Papernut machines thus reducing the customer’s carbon footprint and reducing their cost per package.
Products and Services
We launched our newest industrial machine model during the second quarter of 2015. This unit has an improved gearing system and cut off process and is significantly faster and more reliable than prior versions. We have filed provisional patent applications over the use of several design, manufacturing, and process improvements made by the company to the PaperNuts original intellectual property. The immediate "Patent Pending" status over these innovations will help safeguard the Company's exclusive rights to the latest PaperNuts technology and create a foundation for additional patents and claims as the Company continues to make additional advancements. The planned provisional and subsequent non-provisional application would protect the latest PaperNuts technology with patent exclusivity to 2035 or beyond, if granted and extended.
We are also in the process of applying for patent protection on the latest PaperNuts machine (the “Omni-channel machine”) that will have a much smaller footprint and will primarily be focused on supporting the Omni-channel market for large retailers. Finally, a number of modifications on the type of paper nut have been developed including variable length, weight, single and double cut products. We have partnered with Spark Innovations, a leading Canadian industrial design company, for the completion of design and prototype development. The Omni-channel machine will be smaller, quieter, and lighter than current industrial scale machines and will enable select retail channel partners to manufacturer PaperNuts on-site on-demand at the retail store level. This will allow consumers direct access to PaperNuts products at their favorite local shipping and supply stores while freeing valuable shelf space at retailers that can be reallocated to selling other products.
We intend to customize our products such that each addresses individual industry requirements. In most cases we will supply the machine at no cost to qualified customers conditional upon a minimum paper usage. Our plan of operations assumes a customer purchases a minimum of 2500 lbs of paper per month. Given that the capacity of a machine is at least 30,000 lbs of product per month we believe this is a reasonable expectation on minimum usage. A single machine can produce 1500 lbs of PaperNuts/day in an 8 hour shift.
For low volume end users we will provide a finished product. We see this as less than 10% of the overall business. However, we do feel there is a significant opportunity to provide a number of large national retailers with retail ready packages as many of them are currently selling polystyrene foam peanuts. Additionally, we will be working towards establishing strategic alliances with large end users where we will provide them with our PaperNut machines at little to no cost on a contractual basis that they procure a minimum amount of paper sales through us on a monthly basis.
The Competition
The main competition to PaperNuts is: polystyrene plastic "peanuts" or corn fillers, bubble wrap; foam and air pillows. These products were the solution of choice for most business operators but as industry is moving away from oil-based products and more towards "eco" friendly solutions a new market has developed for eco-friendly biodegradable solutions such as PaperNuts. In addition to their negative environmental impact many of these oil-based products need to be shipped at a significant cost to the customer, which ultimately increases the customer’s carbon footprint and negatively effects bottom line performance.
PaperNuts produces a “green” product that addresses all the shortcomings of polystyrene solutions. The packaging industry as a general rule will look for change only if the change results in a direct cost savings to operations. The environmentally friendly product, or “green” product, would only be selected by a majority of customers who can identify a lower cost and take the added benefit of being eco-friendly. In other words, if the competition to an oil-based product does not come at a lower overall cost then there is a strong possibility it will not be considered as a viable replacement; even if it is “green”.
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Providing an eco-friendly “green” product that is cost competitive is our goal. We believe most businesses that can identify an immediate savings in their packaging costs will chose to switch products.
Anticipated Timelines and Costs
We had previously expected to have additional industrial machine units and Omni-channel machines available for sale during the third and fourth quarter of 2015 respectively. Due to financing delays we were unable to meet these targets. We now expect these items to be available beginning in the second quarter of 2016.
We anticipate research and development expenditures of $175,000 over the next twelve months. We estimate an additional $350,000 in fixed asset purchases over the same time frame. Both machine models are expected to be produced at a cost of $5,000 per unit.
PaperNuts will have all CSA & ESA certifications for both its industrial and Omni-channel machines. We have chosen Canadian Eco Systems of Concord, Ontario to assist us with the approval process to ensure we can achieve the respective certifications within a timely manner.
“CSA” refers to the “Canadian Standards Association” who provide product certification to manufacturers, retailers, code authorities and consumers around the world. In order to sell our products to the North American market, they must be tested by an accredited third party testing agency, such as CSA, to applicable industry standards. The certification process involves sending product samples to CSA laboratories for inspection and testing. Once all the requirements outlined in the standards are met, CSA will issue a certification report and certificate of compliance.
“ESA” refers to the Electrical Safety Authority which is the regulatory body governing electrical product safety in the province of Ontario. The objectives of ESA are to ensure that electrical products do not present a serious product hazard; to ensure that electrical products are approved; and to ensure accountability for the safety of electrical products offered for sale. ESA approvals are obtained by obtaining a certification mark or field evaluation label from a recognized testing agency.
Machine Fabrication
PaperNuts has selected Girotti Machine as its North American Manufacturer of the PaperNuts Paper Converter, which is the machine that turns ordinary 100% recycled kraft paper into our finished product – PaperNuts. Girotti Machine, located in St. Catharines Ontario, is strategically positioned close to company headquarters. Having served the manufacturing industry in the Niagara area for more than half a century, Girotti Machine developed the expertise to serve its customers in any capacity, from machining and fabrication to machine repair on both Ajax and National forging presses. Girotti Machine has been able to use their expertise to serve a larger customer base across North America. With ISO 9001and Z299 certification, Girotti Machine has managed projects in the power generation sectors, both nuclear and oil and gas, as well as the steel manufacturing industry. From material handling equipment, to ship winches, Girotti Machine has the capability and expertise to move this project forward. Girotti Machine has assembled a manufacturing team for the PaperNuts Paper Converter including; mechanical designers, gearing experts, electricians, machining technicians, and a project manager.
Strategic Alliances
SP Fiber Technologies
SPFT is our main paper supplier. SPFT is one of only a few packaging companies that produces 100% recycled materials. They are deeply committed to minimizing their impact on the environment, and strive to be the "greenest" mill in North America. Major capital investments were made in 2013 at the Dublin, GA mill, and they now have the two largest and most efficient paper machines in the kraft paper market. Because of their commitment to the environment, their capacity to supply all of North America, and their capability to do so in an efficient and low cost manner, we view SPFT as a key supplier and partner going forward. It was announced on August 11, 2015 that Norcross, GA based WestRock Company (NYSE: WRK) had entered into a definitive agreement to acquire SP Fiber Holdings Inc., the parent company of SPFT. It is our intention to continue our relationship with the Dublin, GA mill"s new ownership and expect to continue business as usual.
6
Spark Innovations
Founded in 1989, Spark Innovations is an award-winning industrial design company specializing in the development of innovative products and inventions. Spark's professional team of industrial designers and mechanical engineers has taken thousands of products from the early stages of an idea to the mass market. Spark's in-house team works closely with clients on product development, strategy, product management, manufacturing, patents, and logistics. We help companies and individual inventors identify, visualize, and communicate product design opportunities to create revenue. Spark designs projects ranging from electronic consumer goods and housewares to sports and industrial equipment. Spark's strategic design development process has resulted in over 240 U.S. patents issued. For additional information regarding Spark Innovations, visit www.sparkinnovations.com.
Research & Innovation Division, Niagara College
We are in collaboration with Niagara College, uses advanced manufacturing techniques to create machinery engineered specifically for the packaging industry In our first project, we performed an analysis of our machine to evaluate its operations and then developed and implemented potential modifications, with the overall goal of making a more cost efficient machine, thus allowing the Company to scale its business model within the North American marketplace. Positive results from the first project resulted in a second project, which is currently in progress. This entails creating a material handling system for dispensing the PaperNuts product. The result of this project will enable us to respond to our customers' needs by introducing our dispenser into the packaging process. The center at Niagara College allows us access to expertise, technology, students and equipment. This access allows us to develop new process improvements for the next generation of PaperNuts products. We do not have any intellectual property arrangements with Niagara College.
Marketing
We plan to market our product through two immediate initiatives:
1.) Paper Consumable Contracts - We provide large end users with our PaperNut machines at little to no cost on a contractual basis that they procure a minimum amount of paper sales through us on a monthly basis.
2.) National Retailers – We feel there is a significant opportunity to provide a number of large national retailers with retail ready packages, as many of them are currently selling polystyrene foam peanuts at significantly higher costs.
The primary distribution strategy will involve forming strategic partnerships with large North American distribution companies that are looking for sustainable packaging solutions. These companies have their own sales teams across North America with a specific focus on packaging products making it a natural fit. As a result, it avoids us having to build out a North American sales team and supply chain network. We believe this is the most efficient market strategy and will allow us to scale the business faster than any other option.
Over the past year we have introduced our product to a number of potential customers, both large and medium sized operations, and haves received an overwhelming positive response. The issue to be resolved in meeting customer requests was machine availability. To date, customer responses received were based upon a limited marketing attempt by the Company and were “word of mouth” opportunities.
Employee
We had 6 employees as of March 29, 2016.
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Other Information
News and information about Axiom Corp. and our wholly owned subsidiary is available on and/or may be accessed through our website, www.axiompaper.com. In addition to news and other information about our company, we have provided access through this site to our filings with the SEC as soon as reasonably practicable after we file or furnish them electronically. Information on our website does not constitute part of and is not incorporated by reference into this registration statement or any other report we file or furnish with the SEC. You may also read and copy any document that we file at the public reference facilities of the SEC in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s website at http://www.sec.gov.
We are not required to provide this information as we are a smaller reporting company.
Item 1B. Unresolved Staff Comments
We are not required to provide this information as we are a smaller reporting company
We maintain executive offices at 380 Vansickle Road, Unit 600, St. Catharines, Ontario, Canada. The office and general expenses associated with leasing our office space is approximately $2,500 per month. We believe that our office space is adequate for our current needs, but growth potential may require a facility due to anticipated addition of personnel. We do not have any policies regarding investments in real estate, securities or other forms of property. We do not own any real property.
Other than stated below, we know of no material, existing or pending legal proceedings against the Company or PaperNuts Corporation, nor is the Company or PaperNuts Corporation involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which directors, officers or any affiliates, or any registered or beneficial shareholders, of the Company or PaperNuts Corporation is an adverse party or has a material interest adverse to the interests of the Company or PaperNuts Corporation.
In the first quarter of 2015 PaperNuts became aware of a potential claim from an individual stating that he was owed $150,000 worth of common shares. No action has been commenced as of the date of this report. Management is of the opinion that this potential claim is without merit. Accordingly, no provision has been made in the financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market For Common Equity
There is a limited public market for our common stock. Our common stock is quoted on OTC PINK under the symbol “AXMM.”
The following table sets forth the high and low prices of our common stock, without retail mark-up, mark-down or commission and may not be reflective of actual transactions:
| Fiscal Year Ended December 31, 2015 | ||||||||
| Quarter Ended | High $ | Low $ | ||||||
| December 31, 2015 | 0.03 | 0.01 | ||||||
| September 30, 2015 | 0.07 | 0.02 | ||||||
| June 30, 2015 | 0.47 | 0.04 | ||||||
| March 31, 2015 | 1.87 | 0.25 | ||||||
| Fiscal Year Ended December 31, 2014 | ||||||||
| Quarter Ended | High $ | Low $ | ||||||
| December 31, 2014 | 0.55 | 0.26 | ||||||
| September 30, 2014 | 0.45 | 0.26 | ||||||
| June 30, 2014 | 0.45 | 0.41 | ||||||
| March 31, 2014 | 0.41 | 0.41 | ||||||
Holders
As of March 22, 2016, there were 51 holders of record of our common stock. As of such date, 67,397,975 shares of our common stock were issued and outstanding.
Dividend Policy
To date, we have not paid dividends on shares of our common stock and we do not expect to declare or pay dividends on shares of our common stock in the foreseeable future. The payment of any dividends will depend upon our future earnings, if any, our financial condition, and other factors deemed relevant by our board of directors.
9
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
In March, 2015, the Company sold 900,000 shares of common stock through a subscription agreement for total proceeds of $270,000. The shares were issued at a price of $0.30 per common share.
In May, 2015 the Company sold 250,000 shares of common stock through a subscription agreement for total proceeds of $75,000. The shares were issued at a price of $0.30 per common share.
In September 2015 the Company issued 100,000 shares of common stock to an advisory firm for services rendered, the value of the services were $4,000.
