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EX-32.2 - EXHIBIT 32.2 - ECO Building Products, Inc.v432331_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - ECO Building Products, Inc.v432331_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - ECO Building Products, Inc.v432331_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - ECO Building Products, Inc.v432331_ex31-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2015

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

 

For the transition period from                          to                         

 

Commission file number:                 000-53875               

 

Eco Building Products, Inc.

(Exact name of registrant as specified in its charter)

 

Colorado   20-8677788
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

11568 Sorrento Valley Road

San Diego CA 92121

(Address of principal executive offices)(Zip Code)

 

                                   858-222-0955                                   

(Registrant’s telephone number, including area code)

 

909 West Vista Way Vista Ca 92083

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. xYes ¨ 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).

 

x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company; as defined within Rule 12b-2 of the Exchange Act.

¨ Large accelerated filer   ¨ Accelerated filer   ¨ Non-accelerated filer  x 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 x No

 

The number of shares outstanding of each of the issuer's classes of common equity as of February 22, 2016:

3,489,745,293 shares of common stock

 

 

 

  

Eco Building Products, Inc.

 

Contents

 

      Page
      Number
       
PART I - FINANCIAL INFORMATION    
       
Item 1. Financial Statements.    
       
  Condensed Consolidated Balance Sheets as of December 31, 2015 (unaudited)  and June 30, 2015   3
       
  Condensed Consolidated Statements of Operations for the three months and six months ended December 31, 2015 and 2014 (unaudited)   4
       
  Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2015 and 2014 (unaudited)   5
       
  Notes to the Condensed Consolidated Financial Statements     6
       
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.   18
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk.   22
       
Item 4. Controls and Procedures.   22
       
Part II - OTHER INFORMATION    
       
Item 1. Legal Proceedings.   23
       
Item 1A. Risk Factors.   24
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.   24
       
Item 3. Defaults Upon Senior Securities.   24
       
Item 4. Mine Safety Disclosures.   24
       
Item 5. Other Information.   24
       
Item 6. Exhibits.   24
       
SIGNATURES   25

 

 2 
 

  

ECO BUILDING PRODUCTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   Dec 31   June 30 
   2015   2015 
   (unaudited)     
ASSETS          
CURRENT ASSETS          
Cash  $967   $40,306 
Accounts receivable, net of allowance for doubtful accounts of $1,607 and $1,607, respectively   24,819    14,042 
Inventories, net   158,778    171,631 
Prepaid expenses   3,000    3,000 
Other current assets   43,887    58,089 
Total current assets   231,451    287,068 
           
PROPERTY AND EQUIPMENT, net   706,615    592,679 
           
TOTAL ASSETS  $938,066   $879,747 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
CURRENT LIABILITIES          
Accounts payable  $1,454,484   $1,256,160 
Payroll and taxes payable   1,517,550    1,571,783 
Accrued interest   407,807    237,907 
Other payables and accrued expenses   146,041    167,565 
Derivative Liability   31,050,647    14,198,848 
Convertible notes payable, net of debt discount   987,691    759,956 
Current maturities of notes payable   23,916    23,916 
Loans payable - other   1,378,070    838,245 
Loans payable - related parties   2,000    45,000 
Total current liabilities   36,968,206    19,099,380 
           
LONG TERM LIABILITIES          
Notes payable, less current maturities   63,410    69,778 
Total long term liabilities   63,410    69,778 
           
TOTAL LIABILITIES  $37,031,616   $19,169,158 
           
LIABILITIES RELATED TO DISCONTINUED OPERATIONS   1,148,229    1,148,229 
           
COMMITMENTS AND CONTINGENCIES  $-   $- 
           
STOCKHOLDERS' DEFICIT          
Preferred stock, Series A, $0.001 par value, 30,000 shares authorized, -0- and 30,000 shares issued and outstanding at December 31, 2015 and at June 30, 2015  $-   $- 
Preferred stock, Series B, $0.001 par value, 9,250 shares authorized, -0- shares issued and outstanding at December 31, 2015 and June 30, 2015   -    - 
Preferred stock, Series C, $0.001 par value, 120,000 shares authorized, 101,099 and 104,440 shares issued and outstanding at December 31, 2015 and June 30, 2015 respectively   101    104 
Preferred stock, Series D, $0.001 par value, 20,000 shares authorized, 17,114 and 9,979 shares issued and outstanding at December 31, 2015 and June 30, 2015, respectively   17    10 
Common stock, $0.001 par value, 10,000,000,000 shares authorized, 3,223,078,626 and 608,622,815 shares issued and 3,221,645,579 and 607,189,768 outstanding at December 31, 2015 and June 30, 2015 respectively   3,223,079    608,623 
Treasury Stock   (1,434)   (1,434)
Additional paid-in capital   53,051,023    54,831,568 
Accumulated deficit   (93,514,564)   (74,876,514)
Total stockholders' deficit   (37,241,779)   (19,437,643)
           
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $938,066   $879,747 

 

See accompanying notes to condensed consolidated financial statements

 

 3 
 

  

ECO BUILDING PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   6 months ended Dec 31,   3 months ended Dec 31, 
   2015   2014   2015   2014 
REVENUE                    
Product sales  $387,125   $1,653,115   $111,374   $777,366 
                     
                     
TOTAL REVENUE   387,125    1,653,115    111,374    777,366 
                     
COST OF SALES                    
Cost of sales - product   610,576    2,003,244    259,389    878,629 
    -    -         - 
                     
TOTAL COST OF SALES   610,576    2,003,244    259,389    878,629 
                     
GROSS LOSS   (223,452)   (350,129)   (148,015)   (101,263)
                     
OPERATING EXPENSES                    
Research and development   159,564    39,816    79,591    5,618 
Marketing   60,366    48,267    28,442    18,543 
Compensation and related expenses   290,533    1,104,928    180,172    533,927 
Rent - facilities   42,360    112,235    23,187    60,054 
Professional and consulting fees   228,763    390,832    99,188    206,301 
Other general and administrative expenses   293,413    301,252    127,141    147,491 
                     
Total operating expenses   1,074,998    1,997,331    537,721    971,935 
                     
LOSS FROM OPERATIONS   (1,298,449)   (2,347,459)   (685,735)   (1,073,198)
                     
OTHER INCOME (EXPENSE)                    
Interest expense   (508,171)   (2,039,981)   (74,080)   (1,013,524)
Gain (loss) on derivative liability   (16,007,731)   5,748,916    (9,372,884)   686,710 
Impairment expense   -    88,985         - 
Other Income   -    (243,496)   -    - 
Gain (loss) on settlement of debt   -              18,000 
Derivative expense   (823,699)   (2,080,117)   (540,096)   (23,201)
                     
Total other income   (17,339,601)   1,474,307    (9,987,060)   (332,015)
                     
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES   (18,638,051)   (656,989)   (10,672,795)   (1,334,596)
                   - 
NET LOSS FROM DISCONTINUED OPERATIONS   -    (216,164)   -    (70,617)
                     
NET INCOME (LOSS)  $(18,638,050)  $(873,153)  $(10,672,795)  $(1,405,213)
                     
NET INCOME (LOSS) PER COMMON SHARE, FROM CONTINUING OPERATIONS - Basic & Diluted  $(0.01)  $(0.02)  $(0.01)  $(0.00)
NET INCOME (LOSS) PER COMMON SHARE, FROM DISCONTINUED OPERATIONS - Basic & Diluted  $(0.00)  $(0.02)  $(0.01)   (0.00)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                    
Basic -   1,731,591,534    4,974,301,318    938,360,716    6,363,429,751 
Diluted -   106,540,675,435    4,974,301,318    938,360,116    6,363,429,751 

