UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

[  ] 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, Suite 13

San Diego, California 92121

(Address of principal executive offices) (Zip Code)

 

(858) 780-4747

(Registrant’s telephone number, including area code)

 

 

(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. [X] 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). [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 June 13, 2017: 704,925,771 shares of common stock.

 

 

 

Table of Contents

 

			Page Number
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.		3
	Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and June 30, 2016		3
	Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2017 and 2016 (unaudited)		4
	Condensed Consolidated Statement of Cash Flows for the nine months ended March 31, 2017 and 2016 (unaudited)		5
	Notes to the Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		20
Item 4.	Controls and Procedures.		20
Part II - OTHER INFORMATION
Item 1.	Legal Proceedings.		22
Item 1A.	Risk Factors.		22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		22
Item 3.	Defaults Upon Senior Securities.		22
Item 4.	Mine Safety Disclosures.		22
Item 5.	Other Information.		23
Item 6.	Exhibits.		23
SIGNATURES			24

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ECO BUILDING PRODUCTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31, 2017				June 30, 2016
		(unaudited)
CURRENT ASSETS
Cash		$	3,518				45,153
Accounts Receivable			1,237				2,150
Inventory			47,428				51,357
Prepaid expenses			5,100				3,000
Other current assets			204,368				11,793
TOTAL CURRENT ASSETS			261,651				113,453
Property and equipment, net			341,118				382,128
TOTAL ASSETS		$	602,769				495,581
CURRENT LIABILITIES
Accounts payable		$	1,457,157				1,460,792
Payroll and taxes payable			2,035,506				1,675,638
Accrued interest			1,278,338				749,766
Other payables and accrued expenses			203,177				241,156
Derivative liability			34,265,892				37,376,605
Convertible notes payable, net			1,879,984				1,116,088
Loans payable			2,148,520				1,831,220
TOTAL CURRENT LIABILITIES		$	43,268,574				44,451,265
LIABILITIES RELATED TO DISCONTINUED OPERATIONS			1,148,229				1,148,229
STOCKHOLDERS’ DEFICIT
Preferred stock, Series C, $0.001 par value, 120,000 shares authorized, 95,625 and 97,090 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively			96				97
Preferred stock, Series D, $0.001 par value, 30,000 shares authorized, 20,947 shares issued and outstanding at March 31, 2017 and June 30, 2016			21				21
Common stock, $0.001 par value, 10,000,000,000 shares authorized, 242,170,481 and 37,564,120 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively			242,171				37,564
Treasury stock			(1,434	)			(1,434	)
Additional paid-in capital			56,988,343				56,314,675
Accumulated deficit			(101,043,231	)			(101,454,836	)
TOTAL STOCKHOLDERS’ DEFICIT			(43,814,034	)			(45,103,913	)
TOTAL LIABILITIES AND DEFICIT		$	602,769			$	495,581

 

See accompanying notes to condensed consolidated financial statements

 

 

ECO BUILDING PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended March 31								Nine Months Ended March 31
		2017				2016				2017				2016
REVENUE
Product and coating sales		$	14,946			$	52,487			$	61,084			$	439,612
COST OF SALES
Cost of sales			11,968				226,623				42,846				837,199
GROSS PROFIT/(LOSS)			2,978				(174,136	)			18,238				(397,587	)
OPERATING EXPENSES
Research and development			78,529				51,284				218,490				210,848
Marketing			4,004				14,795				7,414				75,160
Compensation and related expenses			123,532				172,866				423,136				463,419
Rent - facilities			14,386				10,312				49,767				52,672
Professional fees			175,405				51,630				356,559				280,393
Other general and administrative expenses			52,015				114,000				183,514				407,413
Total operating expenses			447,871				414,907				1,238,880				1,489,905
LOSS FROM OPERATIONS			(444,893	)			(589,043	)			(1,220,642	)			(1,887,492	)
OTHER INCOME (EXPENSE)
Interest /amortization expense			(465,609	)			(139,631	)			(1,466,638	)			(647,802	)
Gain (Loss) on derivative liability			5,858,348				(4,534,692	)			4,407,274				(20,542,423	)
Other expenses			814				(120,210	)			(3,283	)			(120,210	)
Other Income			7,757				8,197				14,257				8,197
Gain on settlement of debt			-				744,587				-				744,587
Derivative expense			(80,055	)			(536,528	)			(1,319,363	)			(1,360,227	)
Total other income			5,321,255				(4,578,277	)			1,632,247				(21,917,878	)
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES			4,876,362				(5,167,320	)			411,605				(23,805,370	)
Provision for income taxes			-				-				-				-
NET INCOME (LOSS)		$	4,876,362			$	(5,167,320	)		$	411,605			$	(23,805,370	)
NET INCOME (LOSS) PER COMMON SHARE, FROM CONTINUING OPERATIONS
Basic -		$	0.04			$	(0.15	)		$	0.01			$	(1.04	)
Diluted -		$	0.00			$	(0.15	)		$	0.00			$	(1.04	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic -			109,349,435				34,214,303				48,156,690				22,907,745
Diluted -			4,113,079,976				34,214,303				4,051,887,231				22,907,745