On October 16, 2015, the Company closed a financing transaction pursuant to Securities Purchase Agreements, dated October 5, 2015 (the “Securities Purchase Agreements”) and Convertible Promissory Notes, dated October 5, 2015 (the “Notes”), each entered into by the Company and two investors (the “Purchasers”). Pursuant to the Securities Purchase Agreements, as described below, the principal amount of the Notes is $612,250, and the purchase price of the Notes is $575,000. The conversion price is equal to 60% multiplied by the lowest average trading price for the Company’s common stock during the twenty (20) day trading period ending on the latest complete trading day prior to the date of conversion. While the Purchasers’ conversion rights exist, the Company will reserve a sufficient number of shares from its authorized and unissued shares of common stock to provide for the issuance of common stock upon the full conversion of the Notes.
The above issuances of shares are exempt from registration, pursuant to Section 4(2) of the Securities Act. These securities qualified for exemption under Section 4(2) of the Securities Act since the issuance securities by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of securities offered. We did not undertake an offering in which we sold a high number of securities to a high number of investors. In addition, these stockholders had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.
Item 6. Selected Financial Data
As a “smaller reporting company”, we are not required to provide the information required by this Item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
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Our audited consolidated financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report.
In this annual report, unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to "US$" refer to United States dollars and all references to "common stock" refer to the common shares in our capital stock.
As used in this annual eport, the terms “we”, “us”, “our”, “Axiom” and “our company” mean Axiom Corp. and our 95.6% majority-owned subsidiary, Papernuts Corporation (“Papernuts Canada”), a corporation established under the laws of the province of Ontario, Canada, unless otherwise indicated.
Overview
The Company, through our subsidiary Papernuts Canada, provides an alternative packaging solution to plastic and corn based loose fill material. We are taking a new approach to the loose-fill packaging industry currently dominated by the polystyrene plastic “peanut” styrofoam fillers, bubble wrap, air pillows, crumpled paper, foam-in-place and corn starch peanut products. The waste and inconvenience of dealing with plastic material is a problem for many end users. It commonly needs to be separated from organic or recyclable waste for proper disposal and lasts for thousands of years in landfills. Plastic and corn-based fillers typically do a poor job of protecting items as they are smooth and can be easily compressed allowing items to migrate and damage to occur. Our product “Papernuts” is re-usable whereas most plastic products are not.
Using 100% recycled paper and our Papernuts machine, Papernuts interlocks with each other forming a protective matrix around packaged items. The trend towards environmentally friendly packaging solutions is gaining momentum with companies such as Wal-Mart and other industry leaders, adopting new standards for responsible packaging by way of the “Sustainable Packaging Scorecard.” (http://news.walmart.com/news-archive/2006/11/01/wal-mart-unveils-packaging-scorecard-to-suppliers).
The main objection to polystyrene “foam peanuts” and corn fillers, besides their typical higher cost and larger carbon footprint, is that they are not made on site but manufactured in a centrally located installation forcing the finished product to be transported with a substantial shipping cost to the purchaser. Papernuts is now purchased as a finished product but for high volume users we also have the ability to supply compact Papernuts “Factories” or machines that require only 10 square feet of floor space. Thus, providing the ability to manufacture product protection on site, which reduces the shipping and storage costs associated with competitive products.
We are currently selling the finished Papernuts product to customers and are actively pursuing the needs of high volume end-users.
Located in a St. Catharines’, Ontario industrial complex, our location serves as corporate office, production facility and storage. The staff is made up of a team of experienced individuals including, management, sales and marketing personnel.
Recent Events
Share Exchange Transaction
On February 23, 2015, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Papernuts Corporation, a corporation established under the laws of the Province of Ontario, Canada (“Papernuts Canada”), the shareholders of Papernuts Canada (the “Papernuts Canada Shareholders”), and Kranti Kumar Kotni, the controlling stockholder of the Company (the “Controlling Stockholder”). Pursuant to the Share Exchange Agreement, the Company agreed to acquire up to 1,220,165 shares, which represents 100% shares of common stock of Papernuts Canada, from the Papernuts Canada Shareholders (the “Papernuts Canada Shares”) in exchange for up to Fifty Two Million (52,000,000) restricted shares of the Company’s common stock (the “Company Shares”).
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On February 26, 2015, the Company closed on the Share Exchange Agreement, with 95.6% of the Papernuts Canada Shareholders exchanging a total of 1,166,540 Papernuts Canada Shares (the “Papernuts Exchanged Shares”) for a total of 49,714,642 Company Shares (the “Company Exchanged Shares”). Each Papernuts Exchanged Shares was converted into the number of Papernuts Exchanged Shares at an exchange ratio of 42.617187019 (the “Exchange Ratio”), rounded, if necessary, up to the nearest whole share (the “Share Exchange”). After the Share Exchange, Papernuts Canada becomes a majority-owned subsidiary of the Company.
Pursuant to the Share Exchange Agreement, the Company also issued warrants to purchase an aggregate of 5,650,000 shares of the Company’s common stock at exercise prices ranging from $0.056 to $0.075 per share to replace warrants previously held by Papernuts Canada warrant holders (the “Warrants”). The Warrants are currently exercisable and may be exercised for a period of 24 months from the date of issuance, February 26, 2015.
The Share Exchange Agreement contains customary representations and warranties.
Additionally, as required by the Share Exchange Agreement, the Company and Mr. Kotni entered into a Share Transfer & Assignment Agreement dated February 26, 2015, pursuant to which the Company, following the Closing of the Share Exchange Agreement, transferred to Mr. Kotni all of the issued and outstanding shares of the Company’s formerly wholly-owned subsidiary, Acton Holdings Limited, a Kenyan company. Mr. Kotni assumes all the liabilities of Acton Holdings Limited.
As a result of the Share Exchange Agreement, (i) we have discontinued all prior operations, and our principal business has become the business of Papernuts Canada, and (ii) Papernuts became a majority owned subsidiary of the Company. As the Papernuts Canada Shareholders obtained the majority of the outstanding shares of the Company through the acquisition, the acquisition is accounted for as a reverse merger or recapitalization of the Company. As such, Papernuts Canada is considered the acquirer for accounting purposes.
Financing
On October 16, 2015, the Company closed a financing transaction pursuant to Securities Purchase Agreements, dated October 5, 2015 (the “Securities Purchase Agreements”) and Convertible Promissory Notes, dated October 5, 2015 (the “Notes”), each entered into by the Company and two investors (the “Purchasers”). Pursuant to the Securities Purchase Agreements, as described below, the principal amount of the Notes is $612,250, and the purchase price of the Notes is $575,000. The conversion price is equal to 60% multiplied by the lowest average trading price for the Company’s common stock during the twenty (20) day trading period ending on the latest complete trading day prior to the date of conversion. While the Purchasers’ conversion rights exist, the Company will reserve a sufficient number of shares from its authorized and unissued shares of common stock to provide for the issuance of common stock upon the full conversion of the Notes.
Results of Operations
The following summary of our results of operations should be read in conjunction with our consolidated financial statements for the year ended December 31, 2015 and 2014 which are included herein.
Our operating results for year ended December 31, 2015 and 2014 are summarized as follows:
| 2015 | 2014 | |||||||
| Revenue | $ | 82,130 | $ | 57,667 | ||||
| Cost of revenue | (51,131 | ) | (26,775 | ) | ||||
| Total operating expense | 1,012,042 | 338,556 | ||||||
| Net loss | $ | (1,072,692 | ) | $ | (397,376 | ) | ||
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Revenue for the year ended December 31, 2015 was $82,130 (2014 - $57,667) and cost of revenue was $51,131 (2014 - $26,775) for gross profit of $30,999 and $30,892. Revenue is expected to increase when the newly designed retail machines are available for sale. Management expects this to be in the second quarter of 2016.
The Company believes that all expired patents can be extended based on noticeable improvements to the machine/apparatus as well as the finished product itself. The Company has filed provisional patents on these new machines and the associated intellectual property. The Company has introduced an entirely new generation of PaperNuts machines that was designed to service a variety of large retail channels/outlets across North America and ultimately abroad as the business grows. We expect to file provisional patents on the retail machine in 2016.
Expenditures during the year ended December 31, 2015 totaled $1,012,042 (2014– $338,556) which include the below items:
The Company incurred advertising and promotion expenses of $2,182 (2014 - $12,652) in connection with promotional activity during the period.
The Company incurred interest and financing expenses of $22,976 (2014 – $10,186) in connection with its loans outstanding and note payable. The future expense will increase or decrease as further loans are advanced or repaid.
The Company incurred office and general expenses of $38,857 (2014 - $24,285).
The Company incurred rent expenses of $13,254 (2014 - $14,714) which was consistent with the prior period. Rent expense is expected to be consistent in the short-term.
The Company incurred salaries and consulting fees expenses of $439,445 (2014 - $106,561). Fees were higher than expected in the first quarter of 2015 as a result of the share exchange transaction. These costs are expected to be reduced in the short-term.
The Company incurred travel expenses of $9,350 (2014 - $18,843).
The Company had a depreciation and amortization expense of $23,416 (2014- $8,000) in connection with its existing capital and intangible assets. As the Company adds further equipment, the expense will increase.
The Company incurred research and development costs of $134,658 (2014 – $20,626). The increase in research and development costs relates to the design and development of the Company’s latest PaperNuts converter which was completed during the second quarter of 2015.
The Company incurred professional fees of $179,779 (2014- $122,688) which include audit and review fees as well as legal counsel. The increase relates to additional costs associated with loans advanced during the period and the share exchange transaction described above.
The Company recorded stock-based compensation expense of $148,125 (2014 - $Nil) relating to warrants issued by the Company during the period. The warrants were valued using the Black-Scholes pricing model.
The Company recorded a gain on foreign exchange of $22,031 (2014 – loss of $9,564) in connection with the fluctuating exchange rate.
The Company recorded an impairment of assets of $62,697 (2014 - $80,148). The carrying value of the Company’s intangible assets was fully written off due to the uncertainty of the future benefit that the Company will be able to realize.
The Company also recorded a valuation loss of $50,983 (2014 - $Nil) in connection with convertible loans issued in the fourth quarter of 2015.
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The Company had net loss and comprehensive loss of $1,072,692 (2014 - $397,396). The increased loss year over year relates to the additional staff costs in the current period, as well as increased professional fees in connection with the share exchange transaction. Also contributing to the loss was a share-based compensation valuation for options issued in the current period.
Three Months Ended December 31, 2015
Revenue for the three months ended December 31, 2015 was $39,234 (2014 - $12,912) and cost of revenue was $28,329 (2014 - $12,372) for gross profit of $10,904 and $539.
Expenditures during the three month period ended December 31, 2015 totaled $145,108 (2014– $173,504) which include the below items:
The Company incurred advertising and promotion expenses of $Nil (2014 - $3,737 in connection with promotional activity during the period.
The Company incurred interest expenses of $11,358 (2014 – $3,007) in connection with its loans outstanding and note payable. The future expense will increase or decrease as further loans are advanced or repaid.
The Company incurred office and general expenses of $10,289 (2014 - $5,075).
The Company incurred rent expenses of $3,111 (2014 - $3,576) which was consistent with the prior period. Rent expense is expected to be consistent in the short-term.
The Company incurred salaries and fees expenses of $53,646 (2014 - $63,489). The decrease is a result of certain staff moving from full-time to part-time during the period. The future expense is expected to be reduced in the short term.
The Company recorded travel expenses of $2,278 (2014 –$13,239).
The Company had a depreciation and amortization expense of $6,621 (2014- $4,446) in connection with its existing capital and intangible assets. As the Company adds further equipment, the expense will increase.
The Company incurred research and development costs of $34,057 (2014 – $18,814) in connection with new machine development.
The Company incurred professional fees of $23,748 (2014- $58,119) which include audit and review fees as well as legal counsel.
The Company recorded a loss on foreign exchange of $12,146 (2014 – $2,272) in connection with the fluctuating exchange rate.
The Company recorded an impairment of assets of $62,697 (2014 - $60,865). The carrying value of the Company’s intangible assets was fully written off due to the uncertainty of the future benefit that the Company will be able to realize.
The Company also recorded a valuation loss of $50,983 (2014 - $Nil) in connection with convertible loans issued in the fourth quarter of 2015.
The Company had net loss and comprehensive loss of $235,739 (2014 - $397,376).