 

See accompanying notes to condensed consolidated financial statements

 

 4 
 

  

ECO BUILDING PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

    6 months ended Dec 31,  
Cash flows from operating activities   2015     2014  
Net Income (Loss)   $ (18,638,050 )   $ (873,152 )
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
               
Depreciation and amortization expense     64,863       138,340  
Amortization of debt discount & deferred financing costs     288,062       795,900  
Initial interest expense on value of derivative (excess)     -       1,232,464  
Derivative expense     823,699       2,080,117  
Stock Based Compensation     -       27,292  
Common Stock issuance for interest and OID     11,750       -  
Financing costs     39,165       -  
Loss on derivative liability fair value adjustment     16,007,731       (5,748,916 )
Loss on extinguishment of Convertible Notes and Accounts Payable     -       243,496  
Gain on settlement of notes payable     -       (88,985 )
Expense paid on behalf of the Company     -       1,221,457  
Assignment of accounts receivable to note payable holder     -       (473,703.00 )
  Changes in assets and liabilities:                
Accounts receivable     10,777       (97,869 )
Inventory     12,853       (65,299 )
Other current assets and prepaid expenses     14,201       -  
Accounts payable     198,324       224,588  
Payroll and taxes payable     (54,245 )     (26,801 )
Deferred Revenue     -       -  
Other payable and accrued expenses     (21,491 )     20,900  
Accrued interest     169,900       38,280  
Net cash from continuing operations     (1,072,461 )     (1,351,891 )
Net cash from discontinued operations     -       -  
Net cash from operating activities     (1,072,461 )     (1,351,891 )
                 
Cash flows from investing activities                
Purchase of property and equipment     (176,209 )     (28,953 )
Notes receivable payments     -       -  
Net cash used by investing activities     (176,209 )     (28,953 )
                 
Cash flows from financing activities                
Payments on related party notes     (43,000 )     (60,158 )
Proceeds from issuance of common stock     -       100,000  
Proceeds from issuances of series C convertible preferred stock     -       975,000  
Proceeds from issuances of series D convertible preferred stock     738,749       -  
Proceeds from convertible notes payable     855,250       180,000  
Proceeds from notes payable - related parties     -       -  
Payments on notes payable     (335,300 )     (95,855 )
Payments on notes payable - vehicles loan     (6,368 )     (17,666 )
Proceeds from related party line of credit advances     -       -  
Payments on accrued interest             -  
Net cash provided by financing activities     1,209,331       1,081,321  
                 
Net change in cash and cash equivalent     (39,339 )     (299,523 )
Cash and cash equivalent at the beginning of year     40,306       375,066  
                 
Cash and cash equivalent at the end of year   $ 967     $ 75,542  
                 
Supplemental disclosures of cash flow Information:                
Cash Paid for Interest   $ 8,333       8,333  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Common shares issued for conversion of notes payable   $ 60,077     $ 168,024  
Shares issued for conversion of notes payable   $ 643,901     $ -  
Preferred shares  issued for extinguishment of convertible notes payable & A/P   $ -     $ 2,199,315  
Shares issued for conversion of Pref C convertible preferred stock   $ 2,406,388     $ 1,064,676  
Convertible notes issued for assumption of notes payable   $ -     $ 410,000  
Declared dividends   $ -     $ 25,851  
Purchase of property & equipment with loans payable   $ -     $ 105,284  
Debt Discount on convertible notes   $ 42,222     $ 696,085  

 

See accompanying notes to condensed consolidated financial statements

 

 5 
 

 

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

1.   Organization and Basis of Presentation

 

Basis of Presentation

The accompanying condensed consolidated financial statements as of December 31, 2015, and for the three and six months ended December 31, 2015 and 2014 have been prepared by Eco Building Products, Inc (or “the Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015. In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair statement have been included.

 

The condensed consolidated balance sheet at December 31, 2015 has been derived from the unaudited consolidated financial statements as of that date but does not include all of the information and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2015. The results of operations for the three and six months ended December 31, 2015 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

 

Going Concern

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. To date the Company has recorded an accumulated deficit of $93,514,564, recurring losses from operations and significant cash used in operating activities over the last two years, and is dependent upon its ability to obtain future financing and successful operations.

 

Our continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations. Our future is dependent upon our ability to obtain financing and upon future profitable operations. The Company estimates the current operational expenses of approximately one hundred fifty thousand dollars a month is required to continue to operate. This is achieved either through profit from sales; or by management seeking additional financing through the sale of its common stock, and/or through private placements. The minimum operational expenses must be met in order to relive the threat of the company’s ability to continue as a going concern. There is no assurance that our current operations will be profitable or that we will raise sufficient funds to continue operating. The Company continues to trim overhead expenses to meet revenues. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event we cannot continue in existence. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

2.   Summary of Significant Accounting Policies

 

Loss Per Share

 

Basic net loss per share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is determined by dividing net loss by the weighted average number of common shares used in the basic loss per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding under the treasury stock method. Potential common shares at December 31, 2015 from preferred C shares convertible into 178.3 billion shares of common stock, preferred D shares convertible into 2.7 billion shares of common stock, and convertible notes convertible into 22 billion shares of common stock (December 31, 2014 – 12.6 billion). Accordingly, total common share equivalents of 203 billion were excluded in the computation of diluted net loss per share for the six months ended December 31, 2015, because the effect would be anti-dilutive.

 

 6 
 

  

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affects 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 reporting period. Actual results could differ from those estimates.

 

Recent Accounting Pronouncements

 

Management has determined that no new accounting pronouncements during the period that would affect the condensed consolidated financial statements.

  

3.   Balance Sheet details

 

As of December 31, 2015, inventories consisted of the following:

 

Chemicals  $126,970 
Lumber  $31,808 
   $158,778 

 

All of the Company’s inventories are pledged as collateral for the Company’s Senior Secured Notes (see Note 4). In addition, inventory is considered finished goods as the Company sells and markets the chemical and treated and untreated lumber. The chemicals and lumber include a $47,264 reserve for obsolete inventory.

 

Property and Equipment

 

Property and equipment is stated at cost.  Property and equipment-related expenditures for items with useful lives exceeding one year and major renewals and improvements are recorded as assets, while replacements and maintenance and repairs that do not improve or extend the lives of the respective assets are expensed.  At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts.  Gains or losses from retirements or sales are credited or charged to income.  Depreciation expense is recorded on a straight-line basis over the estimated useful lives of the assets, ranging from (3) to seven (7) years.  Leasehold improvements are depreciated over their useful life or the term of the related lease, whichever is shorter.  Depreciation expense is not recorded on idle property and equipment until such time as it is placed into service. Depreciation expense for the six months ending December 31, 2015 was $64,863.

 

Accrued Liabilities

 

As of December 31, 2015, the Company owed $825,578 in past due payroll taxes and accrued penalties. The Company has made an arrangement with the IRS for monthly payments for a $651,999 portion of the liability. However, the Company is in default with this agreement. These amounts are recorded within payroll and taxes payable on the accompanying consolidated balance sheet.

 

Derivative Liabilities

 

During the six months ended December 31, 2015, the Company issued convertible preferred stock that can be converted to common stock in connection with raising equity and debt financing. As of December 31, 2015, the Company’s number of potential common shares plus the number of actual common shares outstanding (“Committed Shares”) exceeded the number of common shares authorized to issue in accordance with ASC 815-40-19 “Contracts in Entity’s Own Equity”. The number of outstanding common shares plus the potential common share liability has exceeded the amount of authorized shares, therefore the Company has to employ ASC 815-40-19 (“ASC 815”) to value common share equivalents potentially issuable to settle conversions of convertible notes, convertible preferred shares and exercise of warrants and options.

