ECO BUILDING PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED)
|
|
Nine Months Ended March 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and coating sales
|
|
$
|
439,612
|
|
|
$
|
2,247,210
|
|
|
$
|
52,487
|
|
|
$
|
594,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUE
|
|
|
439,612
|
|
|
|
2,247,210
|
|
|
|
52,487
|
|
|
|
594,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
837,199
|
|
|
|
2,679,167
|
|
|
|
226,623
|
|
|
|
675,922
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COST OF SALES
|
|
|
837,199
|
|
|
|
2,679,167
|
|
|
|
226,623
|
|
|
|
675,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS LOSS
|
|
|
(397,587
|
)
|
|
|
(431,957
|
)
|
|
|
(174,136
|
)
|
|
|
(81,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
210,848
|
|
|
|
52,946
|
|
|
|
51,284
|
|
|
|
13,130
|
|
Marketing
|
|
|
75,160
|
|
|
|
57,021
|
|
|
|
14,795
|
|
|
|
8,754
|
|
Compensation and related expenses
|
|
|
463,419
|
|
|
|
1,036,199
|
|
|
|
172,886
|
|
|
|
257,492
|
|
Rent - facilities
|
|
|
52,672
|
|
|
|
126,000
|
|
|
|
10,312
|
|
|
|
42,000
|
|
Professional and consulting fees
|
|
|
280,393
|
|
|
|
433,385
|
|
|
|
51,630
|
|
|
|
42,553
|
|
Other general and administrative expenses
|
|
|
407,413
|
|
|
|
940,869
|
|
|
|
114,000
|
|
|
|
285,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,489,905
|
|
|
|
2,646,420
|
|
|
|
414,907
|
|
|
|
649,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(1,887,492
|
)
|
|
|
(3,078,377
|
)
|
|
|
(589,043
|
)
|
|
|
(730,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense//amortization expense
|
|
|
(647,802
|
)
|
|
|
(2,280,676
|
)
|
|
|
(139,631
|
)
|
|
|
(207,109
|
)
|
Loss on derivative liability
|
|
|
(20,542,423
|
)
|
|
|
(27,553,227
|
)
|
|
|
(4,534,692
|
)
|
|
|
(33,302,143
|
)
|
Other expenses
|
|
|
(120,210
|
)
|
|
|
|
|
|
|
(120,210
|
)
|
|
|
-
|
|
Other Income
|
|
|
8,197
|
|
|
|
|
|
|
|
8,197
|
|
|
|
-
|
|
Gain on exchange of debt for preferred C stock
|
|
|
744,587
|
|
|
|
88,985
|
|
|
|
744,587
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
(228,607
|
)
|
|
|
-
|
|
|
|
|
|
Derivative expense
|
|
|
(1,360,227
|
)
|
|
|
(2,061,420
|
)
|
|
|
(536,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
(21,917,878
|
)
|
|
|
(32,034,945
|
)
|
|
|
(4,578,277
|
)
|
|
|
(33,509,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
(23,805,370
|
)
|
|
|
(34,897,158
|
)
|
|
|
(5,167,320
|
)
|
|
|
(34,169,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
NET LOSS FROM DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
|
(216,164
|
)
|
|
|
-
|
|
|
|
(70,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(23,805,370
|
)
|
|
$
|
(35,113,322
|
)
|
|
$
|
(5,167,320
|
)
|
|
$
|
(34,240,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE, FROM CONTINUING OPERATIONS - Basic & Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
NET LOSS PER COMMON SHARE, FROM DISCONTINUED OPERATIONS - Basic & Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.00
|
)
|
|
|
(0.00
|
)
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic -
|
|
|
2,290,774,536
|
|
|
|
4,974,301,318
|
|
|
|
3,421,430,275
|
|
|
|
6,363,429,751
|
|
Diluted -
|
|
|
2,290,774,536
|
|
|
|
4,974,301,318
|
|
|
|
3,421,430,275
|
|
|
|
6,363,429,751
|
|
See accompanying notes to condensed consolidated
financial statements
ECO BUILDING PRODUCTS,
INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
Nine Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(23,805,370
|
)
|
|
$
|
(35,113,323
|
)
|
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
62,997
|
|
|
|
159,426
|
|
Bad debt expense
|
|
|
11,750
|
|
|
|
|
|
Amortization of debt discount & deferred financing costs
|
|
|
310,061
|
|
|
|
1,054,961
|
|
Derivative expense
|
|
|
1,360,227
