Item 1.     Financial State me nts.

 

 

 

 

 

 

 

 

 

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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1.   Organization and Basis of Presentation

 

 

 

		As of December 31, 2013
Description		Short term				Long term
Convertible notes, net			$	3,969,410			$	—
Auto notes payable				8,278				6,217
Loan payable - related party				530,171				—
Loan payable - other				413,294				—
Total notes payable			$	4,916,153			$	6,217

Eco Building Products, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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		As of June 30, 2013
Description		Short term				Long term
Convertible notes, net			$	1,532,909			$	—
Auto notes payable				8,278				9,103
Loan payable - related party				509,151				—
Loan payable - other				1,303,136				—
Total notes payable			$	3,353,474			$	9,103

 

Following is further disclosure of each note payable.

 

Convertible Notes

 

At December 31, 2013, the Company issued convertible notes and the convertible notes can be converted to common stock in connection with raising equity and debt financing. However, as of December 31, 2013, 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 options issued for the potential liability associated with the convertible notes. The Company has estimated the fair value of the derivative financial instruments by using the Black-Scholes option valuation technique.

 

Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s operating results will reflect the volatility in these estimate and assumption changes. This liability represents the maximum amount management believes the Company would have been liable for if the Company were required to meet all of its committed share obligations.

 

During the six months ended December 31, 2013, the Company issued an aggregate of $1,732,590 convertible promissory notes, including $780,000 in new convertible notes, and increasing existing notes outstanding balances by $952,590 for additional fees and conversion terms, to various creditors that mature from November 30, 2013 to May 15, 2014. These notes are convertible into the Company’s common shares, at the holder’s option, at conversion prices equal to the lesser of (a) a “Fixed Price” of $0.0025 or (b) an amount ranging from 50% of the stock’s trading price, defined as the lowest average or actual (range of) (3) three to (5) five trading prices of the (range of) 20 trading days immediately prior to the date of conversion.

 

The fair value of the embedded derivatives for the notes was determined using the Black-Scholes option pricing model. Following are the ranges of inputs (or assumptions) the Company used to value the derivative liabilities at note issuances, conversion dates, and at period end:

 

(1)	dividend yield of 0%
(2)	expected volatility of  8.71% to 13.35%
(3)	risk-free interest rate of 0.01% to 0.08%
(4)	expected life of 33 days to 334 days, and
(5)	estimated fair value of the Company’s common stock of $0.0011 to $0.0107 per share.

 

For all convertible notes described in the following paragraphs, the fair value of the resulting derivative liability was $6,427,542 and $9,179,309 at December 31, 2013 and June 30, 2013, respectively, with corresponding debt discounts with an aggregate balance of $2,953,366 and $4,779,975, respectively and corresponding amortization of debt discount (interest expense) of $3,574,809. Additionally, during the period ended December 31, 2013, because the initial

 

 

 

 

 

 

valuation of the derivative liabilities exceeded the face value of the convertible notes and the corresponding discounts, the Company recorded interest expense of $2,461,584, representing an expense for the value of the derivative over the discounts recorded. Lastly during the period, after conversions and/or valuation of the derivative liability, the Company recorded a gain on derivative liability of $5,325,433, which represents the changes in the fair value of the derivative liability.

 

$5,000,000 convertible line of credit (loan facility)

 

As of December 31, 2013, the Company had a $2,913,696 balance on convertible credit facility due to a third party creditor, represented by a convertible note payable bearing interest of twelve percent (12%) per annum and is due May 29, 2014. The creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.During the six months ended December 31, 2013, the Company had amortized $2,906,445 of the debt discount to interest expense, leaving $1,655,199 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the Company recorded a derivative liability of $2,885,387 and corresponding gain on change in derivative liability $3,688,609.

 

During the six months ended December 31, 2013, the Company converted $431,105 convertible notes into 292,164,295 shares of common stock and the outstanding convertible notes as of December 31, 2013 was $2,913,696.  During the three and six months ended December 31, 2013, the Company recorded $0 interest expense on the convertible note which was over the original debt discount from derivative liability.  During the three and six months ended December 31, 2013, the Company recorded $556,637 conversion of derivative to additional paid in capital.