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Liquidity and Capital Resources
| At | At | |||||||
| December 31, | December 31, | |||||||
| Working Capital | 2015 | 2014 | ||||||
| Current Assets | $ | 95,130 | $ | 46,269 | ||||
| Current Liabilities | $ | 894,499 | $ | 248,977 | ||||
| Working Capital Deficiency | $ | (799,369 | ) | $ | (202,708 | ) | ||
Year Ended | Year Ended | |||||||
| December 31, | December 31, | |||||||
| 2015 | 2014 | |||||||
| Cash Flows | ||||||||
| Net Cash (Used In) Operating Activities | $ | (677,893 | ) | $ | (373,514 | ) | ||
| Net Cash From (Used in) Investing Activities | 51,566 | (127,107 | ) | |||||
| Net Cash from Financing Activities | 647,015 | 509,223 | ||||||
| Foreign exchange | 18,826 | - | ||||||
| Increase in Cash | $ | 39,514 | $ | 8,602 | ||||
The Company had working capital deficit of approximately $799,369 as at December 31, 2015 (December 31, 2014 - $202,708). The Company has some revenue but additional funding will be required for working capital and further expansion of the business. Management believes that it will have sufficient capital to fund its operations for the next twelve months. Our financial statements for the year ended December 31, 2015 have been prepared on a going concern basis and do not include any adjustments that might result from the outcome of this uncertainty. Although we have been successful in the past in obtaining financing, there is no assurance that it will be able to obtain adequate financing in the future or that such financing will be on terms advantageous to our Company.
We anticipate that we will meet our ongoing cash requirements through equity or debt financing as well as product sales. We estimate that our expenses over the next 12 months will be approximately $770,000 which consists of salaries and management fees of $385,000, professional fees of $125,000, research and development expenses of $175,000, administrative expenses of $60,000 and interest of $25,000. We further anticipate fixed asset purchases of approximately $350,000 over the next twelve months. These estimates may change significantly depending on the nature of our future business activities and our ability to raise capital from shareholders or other sources.
In addition to product sales, we intend to meet our cash requirements for the next 12 months through a combination of debt financing and equity financing by way of private placements. We decided to become a reporting company to be better equipped to raise capital by providing transparency to the public about our operations and development. There is no assurance that we will be successful in completing any such financings on terms that will be acceptable to us.
If we are not able to raise the funds necessary to implement our business plan as anticipated, we will scale back our business development in line with available capital. Our main priority will be to retain our reporting status with the Securities and Exchange Commission which means that we will first ensure that we have sufficient capital to cover our legal and accounting expenses. Once these costs are accounted for, in accordance with how much financing we are able to secure, we will focus on developing our marketing our products, and paying consulting and management fees. We will likely not expend funds on the remainder of our planned activities unless we have the required capital.
Management is unaware of any demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant's liquidity increasing or decreasing in any material way.
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Investing Activities
We used $23,401 in investing activities relating to equipment purchases during the year ended December 31, 2015. Additionally we received $74,967 in connection with the reverse merger.
Financing Activities
We received $54,983 in related party loans and advances during the year ended December 31, 2015. In March, 2015 the Company received $270,000 from a private investor in a private sale in exchange for 900,000 shares of the Company’s common stock. In May, 2015 the Company received $75,000 from a private investor in a private sale in exchange for 250,000 shares of the Company’s common stock. In September, 2015 the Company received $200,000 from a demand note.
On October 16, 2015, the Company closed a financing transaction pursuant to Securities Purchase Agreements dated October 5, 2015 (the “Securities Purchase Agreements”) and Convertible Promissory Notes dated October 5, 2015 (the “Notes”), each entered into by the Company and two investors (the “Purchasers”). Pursuant to the Securities Purchase Agreements, as described below, the principal amount of the Notes is $612,250, and the purchase price of the Notes is $581,000. The terms of the Notes are as follows:
The Notes, dated October 5, 2015, (the “Issue Date”), earn interest at an annual rate equal to 10% and provide for a maturity date of October 5, 2016. The funding calls for $256,000 at the time of closing of the Securities Purchase Agreements and Notes, $50,000 upon the filing of a registration statement with the Securities and Exchange Commission (the “SEC”), $50,000 upon receipt of the first round of comments from the SEC regarding the registrations statement, $125,000 upon the effectiveness of the registration statement, and at the Company’s option, $100,000 thirty (30) days after the registration statement becomes effective. As part of the Securities Purchase Agreements, the Company entered into a Registration Rights Agreement (‘RRA”) with the Purchasers. Pursuant to the RRA, the Company shall use its best efforts to file a registration statement on Form S-1 (the “Registration Statement) with the SEC, registering the shares of common stock which may be issued to the Purchasers pursuant to the Securities Purchase Agreements. The Company must use its commercially reasonable efforts to cause the Registration Statement to be declared effective by the SEC. As at March 22, 2016 the registration was not yet effective.
Any amount of principal or interest not paid when due on the Notes will bear interest at an annual rate of 24% applied from the due date until the date of payment. The Notes carry an original issue discount (“OID”) of $28,750. The Company agrees to pay the Purchasers $8,500 to cover certain fees incurred in connection with the Securities Purchase Agreements and Notes. The amount for fees is included in the initial principal amount of the Notes and the original issue discount is applied pro rata in accordance with the funded tranches.
The notes are convertible at a conversion price equal to the lower of: 1) 60% multiplied by the lowest average trading price for the Company’s common stock during the twenty (20) day trading period ending on the latest complete trading day prior to the date of conversion; or 2) the closing price at October 5, 2015. While the Purchasers’ conversion rights exist, the Company will reserve a sufficient number of shares from its authorized and unissued shares of common stock to provide for the issuance of common stock upon the full conversion of the Notes.
In the event the Company redeems the Notes prior to maturity, the Company is required to pay off all principal balance, interest and any other amounts owing multiplied by 125%. In the event of default, the amount of principal and accrued interest will be due immediately, multiplied by 130%. The Securities Purchase Agreements restricts the ability of the Purchasers to convert the Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.
As a result of the variability in the amount of shares of common stock to be issued in accordance with variable pricing terms or conversion price protection clauses, the Company has recorded the conversion features as liabilities at fair value. The Company has determined that the convertible notes are valued at amortized cost, the conversion features are Level 2 fair value measurement and the binominal lattice pricing model was used to calculate the fair value as of December 31, 2015, and the commitment dates.
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Contractual Obligations
As a “smaller reporting company”, we are not required to provide tabular disclosure obligations.
Going Concern
The accompanying financial statements have been prepared assuming that our company will continue as a going concern. As shown in the accompanying financial statements, our company incurred a net loss of $1,041,782 for the year ended December 31, 2015. These factors raise substantial doubt about our company’s ability to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that our company cannot continue as a going concern. Management anticipates that it will be able to raise additional working capital through the issuance of stock and through additional loans.
The ability of our company to continue as a going concern is dependent upon our company’s ability to attain a satisfactory level of profitability and obtain suitable and adequate financing. There can be no assurance that management’s plan will be successful.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon the accompanying consolidated financial statements, which have been prepared in accordance with the accounting principles generally accepted in the United States of America and are expressed in United States Dollars. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of our company and our 95.6% owned subsidiary, Papernuts Canada. All significant intercompany balances and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with 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 date of the financial statements and the reported amounts of revenues and expenses during the year. Significant estimates include the useful life of its equipment and intangible assets and the valuation of equipment and intangible assets.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. At December 31, 2015 and December 31, 2014, the Company had a cash balance of $48,116 and $8,602 respectively.
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Financial Instruments
The Company’s financial instruments include cash, accounts receivables, bank overdraft, accounts payable and accrued liabilities and loans payable to related parties. The carrying value of these instruments approximates their fair values due to their short-term nature. Cash and accounts receivables are classified as loans and receivables, bank overdraft, accounts payable and accrued liabilities and loans payable to related parties are classified as other financial liabilities, all of which are measured at amortized cost. It is the opinion of Management that the Company is not exposed to significant interest, currency or credit risks arising from its financial instruments.
The Company has issued convertible loans that are convertible into common stock, at the option of the holder, at conversion prices based on the trading price per share over a period of time. As a result of the variability in the amount of common stock to be issued, the conversion features are reflected at fair value. The instrument is bifurcated into a debt and derivative liability piece. The debt piece is accreted to face value over the life of debt. The derivative liability piece is measured using a binomial lattice valuation methodology and is included in the consolidated balance sheets under the caption “loans payable and conversion features”. Any unrealized and realized gains and losses related to the convertible loans are measured based on the changes in the fair values of the derivative liability. Such gains and losses and accretion costs are recorded as a valuation adjustment of convertible loans payable on the consolidated statements of operations and comprehensive loss.
Earnings (Loss) Per Share
Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. In periods that the Company reports a net loss, loss per share is not presented on a diluted basis, as the result would be anti-dilutive.
Foreign Currency Translation
Our company’s planned operations will be in the United States and Canada, which results in exposure to market risks from changes in foreign currency exchange rates. The financial risk is the risk to our company’s operations that arise from fluctuations in foreign exchange rates and the degree of volatility of these rates. Currently, our company does not use derivative instruments to reduce our exposure to foreign currency risk. Our company's functional currency for operations worldwide is the U.S. dollar. Nonmonetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at exchange rates in effect at the end of the year. Revenues and expenses are translated at average rates for the year. Gains and losses from translation of foreign currency financial statements into U.S. dollars are included in current results of operations.
Income Taxes
Our company accounts for income taxes using the asset and liability method which provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. Our company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
Recent Accounting Pronouncements
Our Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company”, we are not required to provide the information required by this Item.
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Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of our company have been prepared in accordance with generally accepted accounting principles in the United States and are expressed in US dollars.
AXIOM CORP.
TABLE OF CONTENTS
DECEMBER 31, 2015 AND 2014
| Report of Independent Registered Public Accounting Firm | Page F-1 |
| Consolidated Balance Sheets as of December 31, 2015 and December 31, 2014 | Page F-2 |
| Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2015 and 2014 | Page F-3 |
| Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2015 and 2014 | Page F-4 |
| Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014 | Page F-5 |
| Notes to the Consolidated Financial Statements | Pages F-6 - F-18 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board Of Directors and Shareholders of Axiom Corp.