|
|
|
|
3,381,768
|
|
Stock Based Compensation
|
|
|
-
|
|
|
|
27,292
|
|
Financing costs
|
|
|
34,943
|
|
|
|
-
|
|
Loss on derivative liability fair value adjustment
|
|
|
20,542,423
|
|
|
|
27,553,227
|
|
Loss on extinguishment of Convertible Notes and Accounts Payable
|
|
|
-
|
|
|
|
228,607
|
|
Gain on settlement of notes payable
|
|
|
-
|
|
|
|
(88,985
|
)
|
Expense paid on behalf of the Company
|
|
|
-
|
|
|
|
1,239,324
|
|
Gain on note payable exchanged for Preferred C Stock
|
|
|
(744,587
|
)
|
|
|
-
|
|
Assignment of accounts receivable to note payable holder
|
|
|
-
|
|
|
|
(541,576
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(18,551
|
)
|
|
|
(54,900
|
)
|
Inventory
|
|
|
120,924
|
|
|
|
123,008
|
|
Prepaid expenses and other
|
|
|
25,255
|
|
|
|
(18,038
|
)
|
Accounts payable
|
|
|
197,090
|
|
|
|
583,240
|
|
Accrued expenses
|
|
|
(40,850
|
)
|
|
|
15,183
|
|
Other payable and accrued expenses
|
|
|
(20,034
|
)
|
|
|
(29,364
|
)
|
Accrued interest
|
|
|
355,988
|
|
|
|
47,815
|
|
Net cash from operating activities
|
|
|
(1,607,734
|
)
|
|
|
(1,432,335
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(11,265
|
)
|
|
|
(34,004
|
)
|
Net cash used by investing activities
|
|
|
(11,265
|
)
|
|
|
(34,004
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payments on related party notes
|
|
|
(43,000
|
)
|
|
|
(60,158
|
)
|
Proceeds from issuance of common stock
|
|
|
-
|
|
|
|
100,000
|
|
Proceeds from issuances of series C convertible preferred stock
|
|
|
-
|
|
|
|
975,000
|
|
Proceeds from issuances of series D convertible preferred stock
|
|
|
1,071,832
|
|
|
|
-
|
|
Proceeds from convertible notes payable
|
|
|
88,000
|
|
|
|
-
|
|
Proceeds notes payable
|
|
|
819,307
|
|
|
|
200,000
|
|
Payments on convertible notes payable
|
|
|
-
|
|
|
|
(104,188
|
)
|
Payments on notes payable
|
|
|
(343,569
|
)
|
|
|
(15,014
|
)
|
Net cash provided by financing activities
|
|
|
1,592,570
|
|
|
|
1,095,640
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalent
|
|
|
(26,429
|
)
|
|
|
(370,699
|
)
|
Cash and cash equivalent at the beginning of year
|
|
|
40,306
|
|
|
|
375,066
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent at the end of year
|
|
$
|
13,877
|
|
|
$
|
4,366
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow Information:
|
|
|
|
|
|
|
|
|
Cash Paid for Interest
|
|
$
|
15,000
|
|
|
|
8,333
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common shares issued for conversion of notes payable
|
|
$
|
654,084
|
|
|
$
|
168,024
|
|
Common shares issued for settlement of investor loans
|
|
$
|
-
|
|
|
$
|
12,000
|
|
Note payable issued for Preferred Stock cancellation
|
|
$
|
377,000
|
|
|
|
|
|
Options issued in exchange for series A preferred stock and forgiveness of liabilities
|
|
$
|
-
|
|
|
$
|
57,513
|
|
Preferred shares issued for extinguishment of convertible notes payable & A/P
|
|
$
|
-
|
|
|
$
|
2,154,426
|
|
Shares issued for conversion of Series C convertible preferred stock
|
|
$
|
3,041,338
|
|
|
$
|
1,951,241
|
|
Convertible notes issued for assumption of notes payable
|
|
$
|
-
|
|
|
$
|
410,000
|
|
Declared dividends
|
|
$
|
-
|
|
|
$
|
203,083
|
|
Purchase of property & equipment with loans payable
|
|
$
|
-
|
|
|
$
|
105,284
|
|
Debt Discount on convertible notes
|
|
$
|
38,000
|
|
|
$
|
1,144,731
|
|
Common Shares issued for interest expense
|
|
$
|
-
|
|
|
$
|
76,190
|
|
OID
|
|
$
|
4,222
|
|
|
$
|
59,454
|
|
See accompanying notes to condensed consolidated financial statements
1. Organization
and Basis of Presentation
Basis of Presentation
The accompanying condensed consolidated financial statements as of March 31,
2016, and for the three and nine months ended March 31, 2016 and 2015 have been prepared by Eco Building Products, Inc (or “the
Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company
believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2015. In the opinion of management, all adjustments (primarily
consisting of normal recurring adjustments) considered necessary for a fair statement have been included.
The condensed consolidated balance sheet
at March 31, 2016 has been derived from the unaudited consolidated financial statements as of that date but does not include all
of the information and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2015.
The results of operations for the three and nine months ended March 31, 2016 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 $98,681,884, recurring
losses from operations and significant cash used in operating activities over the last three 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 entirely dependent upon
our ability to obtain financing and upon future profitability of our operations. The Company estimates the current operational
expenses of approximately two 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/preferred stock, and/or through
private placements. Currently, the Company has relied upon the sale of preferred stock and issuance of convertible debt to meet
monthly cash flow demands. The sale of preferred stock with convertible features and issuance of convertible debt (see note 7)
poses dilutive effects due to the nature of this financing. The minimum operational expenses must be met in order to relive the
threat of the company’s ability to continue as a going concern. There is no assurance that our current operations will be
profitable or that we will raise sufficient funds in a timely manner to continue operating. The Company has significantly reduced
expenditures. The financial statements do not include any adjustments relating to the recoverability and classification of recorded
assets, or the amounts of and classification of liabilities that might be necessary in the event we cannot continue in existence.
These factors raise substantial doubt about the Company’s ability to continue as a going concern.
2. Summary of
Significant Accounting Policies
Loss Per Share
Basic
net loss per share is determined by dividing net loss by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is determined by dividing net loss by the weighted average number of common shares
used in the basic loss per share calculation plus the number of common shares that would be issued assuming conversion of
all potentially dilutive securities outstanding under the treasury stock method.
Potential common shares at March
31, 2016 from preferred C shares convertible into 162.1 billion shares of common stock, preferred D shares convertible into
34.5 billion shares of common stock (March 31, 2015 – 9.7 billion ) and convertible notes convertible into 22.1
billion shares of common stock (March 31, 2015 – 712.6 million). Accordingly,
total
common share equivalents
of
218.7 billion
were
excluded in the computation of diluted net loss per share for the three and nine months ended March 31, 2016, because
the effect would be anti-dilutive.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affects the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Recent Accounting Pronouncements
Management has determined that no new accounting
pronouncements during the period that would affect the condensed consolidated financial statements.
3. Balance Sheet details
As of March 31, 2016, inventories consisted
of $50,707 in chemicals.
All of the Company’s inventories are pledged as collateral for the Company’s Senior Secured
Notes (see Note 4). In addition, inventory is considered finished goods as the Company sells and markets the chemicals.