 

As of December 31, 2013 and June 30, 2013, the balance on this line of credit was $4,568,895 and $5,000,000, respectively. The Company accrued $254,397 in interest for the six months ended December 31, 2013 leaving balances in accrued interest of $797,361 and $542,964 as of December 31, 2013 and June 30, 2013, respectively.

 

Convertible Notes - $1,080,000 Financing

 

On August 13, 2012, Eco Building Products, Inc., and subsidiaries entered into a Securities Purchase Agreement (the “Purchase Agreement”) wherein the Company agreed to privately issue and sell (the “Offering”) and the purchaser identified on the signature page to the Purchase Agreement (the “Purchaser”) agreed to purchase (i) $1 million, in the aggregate, of Original Issue Discount Senior Secured Convertible Debenture due on November 13, 2012 (the “Debenture”) and (ii) an aggregate of 3,500,000 shares (the “Shares”) of the Company’s common stock (the “Common Stock”). The closing of the Offering occurred on August 13, 2012 (“Original Issue Date”).

 

The Company sold to the Purchaser the Debenture having a principal amount of $1,080,000. At any time after the six month anniversary of the Original Issue Date until the Debenture is no longer outstanding, the Debenture shall be convertible, in whole or in part, into shares of Common Stock at the option of holder, subject to certain conversion limitations set forth in the Debenture, at a conversion price equal to the lesser of (i) $0.08, subject to adjustment thereunder, and (ii) 80% of the average of the lowest 3 closing prices during the 3 trading days immediately prior to any such date of conversion.

 

Upon any Event of Default (as defined in the Debenture), the outstanding principal amount of the Debenture, plus liquidated damages, interest and other amounts owing in respect thereof through the date of acceleration, shall become, at holder’s election, immediately due and payable in cash. Commencing after the occurrence of any Event of Default, the interest rate on the Debenture shall accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. The Company is also subject to certain non-financial covenants under the Debenture.

 

 

 

 

 

 

To secure the Company’s obligations under the Debenture, the Company granted a security interest in substantially all of its property to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the Debenture in accordance with that certain security agreement between the Company and the Purchaser, dated as of August 13, 2012 (the “Security Agreement”). Furthermore, the Company’s subsidiaries entered into a subsidiary guarantee, dated as of August 13, 2012 (the “Subsidiary Guarantee”), to guarantee the prompt and complete payment and performance when due of all of the obligations pursuant to the Debenture and transaction documents.

 

Chardan Capital Markets acted as placement agent and received compensation in the amount of 1,500,000 restricted shares of Common Stock.

 

During the six months ended December 31, 2013, the Company converted $247,000 convertible notes into 40,888,553 shares of common stock and the outstanding convertible notes as of December 31, 2013 was $0. The Company had $0 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $0 and recognized a gain of $183,841 on derivative liability. During the six months ended December 31, 2013, the Company recorded $0 interest expense on the convertible note which was over the original debt discount from derivative liability. During the six months ended December 31, 2013, the Company recorded $514,050 conversion of derivative to additional paid in capital, respectively.

 

Convertible Notes - $ 5,000 Financing

 

On June 13, 2013, the Company issued a 12% Convertible Note due December 13, 2013 (the “Note”) to an accredited investor pursuant to which the Company borrowed $5,000. The Note bears interest of twelve percent (12%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to eighteen percent (18%) per annum. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months ended December 31, 2013, the Company accrued $150 of interest expense related to this Note. As of the three and six months ended December 31, 2013, the Company had amortized the $0 and $134 of the debt discount to interest expense, leaving $108 in unamortized debt discount at the period ended December 31, 2013. As of December 31, 2013, the derivative liability was $8,587 and recognized a loss of $1,556 on derivative liability. The balance of this note payable at December 31, 2013 and June 30, 2013 was $5,000 and $5,000, respectively, and accrued interest of $179 and $29, respectively.