We have audited the accompanying consolidated balance sheets of Axiom Corp. as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income, changes in shareholders' deficit, and cash flows for the years then ended. Axiom Corp.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Axiom Corp. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Axiom Corp.’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Axiom Corp. as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1, the Company has experienced negative cash flows from operations since inception and has accumulated a significant deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
|
Chartered
Professional Accountants |
Mississauga, Ontario
March 29, 2016
F-1
Consolidated Balance Sheets
(Expressed in United States dollars)
| Notes | December 31, 2015 | December 31, 2014 | ||||||||||
| Assets | ||||||||||||
| Current assets | ||||||||||||
| Cash | $ | 48,116 | $ | 8,602 | ||||||||
| Accounts receivable (net of allowance of $nil (2014 - $nil)) | 9,727 | 2,389 | ||||||||||
| Inventory | 5 | 13,528 | 13,410 | |||||||||
| Prepaid expenses and other receivables | 23,759 | 21,868 | ||||||||||
| Total current assets | 95,130 | 46,269 | ||||||||||
| Non-current assets | ||||||||||||
| Equipment | 6 | 21,646 | 14,284 | |||||||||
| Intangible assets | 7 | - | 70,074 | |||||||||
| Total non-current assets | 21,646 | 84,358 | ||||||||||
| Total assets | $ | 116,776 | $ | 130,627 | ||||||||
| Liabilities | ||||||||||||
| Current liabilities | ||||||||||||
| Accounts payable and accrued liabilities | 8 | $ | 251,433 | $ | 125,898 | |||||||
| Other taxes payable | 3,450 | 7,191 | ||||||||||
| Current portion of deferred revenue | 11 | 7,948 | 9,482 | |||||||||
| Due to related parties | 9 | 169,526 | 106,406 | |||||||||
| Loans payable and conversion features | 10 | 462,142 | - | |||||||||
| Total current liabilities | 894,499 | 248,977 | ||||||||||
| Non-current liabilities | ||||||||||||
| Deferred revenue | 11 | 10,597 | 22,125 | |||||||||
| Total non-current liabilities | 10,597 | 22,125 | ||||||||||
| Total liabilities | 905,096 | 271,102 | ||||||||||
| Stockholders' Deficit | ||||||||||||
| Capital Stock: | ||||||||||||
| Common stock, (authorized 200,000,000, issued 67,397,975, par value $0.00001 per share) | 12 | 674 | 520 | |||||||||
| Series A Preferred, (authorized 5,000,000, issued 2,666,668, par value $0.00001 per share) | 12 | 27 | - | |||||||||
| Series B Preferred, (authorized 5,000,000, issued 1,000,002, par value $0.00001 per share) | 12 | 10 | - | |||||||||
| Additional paid-in capital | 1,211,240 | 798,066 | ||||||||||
| Accumulated other comprehensive income | 36,633 | 17,807 | ||||||||||
| Deficit | (1,998,650 | ) | (956,868 | ) | ||||||||
| Axiom Corporation Ltd. Stockholders’ equity | (750,066 | ) | (140,475 | ) | ||||||||
| Non-controlling interest | (38,254 | ) | - | |||||||||
| Total stockholders’ deficit | (788,320 | ) | (140,475 | ) | ||||||||
| Total liabilities and deficit | $ | 116,776 | $ | 130,627 | ||||||||
| Going Concern | 1 | |||||||||||
| Contingency | 13 | |||||||||||
| Subsequent Events | 15 | |||||||||||
| Approved by the Board | |||
| “Scott MacRae” | “Jerry Moes” | ||
| Director | Director |
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Consolidated Statements of Operations and Comprehensive Loss
(Expressed in United States dollars)
| For the year | For the year | |||||||||||
| ended | ended | |||||||||||
| Notes | December 31, 2015 | December 31, 2014 | ||||||||||
| Revenue | 11 | $ | 82,130 | $ | 57,667 | |||||||
| Cost of revenue | 51,131 | 26,775 | ||||||||||
| Gross profit | 30,999 | 30,892 | ||||||||||
| Expenses | ||||||||||||
| Advertising and promotion | 2,182 | 12,652 | ||||||||||
| Interest and financing costs | 9, 10 | 22,976 | 10,186 | |||||||||
| Office and general | 38,857 | 24,286 | ||||||||||
| Rent | 13,254 | 14,714 | ||||||||||
| Salaries and fees | 439,445 | 106,561 | ||||||||||
| Travel | 9,350 | 18,843 | ||||||||||
| Depreciation and amortization | 6, 7 | 23,416 | 8,000 | |||||||||
| Research and development | 134,658 | 20,626 | ||||||||||
| Stock-based compensation | 12 | 148,125 | - | |||||||||
| Professional fees | 179,779 | 122,688 | ||||||||||
| Total operating expenses | 1,012,042 | 338,556 | ||||||||||
| (981,043 | ) | (307,664 | ) | |||||||||
| Impairment of assets | 7 | (62,697 | ) | (80,148 | ) | |||||||
| Valuation adjustment of convertible loans payable | 10 | (50,983 | ) | - | ||||||||
| Gain (loss) on foreign exchange | 22,031 | (9,564 | ) | |||||||||
| Net loss for the year | $ | (1,072,692 | ) | $ | (397,376 | ) | ||||||
| Net loss attributed to non-controlling interest | (30,910 | ) | - | |||||||||
| Net loss attributed to Axiom Corporation | (1,041,782 | ) | (397,376 | ) | ||||||||
| Net loss per share - basic and diluted | $ | (0.02 | ) | $ | (0.01 | ) | ||||||
| Weighted average number of shares outstanding - basic and diluted | 67,460,072 | 56,433,333 | ||||||||||
| Net loss for the year | $ | (1,072,692 | ) | $ | (397,376 | ) | ||
| Other comprehensive income – foreign exchange | 18,826 | 17,807 | ||||||
| Comprehensive loss for the year | $ | (1,053,866 | ) | $ | (379,569 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Consolidated Statements of Stockholders’ Deficit
(Expressed in United States dollars)
Common Stock | Series A Preferred Stock | Series B Preferred Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Deficit | Non-controlling interest | Total | |||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Balance January 1, 2015 | 520 | - | - | 798,066 | 17,807 | (956,868 | ) | (140,475 | ) | |||||||||||||||||||||||
| Issuance of warrants | - | - | - | 148,125 | - | - | 148,125 | |||||||||||||||||||||||||
| Reverse acquisition by Papernuts Canada | 564 | - | - | (84,301 | ) | 18,826 | - | - | (64,911 | ) | ||||||||||||||||||||||
| Shares issued for services | 1 | - | - | 3,999 | 4,000 | |||||||||||||||||||||||||||
| Non-controlling interest | (23 | ) | (7,344 | ) | (7,367 | ) | ||||||||||||||||||||||||||
| Proceeds of share subscriptions collected | 12 | - | - | 344,988 | - | - | 345,000 | |||||||||||||||||||||||||
| Conversion of common shares | (400 | ) | 27 | 10 | 363 | - | - | - | ||||||||||||||||||||||||
| Net (loss) for the year | - | - | - | - | - | (1,041,782 | ) | (30,910 | ) | (1,072,692 | ) | |||||||||||||||||||||
| Balance December 31, 2015 | 674 | 27 | 10 | 1,211,240 | 36,633 | (1,998,650 | ) | (38,254 | ) | (788,320 | ) | |||||||||||||||||||||
Common Stock | Series A Preferred Stock | Series B Preferred Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Deficit | Non-controlling interest | Total | |||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Balance January 1, 2014 | 426 | - | - | 306,755 | - | (559,492 | ) | (252,311 | ) | |||||||||||||||||||||||
| Issuance of common shares | 94 | - | - | 491,311 | - | - | 491,405 | |||||||||||||||||||||||||
| Net (loss) for the year | - | - | - | - | 17,807 | (397,376 | ) | - | (379,569 | ) | ||||||||||||||||||||||
| Balance December 31, 2014 | 520 | - | - | 798,066 | 17,807 | (956,868 | ) | - | (140,475 | ) | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
| For the year | For the year | |||||||
| ended | ended | |||||||
| December 31, 2015 | December 31, 2014 | |||||||
| Operating activities | ||||||||
| Net loss for the year | $ | (1,072,692 | ) | $ | (397,376 | ) | ||
| Depreciation and amortization | 23,416 | 8,000 | ||||||
| Impairment of assets | 62,697 | 80,148 | ||||||
| Valuation adjustment of convertible loans | 50,983 | - | ||||||
| Stock-based compensation | 148,125 | - | ||||||
| Accrued interest on loans | 24,168 | 7,175 | ||||||
| Non-cash consulting services provided | 4,000 | 5,473 | ||||||
| Net changes in non-cash working capital: | ||||||||
| Changes in accounts receivable | (9,229 | ) | 6,987 | |||||
| Change in inventory | (118 | ) | (41,065 | ) | ||||
| Changes in prepaid expenses | - | (17,837 | ) | |||||
| Changes in accounts payable and accrued liabilities and other taxes payable | 103,818 | (15,061 | ) | |||||
| Changes in deferred revenue | (13,061 | ) | (9,958 | ) | ||||
| Net cash flows (used in) operating activities | (677,893 | ) | (373,514 | ) | ||||
| Investing activities | ||||||||
| Purchase of intangible assets | - | (75,000 | ) | |||||
| Cash obtained from reverse merger | 74,967 | - | ||||||
| Purchase of equipment | (23,401 | ) | (52,107 | ) | ||||
| Net cash flows from investing activities | 51,566 | (127,107 | ) | |||||
| Financing activities | ||||||||
| Proceeds from common shares issued | 345,000 | 491,405 | ||||||
| Bank overdraft | - | (190 | ) | |||||
| Proceeds from loans | 595,068 | - | ||||||
| Repayment of loans | (348,036 | ) | - | |||||
| Related party loans and advances | 54,983 | 18,008 | ||||||
| Net cash flows generated by financing activities | 647,015 | 509,223 | ||||||
| Foreign exchange gain | 18,826 | - | ||||||
| Net increase in cash | 39,514 | 8,602 | ||||||
| Cash, beginning of year | 8,602 | - | ||||||
| Cash, end of year | $ | 48,116 | $ | 8,602 | ||||
The accompanying notes are an integral part of consolidated financial statements.
F-5
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 1. | Nature of Business, Economic Dependence and Going Concern |
Axiom Corp. (“Axiom” or the “Company”) was incorporated in the State of Colorado on April 2, 2012.
On February 23, 2015, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with shareholders of Papernuts Corporation (the “Papernuts Shareholders”) and Kranti Kumar Kotni, the controlling stockholder of Axiom (the “Controlling Stockholder”). Pursuant to the Share Exchange Agreement, the Papernuts Shareholders agreed to exchange up to 1,220,165 shares, which represents 100% of the common stock of Papernuts Corporation (“Papernuts”), for up to Fifty Two Million (52,000,000) shares of Axiom’s common stock (the “Company Shares”).
On February 26, 2015, the Company closed on the Share Exchange Agreement, with 95.6% of the Papernuts Shareholders exchanging a total of 1,166,540 common shares (the “Papernuts Exchanged Shares”) for a total of 49,714,642 Axiom Shares (the “Company Exchanged Shares”). Each Papernuts Exchanged Share was converted into the number of Company Exchanged Shares at an exchange ratio of 42.617187019 (the “Exchange Ratio”), rounded, if necessary, up to the nearest whole share (the “Share Exchange”).
Pursuant to the Share Exchange Agreement, the Company also issued warrants to purchase a total of 5,650,000 shares of the Company’s Common Stock at exercise prices ranging from $0.056 to $0.075 per share. These warrants have terms which are the same as and replace warrants previously held by Papernuts warrant holders. (see also note 12).
Additionally, on February 23, 2015, Mr. Scott MacRae, the former Chief Executive Officer of Papernuts, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with the Controlling Shareholder, whereby Mr. MacRae purchased 30,000,000 shares (the “Shares”) of the Company’s common stock beneficially owned by Mr. Kotni. The Shares were purchased by Mr. MacRae for an aggregate purchase price of $75,000.
As a result of the Share Exchange transaction and the transaction between Mr. MacRae and Mr. Kotni, Papernuts Canada has become a majority owned subsidiary of the Company and the Company now carries on the business of Papernuts Canada as its primary business.
Additionally, as required by the Share Exchange Agreement, the Company and Mr. Kotni entered into a Share Transfer & Assignment Agreement dated February 26, 2015, pursuant to which the Company, following the Closing of the Share Exchange Agreement, transferred to Mr. Kotni all of the issued and outstanding shares of the Company’s formerly wholly-owned subsidiary, Acton Holdings Limited, a Kenyan company. Mr. Kotni assumes all the liabilities of Acton Holdings Limited.
Papernuts was incorporated in Ontario, Canada on April 8, 2010 as 2239794 Ontario Inc. On January 19, 2015 Papernuts changed its name to Papernuts Corporation. The Company’s primary focus is the sale of paper and equipment. The Company’s registered office is as follows: 380 Vansickle Road, Unit 600, St. Catharines, Ontario, Canada, L2S 0B5.
At December 31, 2015, the Company had not yet achieved profitable operations, had an accumulated deficit of $1,998,650 and expects to incur further losses in the development of its business, all of which casts significant doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to raise additional funding to further develop operations and a sales and marketing program so as to grow revenue and attain profitability. Although the Company has been successful in the past in obtaining financing, there remains significant doubt that it will be able to obtain adequate financing in the future or that such financing will be on terms advantageous to the Company. During the year approximately 31% of revenues were derived from one customer (2014 – 66% from this same customer).
F-6
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 2. | Significant Accounting Policies |
Principles of Consolidation and Basis of Presentation
These consolidated financial statements include the accounts of the Company and its 95.6% owned subsidiary, Papernuts. All inter-company balances and transactions have been eliminated on consolidation. The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Use of Estimates
The preparation of financial statements in conformity with 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 date of the financial statements and the reported amounts of revenues and expenses during the period. Significant estimates include the use of the going concern assumption, the useful life of equipment and intangible assets, the valuation of equipment and intangible assets and the valuation of convertible debt.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. At December 31, 2015 and December 31, 2014, the Company had a cash balance of $48,116 and $8,602 respectively.
Revenue Recognition and Deferred Revenue
Revenue from product sales is recognized when the customer takes title, assumes the risks and rewards of ownership and collectability is reasonably assured. Revenue is recorded at the time of shipment for terms designated f.o.b. (free on board) shipping point. For sales transactions designated f.o.b. destination, revenue is recorded when the product is delivered to the customer’s delivery site, when title and risk of loss are transferred.
Revenue from the sale of licences and distribution agreements is recognized over the related term of the agreement. Proceeds received prior to the Company meeting its revenue recognition criteria is recorded as deferred revenue and shown as either a current or non-current liability depending on the expected timing of recognition.
Shipping and Handling Costs
Shipping and handling costs, such as freight to our customers’ destinations, are included in cost of revenue in the statement of operations and comprehensive loss. When shipping and handling costs are included in the sales price charged for our products, they are recognized in revenue. $12,574 (2014 -$2,426) of shipping and handling costs was included in cost of revenue for the year.
Inventories
Inventories are valued at the lower of cost or market using the average cost method. Inventory is periodically reviewed for use and obsolescence, and adjusted as necessary. Inventory consists of raw material and finished goods.
Equipment
Equipment is stated at cost, less accumulated depreciation. Expenditures for betterments are capitalized, whereas normal repairs and maintenance are expensed as incurred. The straight-line method is used to depreciate equipment over its estimated useful life, ranging from 3-5 years.