 

The Company values its derivative financial instruments, consisting primarily of embedded conversion features for convertible debt, convertible preferred stock, stock options and warrants, at issuance at fair value and revalues its derivative financial instruments at the end of each reporting period or in the case of any conversion or modification of terms, at the date of any such modification or conversion. Any change in fair value is charged to earnings of the period where the derivative financial instrument is modified or converted. The fair value of these derivative financial instruments was determined using a path-dependent Monte Carlo simulation. The ranges of inputs (or assumptions) the Company used to value the derivative liabilities at respective issuances, conversion or exercise dates, and at period end during the period ended December 31, 2015 were as follows:

 

 7 
 

 

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

(1) dividend yield of 0%

(2) expected annual volatility of 203.47% to 263.89%

(3) risk-free interest rate of 0.28% 1.47%

(4) expected life of 0.53 days to 3.24 years, and

(5) estimated fair value of the Company’s common stock of $0.0001 to $0.0002 per share.

 

For the six months ended December 31, 2015, the Company issued an aggregate of $738,749 convertible preferred D series shares with a stated value of $100 per share as further described below in Note 7 and recorded additional derivative liabilities of $1,474,141 for the conversion features included therein. The Preferred D shares are convertible into the Company’s common shares, at the holder’s option, at conversion prices equal to 60% of the lowest VWAP closing price for the previous 30 days.

 

For all convertible notes described in the following paragraphs and for the options, warrants, and convertible preferred Series C and Series D shares described in Note 7, the fair value of the resulting derivative liability was $31,050,647 and $14,198,848 at December 31, 2015 and June 30, 2015 and, respectively.

 

A reconciliation of the derivative liabilities from June 30, 2015 to December 31, 2015 is:

 

  

Derivative

Liabilities

 
     
Balance as of June 30, 2015   14,198,848 
Additions related to embedded conversion features Preferred Series D issued   1,474,141 
Conversion of convertible debt and Preferred Series C to common stock   (760,602)
Additions related to embedded conversion features of Convertible Debt   130,529 
Loss on increase in value of derivative liabilities   16,007,731 
Balance as of December 31, 2015  $31,050,647 

 

4.   Notes Payable

The following table summarizes the notes payable as of December 31 2015.

 

   As of December 31, 2015 
Description  Short term   Long term 
         
          
Convertible notes   1,042,674     
Less discount to notes payable   (54,983)    
    Convertible notes, net   987,691     
          
           
Auto notes payable   23,916    63,410 
Loans payable – other   1,357,388     
           
   $2,368,995   $63,410 

 

 8 
 

  

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

Convertible notes

 

Inventory Note Payable - $833,333

On September 16, 2014, the Company entered into a Securities Purchase Agreement with Dominion Capital, LLC, whereby Dominion agreed to fund the Company with an aggregate of up to $750,000 in Subscription Amount corresponding to an aggregate of up to $833,333 in the form of a 10% Original Issue Discount Senior Secured Convertible Promissory Note due September 16, 2015 and a Common Stock Purchase Warrant for up to 20,000,000 shares. This funding will be used exclusively to purchase lumber and chemicals and is to be dispersed from an escrow account. On September 29, 2014, Dominion transferred and assigned the Note and the Warrant to M2B Funding Corporation. The Note has a fixed conversion price of $0.20 subject to certain adjustments. The Company is scheduled to repay the Note in monthly installments, the final payment was due on October 16, 2015. The Company is in default on this note. The Company plans on using the receivables from the sale of lumber and chemicals to comply with the terms of the repayment schedule. In the event of default, the Note is subject to an increase in the interest rate to eighteen percent (18%) per annum. In accordance with the Agreement, the Company issued a Common stock Purchase Warrant, allowing M2B Funding Corporation the right to purchase up to 20,000,000 shares of Common Stock on September 16, 2015 and expiring on September 16, 2019. The Company purchased all of the 20,000,000 available warrants under this agreement. The exercise price per share of the Common Stock under this Warrant is $0.02 subject to certain adjustments. The Warrant may be exercised in whole or in part, at such time by means of a cashless exercise (see Note 7). The Common Shares cannot be sold and or assigned for a period of one year from the original Warrant issue date. The Company initially recorded discounts totaling $1,001,326 representing the fair value of the warrants issued. During the six months ended December 31, 2015 the Company amortized the remaining discount balance of $230,905. During the six months ended December 31, 2015 this investor converted $35,877 into 219,321,375 shares of common stock. The balance of this note at December 31, 2015 is $944,902, inclusive of original issue discount of $76,515. Accrued interest at December 31, 2015 is $250,980.

 

Note Payable - $100,000

On November 12, 2014, the Company entered into, with a private investor, a Promissory Note for $100,000, with an original issue discount of $20,000, for net proceeds to the Company of $80,000 for the purpose of funding operations and for general working capital.  In addition the Company issued 12,500,000 restricted common shares. On May 14, 2015, the holder converted $20,000 of this note into 10,000,000 shares of common stock. The conversion represented a substantial modification of the note’s original terms and as a result the Company recognized a loss of $47,000. The note was in default on May 15, 2015. Default provisions included additional interest at 18%. During the six months ended December 31, 2015 this investor converted $24,200 into 154,000,000 shares of common stock. The Company recorded amortization of discounts totaling $53,937 during the six months ended December 31, 2015 and the discount balance is $15,981 at December 31, 2015. The balance of this note at December 31, 2015 is $55,800 plus accrued interest of $7,575.

 

Senior Convertible Note - $14,167

On November 10, 2015, the Company entered into, with a private investor, a Senior Convertible Note for $14,167, with an original issue discount of $1,417, for net proceeds to the Company of $12,750 for the purpose of funding operations and for general working capital.  The maturity date is one year from the issuance date. In the event of default, the Note is subject to an increase in the interest rate to twenty-two percent (22%) per annum. The holder can convert at a 40% discount to the lowest volume weighted average price in the previous twenty-five trading day period. In the event of default the conversion price is equal to 55% of the lowest traded price in the prior thirty trading days. The Company recorded amortization of discounts totaling $1,979 during the six months ended December 31, 2015 and the discount balance is $12,188 at December 31, 2015. The balance of this note at December 31, 2015 is $14,167 plus accrued interest of $435.

 

Senior Convertible Note - $14,167

On November 30, 2015, the Company entered into, with a private investor, a Senior Convertible Note for $14,167, with an original issue discount of $1,417, for net proceeds to the Company of $12,750 for the purpose of funding operations and for general working capital.  The maturity date is one year from the issuance date. In the event of default, the Note is subject to an increase in the interest rate to twenty-two percent (22%) per annum. The holder can convert at a 40% discount to the lowest volume weighted average price in the previous twenty-five trading day period. In the event of default the conversion price is equal to 51% of the lowest traded price in the prior thirty trading days. The Company recorded amortization of discounts totaling $1,203 during the six months ended December 31, 2015 and the discount balance is $12,964 at December 31, 2015. The balance of this note at December 31, 2015 is $14,167 plus accrued interest of $265.  

 

 9 
 

  

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

Senior Convertible Note - $14,167

On December 30, 2015, the Company entered into, with a private investor, a Senior Convertible Note for $13,889, with an original issue discount of $1,389, for net proceeds to the Company of $12,500 for the purpose of funding operations and for general working capital.  The maturity date is one year from the issuance date. In the event of default, the Note is subject to an increase in the interest rate to twenty-two percent (22%) per annum. The holder can convert at a 40% discount to the lowest volume weighted average price in the previous twenty-five trading day period. In the event of default the conversion price is equal to 51% of the lowest traded price in the prior thirty trading days. The Company recorded amortization of discounts totaling $38 during the six months ended December 31, 2015 and the discount balance is $13,851 at December 31, 2015. The balance of this note at December 31, 2015 is $13,889 plus accrued interest of $8.