 

Convertible Notes - $ 50,000 Financing

 

On June 10, 2013, the Company issued a 12% Convertible Note due June 10, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $50,000. The Note matures one year from the date of issue, bears interest of twelve percent (12%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to eighteen percent (18%) per annum. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.025 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months ended December 31, 2013, the Company accrued $3,025 of interest expense related to this Note, respectively. As of the period ended December 31, 2013, the Company had amortized the $12,602 and $25,205 of the debt discount to interest expense, respectively, leaving $22,055 in unamortized debt discount at the period ended December 31, 2013. As of December 31, 2013, the derivative liability was $80,241 and recognized a loss of $2,951 on derivative liability. During the six months ended December 31, 2013, the Company recorded $0 interest expense on the convertible note which was over the original debt discount from derivative liability. The balance of this note payable at December 31, 2013 and June 30, 2013 was $50,000 and $50,000, respectively with accrued interest of $3,387 and $362, respectively.

 

Convertible Notes - $ 25,000 Financing

 

On June 13, 2013, the Company issued a 12% Convertible Note due December 28, 2013 (the “Note”) to an accredited investor pursuant to which the Company borrowed $25,000. The Note matures one year from the date of issue, bears interest of twelve percent (12%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to eighteen percent (18%) per annum. Upon

 

 

 

 

 

 

issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.025 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months ended December 31, 2013, the Company accrued $1,488 of interest expense related to this Note, respectively. As of December 31, 2013, the Company had amortized the $12,293 and $24,861 of the debt discount to interest expense, respectively, leaving $139 in unamortized debt discount at the period ended December 31, 2013. As of the period ended December 31, 2013, the derivative liability was $28,571 and recognized a gain of $7,173 on derivative liability. During the six months ended December 31, 2013, the Company recorded $0 interest expense on the convertible note which was over the original debt discount from derivative liability. The balance of this note payable at December 31, 2013 and June 30, 2013 was $25,000 and $25,000, respectively with accrued interest of $1,513 and $25, respectively.

 

Convertible Notes - $ 110,000 Financing

 

On May 20, 2013, the Company issued a 10% Convertible Note due January 1, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $110,000. The Note bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 (“Fixed Price”) and (b) 70% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months ended December 31, 2013, the Company accrued $7,022 of interest expense related to this Note. As of the period ended December 31, 2013, the Company had amortized $76,241 of the debt discount to interest expense, leaving $9,421 in unamortized debt discount at the period ended December 31, 2013. As of December 31, 2013, the derivative liability was $78,762 and recognized a gain of $57,851 on derivative liability. During the six months ended December 31, 2013, the Company recorded $0 interest expense on the convertible note which was over the original debt discount from derivative liability.

 

During the six months ended December 31, 2013, the Company converted $55,000 convertible notes into 30,555,555 shares of common stock and the outstanding convertible notes as of December 31, 2013 was $45,619, net of discount. During the six months ended December 31, 2013, the Company recorded $0 interest expense on the convertible note which was over the original debt discount from derivative liability. During the three and six months ended December 31, 2013, the Company recorded $18,660 conversion of derivative to additional paid in capital. The balance of this note payable at December 31, 2013 and June 30, 2013 was $55,000 and $110,000, respectively with accrued interest of $8,167 and $1,145, respectively.

 

Convertible Notes - $ 285,000 Financing

 

On December 10, 2012, the Company issued an 8% Convertible Note due June 10, 2013 and was extended till October 10, 2013 (the “Note”) to an accredited investor pursuant to which the Company borrowed $285,000. The Note bears interest of eight percent (8%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to a penalty of 5% of the then outstanding balance of the Note and increase in the interest rate to twenty two percent (22%) per annum. Starting on the 6 month anniversary of the Note issuance date, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to $0.06 subject to adjustment.

 

During the six months ended December 31, 2013, the Company accrued $14,195 of interest expense related to this Note, respectively. For the six months ended December 31, 2013, the Company had amortized the $60,167 of the debt discount to interest expense, leaving $0 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $36,786 and recognized a gain of $84,209 on derivative liability. During the six months ended December 31, 2013, the investor converted $159,410, including $143,623 of principle and $15,787 of accrued interest payable into 49,180,549 shares of common stock, leaving a balance of this note payable at December 31, 2013 and June 30, 2013 of $89,796 and $173,252, net of discount, respectively, and accrued interest of $2,262 and $3,854, respectively. During the six months ended December 31, 2013, the Company recorded $84,209 conversion of derivative to additional paid in capital.