 

See accompanying notes to condensed consolidated financial statements

 

 

ECO BUILDING PRODUCTS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

		Nine months ended March 31, 2017				Nine months ended March 31, 2016
Cash flows from operating activities
Net income (loss)		$	411,605				(23,805,370	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation expense		$	41,010				62,997
Bad debt expense			-				11,750
Amortization of debt discount		$	892,149				310,661
Derivative expense		$	1,319,363				1,360,227
Common Stock issuance for interest		$	1,950				-
Notes payable issued for expenses		$	39,000				-
Financing costs		$	-				34,943
Gain on derivative liability fair value adjustment		$	(4,407,274	)			20,542,423
Gain on note payable exchanged for Preferred C Stock		$	-				(744,587	)
Changes in assets and liabilities:
Accounts receivable		$	913				(18,551	)
Other receivables		$	(192,575	)			-
Inventory		$	3,929				120,924
Prepaid expense and other current assets		$	(2,100	)			25,255
Accounts payable		$	(3,636	)			197,090
Payroll and taxes payable		$	359,868				-
Other payables and accrued expenses		$	(37,979	)			20,034
Accrued interest		$	554,342				355,988
Net cash used by operating activities		$	(1,019,435	)			(1,607,734	)
Cash flows from investing activities
Purchase of property and equipment			-				(11,265	)
Net cash used by investing activities			-				(11,265	)
Cash flows from financing activities
Payments on related party notes			-				(43,000	)
Proceeds from issuances of series D convertible preferred stock		$	-				1,071,832
Proceeds from convertible notes payable		$	660,500				88,000
Proceeds notes payable		$	319,300				819,307
Payments on notes payable		$	(2,000	)			(343,569	)
Net cash provided by financing activities		$	977,800				1,592,570
Net change in cash		$	(41,635	)			(26,429	)
Cash and cash equivalents at the beginning of year		$	45,153				40,306
Cash and cash equivalents at the end of year		$	3,518				3,877
Supplemental disclosures of cash flow Information:
Cash Paid for Interest		$	-				15,000
Supplemental disclosure of non-cash investing and financing activities:
Conversion of Convertible notes to Common Stock		$	430,108				654,084
Note Payable issued for Preferred Stock cancellation		$	-				377,000
Conversion of Series C convertible preferred stock to common stock		$	519,862				3,041,338
Debt discount on convertible notes		$	712,636				38,000
Common Stock issued in settlement of accrued interest		$	25,770				-
Original issue discount		$	67,833				4,222

 

See accompanying notes to condensed consolidated financial statements

 

 

Notes to the Condensed Consolidated Financial Statements

 

1. Organization and Basis of Presentation

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements for the three and nine months ended March 31, 2017 and 2016 have been prepared by 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, 2016. 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 March 31, 2017 has been derived from the unaudited consolidated financial statements as of that date but does not include all the information and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016. The results of operations for the three and nine months ended March 31, 2017 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 $101,043,231 in 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 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 lessen 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.