F-7
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 2. | Significant Accounting Policies - continued |
Intangible Assets
Intangible assets are stated at cost, less accumulated amortization. The straight-line method is used to amortize intangible assets over their estimated useful life, for a period of 10 years.
Impairment of Long-lived Assets
The Company periodically evaluates the carrying value of long-lived assets in accordance with GAAP, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal.
Fair Value of Convertible Loans
The Company has issued convertible loans that are convertible into common stock, at the option of the holder, at conversion prices based on the trading price per share over a period of time. As a result of the variability in the amount of common stock to be issued, the conversion features are reflected at fair value. The instrument is bifurcated into a debt instrument and derivative liability instrument. The debt is accreted to face value over the life of debt. The derivative liability is measured using a binomial lattice valuation methodology and is included in the consolidated balance sheets under the caption “loans payable and conversion features”. Any unrealized and realized gains and losses related to the convertible loans are measured based on the changes in the fair values of the derivative liability. Such gains and losses and accretion costs are recorded as a valuation adjustment of convertible loans payable on the consolidated statements of operations and comprehensive loss.
Loss per Share
Basic loss per share is calculated by dividing the Company’s net loss applicable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing the Company’s net loss available to common stockholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity instruments, if dilutive.
Income Taxes
Income taxes are computed in accordance with the provisions of ASC Topic 740, which requires, among other things, a liability approach to calculating deferred income taxes. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company is required to make certain estimates and judgments about the application of tax law, the expected resolution of uncertain tax positions and other matters. In the event that uncertain tax positions are resolved for amounts different than the Company’s estimates, or the related statutes of limitations expire without the assessment of additional income taxes, the Company will be required to adjust the amounts of related assets and liabilities in the period in which such events occur. Such adjustment may have a material impact on the Company’s income tax provision and results of operations.
Fair value of stock-based compensation
Stock-based compensation is valued using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different than those of traded options and because changes in the subjective input assumptions can materially affect the calculated fair value, such value is subject to measurement uncertainty.
Research and development costs
Development expenditures are capitalized if they meet the criteria for recognition as an asset, and are amortized over their expected useful lives once they are available for use. Research costs are expensed as incurred.
F-8
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 2. | Significant Accounting Policies - continued |
Fair Value of Financial Instruments
The standard, “Disclosures about Fair Value of Financial Instruments”, defines financial instruments and requires fair value disclosures for those instruments. The standard, “Fair Value Measurements”, defines fair value and establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported on the balance sheets for cash, accounts receivable, due to related parties, accounts payable and accrued liabilities and loan payable qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest. For the due to related parties, the Company believes the carrying value of the loans approximates fair value as the interest rates are market rates.
The standard establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy defined by the standard are as follows:
| Level 1 | Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, listed equities and U.S. government treasury securities; |
| Level 2 | Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include non-exchange-traded derivatives such as the conversion features of the loans payable; and |
| Level 3 | Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value from the perspective of a market participant. Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs. At each balance sheet date, the Company performs an analysis of all instruments subject to the standard and includes in Level 3 all of those whose fair value is based on significant unobservable inputs. |
Other than the conversion features, there were no assets or liabilities measured at fair value on a recurring basis as of December 31, 2015.
F-9
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 2. | Significant Accounting Policies - continued |
Foreign Currency Translation
As further described in Note 4, the Canadian dollar had been the functional and reporting currency of the Company’s business and the consolidated financial statements for periods up to December 31, 2014 were expressed in Canadian dollars. On February 26, 2015, to reflect the changed circumstances of the Company, the functional currency of the Company and its subsidiaries changed to the United States dollar and the Company decided to change its reporting currency to the United States dollar as well. Accordingly, these consolidated financial statements are expressed in United States dollars.
Monetary assets and liabilities denominated in currencies other than United States dollars are translated into United States dollars at the rate of exchange in effect at the end of the reporting period. Revenues and expenses are translated at the transaction exchange rate. Foreign currency gains and losses resulting from translation are reflected in net income of the period. An exchange rate of 0.7225 was used to translate the monetary assets and liabilities from Canadian to US dollars at December 31, 2015 (2014 - 0.8620). An exchange rate of 0.7822 was used to translate revenue and expenses from Canadian to US dollars for the year ended December 31, 2015 (2014 - 0.9166).
Accounting Principles for Future Adoption
In May 2014, FASB issued ASU 2014-09 with the intent of significantly enhancing comparability of revenue recognition practices across entities and industries. The new standard provides a single principles-based, five-step model to be applied to all contracts with customers and introduces new, increased disclosure requirements. The new standard is effective for annual and interim periods beginning on or after December 15, 2017 and may be applied on either a full or modified retrospective basis. The Company is currently assessing the impact of the new standard to the Company’s consolidated financial statements.
In August 2014, FASB issued ASU 2014-15 providing guidance on how to account for and disclose going concern risks. The new standard is effective for annual and interim periods beginning on or after December 15, 2016. The Company is currently assessing the impact of the new standard to the Company’s consolidated financial statements.
In April 2015, FSAB issued ASU 2015-03 to simplify presentation of debt issuance costs. The amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The ASU is effective for fiscal years and interim periods beginning after December 15, 2015. The Company is currently assessing the impact, if any, of implementing this guidance on its consolidated financial position and results of operations.
| 3. | Papernuts Reverse Merger |
A reverse acquisition transaction involving a non-public operating entity and a non-operating public company is in substance a share-based payment transaction, rather than a business combination. The Transaction is equivalent to the issuance of shares by the non-public operating entity, Papernuts, for the net assets and the listing status of the non-operating public company, Axiom. The fair value of the shares issued was determined based on the fair value of the common shares issued by Axiom.
A summary of the transaction is as follows:
| Deemed issuance of 49,714,642 post-Transaction common shares to the former shareholders of Papernuts Canada | $ | 124,287 | |||
| Cash and funds held in trust | $ | 74,967 | |||
| Accounts payable and accrued liabilities | (17,974 | ) | |||
| Due to related parties | (61 | ) | |||
| Loans payable | (148,035 | ) | |||
| Listing costs reallocated to additional paid-in capital | 215,390 | ||||
| Value attributed to Papernuts shares issued | $ | 124,287 |
F-10
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 4. | Change of Functional and Reporting Currency |
Effective February 26, 2015, Papernut’s functional currency changed to the United States dollar, and accordingly, Papernuts decided to change its reporting currency to the United States dollar. Prior to February 26, 2015, Papernut’s functional currency was the Canadian dollar and the Company used the Canadian dollar as its reporting currency. With the completion of the Share Exchange Agreement, the Company’s assets, liabilities, revenues and expenses are expected to be predominantly denominated in United States dollars and, accordingly, the use of the Canadian dollar to measure and report the Company’s financial performance and financial position became inappropriate. The impact of the currency translation up to February 26, 2015 is recorded in accumulated other comprehensive income. Under the current rate method for the comparative period presented, all assets and liabilities of the Company’s operations were translated from their Canadian dollar functional currency into United States dollars using the exchange rates in effect on the balance sheet date, shareholders’ equity were translated at the historical rates and revenues, expenses and cash flows were translated at the average rates during the reporting period presented. The resulting translation adjustments are reported under comprehensive income as a separate component of shareholders’ equity.
| 5. | Inventory |
| December
31, 2015 | December 31, 2014 | ||||||||
| Raw materials | $ | 11,306 | $ | 11,126 | |||||
| Finished goods | 2,222 | 2,284 | |||||||
| Total inventory | $ | 13,528 | $ | 13,410 | |||||
F-11
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 6. | Equipment |
| Accumulated | |||||||||||||
| December 31, 2015 |
Cost | Depreciation and Impairment | Net Book Value | ||||||||||
| Furniture | $ | 3,723 | $ | (3,038 | ) | $ | 685 | ||||||
| Machinery | 53,848 | (32,887 | ) | 20,961 | |||||||||
| $ | 57,571 | $ | (35,925 | ) | $ | 21,646 | |||||||
| Accumulated | |||||||||||||
| December 31, 2014 |
Cost | Depreciation and Impairment | Net Book Value | ||||||||||
| Furniture | $ | 3,723 | $ | (2,136 | ) | $ | 1,587 | ||||||
| Machinery | 89,419 | (76,722 | ) | 12,697 | |||||||||
| $ | 93,142 | $ | (78,858 | ) | $ | 14,284 | |||||||
Depreciation expense during the year ended December 31, 2015 was $16,039 (2014 - $4,656). During the year ended December 31, 2015 the Company recorded an impairment charge of $Nil (2014 - $80,148) with respect to its equipment.
| 7. | Intangible Assets |
In June 2014, Papernuts acquired the rights to the Papernuts trademark for $75,000. Terms of the agreement are as follows:
| ● | Upon signing the agreement and paying $20,000 (paid in July 2014), the Company received the temporary right to use the Papernuts name and trademark, provided Papernuts comply with certain insurance and other requirements as stipulated by the vendor. |
| ● | Upon payment of an additional $55,000, required to be paid by September 15, 2014 (and paid on that date), Papernuts received permanent use and ownership of the Papernuts name, web domain and any trademarks, patents and rights to sell Papernuts products in the US and Canada. |
| ● | Papernuts is required to pay a royalty of 2% of sales of Papernuts products, to a maximum of $100,000. |
| ● | As part of this agreement, should Papernuts and the vendor not be able to negotiate a distribution contract in the future, Papernuts would be required to acquire certain of the vendor’s inventory and equipment valued at $40,000 (paid in March, 2015). Papernuts has recorded an impairment charge of $35,000 in December, 2014 with respect to this inventory. |
Papernuts recorded amortization of $7,377 relating to this asset during the year ended December 31, 2015 (2014- $3,688). The remaining balance of $62,697 was fully written off due to the uncertainty of the future benefit that the Company will be able to realize.
F-12
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 8. | Accounts payable and accrued liabilities |
| Accounts payable consisted of the following as at December 31, 2015 and December 31, 2014. |
| December 31, 2015 | December 31, 2014 | ||||||||
| Accounts payable | $ | 159,568 | $ | 1,826 | |||||
| Accrued liabilities | 91,865 | 124,072 | |||||||
| $ | 251,433 | $ | 125,898 | ||||||
| 9. | Related Party Transactions and Balances |
| December
31, 2015 |
December 31, 2014 |
||||||||
| 8% Demand loans inclusive of interest | $ | 147,850 | $ | 99,812 | |||||
| Due to related party | 21,676 | 6,594 | |||||||
| Payable to related parties | $ | 169,526 | $ | 106,406 | |||||
On August 1, 2012, PaperNuts Canada received loans of $32,445 (CDN$32,500) from shareholders Jim Vanderzalm and Rob Moes. The loans were unsecured, and were due and payable on demand as they were contracted to meet PaperNuts Canada’s 2012 general fiscal obligations. In April, 2014 and January, 2015 Mr. Moes made additional advances of $6,818 (CDN$7,500) and $30,184 (CDN$37,500) respectively to PaperNuts Canada. As at December 31, 2015 there is principal and interest of $59,477 ($40,290 as at December 31, 2014) outstanding in relation to those loans. The largest outstanding balance during the year ended December 31, 2015 was $65,198, including principal of $55,997.
On March 28, 2013, PaperNuts Canada received loans of $18,345 (CDN$18,629) from Jerry Moes, a shareholder and director of PaperNuts Canada. The loans were unsecured, and were due and payable on demand as they were contracted to meet PaperNuts Canada’s 2013 general fiscal obligations. Mr. Moes made further advances of $30,180 (CDN$32,098) on December 31, 2013 and $11,190 (CDN$12,310) from January 1, 2014 to April 1, 2014. In January, 2015 Mr. Moes advanced an additional $15,625 (CDN$18,750). As at December 31, 2015, there is principal and interest of $68,094 ($59,522 as at December 31, 2014) outstanding in relation to those loans. The largest outstanding balance during the year ended December 31, 2015 was $68,094 including principal of $59,094.
In January, 2015, PaperNuts Canada received a loan of $15,625 (CDN$18,750) from Ron Vanderzalm, a shareholder of PaperNuts Canada. As at December 31, 2015, there is a principal and interest of $14,557 (December 31, 2014 - $Nil) outstanding in relation to this loan. The largest outstanding balance during the year ended December 31, 2015 was $14,557 including principal of $13,548.
During the years ended December 31, 2015 and 2014 the shareholders above charged interest of $10,819 (CDN$13,832) and $7,175 (CDN$7,927), respectively on these demand loans. No payments of interest have been made and the unpaid interest is included in the loan balances noted above.