 

Loans Payable – Other

  

Auto Loan  

The Company entered in an auto loan agreement on July 21, 2014 to purchase a vehicle. The principal amount of the loan is $83,821 and the interest rate 5.49%. The loan is due on November 13, 2019. The Company is currently paying auto payments of $1,671 per month. Future short term minimum payments due total $27,064 and future long term minimum payments total $60,262 for fiscal years 2016 through 2020.

 

Secured Promissory Note - $44,500

At June 30, 2012, the Company was indebted for $44,500 for amounts received in prior years for operating expenses in exchange for a secured promissory note from a third party entered into during 2010. This amount was due on demand and non-interest bearing. No payments were made on this note during the six months ending December 31, 2015, leaving a balance due of $44,500 at December 31, 2015. The lender is claiming the amount owed is $360,000, which the Company disputes.

 

Inventory Note Payable – up to $1,200,000

On July 18, 2014, the Company signed a Secured Revolving Promissory Note for up to One Million Two Hundred Thousand Dollars ($1,200,000) with an investor to facilitate purchase of inventory for orders from the Company’s material customer. The note is secured by the inventory. Repayment of the note is facilitated by the assignment of the accounts receivable directly from the Company’s material customer to the investor. The initial term of the note is for six months with an option to extend for an additional six month period. The note will bear an 18% interest rate per annum with a maximum default interest of 24% per annum. Within three (3) Business Days after the date of this Note, the Company shall deliver to Payee a Warrant, in a form acceptable to Payee, exercisable for 900,000 shares of the Company’s Common Stock at a price per share equal to the closing price of the Common Stock on the trading day prior to the date of such Warrant. Upon receipt of such Warrant, Payee shall execute a 12-month lock-up agreement in customary form and reasonably acceptable to Payee; currently no warrant or lock-up agreements have been issued or executed. The Company made no additional borrowings or payments on this note during the three months ended September 30, 2015.  The balance of the note as of December 31, 2015 is $183,456 plus accrued default interest of $37,892. This note has not been renewed at the six month anniversary. No payments have been made after December 31, 2015.

 

Lease in Default - $151,275

Effective April 1, 2015 and up through September 30, 2015, the Company has incurred $151,275 in a default on their facilities lease. The default rate on the lease is 10%. No repayments have been made during the six months from June 30, 2015 to December 31, 2015, leaving a balance of $151,275 due at December 31, 2015 plus accrued default interest of $7,626.

 

Note Payable-$500,000  

On February 14, 2014 the Company entered into a Note agreement in the amount of $500,000 for the purpose of purchasing inventory. The note is secured by the Company’s inventory and is to be repaid out of the proceeds of the subsequent inventory sales. The note was due May 14, 2014 and was extended until March 31, 2015. The Note carries minimum interest of $45,000 for the initial term and an additional $45,000 of interest for the extension of the due date. The balance due is $85,911 at December 31, 2015 plus the additional $45,000 as accrued interest. No payments have been made after December 31, 2015.

 

 10 
 

  

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

Note Payable-$250,000

On April 11, 2014, the Company entered into a Note agreement in the amount of $250,000 for the purpose of funding operations and for general working capital. The Note carries minimum interest of $22,500 and the note was due July 1, 2014 and was extended until March 31, 2015.  The Company made no draw-downs or payments on this note during the six months ended December 31, 2015. The balance due is $150,000 at September 30, 2015 plus the additional $36,300 as accrued interest. No payments have been made after December 31, 2015.  

 

Note Payable-$20,000

On March 25, 2015, the Company entered into a Promissory Note agreement in the amount of $20,000 with annual interest of 6% for the purpose of funding operations and for general working capital.  The note was due on April 24, 2015. Default interest of an additional 10% per annum on the original loan amount accrues if the repayment term goes beyond 30 days. The balance due is $20,000 at December 31, 2015 plus $1,474 of accrued interest.   No payments have been made after September 30, 2015.  Additionally, the Company borrowed an additional $3,000 from this same party at 0% and no terms of repayment.

 

Note Payable-$60,000  

On April 2, 2015, a shareholder loaned the company $60,000 on a secured promissory note with a 6% per annum interest rate and a 30 day maturity date.  Default interest of an additional 10% per annum is incurred on this note if repayment is not made by July 2, 2015.   The balance due is $60,000 at December 31, 2015 plus $4,291 of accrued interest.   No payments have been made after December 31, 2015.

 

Promissory Note-$275,000  

On December 15, 2015, a shareholder loaned the company $275,000 on a promissory note with a 24% per annum interest rate with monthly payments of $25,000 commencing in April 2016 until paid in full. The balance due is $275,000 at December 31, 2015.

 

Future Receivables Sale Agreement

Effective March 6, 2015, the Company entered into an agreement whereby it sold a percentage of its future receivables in exchange for $75,000. Per the terms of this agreement, the Company would repay a total of $102,750 via daily remittance of twelve percent (12%) of its accounts receivable collections and other receipts from the sale of its products and services. Alternatively, the Company could elect to repay $120,750 total via a flat daily remittance of $1,038 (“Alternative Daily Amount”) until that amount is repaid in full. The Company elected to repay $120,750 at the Alternative Daily Amount of $1,038, which gives the agreement the character of a $73,500 note. The interest rate was imputed at 184.23% and the $102,750 purchase price was paid off in July 2015.

 

Future Receivables Sale Agreement - $225,000

Effective July 29, 2015, the Company entered into an agreement whereby it sold a percentage of its future receivables in exchange for $220,500 ($225,000 less a $4,500 setup fee). The Company is to repay $309,375 via daily remittance of a percentage of its accounts receivable collections and other receipts from the sale of its products and services. Per the terms of the agreement, the Company made an alternative election to repay the $309,375 via a flat daily remittance of $2,163 until that amount is repaid in full. The Company has accounted for this agreement as a note payable with a maturity date of March 9, 2016 and an imputed interest rate of 123%. The balance of the note is $87,164 at December 31, 2015.

 

Future Receivables Sale Agreement - $70,000

Effective September 16, 2015, the Company entered into a second similar agreement whereby it sold a percentage of its future receivables in exchange for $70,000. Per the terms of the agreement, the Company elected to repay $96,250 via a flat daily remittance of $1,019 until that amount is repaid in full. The Company has accounted for this agreement as a note payable with a maturity date of February 18, 2016 and an imputed interest rate of 177%. The balance of the note is $11,917 at December 31, 2015.

 

Future Receivables Sale Agreement - $120,000

Effective September 28, 2015, the Company entered into a third similar agreement whereby it sold a percentage of its future receivables in exchange for $120,000. Per the terms of the agreement, the Company is to repay $153,000 via a flat daily remittance of $1,196 until that amount is repaid in in full. The Company has accounted for this agreement as a note payable with a maturity date of April 5, 2016 and an imputed interest rate of 98%. The balance of the note is $78,165 at December 31, 2015.

 

 11 
 

  

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

Settlement and Release Agreement - $100,000

In July 2015, the Company entered into a Settlement and Release Agreement (the “Settlement Agreement”) with Eco Prime, LLC. The Settlement Agreement resolves any disputes arising from the Limited Asset Purchase Agreement entered into between the parties on March 19, 2014. Pursuant to the terms of the Settlement Agreement, the Company paid One Hundred Thousand Dollars ($100,000) to acquire the assets from EcoPrime and released each party from any liability under the March 2014 agreement. In order to fund the $100,000 payment, the Company entered into a Promissory Note with a private investor dated July 14, 2015. Pursuant to the terms of the note, it had a 60-day maturity and a flat 25% interest rate. The note was due on September 14, 2015 but, to date, has not been paid off and is currently in default. The note incurs additional default interest of 6%. The balance of the note at December 31, 2015 is $85,000 plus accrued interest of $10,182.