 

 

 

 

 

 

Convertible Notes - $ 310,750 Financing

 

On January 15, 2013, the Company issued a 8% Convertible Note due March 15, 2013 and is currently in default (the “Note”) to an accredited investor pursuant to which the Company borrowed $310,750. The Note bears interest of eight percent (8%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to a penalty of 5% of the then outstanding balance of the Note and increase in the interest rate to twenty four percent (24%) per annum. The Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to $0.06 subject to adjustment.

 

During the six months period ended December 31, 2013, the Company accrued $21,380 of interest expense related to this Note. As of December 31, 2013, there is $0 in unamortized debt discount. As of December 31, 2013, the derivative liability was $176,939 and recognized a loss of $62,414 on derivative liability. During the six months ended December 31, 2013, the investor converted $114,880 into 29,519,607 shares of common stock, leaving a balance of this note payable at December 31, 2013 and June 30, 2013 of $195,870 and $173,252, respectively, and accrued interest of $2,262 and $3,854, respectively. During the six months ended December 31, 2013, the Company recorded $55,119 conversion of derivative to additional paid in capital. The balance of this note payable at December 31, 2013 and June 30, 2013was $195,870 and $310,750, respectively, and accrued interest of $66,973 and $27,372, respectively.

 

Convertible Note - $ 429,729 Financing

 

On November 19, 2012, the Company issued a 6% Convertible Note due May 31, 2013 (the “Note”) to an accredited investor pursuant to which the Company borrowed $429,729. The Note matures approximately 9 months from the date of issue, bears interest of six percent (6%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to six percent (6%) per annum. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.02 (“Fixed Price”) and (b) 60% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months period ended December 31, 2013, the Company accrued $836 in interest expense and transfer of $18,287 interest expense on the note. As of December 31, 2013, there is $0 in unamortized debt discount. As of December 31, 2013, the derivative liability was $115,868 and recognized a loss of $55,028 on derivative liability and the interest expense over debt original discount from derivative liability was $0. During the six months period ended December 31, 2013, the Company paid $15,610 expenses, leaving the balance of this note payable at December 31, 2013 and June 30, 2013 was $90,795 and $106,405, respectively, and accrued interest of $836 and $18,287, respectively.

 

Convertible Note - $220,000 Financing

 

On July 12, 2012, the Company issued a 10% Convertible Note due March 1, 2013 (the “Note”) to an accredited investor pursuant to which the Company borrowed $220,000. On February 25, 2013 the Note was extended until December 31, 2013. The Note matures approximately 7.5 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to eighteen percent (18%) per annum. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.15 (“Fixed Price”) and (b) 70% of the lowest daily VWAP occurring during the ten (10) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months period ended December 31, 2013, the Company accrued $11,950 in interest expense on the note. As of December 31, 2013, there is $0 in unamortized debt discount. As of December 31, 2013, the derivative liability was $6,066 and recognized a gain of $151,461 on derivative liability and the interest expense over debt original discount from derivative liability was $0. During the six months ended December 31, 2013, the investor converted $45,019 including $40,000 of principle and $5,019 of accrued interest payable into 45,440,836 shares of common stock, leaving a balance of this note payable at December 31, 2013 and June 30, 2013 of $130,000 and $170,000, respectively, accrued interest of $32,727 and $25,996, respectively. During the three and six months ended December 31, 2013, the Company recorded $9,220 conversion of derivative to additional paid in capital.

 

 

 

 

 

 

Convertible Note - $ 55,000 Financing

 

On September 26, 2012, the Company issued a 10% Convertible Note due June 1, 2013 (the “Note”) to an accredited investor pursuant to which the Company borrowed $55,000. The Note matures approximately 8 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to eighteen percent (18%) per annum. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.08 (“Fixed Price”) and (b) 70% of the lowest daily VWAP occurring during the ten (10) consecutive Trading Days immediately preceding the applicable Conversion date.

 

During the six months period ended December 31, 2013, the Company recorded $1,375 in interest expense on the note. As of December 31, 2013, there is $0 in unamortized debt discount. As of December 31, 2013, the derivative liability was $18,448 and recognized a gain of $37,510 on derivative liability. The balance of this note payable at December 31, 2013 and June 30, 2013 was $55,000 and $55,000, respectively, and accrued interest of $5,899 and $4,524, respectively.