During the year ended December 31, 2013, Joanne Secord, a former vice-president of PaperNuts Canada earned sales commissions of CDN$18,596 and earned additional sales commissions of CDN$6,044 in 2014. These commissions were satisfied through the issuance of 50,000 common shares on April 2, 2014.
In June, 2014, PaperNuts Canada received an advance of CDN$25,000 from Scott MacRae, a director of PaperNuts Canada. This amount was non-interest bearing and was repaid in July, 2014.
F-13
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 9. | Related Party Transactions and Balances - continued |
As of December 31, 2015, the Company owes Mr. Kotni, a former director of the Company $Nil (December 31, 2014 - $810) for expenditures paid on behalf of the Company. The amount included in due to related parties is unsecured, non-interest bearing, and has no specified repayment terms.
As at December 31, 2015, due to related party included $21,676 (December 31, 2014 - $6,594) in unpaid fees and salaries due to officers and directors of the Company, including Tyler Pearson, CEO, Scott MacRae, Director and Andrew Hilton, CFO.
| 10. | Loans Payable and Conversion Features |
| (a) | On August 1, 2013, Axiom Corp. entered into a line of credit agreement with a third party, enabling the Company to borrow up to $50,000, at 8% per annum, with related amounts being due on demand (“Demand loan”). During 2014, the third party agreed to increase the maximum principal amount to $85,000, however no amount was borrowed as of December 31, 2014. As at December 31, 2015, the amount outstanding under this line of credit was $73,068 with accrued interest of $10,083. In addition to the line of credit the third party advanced $74,967 to the Company’s trust account in connection with the Share Exchange Agreement described in Note 1. This latter amount was repaid in April, 2015. |
(b)
|
On September 11, 2015 the Company received $200,000 via the issuance of a non-interest bearing demand note. The note was repaid in October, 2015. The Company paid $10,000 in legal and administration fees in connection with this note. | |
| (c) | On October 16, 2015, the Company closed a financing transaction pursuant to Securities Purchase Agreements dated October 5, 2015 (the “Securities Purchase Agreements”) and Convertible Promissory Notes dated October 5, 2015 (the “Notes”), each entered into by the Company and two investors (the “Purchasers”). Pursuant to the Securities Purchase Agreements, as described below, the principal amount of the Notes is $612,250, and the purchase price of the Notes is $581,000. The terms of the Notes are as follows:
The Notes, dated October 5, 2015, (the “Issue Date”), earn interest at an annual rate equal to 10% and provide for a maturity date of October 5, 2016. The funding calls for $256,000 at the time of closing of the Securities Purchase Agreements and Notes, $50,000 upon the filing of a registration statement with the Securities and Exchange Commission (the “SEC”), $50,000 upon receipt of the first round of comments from the SEC regarding the registrations statement, $125,000 upon the effectiveness of the registration statement, and at the Company’s option, $100,000 thirty (30) days after the registration statement becomes effective. As part of the Securities Purchase Agreements, the Company entered into a Registration Rights Agreement (‘RRA”) with the Purchasers. Pursuant to the RRA, the Company shall use its best efforts to file a registration statement on Form S-1 (the “Registration Statement) with the SEC, registering the shares of common stock which may be issued to the Purchasers pursuant to the Securities Purchase Agreements. The Company must use its commercially reasonable efforts to cause the Registration Statement to be declared effective by the SEC. As at March 21, 2016 the registration was not yet effective.
Any amount of principal or interest not paid when due on the Notes will bear interest at an annual rate of 24% applied from the due date until the date of payment. The Notes carry an original issue discount (“OID”) of $28,750. The Company agrees to pay the Purchasers $8,500 to cover certain fees incurred in connection with the Securities Purchase Agreements and Notes. The amount for fees is included in the initial principal amount of the Notes and the original issue discount is applied pro rata in accordance with the funded tranches.
The notes are convertible at a conversion price equal to the lower of: 1) 60% multiplied by the lowest average trading price for the Company’s common stock during the twenty (20) day trading period ending on the latest complete trading day prior to the date of conversion; or 2) the closing price at October 5, 2015. While the Purchasers’ conversion rights exist, the Company will reserve a sufficient number of shares from its authorized and unissued shares of common stock to provide for the issuance of common stock upon the full conversion of the Notes. The Company does not currently have enough shares authorized to meet this requirement.
In the event the Company redeems the Notes prior to maturity, the Company is required to pay off all principal balance, interest and any other amounts owing multiplied by 125%. In the event of default, the amount of principal and accrued interest will be due immediately, multiplied by 130%. The Securities Purchase Agreements restricts the ability of the Purchasers to convert the Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.
As a result of the variability in the amount of shares of common stock to be issued in accordance with variable pricing terms or conversion price protection clauses, the Company has recorded the conversion features as liabilities at fair value. The Company has determined that the convertible notes are valued at amortized cost, the conversion features are Level 2 fair value measurement and the binominal lattice pricing model was used to calculate the fair value as of December 31, 2015, and the commitment dates. |
F-14
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 10. | Loans Payable and Conversion Features - continued |
The following is a summary of the convertible promissory notes at commitment dates:
| Convertible Loans | |||||
| Gross notes | $ | 374,893 | |||
| Less: original issue discount | (16,393 | ) | |||
| Less: fees | (36,500 | ) | |||
| Net proceeds | $ | 322,000 | |||
| Conversion features | (313,632 | ) | |||
| Debt | $ | 8,368 | |||
| Key inputs to determine the fair value at commitment dates: | |||||
| Stock Price | $ | 0.015-0.0249 | |||
| Exercise Price | $ | 0.0115-0.0173 | |||
| Time to expiration – days | 280-356 | ||||
| Risk-free interest rate | 0.48% - 0.53 | % | |||
| Estimated volatility | 150 | % | |||
| Dividend | - | ||||
| Demand loan (a) | Debt (c) | Conversion features (c) | Total | ||||||||||||||
| Loans payable – original | $ | 73,068 | $ | 8,368 | $ | 313,632 | $ | 384,985 | |||||||||
| Accrued interest | 10,083 | 6,008 | - | 16,091 | |||||||||||||
| Accretion | - | 59,922 | - | 59,922 | |||||||||||||
| Change in fair value of conversion features | - | - | (8,939 | ) | (8,939 | ) | |||||||||||
| Loans payable, December 31, 2015 | $ | 83,151 | $ | 74,298 | $ | 307,693 | $ | 452,059 | |||||||||
| $6,008 is included in interest expense and $59,922 and $(8,939) is included in valuation adjustment of convertible loan payable. |
| Key inputs to determine the fair value at December 31, 2015: | |||||
| Stock Price | $ | 0.0160 | |||
| Exercise Price | $ | 0.0114 | |||
| Time to expiration – days | 279 | ||||
| Risk-free interest rate | 0.48 | % | |||
| Estimated volatility | 150 | % | |||
| Dividend | - | ||||
| 11. | Deferred Revenue |
In April 2013, Papernuts entered into an exclusive distribution agreement providing the rights to commercialize and distribute Papernuts’ converter machines in the Ottawa and Hull-Gatineau regions of Canada.
Of the $44,035 (CDN$55,000) up-front licensing fee received, $8,614 (CDN $11,000) has been recognized as revenue during the year ended December 31, 2015 (2014 - $10,015 or CDN $11,000) and $18,545 (CDN $14,667) has been recorded as deferred revenue as at December 31, 2015 (December 31, 2014 - $31,607 or CDN $25,667). The balance of deferred revenue will be amortized into contract revenue over the remaining period of Papernuts obligations under the agreement of approximately 2.3 years.
F-15
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 12. | Stockholder’s Equity |
| The Company’s authorized capital consists of 200,000,000 shares of common stock with a par value of $0.00001 per share, 5,000,000 shares of Series A Preferred stock with a par value of $0.00001 per share and 5,000,000 shares of Preferred B stock with a par value of $0.00001 per share. |
| Number of | Par | ||||||||
| Capital stock | Shares | Value | |||||||
| Common Shares: | |||||||||
| Common shares issued and outstanding as at December 31, 2014 | 56,433,333 | $ | 564 | ||||||
| Common shares of Papernuts issued as of December 31, 2014 | 1,220,165 | 798,586 | |||||||
| Adjustment for Share Exchange Agreement /elimination of Papernuts shares and the value of the Company’s capital stock | (1,220,165 | ) | (564 | ) | |||||
| Shares issued to Papernuts shareholders in connection with the Transaction (Note 1) | 49,714,642 | 497 | |||||||
| Reallocation of Papernuts share capital amounts to reflect the legal capitalization of Axiom subsequent to the transaction | - | (798,022 | ) | ||||||
| Conversion of common shares to Series A and Series B preferred shares (a) | (40,000,000 | ) | (400 | ) | |||||
| Issuance of common shares via private sale (c) | 1,150,000 | 12 | |||||||
| Shares issued for services (d) | 100,000 | 1 | |||||||
| Common Shares as at December 31, 2015 | 67,397,975 | $ | 674 | ||||||
| Series A Preferred Shares | |||||||||
| Series A preferred shares issued and outstanding as at December 31, 2014 and 2013 | - | $ | - | ||||||
| Conversion of common shares to Series A preferred shares (a) | 2,666,668 | 27 | |||||||
| Series A Preferred shares as at December 31, 2015 | 2,666,668 | $ | 27 | ||||||
| Series B Preferred Shares | |||||||||
| Series B preferred shares issued and outstanding as at December 31, 2014 and 2013 | - | $ | - | ||||||
| Conversion of common shares to Series B preferred shares (a) | 1,000,002 | 10 | |||||||
| Series B Preferred shares as at December 31, 2015 | 1,000,002 | $ | 10 | ||||||
F-16
Axiom Corp. and Subsidiary
Notes to the Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(Expressed in United States Dollars)
| 12. | Stockholder’s Equity - continued |
| a) | In March, 2015 the Company completed agreements with three directors of Papernuts for the cancellation of 40,000,000 Common Shares of the Company in exchange for a combination of newly issued multi-voting Series A Preferred Shares and multiple-voting Series B Preferred Shares. |
As per the agreements, the 40,000,000 common shares were converted into 2,666,668 multiple-voting Series A Preferred Shares and 1,000,002 multiple-voting Series B Preferred Shares.
Series A Preferred Shares are convertible into Common Shares at the option of the holder at a ratio of 1:10, meaning each Preferred A Share can convert into ten (10) Common Shares of the Company. In addition, holders of each Series A Preferred Share shall have the right to one (1) vote for each Common Share into which such Series A Preferred Share could be converted. Assuming the exercise of all convertible securities including warrants, the Series A Preferred Shares represent 7.7% of the total voting power of the Company’s shareholders.
Series B Preferred Shares are convertible into Common Shares at the option of the holder at a ratio of 1:10, meaning each Preferred B Share can convert into ten (10) Common Shares of the Company. In addition, holders of each Series B Preferred Share shall have the right to twenty-five (25) votes for each Common Share into which such Series B Preferred Share could be converted. Assuming the exercise of all convertible securities including warrants, the Series B Preferred Shares represent 71.7% of the total voting power of the Company’s shareholders.