 

In connection with this agreement, the Company borrowed an additional $32,000 from this same party at 0% in a short-term bridge financing arrangement which has been repaid.

 

On November 19, 2014, the Company entered into a Promissory Note for $100,000 with annual interest of 6% for the purpose of funding operations and for general working capital.  In addition the Company issued 12,500,000 restricted common shares. The note was due on February 19, 2015. As of May 18, 2015 the Company has extended the note to August 21, 2015 with the agreement to issue, prior to the new maturity date, an additional 25,000,000 common shares.  Pursuant to the default provisions of the note, the Company issued an additional 15,000,000 common shares during the six months ended December 31, 2015. The balance due is $100,000 at December 31, 2015 plus $11,852 of accrued interest. No payments have been made after December 31, 2015.

 

On January 16, 2015 the Company entered into an additional promissory note for $20,000 with annual interest of 6%. This note was due on July 16, 2015.  In addition the Company issued 30,000,000 restricted common shares. The balance due is $20,000 at December 31, 2015 plus $2,147 of accrued interest. No payments have been made after December 31, 2015.

 

Loans Payable – Related Party

 

At December 31, 2015, the Company had interest bearing notes payable due to its Chief Technical Officer with a balance of $2,000. During the six months ending December 31, 2015, the Company made payments totaling $43,000 under this note.

  

 12 
 

  

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

5.   Related Party Transactions

 

See Note 4 for Loans payable – related parties and equity issuances in Note 7.

 

6.   Fair Value of Assets and Liabilities

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Further, entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.

 

Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

Application of Valuation Hierarchy 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodology used to measure fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Advances from Related Party. The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.

 

Notes Payable – Related Party. The Company assessed that the fair value of this liability to approximate its carrying value based on the effective yields of similar obligations.

 

Convertible Notes Payable.

The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.

 

Loans Payable - Related Party. The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.

 

 13 
 

 

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

Loans Payable - Other. The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.

 

Derivative Liabilities. The Company assessed that the fair value of these liabilities using observable inputs described in level 2 above. The methodology described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. If readily determined market values became available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be adjusted, which could result in material differences from the recorded carrying amounts. The Company believes its method of determining fair value is appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value

 

7.   Stockholders' Deficit

 

Preferred Stock

The Company is authorized to issue 500,000,000 shares of redeemable convertible preferred stock with a par value of $0.001 per share. During the year, the Company issued three series of Preferred Stock:

 

Series A Preferred Stocks:

On January 27, 2014 the Board of Directors authorized 30,000 shares of Class A Preferred Stock with a par value of $0.001.

The terms of the preferred series A shares are as follows:

 

·Series A Preferred stock is not convertible.
·Each share of Series A Preferred stock is entitled to 100,000 votes on matters that the holders of the Company's common stock may vote.
·The Series A Preferred stock is redeemable by the company for no consideration at any time.
·The Series A Preferred stock cannot vote on election or removal of directors.
·The Series A Preferred stock has no stated dividend rate and has no liquidation preference.

 

Effective with the Chief Executive Officer’s termination on June 15, 2015, all 30,000 Series A preferred shares were cancelled. There were no issuances of Series Preferred A stock during the six months ended December 31, 2015. There were no Series preferred A shares outstanding at December 31, 2015.

 

Series B 12% Convertible Preferred Stock:

$925,000 Series B Preferred Stock Financing

On February 26, 2014 the Board of Directors authorized 6,750 shares of Class B Preferred Stock (“Preferred B Stock”) with a par value of $0.001. On April 17, 2014, an additional 2,500 shares of Preferred B Stock was authorized with a par value of $0.001, for a total authorized amount of 9,250.

 

The terms of the Series B Preferred Stock (“Preferred B”) are as follows:

  The Preferred B Stock shall have no voting rights.
  The Preferred B Stock is convertible at any time at 60% of the lowest VWAP of the 20 days leading up to conversion multiplied by the stated value of $100.
  The Preferred B Stock has a 12% per annum stated dividend rate, which is calculated daily on a 360 day year.
  The Preferred B Stock shall have a liquidation preference equal to the stated value of each share of Preferred Stock or $100 per share.

 

On June 3, 2014, all shares of the Preferred B Stock were converted into an equal number of shares of the Company’s Series C Convertible Preferred Stock as described below.  There were no Preferred B shares outstanding at December 31, 2015 or June 30, 2015.

 

Series C 12% Convertible Preferred Stock:

On May 30, 2014, the Company authorized 120,000 shares of a newly-created Series C 12% Convertible Preferred Stock, par value $0.001 per share (the “Preferred C Stock”).

 

The terms of the Preferred C Stock are as follows:

 

 14 
 

 

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

  The Preferred C Stock shall have no voting rights.
  The Preferred C Stock is convertible at any time at 60% of the lowest VWAP of the 20 days leading up to conversion multiplied by the stated value of $100.
  The Preferred C Stock has a 12% per annum stated dividend rate, which is calculated daily on a 360 day year. Any dividends, whether paid in cash or shares of Common Stock, that are not paid within five trading days following a dividend payment date shall continue to accrue and shall entail a late fee at 18% per annum. In addition, the dividend rate of 12% is subject to an adjustment up to 18% if at any time the Company does not have an amount equal to or greater than 150% of the authorized but unissued common shares that would be required (on an “if converted” basis) to settle the conversion of Preferred C Stock outstanding. As of December 31, 2015, the Company has accrued dividends on Preferred C Stock in the amount of $588,961. The amount of dividends has not yet been determined by the Company and the holders whether to be payable in cash, common stock or additional shares of Preferred C Stock.
  The Preferred C Stock shall have a liquidation preference equal to the stated value of each share of Preferred Stock or $100 per share.

 

The following table provides the activity of the Company’s Preferred C stock for the six months ended December 31, 2015:

 

Balance as of June 30, 2015   104,440 
Preferred C Stock issued for cash    
Preferred C Stock converted into Common Stock   (3,341)
Balance as of December 31, 2015   101,099 

 

Preferred C Stock converted to Common Stock 

During the six months ended December 31, 2015, according to the conversion terms described above, the investors converted 3,341 shares of Preferred C Stock representing value of $334,042 into 2,226,134,436 shares of the Company’s Common Stock.

 

Series D 12% Convertible Preferred Stock:

On March 31, 2015, the Company authorized 10,000 shares of a newly-created Series D 12% Convertible Preferred Stock, par value $0.001 per share (the “Preferred D Stock”). Effective July 2, 2015, the Company increased the number of authorized shares to 20,000.

 

  The Preferred D Stock shall have no voting rights.
  The Preferred D Stock is convertible at any time at 60% of the lowest VWAP of the 30 days leading up to conversion multiplied by the stated value of $100.
  The Preferred D Stock has a 12% per annum stated dividend rate, which is calculated daily on a 360 day year.  Any dividends, whether paid in cash or shares of Common Stock, that not paid within five trading days following a dividend payment date shall continue to accrue and shall entail a late fee at 18% per annum. In addition, the dividend rate of 12% is subject to an adjustment up to 18% if at any time the Company does not have an amount equal to or greater than 150% of the authorized but unissued common shares that would be required (on an “if converted” basis) to settle the conversion of Preferred C Stock outstanding. As of December 31, 2015, the Company has accrued dividends on Preferred D Stock in the amount of $158,251. The amount of dividends has not yet been determined by the Company and the holders whether to be payable in cash, common stock or additional shares of Preferred D Stock.
  The Preferred D Stock shall have a liquidation preference equal to the stated value of each share of Preferred Stock or $100 per share.