 

Convertible Note - $15,000 Financing

 

On July 18, 2013, the Company issued a 10% Convertible Note due January 18, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $15,000. The Note matures approximately 6 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to $1,000 per day. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months period ended December 31, 2013, the Company recorded $304 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $5,999 of the debt discount to interest expense, leaving $9,001 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $20,028 and recognized a gain of $5,484 on derivative liability and the interest expense over debt original discount from derivative liability was $10,512. The balance of this note payable at December 31, 2013 was $15,000 and accrued interest of $682.

 

Convertible Note - $10,000 Financing

 

On July 18, 2013, the Company issued a 10% Convertible Note due January 18, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $10,000. The Note matures approximately 6 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to $1,000 per day. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

Convertible Note - $10,000 Financing

 

On July 18, 2013, the Company issued a 10% Convertible Note due January 18, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $10,000. The Note matures approximately 6 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to $1,000 per day. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months period ended December 31, 2013, the Company recorded $455 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $4,009 of the debt discount to interest expense, leaving $5,991 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $13,078 and recognized a gain of $3,930 on derivative liability and the interest expense over debt original discount from derivative liability was $7,008. The balance of this note payable at December 31, 2013 was $10,000 and accrued interest of $455.

 

 

 

 

 

 

Convertible Note - $50,000 Financing

 

On July 18, 2013, the Company issued a 10% Convertible Note due January 18, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $50,000. The Note matures approximately 6 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to $1,000 per day. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

Convertible Note - $25,000 Financing

 

On July 18, 2013, the Company issued a 10% Convertible Note due January 18, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $25,000. The Note matures approximately 6 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to $1,000 per day. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months period ended December 31, 2013, the Company recorded $1,137 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $22,554 of the debt discount to interest expense, leaving $2,446 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $33,381 and recognized a gain of $9,139 on derivative liability and the interest expense over debt original discount from derivative liability was $17,520. The balance of this note payable at December 31, 2013 was $25,000 and accrued interest of $1,137.

 

During the six months period ended December 31, 2013, the Company recorded $2,274 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $45,109 of the debt discount to interest expense, leaving $4,891 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $66,761 and recognized a gain of $51,733 on derivative liability and the interest expense over debt original discount from derivative liability was $68,494. The balance of this note payable at December 31, 2013 was $50,000 and accrued interest of $2,274.

 

Convertible Note - $25,000 Financing

 

On July 18, 2013, the Company issued a 10% Convertible Note due January 18, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $25,000. The Note matures approximately 6 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to $1,000 per day. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months period ended December 31, 2013, the Company recorded $1,137 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $22,554 of the debt discount to interest expense, leaving $2,446 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $33,381 and recognized a gain of $9,139 on derivative liability and the interest expense over debt original discount from derivative liability was $17,520. The balance of this note payable at December 31, 2013 was $25,000 and accrued interest of $1,137.

 

Convertible Note - $15,000 Financing

 

On July 22, 2013, the Company issued a 10% Convertible Note due January 22, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $15,000. The Note matures approximately 6 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to $1,000 per day. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

 

 

 

 

 

During the six months period ended December 31, 2013, the Company recorded $288 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $12,450 of the debt discount to interest expense, leaving $2,550 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $20,115 and recognized a gain of $11,018 on derivative liability and the interest expense over debt original discount from derivative liability was $10,063. The balance of this note payable at December 31, 2013 was $15,000 and accrued interest of $288.

 

Convertible Note - $15,000 Financing

 

On July 22, 2013, the Company issued a 10% Convertible Note due January 22, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $15,000. The Note matures approximately 6 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to $1,000 per day. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months period ended December 31, 2013, the Company recorded $288 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $5,686 of the debt discount to interest expense, leaving $9,314 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $20,115 and recognized a gain of $10,777 on derivative liability and the interest expense over debt original discount from derivative liability was $15,892. The balance of this note payable at December 31, 2013 was $15,000 and accrued interest of $288.