 

If current and projected revenue growth does not meet Management estimates, the Management may continue to 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, the Company does not have any commitments or assurances for additional capital, nor can the Company provide assurance that such financing will be available to it on favorable terms, or at all. If, after utilizing the existing sources of capital available to the Company, further capital needs are identified and the Company is not successful in obtaining the financing, it may be forced to curtail its existing or planned future operations. The Company has already taken steps to reduce expenses. Additionally, the Company has recently changed the product offering to better align with our product certifications and the intended use. This has resulted in three products now marketed as “Sill Plate” to meet the accolades of our TER 1511-09, “Advanced Framing Lumber” to meet the accolades of our TER 1511-10 which includes the attributes of Sill Plate with the addition of our Fire Inhibitor. This product is meant for the full framing package of a wood framed building and is sold as a value-added protection. Our third product is offered as “Fire Treatment or FT” to meet the accolades of our TER 1510-01 which includes all of the prior two accolades and is the original formulation meeting the IBC Section 2303.2 as an alternate material to the use of Fire Retardant Treated Wood (FRTW). This change has afforded the company and its affiliates the ability to address each segment of the market increasing sales opportunities and allowing the Company to make a consistent margin on every sale. Nevertheless, the Company continues to experience cash flow difficulties and there is no assurance of when it may be profitable.

 

 

2. Summary of Significant Accounting Policies

 

Earnings Per Share

 

Basic net earnings per share is determined by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net earnings per share is determined by dividing net income by the weighted average number of common shares used in the basic earnings 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 March 31, 2017 from preferred C shares convertible into 1.6 billion shares of common stock, preferred D shares convertible into 349.1 million shares of common stock, 1.5 billion from stock options and convertible notes convertible into 541 million shares of common stock. Accordingly, total common share equivalents of approximately 4.0 billion were included in the computation of diluted net earnings per share for the three and nine month period ended March 31, 2017.

 

Reclassifications

 

Certain balances in previously issued financial statements have been reclassified to be consistent with the current period presentation.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Eco Building Products (“Parent”) and Wood Protection Technology (“WPT”). WPT is currently a majority controlled consolidated variable interest entity and in the near future the Company intends to acquire 95% ownership in WPT. All intercompany accounts have been eliminated upon consolidation.

 

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 the following accounting pronouncement may be relevant. In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. The new standard contains several amendments that will simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital.

 

3. Balance Sheet Details

 

As of March 31, 2017, inventories consisted of the following:

 

Chemicals		$	47,428
		$	47,428

 

All 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 chemicals. The chemicals include a $0 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. During the period, the Company purchased no new property and equipment. Depreciation expense for the three and nine months ending March 31, 2017 was $13,581 and $41,010 respectively.

 

 

Accrued Liabilities

 

As of March 31, 2017, the Company owed $2,035,506 in past due payroll, payroll taxes and accrued penalties. These amounts are recorded within payroll and taxes payable on the accompanying consolidated balance sheet. Also at March 31, 2017, the Company owed $34,434 in past due sales tax in which it has filed the appropriate reports and is making periodic payments. On September 29, 2016, the Board of Equalization has levied this debt against the Company bank account.

 

Derivative Liabilities

 

During the nine months ended March 31, 2017, the Company issued additional convertible notes payable amounts and convertible preferred stock that can be converted to common stock in connection with raising equity and debt financing. As of March 31, 2017, 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 and available 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 March 31, 2017 were as follows:

 

(1) dividend yield of 0%

 

(2) expected annual volatility of 139% to 208%

 

(3) risk-free interest rate of 0.56% to 1.33%

 

(4) expected life of 0.37 years to 2.34 years, and

 

For the nine months ended March 31, 2017, the Company issued an aggregate of $767,333 convertible debt as further described below in Note 4 and recorded additional derivative liabilities of $2,031,999 for the conversion features included therein.

 

For all convertible notes described in the following paragraphs and for the warrants, and convertible preferred Series C and Series D shares described in Note 7, the fair value of the resulting derivative liability was $34,265,892 and $37,376,605 at March 31, 2017 and June 30, 2016, respectively.

 

A reconciliation of the derivative liabilities from June 30, 2016 to March 31, 2017 is:

 

		Derivative Liabilities
Balance as of June 30, 2016			37,376,605
Conversion of Preferred Series C and Convertible Debt to common stock			(735,438	)
Additions related to embedded conversion features of Convertible Debt			2,031,999
Gain on change in fair value of derivative liability			(4,407,274	)
Balance as of December 31, 2016		$	34,265,892

 

 

4. Convertible Notes Payable and Loans Payable

 

The following tables summarize notes payable as of March 31, 2017.