 

Preferred D Stock issued for cash

During the six months ended December 31, 2015, investors purchased 7,387 shares of Preferred D Stock for $738,749 of cash.

 

Common Stock Issuances

 

During the six months ended December 31, 2015, the Company issued a total of 2,614,455,811 shares of its common stock as follows:

 

373,321,375 shares were issued for conversion of convertible debt and accrued interest with an aggregate value of $60,077;

 

 15 
 

 

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

15,000,000 shares were issued pursuant to default provisions of a note payable with an aggregate value of $11,750; and

 

2,226,134,436 shares were issued for conversion of 3,341 shares of convertible Preferred C stock as described above.

 

Treasury Stock

 

There were no treasury stock transactions during the six months ended December 31, 2015. The Company held 1,433,047 shares of common stock as treasury stock at December 31, 2015.

 

Warrants

 

As discussed in Note 4, the Company issued a Common Stock Purchase Warrant, allowing M2B Funding Corporation the right to purchase up to 20,000,000 shares of Common Stock on September 16, 2014 and expiring on September 16, 2019. The exercise price per share of the Common Stock under these warrants is $0.02 subject to certain adjustments. The 20,000,000 warrants were valued at $438,590 using the Black-Scholes Option Model with a risk free interest rate of 1.47%, volatility of 203.47%, and trading price of $0.0001 per share.

 

The following is a schedule of warrants outstanding as of December 31, 2015:

 

  

Warrants

Outstanding

   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Life
 
             
Balance, June 30, 2015   20,000,000   $0.02     4.21 Years 
Warrants issued   -    -      
Warrants expired   -    -      
Warrants cancelled   -    -    - 
Balance, December 31, 2015   20,000,000   $0.02     3.71 Years 

 

Options

 

In April 2011, the Company granted options to its Chief Technical Officer to purchase 400,000 shares of its common stock. The 400,000 options have an exercise price of $0.10 per share and expire in five years.

 

In November 2013, the Company granted options to its Chief Technical Officer to purchase 800,000 shares of its common stock. The 800,000 options have an exercise price of $0.10 per share and expire in 5 years.

 

The Company granted options to its former Chief Executive Officer as in connection with his termination agreement that was effective June 15, 2015. A total of 5,786,227 options were granted based on the number of shares of Common Stock equal to one percent (1%) of the total number of shares outstanding on the date of grant. The options have an exercise price equal to the closing bid price on the date of grant ($0.0038 per share) and an expiration date of ten (10) years from the date of issuance. A total of 5,786,227 options were granted under these terms. The options vest fifty percent (50%) on the effective date of the agreement, with the remaining fifty percent (50%) vesting six (6) months after the effective date of the agreement. The options were valued at $21,987, as determined using the Black-Scholes option-pricing model using a risk free rate of 2.35%, volatility of 257% and a trading price of the underlying shares of $0.038.

 

The following is a schedule of options outstanding as of December 31, 2015:

 

 16 
 

 

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

  

Options

Outstanding

   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Life
   Aggregate
Intrinsic
Value
 
                 
Balance, June 30, 2015   6,986,227   $0.02    9.98 Years   $- 
Options granted   -    -         - 
Options cancellation/expired   -    -    -    - 
Balance, December 31, 2015   6,986,227   $0.02    8.37 Years   $- 

 

As of December 31, 2015, 4,093,114 of the 6,986,227 options are exercisable.  Compensation expense of $10,994 remaining, will be recognized over the remaining vesting period.

 

8.   Commitments and Contingencies

 

Purchase commitments

 

On January 18, 2011, the Company entered into an AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Newstar Holdings Pte Ltd inventors and owners of technical data and intellectual property for a protective coating in order to obtain an exclusive supply, marketing and distribution rights of the coating product. The product is a non-toxic non-corrosive fire inhibitor. Pursuant to the Agreement, the Company guaranteed it will purchase a minimum of nine hundred fifty (650) gallon totes of product in the first two-year period at a cost of $1,815,450 for the first two years. The Company is required to increase the minimum quantities in the third year to 842 totes making the total purchase commitment $2,351,706 for year three. In the fourth year the Company is required to increase the minimum quantities to 1,264 totes making the total purchase commitment $3,530,352 for year four. There are no penalty clauses other than cancellation of the agreement if the minimum purchase commitments are not met. The Company and Newstar Holdings are currently in negotiations to modify the current contract to accurately reflect the anticipated future business volumes. Both parties have engaged in the efforts to manufacture additional product to optimize supply chain and meet Company demands. Albeit the Company has not met the stated quantity purchases both parties have reaffirmed their intent to continue the business relationship and confirm the current contract is still in effect and a default situation does not exist. If the agreement were to be cancelled it would have a significant impact on the Company’s operations until a replacement product could be arranged.

 

On March 5, 2014, the Company entered into a first amendment to the AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Newstar Holdings Pte Ltd inventors and owners of technical data. The amendment modified the current agreement in the following manner;

 

All parties agree;

 

The “Buyer” has changed their corporate name from EcoBlu Products, Inc. to Eco Building Products, Inc. and this change has no impact on the validity or assignment of the contract other than a corporate name change.

 

To modify section 1.3 Rights to use Product Technology - sub section (A) to substitute the sentence defining “of and rights within the USA and Canada to use the Product as a component of the Enhanced Products” to now state “of and rights within the Entire World to use the Product as a component of the Enhanced Products” the change from USA and Canada to Entire World or Worldwide also effects language in section D.

 

All parties agree that the original agreement referenced hereto and the modifications as defined in this Amendment are in good standing.

 

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Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) DECEMBER 31, 2015

 

 

 

Legal Proceedings

 

On June 4, 2013, Trical Construction, Inc. filed a complaint against the Company in Superior Court of California, County of Los Angeles. The nature of the litigation involved Trical’s claim that it suffered various construction delays and other damages from Eco Building Products in connection with the construction of a 77 unit apartment building. The matter was ultimately resolved by settlement on August 1, 2014 in the amount of $180,564.50, with payment of $30,000.00 by Eco Building Products to Trical on that date and scheduled payments of $10,000 each month beginning on November 1, 2014 through February 1, 2016. This was amended on April 15, 2015, extending payments to October 2016 and reducing the payment amount to $2,500 per month. The balance on this settlement is $123,065 at June 30, 2015 and no payments have been made since June 15, 2015. The Company is in default on this settlement agreement.

 

On October 6, 2015, the landlord for the former Vista, CA location filed a complaint against us in the Superior Court of California, County of San Diego for a Breach of Contract for a Promissory Note that we issued to him in connection with unpaid lease payments that we owed in the amount of $151,272.65 under the terms of the lease that we entered into for our Vista, CA location.

 

The Company is a co-defendant in a legal action filed October 22, 2015 for past-due fees for professional services in the amount of $194,569. Due to the early stage of this suit, the outcome cannot be determined at this time.

 

From time to time the Company may be named in claims arising in the ordinary course of business. Currently, no legal proceedings or claims, other than those disclosed above, are pending against or involve the Company that, in the opinion of management, could reasonably be expected to have a material adverse effect on its business and financial condition.

 

9. Subsequent Events

 

From December 31, 2015 to February 22, 2016, the Company issued to investors a total of 3,083 Preferred D shares for total cash of $308,333.

From December 31, 2015 to February 22, 2016, the Company issued to investors a total of 116,666,667 common shares converted from 70 preferred C shares.