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.
Accrued
Liabilities
As of March 31, 2016, the Company
owed $825,578 in past due payroll taxes and accrued penalties. This amount is recorded within payroll and taxes payable on
the accompanying consolidated balance sheet. Also at March 31, 2016, the Company owed $157,995 in past due sales tax in which
it has filed the appropriate reports This amount is recorded in liabilities related to discontinued operations on the
accompanying consolidated balance sheet.
Derivative Liabilities:
During the nine months ended March 31,
2016, 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, 2016, 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, 2016 were as follows:
(1) dividend yield of 0%
(2) expected annual volatility of 136.1% to 223.9%
(3) risk-free interest rate of 0.28% 1.26%
(4) expected life of 0.33 years to 2.99 years, and
(5) estimated fair value of the Company’s common stock
of $0.0001 per share.
For the nine months ended March 31, 2016,
the Company issued an aggregate of $1,071,832 convertible preferred D series shares with a stated value of $100 per share as further
described below in Note 7 and recorded additional derivative liabilities of $2,375,009 for the conversion features included therein.
The Preferred D shares are convertible into the Company’s common shares, at the holder’s option, at conversion prices
equal to 60% of the lowest VWAP closing price for the previous 30 days.
For all convertible notes described in
the following paragraphs and for the options, warrants, and convertible preferred Series C and Series D shares described in Note
7, the fair value of the resulting derivative liability was $35,347,830 and $14,198,848 at March 31, 2016 and June 30, 2015 and,
respectively.
A
Balance as of June 30, 2015
|
|
$
|
14,198,848
|
|
|
|
|
|
Additions related to embedded conversion
features Preferred Series D issued
|
|
|
2,375,009
|
|
|
|
|
|
Conversion of convertible debt and Preferred
Series C to common stock
|
|
|
(777,393
|
)
|
|
|
|
|
Cancellation of Preferred Series C
|
|
|
(1,121,587
|
)
|
|
|
|
|
Additions related to embedded conversion
features of Convertible Debt
|
|
|
130,530
|
|
|
|
|
|
Loss on increase
in value of derivative liabilities
|
|
|
20,542,423
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
$
|
35,347,830
|
|
|
|
|
|
A reconciliation of the derivative liabilities from June 30,
2015 to March 31, 2016 is:
4. Notes Payable
The following table summarizes
the notes payable as of March 31, 2016.
|
|
As of March 31, 2016
|
|
Description
|
|
Short term
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
1,115,174
|
|
Less discount to convertible notes
|
|
|
(32,984
|
)
|
Convertible notes, net
|
|
|
1,082,190
|
|
|
|
|
|
|
Auto notes payable
|
|
|
85,425
|
|
Loans payable – other
|
|
|
1,704,445
|
|
|
|
|
|
|
|
|
$
|
2,872,060
|
|
Convertible
notes
Inventory
Note Payable - $833,333
On September 16,
2014, the Company entered into a Securities Purchase Agreement with Dominion Capital, LLC, whereby Dominion agreed to fund the
Company with an aggregate of up to $750,000 in Subscription Amount corresponding to an aggregate of up to $833,333 in the form
of a 10% Original Issue Discount Senior Secured Convertible Promissory Note due September 16, 2015 and a Common Stock Purchase
Warrant for up to 20,000,000 shares. This funding was to be used exclusively to purchase lumber and chemicals and was to be dispersed
from an escrow account. On September 29, 2014, Dominion transferred and assigned the Note and the Warrant to M2B Funding Corporation.