 

		As of March 31, 2017
Description		Short term				Long term
Convertible notes			2,099,262				—
Less discount to notes payable			(219,278	)			—
Convertible notes, net			1,879,984				—
Loans payable			2,148,520				—
		$	4,028,504			$	—

 

TYPE		ORIGNATION DATE		INTEREST RATE				DUE DATE		PRINCIPAL BALANCE				INTEREST BALANCE
Convertible		11/12/2014			18	%		05/15/2015			48,300				18,492
Convertible		09/16/2014 – 12/09/2016			22 – 24	%		09/16/2015 – 12/08/2017			1,107,643				634,660
Convertible		03/17/2016 – 1/20/2017			24	%		12/31/2016 – 1/20/2018			911,900				114,743
Convertible		05/02/2016			8	%		11/02/2016			31,419				544
Debt discount		NA			NA			NA			(219,278	)
Secured Revolving Promissory Note		07/18/2014			24	%		01/18/2015			183,456				92,898
Non-convertible		03/31/2015			10	%		06/30/2015			151,275				26,525
Future receivables sale agreement		08/12/2015			Imputed 123	%		03/09/2016			141,096				-
Non-convertible		07/17/2015			12	%		09/17/2015			85,000				32,077
Non-convertible		03/04/2016			6	%		Demand			377,000				7,313
Future receivables sale agreement		09/30/2015			Imputed 98	%		04/05/2016			96,667				-
Non-convertible		03/24/2010			0	%		Demand			44,500				-
Non-convertible		02/14/2014 – 12/15/2015			6%-37	%		5/14/2014 – 04/15/2016			593,911				319,589
Non-convertible		11/21/2014 – 01/16/2015			18	%		07/16/2015 – 08/21/2015			120,000				16,215
Future receivables sale agreement		09/30/2015			Imputed 177	%		02/18/2016			36,315				-
Non-convertible		12/09/2016- 03/31/2017			18	%		12/09/2017- 07/01/2017			163,300				3,868
Non-convertible		02/17/2017 – 03/31/2017			18	%		07/01/2017			48,500				502
Non-convertible		01/11/2017 – 03/29/2017			18	%		07/01/2017			94,000				1,859
Non-convertible		03/032017 – 03/08/2017			18	%		07/01/2017			13,500				168
TOTAL										$	4,028,504			$	1,278,338

 

 

Convertible Promissory Notes - $506,000

 

From July 8, 2016 through January 20, 2017 the Company issued twenty Convertible Promissory Notes totaling $550,000, including an original issue discount totaling $50,000. The net proceeds to the Company were $500,000 and the proceeds are for funding operations and for general working capital. The maturity dates range between December 31, 2016 and January 20, 2018 for the Notes. The notes carry a default rate of 24%. The Notes will pay $50,000 in interest at maturity of the Notes. The holder can convert into Series D Preferred Stock. The balance of these notes at March 31, 2017 is $550,000 plus accrued interest of $58,564.

 

Senior Convertible Notes - $178,333

 

From July 25, 2016 through December 9, 2016, the Company entered into, with a private investor, seven Senior Convertible Notes totaling $178,333 including an original issue discount totaling $17,833, for net proceeds to the Company of $160,500 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 $91,309 during the nine months ended March 31, 2017 and the discount balance is $87,024 at December 31, 2016. The balance of this note at December 31, 2016 is $178,333 plus accrued interest of $20,053.

 

Loan Payable – Other

 

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 is due on demand and non-interest bearing. The Creditor claims amount owed is $360,000, which the Company disputes.

 

5. Related Party Transactions

 

None.

 

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.

 

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

 

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

 

The Company is authorized to issue 500,000,000 shares of redeemable convertible preferred stock with a par value of $0.001 per share. As of December 31, 2016, the Company has issued four series of Preferred Stock:

 

Series A Preferred Stock:

 

On January 27, 2014, the Board of Directors authorized 30,000 shares of Series 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 shares of Series A preferred stock were cancelled. There are no Series A preferred shares outstanding at December 31, 2016.

 

 

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 shares.

 

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

 

	●	The Preferred B Stock had no voting rights.
	●	The Preferred B Stock was convertible into common stock 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 had a 12% per annum stated dividend rate, which is calculated daily on a 360 day year.
	●	The Preferred B Stock had a liquidation preference equal to the stated value of each share of Preferred Stock or $100 per share.

 

On June 3, 2014, all 9,250 shares of the Preferred B Stock was converted into an equal number of shares of the Company’s Series C Convertible Preferred Stock. There were no Preferred B Stock outstanding or issued as of and for the period ending December 31, 2016.