From December 31, 2015 to February 22, 2016, the Company issued 150,000,000 of common shares from conversions of debt amounting $7,500.

In February, 2016, the Company consolidated its coating services only (CSO) operations in Augusta, GA, closing the Tacoma WA and Fair Lawn NJ plants.

In February, 2016, the Company moved its headquarters from Vista CA to San Diego CA.

 

10. Discontinued Operations

 

On April 15, 2015, the Company completed the sale of E Build & Truss to former employees of the Company. In exchange for certain assets, the purchaser accepted $112,102 of liabilities related to E Build and Truss. As such, this has been accounted for as a discontinued operation in the June 30, 2015 financial statements. The Company has recorded a loss from discontinued operations of $216,164 as a result of this transaction, which is comprised of $363,500 in revenues, $44,702 in gain on asset sale and $624,366 in costs and expense. Included in the $1,148,229 of liabilities from discontinued operations in 2015 are $205,113 in accounts payable and $943,116 in accrued expenses related to E Build and Truss.

 

Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

The following management's discussion and analysis should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three and six months ended December 31, 2015 included in this report and our audited consolidated financial statements and related notes for the year ended June 30, 2015 included in our Annual Report on Form 10-K filed on November 16, 2015 with the Securities and Exchange Commission.

 

Forward-Looking Statements

 

Certain statements concerning our plans and intentions included herein may constitute forward-looking statements. There are a number of factors that may affect our future results, including, but not limited to, (a) our ability to obtain additional funding for operations, (b) the continued availability of management to develop the business plan and (c) on ramping the supply side which yields higher profits (d) successful development and market acceptance of our products.

 

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This quarterly report may contain both historical facts and forward-looking statements. Any forward-looking statements involve risks and uncertainties, including, but not limited to, those mentioned above. Moreover, future revenue and margin trends cannot be reliably predicted.

 

Overview

Eco Building Products, Inc., or "ECOB", has developed a line of eco-friendly protective wood coatings, Eco Red Shield TM and Eco Clear Shield TM , that extend the lifecycle of framing lumber and other wood products used in the construction of single-family homes and multi-story buildings. The Company has expanded its’ product offering to include Eco Fire Break TM , Eco Disaster Break TM , Eco Armor Paint TM , Eco D-Fence TM , Eco Disaster Cleaner TM , Eco Flood Caulk TM , Eco Trim TM , and Eco Christmas Tree Protection TM .

 

Eco Building Products wood coatings are topically applied to a wide range of lumber products providing protection from mold, mildew, fungus, decay, wood rot, wood ingesting insects, including Formosan termites. Eco Red Shield™ also serves as a fire inhibitor; significantly increasing treated lumber’s resistance to fire, by way of decreasing the smoke (fire gases) index, slowing ignition time and flame spread.

 

The ECOB system of coatings is eco-friendly and remains chemically stable over time. The coatings emit virtually zero volatile organic compounds (VOCs), do not leech heavy metals or toxins into groundwater, and do not allow for the growth and propagation of various molds on the cured film surface, that have the potential to contaminate occupant indoor air quality. More importantly, ECOB coatings prevent the degradation of structural lumber that potentially requires existing homes to be periodically renovated resultant of rot and/or insect damage, thereby indirectly preserving our forests.

 

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In 2015, the Company changed its business model to focus on coating services only and chemical sales. The Company no longer purchases lumber for coating and resells the treated lumber. Customers have their lumber shipped to one of three facilities: (i) Fair Lawn, New Jersey (consolidated with Augusta GA in February 2016), (ii) Tacoma, Washington (consolidated with Augusta GA in February 2016); or (iii) Augusta, Georgia.

 

Critical Accounting Policies

 

The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and various other factors that we believe are reasonable under the circumstances. We consider our accounting policies related to revenue recognition, stock-based compensation, goodwill and purchased-intangible assets and accounting for income taxes to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to estimate the best evidence of selling price for revenue recognition, the calculation of stock-based compensation expense, evaluation of the potential impairment of goodwill and purchased-intangible assets and the income tax related balances. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.

 

Fair Value Policy

 

Management believes there have been no significant changes during the six months ended December 31, 2015 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For a description of those accounting policies, please refer to our 2014 Annual Report on Form 10-K.

 

Going Concern

 

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. To date the Company has generated minimal operating revenues, losses from operations, significant cash used in operating activities, and is dependent upon its ability to obtain future financing and successful operations.

 

Our continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations. Our future is dependent upon our ability to obtain financing and upon future profitable operations. The Company estimates the current operational expenses of approximately one hundred fifty thousand dollars a month is required to continue to operate. This is achieved either through profit from sales; or by management seeking additional financing through the sale of its common stock, and/or through private placements; the minimum operational expenses must be met in order to relieve the threat of the company’s ability to continue as a going concern. There is no assurance that our current operations will be profitable or we will raise sufficient funds to continue operating. The Company continues to trim overhead expenses to meet revenues. Utilization of the credit facilities secured in the period have allowed the company to increase sales of finished goods resulting in higher gross revenues and increasing profits. We expect the company will continue to gain market share having an inventory of finished goods ready for immediate sales resulting in a continued trend towards profitability. The Company has focused primarily on the direct sales of coating services and chemical sales to affiliates. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event we cannot continue in existence. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

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Financial Condition and Results of Operations

 

Results of Operations for the Three and Six Months Ended December 31, 2015 as Compared to the Three and Six Months Ended December 31, 2014

 

Revenues - For the three months ended December 31, 2015, the Company had total revenues of $111,374 from product sales, as compared to $777,366 in revenues of product sales for three month period ended December 31, 2014. The decrease in revenue is mainly attributed to the loss of a large, unprofitable customer and the discontinuance of lumber sales as a product line.

 

For the six months ended December 31, 2015, the Company had total revenues of $387,125 of product sales as compared to $1,653,115 for the six months ended December 31, 2014. The decrease was also due to the loss of a large, unprofitable customer and the discontinuance of lumber sales as a product line.

 

Cost of Sales and Gross Loss - The gross loss for the three months ended December 31, 2015 and December 31, 2014 was $148,015 and $101,263, respectively. The gross loss for both years can be attributed to plant consolidation and closing costs and excess capacity in all of our production facilities

 

The gross loss for the six months ended December 31, 2015 and December 31, 2014 was $223,452 and $350,129, respectively. The gross loss for both years can also be attributed to plant consolidation and closing costs and excess capacity in all of our production facilities

 

Operating Expenses - For the three months ended December 31, 2015, our total operating expenses were $537,721 or $434,214 below the three months ended December 31, 2014 of $971,935. The significant reduction in expenses year over year can be attributed to a reduction in head count and other expense reductions by new management. Included in our operating expenses for the three months ended December 31, 2015 were general and administration compensation and related costs of $180,172. Professional fees included in our operating expenses for the three months ended December 31, 2015 amounted to $99,188. Other significant operating costs we incurred during the three months ended December 31, 2015 included rent of $23,187, sales and marketing of $28,442, research and development of $79,591, and other general and administrative costs of $127,141.

 

For the six months ended December 31, 2015, our total operating expenses were $1,074,998 or $922,333 below the six months ended December 31, 2014 of $1,997,331. The significant reduction in expenses year over year can also be attributed to a reduction in head count and other expense reductions by new management. Included in our operating expenses for the six months ended December 31, 2015 were general and administration compensation and related costs of $290,533. Professional fees included in our operating expenses for the six months ended December 31, 2015 amounted to $228,763. Other significant operating costs we incurred during the six months ended December 31, 2015 included rent of $42,360, sales and marketing of $60,366, research and development of $159,564, and other general and administrative costs of $293,413.