 

Convertible Note - $150,000 Financing

 

On September 3, 2013, the Company issued a 8% Convertible Note due September 2, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $150,000. The Note matures approximately 6 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to $1,000 per day. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.1 (“Fixed Price”) and (b) 45% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months period ended December 31, 2013, the Company recorded $4,868 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $49,315 of the debt discount to interest expense, leaving $100,685 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $292,777 and recognized a gain of $78,811 on derivative liability and the interest expense over debt original discount from derivative liability was $221,588. The balance of this note payable at December 31, 2013 was $150,000 and accrued interest of $888.

 

Convertible Note - $50,000 Financing

 

On September 9, 2013, the Company issued a 10% Convertible Note due March 9, 2014 (the “Note”) to an accredited investor pursuant to which the Company borrowed $50,000. The Note matures approximately 6 months from the date of issue, bears interest of ten percent (10%) per annum on the face amount and is payable in full upon maturity. In the event of default, the note is subject to an increase in the interest rate to $1,000 per day. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.005 (“Fixed Price”) and (b) 50% of the lowest daily VWAP occurring during the twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

 

 

 

 

 

During the six months period ended December 31, 2013, the Company recorded $1,548 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $31,225 of the debt discount to interest expense, leaving $18,775 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $74,608 and recognized a gain of $83,564 on derivative liability and the interest expense over debt original discount from derivative liability was $108,172. The balance of this note payable at December 31, 2013 was $50,000 and accrued interest of $1,548.

 

Convertible Note - $500,000 Financing

 

On September 4, 2013, the Company issued a 12% Convertible Note due September 4, 2015 (the “Note”) to an accredited investor pursuant to which the Company borrowed $500,000. The Note matures approximately 2 years from the date of issue, bears interest of twelve percent (12%) per annum on the face amount and is payable in full upon maturity. The principal sum is up to $500,000 plus accrued and unpaid interest and any other fees. The consideration is $450,000 payable by wire and $50,000 is original issue discount (“OID”). The Lender paid $50,000 of Consideration upon closing of the Note. The Lender offered 0% interest for the first three and six months. After three and six months, a one-time interest charge of 12% shall be applied to the Principal Sum. Any interest payable is in addition to OID and that OID remains payable regardless of time and manner payment by the Company. The Company received $50,000 from the Lender on September 4, 2013. Upon issuance of the Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to the lesser of (a) $0.03 (“Fixed Price”) and (b) 60% of the lowest daily VWAP occurring during the twenty five (25) consecutive Trading Days immediately preceding the applicable Conversion Date.

 

During the six months period ended December 31, 2013, the Company recorded $254 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $8,082 of the debt discount to interest expense, leaving $41,918 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $77,891 and recognized a gain of $261,423 on derivative liability and the interest expense over debt original discount from derivative liability was $289,314. The balance of this note payable at December 31, 2013 was $50,000 and accrued interest of $254.

 

Convertible Note - $400,000 Financing

 

On October 18, 2013, the Company signed a $400,000 12% convertible debenture agreement with a private investor. The convertible debenture is due on May 15, 2014. If any event of default occurs, the full principal amount of the debenture together with the interest and other amounts owing in respect thereof, need to be due immediately and payable in cash. The debenture including interest and principal, shall be convertible into shares of common stock at a price of the lower of $0.025 per share or 50% of the lowest traded price, for 20 days prior to conversion at the option holder, in whole at any time and from time to time.

 

During the six months period ended December 31, 2013, the Company recorded $9,863 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $141,637 of the debt discount to interest expense, leaving $258,363 in unamortized debt discount at December 31, 2013. As of December 31, 2013, the derivative liability was $624,093 and recognized a gain of $335,320 on derivative liability and the interest expense over debt original discount from derivative liability was $559,313. The balance of this note payable at December 31, 2013 was $400,000 and accrued interest of $9,863.

 

Convertible Note - $968,200 Financing

 

On October 28, 2013, the Company combined outstanding promissory notes including $135,118 interest expense and $833,082 transfer from promissory notes and converted to convertible notes to extend the due date to November 30, 2013 (the “Note”) to Gemini pursuant to which the Company borrowed $968,200. The Note bears interest of twelve percent (12%) per annum on the face amount and is payable in full upon maturity. Upon issuance of the Senior Secured Convertible Note, the Creditor may elect, in its sole discretion, to convert all or any portion of the outstanding principal amount of the Loan, and any or all accrued and unpaid interest thereon into shares of our common stock at a conversion price equal to $0.0025 immediately preceding the applicable Conversion Date.  The Company agreed to pay the principal sum of $968,200 and interest on the outstanding principal amount of the promissory note to Gemini Finance Corp. on or before November 30, 2013.