The Series A and Series B Preferred Shares are non-redeemable and have a par value of $0.00001 per share.
| b) | Pursuant to the Share Exchange Agreement, the Company also issued warrants to purchase an aggregate of 5,650,000 shares of the Company’s common stock at exercise prices ranging from $0.056 to $0.075 per share to replace warrants previously held by Papernuts warrant holders (the “Warrants”). The Warrants are currently exercisable and may be exercised for a period of 24 months from the date of issuance, February 26, 2015. The Warrants were initially valued at $148,125 using the Black-Scholes pricing model assuming no expected dividends, a volatility of 100%, expected life of two years and a risk-free rate of 0.43%, the value of which is included in additional paid in capital. As at September 30, 2015 there were 5,650,000 warrants outstanding. |
| c) | In March, 2015 the Company received $270,000 from a private investor in a private sale in exchange for 900,000 shares of the Company’s common stock. In May, 2015 the Company received $75,000 from a private investor in a private sale in exchange for 250,000 shares of the Company’s common stock. |
| d) | In September, 2015 the Company issued 100,000 common shares to an advisory firm for services rendered. The services were valued at $4,000. |
| 13. | Contingency |
| In the first quarter of 2015 the Company became aware of a potential claim from an individual stating that he was owed $118,427 (CDN$150,000) worth of Papernuts common shares. No action has been commenced as of the date of this report. Management is of the opinion that this potential claim is without merit. Accordingly, no provision has been made in these consolidated financial statements. |
F-17
| 14. |
Income Taxes
Reconciliation of the statutory tax rate of 26.5% (2014 – 26.5%) and income tax benefits at those rates to the effective income tax rates and income tax benefits reported in the statement of operations and comprehensive loss is as follows: |
| 2015 | 2014 | ||||||||
| Net loss for the year before income taxes | $ | 1,072,692 | $ | 397,376 | |||||
| Expected income tax recovery | (284,260 | ) | (105,305 | ) | |||||
| Impact of tax rate differences in foreign jurisdictions | (13,260 | ) | - | ||||||
| Reverse acquisition transaction | (43,484 | ) | - | ||||||
| Other permanent differences | 88,554 | - | |||||||
| Tax effect of asset purchase | - | - | |||||||
| Change in valuation allowance | 252,450 | 105,305 | |||||||
| Provision for income taxes | $ | - | $ | - | |||||
|
Deferred Tax
The following table summarizes the significant components of deferred tax: |
| 2015 | 2014 | ||||||||
| Deferred Tax Assets | |||||||||
| Net operating loss carryforwards | $ | 356,666 | $ | 128,342 | |||||
| Research and development credits | 21,455 | 29,046 | |||||||
| Property and equipment | 4,070 | 1,717 | |||||||
| Intangible assets | 9,988 | - | |||||||
| Note payable | 19,377 | - | |||||||
| Total deferred tax assets | 411,556 | 159,106 | |||||||
| Valuation allowance | (411,556 | ) | (159,106 | ) | |||||
| Net deferred tax asset | $ | - | $ | - | |||||
|
The Company has income tax net operating loss carryforwards related to its Canadian operations of $1,277,487 which will expire between 2029 and 2035.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts using enacted tax rates and laws in effect in the year in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is determined to be more likely than not that the deferred tax asset will not be realized.
The Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date. The Company is subject to examination by taxing authorities in jurisdictions such as the United States and Canada. Management does not believe that there are any uncertain tax positions that would result in an asset or liability for taxes being recognized in the accompanying consolidated financial statements. The Company recognizes tax-related interest and penalties, if any, as a component of income tax expense. All tax years of the Company are open to IRS or CRA for their reviews. |
F-18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (CEO) and chief financial officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our CEO and CFO have concluded that as of December 31, 2015, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment, management has concluded that its internal control over financial reporting was effective as of December 31, 2015 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the fourth quarter of 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
None.
20
Item 10. Directors, Executive Officers and Corporate Governance
Identification of Executive Officers and Directors of the Company
Our current executive officers and directors are as follows:
| Name and Age | Position(s) Held | Tenure | ||
| Tyler Pearson, 33 | Chief Executive Officer & Director | From February 26, 2015 to present | ||
| Scott MacRae, 52 | President & Director | From February 26, 2015 to present | ||
| Andrew Hilton, 33 | Chief Financial Officer & Treasurer | From February 26, 2015 to present | ||
| Jerry Moes, 55 | Director | From February 26, 2015 to present | ||
| John Lynch, 54 | Director | From February 26, 2015 to present |
Tyler Pearson, 33 – Chief Executive Officer and Director
A graduate of Wilfrid Laurier University’s Business Program in 2004, Tyler has held a variety of progressive sales and sales management roles within the North American packaging and distribution industry. His primary duties included business development, P&L responsibility and North American account management. From October 2004 to July 2014, Tyler held a number of progressive roles with Unisource Worldwide where he was primarily in charge of business development within their packaging and supply chain vertical. Most recently, from 2012 to 2014, he managed North American Corporate Accounts for Unisource Worldwide - now Veritiv Corp. NYSE:VRTV – where his primary role was to create customized supply chain and packaging solutions for a number of Fortune 500 companies. Tyler has been with PaperNuts since the beginning of February 2015 as CEO. He has a tremendous amount of industry knowledge within the global fulfillment vertical and will be a critical component in developing and ultimately executing the overall go to market business strategy for PaperNuts. Mr. Pearson was selected as a director because of his extensive management experience, his background in the industry and his knowledge of the business of the Company.
Scott MacRae, 52 – President & Director
Scott is the founder of PaperNuts Canada and its original seed investor. He attended Texas A&M University. From the early 1980’s through the 1990’s worked as a computer engineer with Nortel Networks on several international telecom projects in US, China and Japan. He later worked with the Balaton Group where he focused on mergers and acquisitions in the high tech sector. From 1995-2009 Scott worked with several government agencies on numerous international transactions in the communications sector. The Company believes that based upon the above experience, Mr. MacRae has the qualifications and skill set to serve as a director.
Andrew Hilton, 33 - Chief Financial Officer and Treasurer
Andrew is a Chartered Professional Accountant, and has been since 2008. Andrew joined the Company in September 2014 to provide accounting services and was appointed Chief Financial Officer in February, 2015. Andrew has also served as the Chief Financial Officer of Jaguar Financial Corporation and Added Capital Inc. since 2013 and Prodigy Ventures Inc. since September, 2015. For the past four (4) years, Andrew has worked as a consultant to various public and private companies assisting with the drafting and preparation of financial statements. Prior to that, from 2010 to 2012, Andrew was the Chief Financial Officer of GC-Global Capital Corp. Andrew has a wealth of knowledge in accounting, risk management, finance and financial modeling.
Jerry Moes, 55 – Director
A successful entrepreneur, Jerry established Rice Road Greenhouses and Garden Centre in 1983 and grew the business to annual sales of over $5 million with 95 employees. Rice Road Greenhouses and Garden Centre is primarily engaged in the sales of garden products. In 2011, he and his brother organized a subdivision development consisting of 100 homes, and as of January 2015 approximately 75% have been sold. He has a varied background, which includes agriculture, real estate development and a keen interest in environmentally clean technology, which led him to become involved with PaperNuts Canada as an investor. The Company believes that based upon the above experience, Mr. Moes has the qualifications and skill set to serve as a director.
John Lynch, 54 – Director
John brings extensive expertise in corporate management, administration and corporate governance specifically in the public market sector. For the past five years, he has served as CEO of Santa Rosa Mining. He served as the Chief Executive Officer and President of NWT Uranium Corp from June 2008 to April 2012 and has held a variety of other high profile roles within the public market space. John also has a tremendous amount of experience working within the North American packaging marketplace. The Company believes that based upon the above experience, Mr. Lynch has the qualifications and skill set to serve as a director.
Term of Office
Each director of the Company serves for a term of one year and until his successor is elected and qualified at the next Annual Shareholders’ Meeting, or until his death, resignation or removal. Each officer of the Company serves for a term of one year and until his successor is elected and qualified at a meeting of the Board of Directors.
21
Significant Employees
In addition to the officers and directors set forth herein, we have one (1) significant employee, Steve Martin.
Mr. Martin has held progressive positions in sales and sales management for over fifteen years. With a career spanning technology consulting and the forest products industry, Mr. Martin has worked for organizations ranging from start up firms to large, multi-national corporations. For the past ten years, he has held various responsibilities for Resolute Forest Products, a $4 billion plus, international, corporation. Most recently, he managed a $100 million plus sales region (northeast United States), and a specialty product line for Resolute Forest Products. Mr. Martin has been with PaperNuts since 2014 and his main responsibilities include business development, material sourcing, and customer service.
Family Relationships
There are no family relationships among the Company’s officers, directors or persons nominated for such positions.
Involvement in Certain Legal Proceedings
During the past ten years no director, executive officer, promoter or control person of the Company has been involved in the following:
| (1) | A petition under the Federal bankruptcy laws or any state insolvency law which was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing; | |
| (2) | Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| (3) | Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities: |
| i. | Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; | |
| ii. | Engaging in any type of business practice; or | |
| iii. | Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws; |
| (4) | Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity; |
22
| (5) | Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated; | |
| (6) | Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated; | |
| (7) | Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: |
| i. | Any Federal or State securities or commodities law or regulation; or | |
| ii. | Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or | |
| iii. | Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| (8) | Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Code of Ethics
The Company has not adopted any formal Code of Ethics.
Committees of the Board of Directors
The Company does not presently have a separately designated standing audit committee, compensation committee, nominating committee, executive committee or any other committees of our Board of Directors. The functions of those committees are undertaken by our Board of Directors. We believe that the creation of these committees, at this time, would be cumbersome and constitute more form over substance.
Audit Committee
The Company has not established a separately designated standing audit committee. However, the Company intends to establish a new audit committee of the Board of Directors that shall consist of independent directors. The audit committee’s duties will be to recommend to the Company’s board of directors the engagement of an independent registered public accounting firm to audit the Company’s financial statements and to review the Company’s accounting and auditing principles. The audit committee will review the scope, timing and fees for the annual audit and the results of audit examinations performed by the internal auditors and independent registered public accounting firm, including their recommendations to improve the system of accounting and internal controls. The audit committee shall at all times be composed exclusively of directors who are, in the opinion of the Company’s board of directors, free from any relationship which would interfere with the exercise of independent judgment as a committee member and who possess an understanding of financial statements and generally accepted accounting principles.
23
Item 11. Executive Compensation
Compensation of Executive Officers
The following table sets forth the compensation paid or payable to the Company’s executive officers for the years ended December 31, 2015 and 2014.
Summary Compensation Table
| Name and principal position | Year | Salary ($) | Bonus ($) | Option/Warrant Awards ($)(4) | Non-equity incentive plan compensation | Nonqualified deferred compensation earnings ($) | All other Compensation ($) | Total ($) | ||||||||||||||||||||||
| Tyler Pearson (1), | 2015 | $ | 93,860 | $ | – | $ | 32,124 | $ | – | $ | – | $ | – | $ | 125,984 | |||||||||||||||
| Chief Executive Officer, and Director | 2014 | $ | 18,106 | – | – | – | – | – | $ | 18,106 | ||||||||||||||||||||
| Andrew Hilton (2) | 2015 | $ | 46,930 | – | 2,570 | – | – | – | $ | 49,500 | ||||||||||||||||||||
| Chief Financial Officer and Treasurer | 2014 | $ | 18,106 | – | – | – | – | – | $ | 18,106 | ||||||||||||||||||||
| Scott MacRae (3) | 2015 | $ | 68,440 | – | 8,995 | – | – | – | $ | 77,435 | ||||||||||||||||||||
| President and Director | 2014 | $ | 24,443 | – | – | – | – | – | $ | 24,443 | ||||||||||||||||||||
(1) Tyler Pearson was appointed Director and Chief Executive Officer on February 26, 2015.
(2) Andrew Hilton was appointed Treasurer and Chief Financial Officer on February 26, 2015.
(3) Scott MacRae was appointed President and Director on February 26, 2015.
(4) As disclosed in Note 12 to the audited financial statements for the year ended December 31, 2015, the Warrants were initially valued at $148,125 using the Black-Scholes pricing model assuming no expected dividends, a volatility of 100%, expected life of two years and a risk-free rate of 0.43%, the value of which is included in additional paid in capital. As of December 31, 2015 there were 5,650,000 warrants outstanding. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and directors which are subject to ASC Topic 718 requirements. These amounts are estimates and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants. The Company recognizes compensation on a straight-line basis over the requisite service period for each award. The following table summarizes the assumptions the Company utilized to record compensation expense for stock warrants and options granted during the years ended December 31, 2015:
Narrative Disclosure to Summary Compensation Table
There are no employment contracts, compensatory plans or arrangements, including payments to be received from the Company with respect to any executive officer, that would result in payments to such person because of his or her resignation, retirement or other termination of employment with the Company, or its subsidiaries, any change in control, or a change in the person’s responsibilities following a change in control of the Company.
24
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information regarding outstanding stock options awards for each of the Named Executive Officers as of December 31, 2015.
| Option Award | ||||||||||||||||
| Name | Number of Securities Underlying Unexercised Warrants/ Options Exercisable | Number of Securities Underlying Unexercised Warrants/ Options Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Warrants | Warrant Exercise Price ($) | Warrant Expiration Date | |||||||||||
| Tyler Pearson | -0- | 1,250,000 | 1,250,000 | 0.075 | 2/26/2017 | |||||||||||
| Andrew Hilton | -0- | 100,000 | 100,000 | 0.075 | 2/26/207 | |||||||||||
| Scott MacRae | -0- | 350,000 | 350,000 | 0.075 | 2/26/2017 | |||||||||||
Insert chart
Long-Term Incentive Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers.
Compensation Committee
We currently do not have a compensation committee of the Board of Directors. The Board of Directors as a whole determines executive compensation.