 

Operating Loss - As a result of the aforementioned, the operating loss for the three months ended December 31, 2015 was reduced to $685,735 or $434,214 below the three months ended December 31, 2014 operating loss of $1,073,198.

For the six months ended December 31, 2015, the operating loss was $1,298,449 or $1,049,010 below the six months ended December 31, 2014 operating loss of $2,347,459.

 

Other Income and Expenses - For the three months ended December 31, 2015 we had other expenses that included interest expense of $74,080. We incurred $9,372,884 for the loss on derivative of our convertible notes payable significantly due to the conversion to common shares and the decrease in the stock price. This is compared to the three months ended December 31, 2014, in which our other income and expenses included interest expense of $1,013,524 and gain on derivative liability of $686,710.

 

For the six months ended December 31, 2015 we had other expenses that included interest expense of $508,171. We incurred $16,007,731 for the loss on derivative of our convertible notes payable and Preferred C and D shares. This is compared to the six months ended December 31, 2014, in which our other expenses that included interest expense of $2,039,981. We incurred $5,748,916 for the gain on derivative of our convertible notes payable.

 

Net Loss

 

The net loss of $10,672,795 and $18,638,050 for the three months and six months ended December 31, 2015, respectively, were primarily a result of derivative expense.

 

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Liquidity and Capital Resources

 

On December 31, 2015, we had $967 cash on hand. During the six months ended December 31, 2015, net cash used in our operating activities amounted to $1,072,461, which included $288,062 amortization of debt discount, $16,007,731 loss on derivative liability fair value adjustment significantly due to the conversion to common shares and the decrease in stock price. Cash of $1,204,331 was provided by financing activities during the same period, $738,449 proceeds from issuance of preferred D stock and $855,250 proceeds from notes payable.

    

If current and projected revenue growth does not meet management estimates and proceeds received from future financing are insufficient, we may choose to raise additional capital through debt and/or equity transactions, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation. Currently, we do not have any commitments or assurances for additional capital, nor can we provide assurance that such financing will be available to us on favorable terms, or at all. If, after utilizing the existing sources of capital available to us, further capital needs are identified and we are not successful in obtaining the financing, we may be forced to curtail our existing or planned future operations.

 

We may continue to incur operating losses over the next three months. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in our stage of development. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things, continue to grow our customer base, implement and successfully execute our business and marketing strategy, continue to develop and upgrade technology and products, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

 

Off Balance Sheet Arrangements

 

We have no off-balance sheet arrangements or financing activities with special purpose entities.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

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 4.Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” pursuant to Exchange Act Rule 13a-15(e) as of December 31, 2015 and all interim subsequent periods. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations. Our internal controls framework is based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our principal executive officer and our principal financial officer has concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are not effective in ensuring that information required to be disclosed in our Exchange Act reports is recorded, processed, and summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms to allow timely decisions regarding required disclosure.  The material weakness and significant deficiency identified by our management as of December 31, 2015 and all interim subsequent periods relates to the ability of the Company to record transactions and provide disclosures in accordance with U.S. GAAP. We did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of U.S. GAAP commensurate with our financial reporting requirements. Our staff needs substantial training to meet the demands of a U.S. public company and our staff’s understanding of the requirements of U.S. GAAP-based reporting are inadequate.

 

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Material Weaknesses

During the period ended December 31, 2015, we determined that because of the limited personnel, lack of segregation of duties and manual process related to the tracking and valuation of our inventory, management determined that a material weakness existed in the processes, procedures and controls related to the preparation of our financial statements.  This material weakness could result in the reporting of financial information and disclosures in future consolidated annual and interim financial statements that are not in accordance with generally accepted accounting principles.

The Company expects to take the following steps to remedy these weaknesses:

1.       Continue the implementation and training of an ERP system in which will improve the segregation of duties issues and automate the tracking of costs related to inventory

2.       Hire additional staff to assist the Controller to implement procedures improving the transaction processing, reconciliation and reporting process of inventory.

The Company expects to remediate these weaknesses prior to the completion of the quarter ended March 31, 2015.

The Company deemed that the internal control over financial reporting for the Company as of December 31, 2014 is not effective.

 

Remediation Initiative

We intend to provide U.S. GAAP training sessions to our accounting team and intend to increase the amount of training that each member of our accounting team receives. The training sessions will be organized to help our corporate accounting team gain experience in U.S. GAAP reporting and to enhance their awareness of new and emerging pronouncements with potential impact over our financial reporting.

 

Changes in Internal Controls

During the period covered by this report, there was no significant change in our internal controls over financial reporting or in other factors that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.     Legal Proceedings.

Except as disclosed below, we are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

The only litigation during the current period was the case of Trical Construction, Inc. v. Eco Building Products. The nature of the litigation involved Trical’s claim that it suffered various construction delays and other damages from Eco Building Products in connection with the construction of a 77 unit apartment building. The matter was ultimately resolved by settlement on August 1, 2014 in the amount of $180,564.50, with payment of $30,000 by Eco Building Products to Trical on that date and scheduled payments of $10,000 each month beginning on November 1, 2014 through February 1, 2016.

 

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Item 1A.     Risk Factors.

 

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 2.      Unregistered Sales of Equity Securities and Use of Proceeds.

 

See comments on Note 7, Common Stock Issuances -

 

During the six months ended December 31, 2015, the Company issued a total of 2,599455811 shares of its common stock as follows:

 

According to the conversion terms described under Note 7 of the Financial Footnotes, investors converted 3,290 shares of Preferred C Stock representing value of $329,042 into 2,142,801,108 shares of the Company’s Common Stock.

 

Common shares totaling 456,654,708 were issued in exchange for $65,077 of convertible notes.

 

The securities described above were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act and Regulation D promulgated thereunder, as applicable, relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.

 

All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock, warrants and options described in this Item 2 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.

 

Item 3.      Defaults Upon Senior Securities.

 

None.

 

Item 4.      Mine Safety Disclosures

 

Not applicable.

 

Item 5.     Other information

 

None.

 

Item 6.     Exhibits.

 

Number   Exhibit Title   Filing Method
         
3.1   Articles of Incorporation, filed as exhibit 3.1.1 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.   Incorporated by Reference
         
3.2   Bylaws, filed as exhibit 3.2 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.   Incorporated by Reference
         
3.3   Amended  Articles of Incorporation ; filed as exhibit 3.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on October 22, 2009   Incorporated by Reference

 

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3.4   Amended  Articles of Incorporation ; filed as exhibit 3.3 with the registrant’s Annual Report on Form 10-K; filed with the Securities and Exchange Commission on September 28, 2011   Incorporated by Reference
         
31.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith
         
31.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith
         
32.1   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   Furnished herewith
         
32.2   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   Furnished herewith
         
101.INS   XBRL Instance Document   Filed herewith
         
101.SCH   XBRL Taxonomy Schema   Filed herewith
         
101.CAL   XBRL Taxonomy Calculation Linkbase   Filed herewith
         
101.DEF   XBRL Taxonomy Definition Linkbase   Filed herewith
         
101.LAB   XBRL Taxonomy Label Linkbase   Filed herewith
         
101.PRE   XBRL Taxonomy Presentation Linkbase   Filed herewith

 

*In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reported to be signed on its behalf by the undersigned thereunto duly authorized.

 

  ECO BUILDING PRODUCTS, INC.
     
Date: February 24, 2016 By: /s/ Tom Comery
    Tom Comery, President, Chief Executive Officer and Director
    (Principal Executive Officer)
     
Date: February 24, 2016 By: /s/ Randall Smith
    Randall Smith, Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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