 

Series C 12% Convertible Preferred Stock:

 

On May 30, 2014, the Company authorized 120,000 shares of 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:

 

	●	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 March 31, 2017, the Company has accrued dividends on Preferred C Stock in the amount of $4,904,751. 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 nine months ended March 31, 2017 :

 

Balance as of June 30, 2016			97,090
Preferred C Stock issued for cash			—
Preferred C Stock converted into Common Stock			(1,465	)
Balance as of March 31, 2017			95,625

 

 

Preferred C Stock converted to Common Stock

 

During the nine months ended March 31, 2017, according to the conversion terms described above, the investors converted 1,460 shares of Preferred C Stock representing value of $68,200 into 91,688,827 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. Effective August 22, 2016, the Company increased the number of authorized shares to 30,000.

 

	●	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 March 31, 2017, the Company has accrued dividends on Preferred D Stock in the amount of $627,556. 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

 

No Preferred D Stock were purchased in the nine months ended March 31, 2017.

 

Common Stock

 

Effective October 19, 2016, the Directors of the Company, after receiving the majority vote of the Company’s Shareholders through a Shareholder Vote on October 5, 2016, approved (i) a reverse split of 100 for 1 of shares of Common Stock of the Company from 4,352,790,291 shares of common stock to 43,527,903 shares of common stock.

 

During the nine months ended March 31, 2017, the Company issued a total of 204,606,361 shares of its common stock for conversion of 1,465 shares of convertible Preferred C stock and $115,117 of convertible notes, $25,770 of accrued interest and $1,950 for default interest.

 

Treasury Stock

 

The Company held 14,330 post-split shares of common stock as treasury stock as of June 30, 2016. There was no change in treasury stock during the nine months ended March 31, 2017.

 

 

Warrants

 

In connection with one of the convertible notes outstanding at March 31, 2017 with a balance of $864,866 (Note 4), the Company issued a Common Stock Purchase Warrant, allowing M2B Funding Corporation the right to purchase up to 200,000 shares (post-split) 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 $2.00 (post-split) subject to certain adjustments. The warrants have been included in the valuations of derivatives (see note 3).

 

The following is a schedule of warrants outstanding as of March 31, 2017:

 

		Warrants Outstanding				Weighted Average Exercise Price				Weighted Average Remaining Life
Balance, June 30, 2016			200,000			$	2.0			3.21 Years
Warrants issued			-				-
Warrants expired			-				-
Warrants cancelled			-				-
Balance, March 31, 2017			200,000			$	2.0			2.46 Years

 

As of March 31, 2017, all the 200,000 (post-split) warrants were fully exercisable.

 

Options

 

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. As of December 31, 2016, 800,000 options to the Chief Technical Officer remain exercisable and outstanding.

 

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 $0, which has been recorded previously, as determined using the Black-Scholes option-pricing model using a risk free rate of 2.35%, volatility of 182% and a trading price of the underlying shares of $0.0009.

 

The following is a schedule of options outstanding as of March 31, 2017:

 

		Options Outstanding				Weighted Average Exercise Price				Weighted Average Remaining Life				Aggregate Intrinsic Value
Balance, June 30, 2016			6,586,228			$	0.015				8.1 Years			$	-
Options granted			-				-								-
Options cancellation/expired			-				-				-				-
Balance, March 31, 2017			6,586,228			$	0.015				7.35 Years			$	-

 

As of March 31, 2017, 6,586,228 of the 6,586,228 options are exercisable.

 

 

8. Commitments and Contingencies

 

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.

 

As of March 31, 2017, the Company owed approximately $730,000 in past due federal and state payroll taxes, of which approximately $660,000 is due to the Internal Revenue Service (IRS). The Company has paid $25,000 to the IRS under a $20,000 per month payment arrangement which the Company is now in default. The Company continues to negotiate with the IRS to re-establish a payment plan for past due taxes. Currently the IRS has acknowledged the situation and so far, has set an expectation that we must stay current with our federal and state taxes. The Company continues to stay current with state and federal payroll tax liabilities. No such arrangement exists for State tax purposes.

 

On October 6, 2015, the landlord for the 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 $151,273 under the terms of the lease that we entered into for our Vista, CA location. As of March 31, 2017, no payments have been made against this obligation, but the facility has been subleased. As of March 31, 2017, the property owner has dismissed Eco Building Products from the lease.