 

During the six months period ended December 31, 2013, the Company recorded $23,873 in interest expense on the note. For the six months ended December 31, 2013, the Company had amortized the $155,690 of the debt discount to interest expense, leaving $812,510 in unamortized debt discount at December 31, 2013.  Per the Note, the Company converted $91,093 into common stocks. As of December 31, 2013, the derivative liability was $1,748,574 and recognized a gain of $373,334 on derivative liability and the interest expense over debt original discount from derivative liability was $1,153,708. The balance of this note payable at December 31, 2013 was $877,108 and accrued interest of $23,873.

 

The following is the summary of convertible notes payable as of December 31, 2013:

 

 

 

 

 

 

 

At December 31, 2013, the Company entered into a non-interest bearing note payable due to its Chief Executive Officer who is also a Director and significant shareholder.  During the six months ended December 31, 2013, the Company paid $73,900, leaving a balance of $435,171 at December 31, 2013.

During the six months ended December 31, 2013, the Company had a 6% interest bearing note payable due to its Chief Technical Officer.  In the event of default, the note is subject to an increase in the interest rate to 10% per annual.  During the six months ended December 31, 2013, the Company had an advance of $95,000, leaving a balance of $95,000 with $450 accrued interest at December 31, 2013.

 

 

 

 

 

 

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.

 

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

 

Derivative and Warrant 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

 

Common Stock Issuances

 

During the six months ended December 31, 2013, the Company issued a total of 896,240,797 shares of its common stock of which 221,666,668 shares were issued for cash for $600,000.  The Company also issued 549,416,062 shares towards the conversion of convertible notes (see Note 4). The Company issued 50,000,000 shares towards the accrued compensation to the officers accounting to $700,000 in stock-based compensation; 25,000,000 shares towards to the consulting fee for services to unrelated parties; 24,920,165 shares towards interest expense and 25,237,902 shares reissued to two Company's officers from the treasury, which resulted in compensation expense of $353,331.

 

 

 

 

 

 

Options

 

In April 2011, the Company granted options to its President to purchase 800,000 shares of its common stock and options to its Chief Technical Officer to purchase 400,000 shares of its common stock. The 1,200,000 options have an exercise price of $0.10 per share and expire in five years. The options were valued at $113,520 using the Black-Scholes Option Model with a risk free interest of 2.24%, volatility of 169.83%, and trading price of $0.10 per share. The $113,520 has already been recorded in prior years. Compensation charged to operation for the six months ended December 31, 2013 was $0. As of December 31, 2013, the derivative liability was $5,111 and recognized a gain of $7,549 on derivative liability (see Note 4).

 

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 six 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.

 

Legal Proceedings

 

At December 31, 2013, the Company is not involved in any litigation relating to claims arising out of the ordinary course of business or otherwise. Any litigation, regardless of outcome, is costly and time-consuming, can divert the attention of management and key personnel from business operations and deter distributors from selling the Company’s products and dissuade potential customers from purchasing the Company’s products. The Company defends itself vigorously against any such claims. Due to the uncertainty surrounding the litigation process, the Company is unable to estimate a range of loss, if any, at this time, however the Company does not believe a material loss is probable.

 

The Company has settled a dispute with Hudson Bay Master Fund, LTD which resulted in a loss of $143,841 and was expensed towards interest expense.

 

9.   Subsequent Events

 

On January 6, 2014, the Company signed a common stock purchase agreement to sell 10,000,000 restricted shares to an accredited private investor for $10,000. The shares were issued on January 22, 2014.

 

On January 9, 2014, the Company and an investor entered into a final court judgment for the forbearance agreement entered on November 1, 2013.  The Company agreed to pay $114,275 to settle the case with the investor.