Compensation of Directors
Pursuant to the Share Exchange Agreement executed on February 26, 2015, the Company issued the following warrants to the Directors of the Company:
| Option Award | ||||||||||||||
| Name | Number of Securities Underlying Unexercised Warrants/ Options Exercisable | Number of Securities Underlying Unexercised Warrants/ Options Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Warrants | Warrant Exercise Price ($) | Warrant Expiration Date | |||||||||
| Jerry Moes | -0- | 400,000 | 400,000 | 350,000 at 0.075 50,000 at 0.056 | 2/26/2017 | |||||||||
| John Lynch | -0- | 750,000 | 750,000 | 0.075 | 2/26/2017 | |||||||||
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information concerning the number of shares of our common stock owned beneficially as of the date of this Current Report by: (i) each of our directors; (ii) each of our executive officers; and (iii) each person or group known by us to beneficially own more than 5% of our issued and outstanding shares of common stock. Unless otherwise indicated, the shareholders listed below possess sole voting and investment power with respect to the shares they own.
| Amount and Nature of Beneficial Ownership | ||||||||||||||||||||||||||||
| Common Stock (1) | Series A Preferred Stock (2) | Series B Preferred Stock (3) | % Total Voting | |||||||||||||||||||||||||
| Name and Address of Beneficial Owner | No. of Shares | % of Class | No. of Shares | % of Class | No. of Shares | % of Class | Power (4) | |||||||||||||||||||||
| Directors and Officers | ||||||||||||||||||||||||||||
| Tyler Pearson 50 Lynn Williams Street, Suite 2104 Toronto, Ontario M6K 3R9 | 1,250,000 | (5) | 1.85 | % | 666,667 | 25 | % | 333,334 | 33.33 | % | 26.17 | % | ||||||||||||||||
| Scott MacRae 1089 Quaker Road Fonthill, ON L0S 1E4 | 7,300,987 | (6) | 10.83 | % | 1,333,334 | 50 | % | 333,334 | 33.33 | % | 29.81 | % | ||||||||||||||||
| Andrew Hilton 1031 Sands Lane Sydenham, ON K0H 2T0 | 100,000 | (7) | * | 0 | 0 | % | 0 | 0 | % | * | ||||||||||||||||||
| Jerry Moes 64 Broadway Avenue St. Catharines, ON L2M 1M4 | 2,797,217 | (8) | 4.15 | % | 666,667 | 25 | % | 333,334 | 33.33 | % | 26.61 | % | ||||||||||||||||
| John Lynch 2067 Lakeshore Blvd. West, Suite 1002 Toronto, Ontario M6K 3R9 | 750,000 | (9) | 1.12 | % | 0 | 0 | % | 0 | 0 | % | * | |||||||||||||||||
| All officers and directors as a group (five persons) | 12,198,204 | 18.1 | % | 2,666,668 | 100 | % | 1,000,002 | 100 | % | 82.84 | % | |||||||||||||||||
| * | Less than 1%. |
| (1) | Based on 67,397,975 shares of common stock issued and outstanding as of March 22, 2016. The number and percentage of shares beneficially owned is determined under rules promulgated by the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days through the exercise of any stock option or other right. The persons named in the table have sole voting and investment power with respect to all shares of common stock shown that are beneficially owned by them, subject to community property laws where applicable and the information contained in the footnotes to this table. |
| (2) | Based on 2,666,668 shares of Series A Preferred Stock issued and outstanding as of March 22, 2016. Each share of Series A Preferred Stock are convertible into 10 shares of common stock and shall be entitled to vote on all matters submitted or required to be submitted to a vote of the stockholders of the Company and shall be entitled to one (1) vote of each share of common stock convertible into, at the record date for the determination of stockholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. |
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| (3) | Based on 1,000,002 shares of Series B Preferred Stock issued and outstanding as of March 22, 2016. Each share of Series B Preferred Stock are convertible into 10 shares of common stock and shall be entitled to vote on all matters submitted or required to be submitted to a vote of the stockholders of the Company and shall be entitled to twenty-five (25) votes of each share of common stock convertible into, at the record date for the determination of stockholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. |
| (4) | Percentage Total Voting Power represents total voting power for each beneficial owner with respect to all shares of our common stock, Series A Preferred Stock and Series B Preferred Stock beneficially owner as of March 22, 2016. |
| (5) | Including warrants to purchase 1,250,000 shares of common stock. |
| (6) | Including 6,950,987 shares of common stock and warrants to purchase 350,000 shares of common stock. |
| (7) | Including warrants to purchase 100,000 shares of common stock. |
| (8) | Including 2,397,217 shares of common stock and warrants to purchase 400,000 shares of common stock. |
| (9) | Including warrants to purchase 750,000 shares of common stock. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
On August 1, 2012, PaperNuts Canada received loans of $32,445 (CDN$32,500) from shareholders Jim Vanderzalm and Rob Moes. The loans were unsecured, and were due and payable on demand as they were contracted to meet PaperNuts Canada’s 2012 general fiscal obligations. In April, 2014 and January 25, 2015 Mr. Moes made additional advances of $6,818 (CDN$7,500) and $30,184 (CDN$37,500) respectively to PaperNuts Canada. As at December 31, 2015 there is principal and interest of $59,477 ($40,290 as at December 31, 2014) outstanding in relation to those loans. The largest outstanding balance during the period ended December 31, 2015 was $65,198, including principal of $55,997.
On March 28, 2013, PaperNuts Canada received loans of $18,345 (CDN$18,629) from Jerry Moes, shareholder and director of PaperNuts Canada. The loans were unsecured, and were due and payable on demand as they were contracted to meet PaperNuts Canada’s 2013 general fiscal obligations. Mr. Moes made further advances of $30,180 (CDN$32,098) on December 31, 2013 and $11,190 (CDN$12,310) from January 1, 2014 to April 1, 2014. In January, 2015 Mr. Moes advanced an additional $15,625 (CDN$18,750). As at December 31, 2015, there is principal and interest of $68,094 ($59,522 as at December 31, 2014) outstanding in relation to those loans. The largest outstanding balance during the period ended December 31, 2015 was $68,094 including principal of $59,094.
In January, 2015, PaperNuts Canada received a loan of $15,625 (CDN$18,750) from Ron Vanderzalm, a shareholder of PaperNuts Canada. As at December 31, 2015, there is a principal and interest of $14,557 (December 31, 2014 - $Nil) outstanding in relation to this loan. The largest outstanding balance during the period ended December 31, 2015 was $14,557 including principal of $13,548.
During the periods ended December 31, 2015 and 2014 the shareholders above charged interest of $10,819 (CDN$13,832) and $7,175 (CDN$7,927), respectively on these demand loans. No payments of interest have been made and the unpaid interest is included in the loan balances noted above.
During the year ended December 31, 2013, Joanne Secord, a former vice-president of PaperNuts Canada earned sales commissions of CDN$18,596 and earned additional sales commissions of CDN$6,044 in 2014. These commissions were satisfied through the issuance of 50,000 common shares on April 2, 2014.
In June, 2014, PaperNuts Canada received an advance of CDN$25,000 from Scott MacRae, a director of PaperNuts Canada. This amount was non-interest bearing and was repaid in July, 2014.
As of December 31, 2015, the Company owes Mr. Kotni, a former director of the Company $Nil (December 31, 2014 - $810) for expenditures paid on behalf of the Company. The amount included in due to related parties is unsecured, non-interest bearing, and has no specified repayment terms.
As at December 31, 2015, due to related party included an additional $21,676 (December 31, 2014 - $6,594) in fees and due to officers and directors of the Company, including Tyler Pearson, CEO, Scott MacRae, Director and Andrew Hilton, CFO.
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Except as disclosed herein, none of the directors or executive officers of the Company, nor any person who owned of record or was known to own beneficially more than 5% of the Company’s outstanding shares of its common stock, nor any associate or affiliate of such persons or companies, has any material interest, direct or indirect, in any transaction that has occurred during the past fiscal year, or in any proposed transaction, which has materially affected or will affect the Company.
With regard to any future related party transaction, we plan to fully disclose any and all related party transactions in the following manner:
· Disclosing such transactions in reports where required;
· Disclosing in any and all filings with the SEC, where required;
· Obtaining disinterested directors consent; and
· Obtaining shareholder consent where required.
Director Independence
For purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCBB on which shares of the Company’s Common Stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent Director” means a person other than an Executive Officer or employee or any other individual having a relationship, which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. According to the NASDAQ definition, two of our directors, Jerry Moes and John Lynch qualify as independent.
Review, Approval or Ratification of Transactions with Related Persons
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 14. Principal Accounting Fees and Services
The aggregate fees billed for the most recently completed fiscal year ended December 31, 2015 and for the fiscal year ended December 31, 2014 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
| Years Ended | ||||||||
| December 31, 2015 $ | December 31, 2014 $ | |||||||
| Audit Fees | 7,587 | 25,616 | ||||||
| Audit Related Fees | 9,939 | 19,009 | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total | 17,526 | 44,625 | ||||||
Audit Related Fees
Audit related fees include interim review fees during the interim periods in 2015 and 2014.
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Tax Fees
For the Company’s fiscal years ended December 31, 2015 and December 31, 2014, we were not billed for professional services rendered for tax compliance, tax advice, and tax planning.
All Other Fees
There were no other fees related to our principal accountant for the years ended December 31, 2015 and 2014.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:
- approved by our audit committee; or
- entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.
We do not have an audit committee. Our entire board of directors pre-approves all services provided by our independent auditors.
However, all of the above services and fees were reviewed and approved by the entire Board of Directors either before or after the respective services were rendered.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements
| (1) | Financial statements for our company are listed in the index under Item 8 of this document. | |
| (2) | All financial statement schedules are omitted because they are not applicable, not material or the required information is shown in the financial statements or notes thereto. |
(b) Exhibits
| Exhibit Number | Description | |
| 2.1 | Share Exchange Agreement by and among the Company, the controlling stockholders of the Company, PaperNuts Corporation, and the shareholders of PaperNuts Corporation dated February 23, 2015 (incorporated by reference to Exhibit 2.01 to our Form 8-K filed on March 12, 2015) | |
| 3.1 | Articles of Incorporation of Axiom Corp. (incorporated by reference to Exhibit 3.1 of our Registration Statement on Form S-1 filed on January 17, 2013) | |
| 3.2 | Bylaws of Axiom Corp. (incorporated by reference to Exhibit 3.2 of our Registration Statement on Form S-1 filed on January 17, 2013) | |
| 3.3 | Certificate of Designation of Series A Preferred Stock and Series B Preferred Stock (incorporated by reference to Exhibit 3.1 to our Form 8-K filed on April 15, 2015) | |
| 10.1 | Form of Stock Purchase Agreement, dated February 26, 2015 (incorporated by reference to Exhibit 10.05 to our Form 10-K filed on March 12, 2015) | |
| 10.2 | Form of Resignation, Release and Waiver of Kranti Kumar Konti (incorporated by reference to Exhibit 10.06 to our Form 8-K filed on March 12, 2015) | |
| 10.3 | Form of Warrant (incorporated by reference to Exhibit 10.07 to our Form 8-K filed on March 12, 2015) | |
| 10.4 | From of Share Transfer & Assignment Agreement by and between the Company and Kranti Kumar Kotni (incorporated by reference to Exhibit 10.08 to our Form 8-K filed on March 12, 2015) | |
| 31.1* | Section 302 Certification under Sarbanes-Oxley Act of 2002 of the Principal Executive Officer | |
| 31.2* | Section 302 Certification under Sarbanes-Oxley Act of 2002 of the Principal Financial Officer | |
| 32.1** | Section 906 Certification under Sarbanes-Oxley Act of 2002 of the Principal Executive Officer | |
| 32.2** | Section 906 Certification under Sarbanes-Oxley Act of 2002 of the Principal Financial Officer | |
| (101)*** | Interactive Data File | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed herewith ** Furnished but not filed |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
| AXIOM CORP. | ||
| (Registrant) | ||
| Dated: March 29, 2016 | /s/ Tyler Pearson | |
| Tyler Pearson | ||
| Chief Executive Officer, Principal Executive Officer and Director | ||
| Dated: March 29, 2016 | /s/ Andrew Hilton | |
| Andrew Hilton | ||
| Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Dated: March 29, 2016 | /s/ Tyler Pearson | |
| Tyler Pearson | ||
| Chief Executive Officer, Principal Executive Officer and Director |
| Dated: March 29, 2016 | /s/ Scott MacRae | |
| Scott MacRae | ||
| Director |
| Dated: March 29, 2016 | /s/ Andrew Hilton | |
| Andrew Hilton, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer |
| Dated: March 29, 2016 | /s/ Jerry Moes | |
| Jerry Moes | ||
| Director |
| Dated: March 29, 2016 | /s/ John Lynch | |
| John Lynch | ||
| Director |
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