 

On May 27, 2016, the prior landlord of the Tacoma, WA, facility obtained a judgment for the collection of unpaid rent in the amount of $168,998 inclusive of interest & attorney fees.

 

On or about October 15, 2016, A Summons & Complaint has been filed for the sum of $36,315, pertaining to a default on a contract with World Global Financing. This has been recorded in the financial statements in Loans payable-other.

 

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. Variable Interest Entity

 

On December 5, 2016, members of Company management formed a new business entity, Wood Protection Technologies Inc, a Nevada corporation (our “Subsidiary” or “WPT”), which is a consolidated majority-controlled variable interest entity. Our Subsidiary (which plans to issue 95% controlling financial interest to the Company and the remaining 5% to Mark Vuozzo, our Chief Technical Officer, in exchange for the intellectual property he assigned to WPT) will have a separate board of directors and its own corporate governance. Nevertheless, for financial reporting purposes, we will consolidate its financial statements with ours. Tom Comery, our Chief Executive Officer, will also serve our subsidiary in that capacity. As of March 31, 2017, Wood Protection Technologies, Inc. has not issued shares to either the Company or Mr. Vuozzo. Thus, it remains a majority-controlled consolidated variable interest entity.

 

Included in the accompanying financial statements are the following assets and liabilities of Wood Protection Technology as of March 31, 2017: cash of $4,311 and notes payable of $156,000.

 

10. Subsequent Events

  

From April 1, 2017 to May 25, 2017, the Company issued to investors a total of 242,499,485 common shares converted from 637 preferred C shares.

 

From April 5, 2017 to May 25, 2017, the Company issued 220,241,476 common shares from conversions of debt amounting to $56,382.

 

 

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 nine months ended March 31, 2017, included in this report and our audited consolidated financial statements and related notes for the year ended June 30, 2016 included in our Annual Report on Form 10-K filed on October 17, 2016 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) continued cease of the labor portion of our business with E Build & Truss and focus on ramping the supply side which yields higher profits (d) successful development and market acceptance of our products.

 

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 changed its’ product offering breaking up the wood treatment into three different categories to include Eco Red Shield Sill Plate (SP), Eco Red Shield Advanced Framing Lumber (AFL) and Eco Red Shield Fire Treated (FT). These newly created categories allow the customer to choose the level of protection at fair market prices and allows the Company to make significantly better margins on each product. Additionally, the Company has advanced the development and implementation of the Eco D-Fence product line.

 

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™ (AFL & FT) 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.

 

In early 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 had their lumber shipped to one of three facilities: (i) Fair Lawn, New Jersey, (ii) Tacoma, Washington; or (iii) Augusta, Georgia. In January 2016, the Company further consolidated operations with the closure of New Jersey, Augusta Georgia and Tacoma facilities and focus mainly on the sale of chemicals to our affiliate network.

 

In January of 2016, Management took steps to narrow its focus to chemical product development, manufacturing and sales. Effectively re-engineering its entire business model and closing its treating operations. While Eco’s chemistry can be applied to many diverse materials, to-date it has purposefully limited its attention to the various wood preservation markets. The Company views its current targeted market opportunity in two large sectors:

 

1) The overall softwood lumber market for which there has been no cost-effective protection chemistry or technology heretofore and

 

2) the traditional wood preservation market. We believe Eco Building Products is uniquely positioned to disrupt both sectors. Eco Building Products chemistry can be applied to any wood substrate where the end-user desires protection against the risks associated with mold, wood rot, termites and fire and hence the market opportunity is extremely large.

 

On February 10, 2017, Eco Building Products, Inc. (the “Company,” “we,” or “us”) announced that we had formed a new subsidiary, Wood Protection Technologies Inc, a Nevada corporation (our “Subsidiary”). Our Subsidiary was incorporated on December 5, 2016, but we did not capitalize it until February 8, 2017. Our Subsidiary (of which we own 95% and Mark Vuozzo, our Chief Technical Officer, who assigned to us the intellectual property that we transferred to our Subsidiary, owns 5%) will have a separate board of directors and its own corporate governance. Nevertheless, for financial reporting purposes, we will consolidate its financial statements with ours. Tom Comery, our Chief Executive Officer, will also serve our subsidiary in that capacity. As of March 31, 2017, Wood Protection Technologies, Inc. has not issued shares to either Eco Building Products, Inc. or Mr. Vuozzo. Thus, it remains a variable interest entity.