 

 

 

 

 

 

On January 10, 2014, the Company signed a $89,500, 10% convertible debenture agreement with a private investor. The convertible debenture is due on July 10, 2014. When the convertible debenture agreement was signed, the private investor paid $50,000 to the Company. If any event of default occurs, the full principal amount of the debenture together with the interest and other amounts owing in respect thereof, need to be due immediately and payable in cash. The debenture including interest and principal, shall be convertible into shares of common stock at 50% of the lowest traded price, for 20 days prior to conversion at the option holder, in whole at any time and from time to time.

 

On January 27, 2014, the board of directors of the Company determined that it was in the best interests of the Company to file a Certificate of Designation that authorized the issuance of up to thirty thousand (30,000) shares of a new series of preferred stock, par value $0.001 per share designated  "Series A Preferred Stock," for which the board of directors established the rights, preferences and limitations thereof. The board of directors authorized the  Series A Preferred Stock pursuant to the authority given to the board of directors under the Articles of Incorporation, which authorizes the issuance of up to five hundred million (500,000,000) shares of preferred stock, par value $0.001 per share, and authorizes the board of directors, by resolution, to establish any or all of the unissued shares of preferred stock, not then allocated to any series into one or more series and to fix and determine the designation of each such shares, the number of shares which shall constitute such series and certain preferences, limitations and relative rights of the shares of each series so established. The Certificate of Designation was filed as an amendment to the Company’s Articles of Incorporation with the State of Colorado on January 27, 2014.

 

On January 27, 2014, the Company issued an aggregate of 11,000 shares of Series A Preferred Stock, par value $0.001 per share, to the CEO in consideration for services rendered to the Company, including for and as incentive to continue to assist and provide services to the Company.  As a holder of outstanding shares of  Series A Preferred Stock, the CEO, is entitled to one hundred thousand (100,000) votes for each share of  Series A Preferred Stock held on the record date for the determination of stockholders entitled to vote at each meeting of stockholders of the Company. The related compensation expense will be recorded in the Company’s books at that date.

 

On January 28, 2014, the Company signed a $50,000 10% convertible debenture agreement with a private investor. The convertible debenture is due on July 28, 2014. If any event of default occurs, the full principal amount of the debenture together with the interest and other amounts owing in respect thereof, need to be due immediately and payable in cash. The debenture including interest and principal, shall be convertible into shares of common stock at 50% of the lowest traded price, for 20 days prior to conversion at the option holder, in whole at any time and from time to time.

 

On February 7, 2014, the Company signed a $52,625 10% convertible debenture agreement with a private investor. The convertible debenture is due on August 7, 2014.  If any event of default occurs, the full principal amount of the debenture together with the interest and other amounts owing in respect thereof, need to be due immediately and payable in cash. The debenture including interest and principal, shall be convertible into shares of common stock at 50% of the lowest traded price, for 20 days prior to conversion at the option holder, in whole at any time and from time to time.

 

On February 10, 2014, the Company entered into a second amendment (the “Amendment”) to supplement the terms in the most recent Supplier Buying Agreement dated November 4, 2014 (the “Supplier Agreement”) with The Home Depot, a Delaware corporation (“Home Depot”). Prior to this Amendment, the Company and Home Depot agreed to an initial ninety (90) day pilot test to sell the Company’s products in ten (10) Home Depot retail stores located in the Northeast United States (the “Initial Pilot”).  Pursuant to this Amendment, the Company and Home Depot agreed to expand the sale of the Company’s products from ten (10) stores in the Initial Pilot to one hundred and four (104) Home Depot retail stores located in the Northeast United States (the “Second Pilot”).  Moreover, unlike the Initial Pilot, the Second Pilot is not limited to ninety (90) days, but is for an indefinite period.  In Connection with the Amendment, Home Depot will have the exclusive right in the United States and its territories and possessions to sell the Company’s products.

 

On February 14, 2014, the Company signed a $500,000 secured promissory note with $10,000 legal fee up front and a guaranteed payback of 9% of the interest being accrued or 545,000 at the maturity date . The promissory note is due on May 14, 2014.   The proceeds are to be used to purchase inventory to supply The Home Depot.  The loan is secured by the accounts receivable from The Home Depot.   If any event the promissory note is not repaid upon the maturity date, the full principal amount of the promissory together with the interest will be converted to convertible promissory note.

 

Between January 3, 2014 and February 13, 2014, various convertible note holders converted $317,443 of debt into 473,876,922 shares of common stock.