 

 

We capitalized our Subsidiary with the transfer of certain rights to our pending patents and other intellectual property (the “IP”). As we announced, we formed our Subsidiary to position our intellectual property for alignment with major industry partners. We also believe that this action will allow us to maximize value for our stockholders in that our Subsidiary may be better positioned to attract the capital that it will require to execute its business plan in a more efficient, lower cost manner than had the patents and other intellectual property and operations remained at our corporate level. In that context, on February 8, 2017, we entered into an “Operating Agreement” with our Subsidiary to define the relationship between our Subsidiary and us, as we work together to market, license, sell and otherwise exploit the transferred Intellectual Property.

 

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.

 

 

Management believes there have been no significant changes during the nine months ended March 31, 2017 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 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For a description of those accounting policies, please refer to our 2016 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 recorded an accumulated deficit of $101,043,231 in 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 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 extinguish 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.

 

Financial Instruments with Derivative Features

 

We do not hold or issue derivative instruments for trading purposes. However, we have financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the fair value of these embedded derivatives using Monte Carlo simulations. The fair value of the derivative instruments is measured each quarter, with the change recorded in earnings.

 

Financial Condition and Results of Operations

 

Results of Operations for the Three and Nine Months Ended March 31, 2017 as Compared to the Three and Nine Months Ended March 31, 2016

 

Revenues - For the nine months ended March 31, 2017, the Company had total revenues of $61,084 of which approximately $38,149 accounted for two customers, as compared to $439,612 in revenues for the nine-month period ended March 31, 2016. The decrease in revenue is mainly attributed to the change in the business model to chemical sales only. The revenue for the three month period ending March 31, 2017 was $14,946 and $52,487 during the corresponding period ending March 31, 2016. The decrease in revenue is mainly attributed to the change in the business model to chemical sales only.

 

Cost of Sales and Gross Profit (Loss) - The gross profit for the nine months ended March 31, 2017 was $18,238. The gross loss for March 31, 2016 was $397,587. For the three month period ending March 31, 2017, the gross profit was $2,978. For the three month period ending March 31, 2016, there was a gross loss of $174,136. The gross profit can be attributed to the change in the business model to supply chemical blends to the industry. The loss for 2016 can be attributed to pricing products below cost, production worker over-staffing, plant consolidation and closing costs and excess capacity in all our production facilities.

 

 

Operating Expenses  - For the nine months ended March 31, 2017, our total operating expenses were $1,238,880. This is compared to $1,489,905 for the nine months period ended March 31, 2016. Included in our operating expenses for the nine months ended March 31, 2017 were compensation and related costs of $423,136 professional fees of $356,559, marketing expenses of $7,414, research and development expense of $218,490 and other general and administrative costs of $183,514. Our operating expenses for the nine months ended March 31, 2016 were $1,489,905. Included were compensation and related costs of $463,149, professional fees of $280,393, research and development expense of $210,848, marketing expense of $75,160 and other general and administrative costs of $407,413. The significant reduction in expenses year over year can be attributed to a reduction in head count and other expense reductions by the current management.

 

For the three months ended March 31, 2017, our total operating expenses were $447,871. This is compared to $414,907 for the three months period ended March 31, 2016. Included in our operating expenses for the three months ended March 31, 2017 were compensation and related costs of $123,532, professional fees of $175,405, marketing expenses of $4,004, research and development expense of $78,529 and other general and administrative costs of $52,015. Our operating expenses for the three months ended March 31, 2016 were $414,907. Included were compensation and related costs of $172,886, professional fees of $51,630, research and development expense of $51,284, marketing expense of $14,795 and other general and administrative costs of $114,000. The significant reduction in expenses year over year can be attributed to a reduction in head count and other expense reductions by the current management.

 

Other Income and Expenses - For the nine months ended March 31, 2017, we had other expenses that included interest and amortization expense of $1,466,638. We recorded a $4,407,274 gain to reflect the change in value of the derivative liability for our convertible notes payable and convertible Preferred C stock. The derivative expense was $1,319,363 as of March 31, 2017. This is compared to the nine months ended March 31, 2016, in which we had interest and amortization expense of $647,802, loss on derivative liability of $20,542,423, derivative expense of $1,360,227 and gain on settlement of notes payable for Preferred C stock of $744,587.

 

For the three months ended March 31, 2017, we had other expenses that included interest and amortization expense of $465,609. We recorded a $5,858,348 gain to reflect the change in value of the derivative liability for our convertible notes payable and convertible Preferred C stock. The derivative expense was $80,055 as of March 31, 2017. This is compared to the nine months ended March 31, 2016, in which we had interest and amortization expense of $139,631, loss on derivative liability of $4,534,692, derivative expense of $536,528 and gain on settlement of notes payable for Preferred C stock of $744,587.

 

Liquidity and Capital Resources 

 

On March 31, 2017, we had $3,518 in cash on hand. During the nine months ended March 31, 2017, net cash used in our operating activities amounted to $1,019,435. Net cash used during the same period for our investing activities totaled $0. During the same period, we received proceeds resulting in net cash from financing activities of $977,800.

 

The following table sets forth selected cash flow information for the period ended March 31, 2017:

 

Net cash used in operating activities		$	(1,019,435	)
Net cash used in investing activities			-
Net cash provided by financing activities			977,800
Net change in cash		$	(41,635	)

 

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

 

Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

 

The Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of March 31, 2017, the end of the period covered by this report. Based upon that evaluation, the Company’s CEO concluded that the Company’s disclosure controls and procedures are not effective at the reasonable assurance level due to the material weaknesses described below:

 

1.	Up until June 15, 2015, the Company’s board of directors did not have an audit committee, independent director or member with financial expertise which causes ineffective oversight of the Company’s external financial reporting and internal control over financial reporting.
2.	The Company does not have sufficient segregation of duties within its accounting functions, which is a basic internal control. Due to its size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.
3.	Manual process of the tracking and process of our inventory.

 

Considering the material weaknesses, the management of the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America. Accordingly, we believe that our consolidated financial statements included herein fairly present, in all material respects, our consolidated financial condition, consolidated results of operations and cash flows as of and for the reporting periods then ended.

 

 

Remediation of Material Weaknesses

 

We intend to remediate the material weaknesses in our disclosure controls and procedures identified above. We have already adopted an Audit Committee Charter and appointed independent members from our Board to an Audit Committee and our Chairman of the Audit Committee has sufficient financial expertise.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

This quarterly report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the SEC that permit the Company to provide only the management’s report in this quarterly report.

 

Changes in Internal Controls over Financial Reporting

 

After our fiscal year end of June 30, 2015, we hired a part-time Chief Financial Officer, Mr. Randall Smith who devoted approximately 20 hours per week to our business. As of September 13, 2016, Mr. Randall Smith has resigned as the Company’s Chief Financial Officer. Tom Comery has assumed the duties as Chief Financial Officer in the interim.

 

 

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.

 

As of March 31, 2017, the Company owed approximately $730,000 in past due federal and state payroll taxes, of which approximately $660,000 is due to the Internal Revenue Service (IRS). The Company had paid $25,000 to the IRS under a $20,000 per month payment arrangement which the Company is now in default. The Company continues to negotiate with the IRS to re-establish a payment plan for past due taxes. Currently the IRS has acknowledged the situation and so far, has set an expectation that we must stay current with our federal and state taxes. The Company continues to stay current with state and federal payroll tax liabilities. No such arrangement exists for State tax purposes.

 

On October 6, 2015, the landlord for the 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 $151,273 under the terms of the lease that we entered into for our Vista, CA location. As of March 31, 2017, no payments have been made against this obligation, but the facility has been subleased and the property owner is in the process of dismissing Eco Building Products from the lease.

 

On May 27, 2016, the prior landlord of the Tacoma, WA, facility obtained a judgment for the collection of unpaid rent in the amount of $168,998 inclusive of interest & attorney fees.

 

On or about October 15, 2016, A Summons & Complaint has been filed for the sum of $36,315, pertaining to a default on a contract with World Global Financing. This has been recorded in the financial statements in Loans payable-other.

 

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.

 

During the nine months ended March 31, 2017, there were 732 Preferred C shares converted into 78,935,888 (post-split) shares of common stock. (See comments in notes.)

 

The issuance of the securities described above were completed in accordance with the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

 

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
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.		Filed 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.		Filed 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

 

 

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: June 13, 2017	By:	/s/ Tom Comery
		Tom Comery, President, Chief Executive Officer and Director
		(Principal Executive and Financial Officer)