The Note has a fixed conversion price of $.20 subject to certain adjustments. The Company will repay the Note in monthly installments,
with the final payment was due on October 16, 2015. The Company is in default on this note. In the event of default, the Note is
subject to an increase in the interest rate to eighteen percent (18%) per annum. In accordance with the Agreement, the Company
issued a Common stock Purchase Warrant, allowing M2B Funding Corporation the right to purchase up to 20,000,000 shares of Common
Stock on September 16, 2015 and expiring on September 16, 2019. The exercise price per share of the Common Stock under this Warrant
shall be $0.02 subject to certain adjustments. The Warrant may be exercised in whole or in part, at such time by means of a cashless
exercise (see Note 7). The Common Shares cannot be sold and or assigned for a period of one year from the original Warrant issue
date. The Company initially recorded discounts totaling $1,001,326 representing the fair value of the warrants issued. During the
nine months ended March 31, 2016 the Company amortized the remaining discount balance of $230,905. During the nine months ended
March 31, 2016 this investor converted $35,877 into 219,321,375 shares of common stock. The balance of this note at March 31, 2016
is $944,902. Accrued interest at March 31, 2016 is $307,519.
Note Payable
- $100,000
On November 12,
2014, the Company entered into, with a private investor, a Promissory Note for $100,000, with an original issue discount of $20,000,
for net proceeds to the Company of $80,000 for the purpose of funding operations and for general working capital. In
addition the Company issued 12,500,000 restricted common shares. On May 14, 2015, the holder converted $20,000 of this note into
10,000,000 shares of common stock. The conversion represented a substantial modification of the note’s original terms and
as a result the Company recognized a loss of $47,000. The note was in default on May 15, 2015. Default provisions included additional
interest at 18%. During the nine months ended March 31, 2016 this investor converted $31,700 into 304,000,000 shares of common
stock. The Company recorded amortization of discounts totaling $65,409 during the nine months ended March 31, 2016 and the discount
balance is $4,509 at March 31, 2016. The balance of this note at March 31, 2016 is $48,300 plus accrued interest of $9,798.
Senior Convertible
Note - $14,167
On November 10,
2015, the Company entered into, with a private investor, a Senior Convertible Note for $14,167, with an original issue discount
of $1,417, for net proceeds to the Company of $12,750 for the purpose of funding operations and for general working capital. The
maturity date is one year from the issuance date. In the event of default, the Note is subject to an increase in the interest rate
to twenty-two percent (22%) per annum. The holder can convert at a 40% discount to the lowest volume weighted average price in
the previous twenty-five trading day period. In the event of default the conversion price is equal to 55% of the lowest traded
price in the prior thirty trading days. The Company recorded amortization of discounts totaling $5,511 during the nine months ended
March 31, 2016 and the discount balance is $8,656 at March 31, 2016. The balance of this note at March 31, 2016 is $14,167 plus
accrued interest of $1,213.
Senior Convertible
Note - $14,167
On November 30,
2015, the Company entered into, with a private investor, a Senior Convertible Note for $14,167, with an original issue discount
of $1,417, for net proceeds to the Company of $12,750 for the purpose of funding operations and for general working capital. The
maturity date is one year from the issuance date. In the event of default, the Note is subject to an increase in the interest rate
to twenty-two percent (22%) per annum. The holder can convert at a 40% discount to the lowest volume weighted average price in
the previous twenty-five trading day period. In the event of default the conversion price is equal to 51% of the lowest traded
price in the prior thirty trading days. The Company recorded amortization of discounts totaling $4,735 during the nine months ended
March 31, 2016 and the discount balance is $9,432 at March 31, 2016. The balance of this note at March 31, 2016 is $14,167 plus
accrued interest of $1,042.
Senior Convertible
Note - $14,167
On December 30,
2015, the Company entered into, with a private investor, a Senior Convertible Note for $13,889, with an original issue discount
of $1,389, for net proceeds to the Company of $12,500 for the purpose of funding operations and for general working capital. The
maturity date is one year from the issuance date. In the event of default, the Note is subject to an increase in the interest rate
to twenty-two percent (22%) per annum. The holder can convert at a 40% discount to the lowest volume weighted average price in
the previous twenty-five trading day period. In the event of default the conversion price is equal to 51% of the lowest traded
price in the prior thirty trading days. The Company recorded amortization of discounts totaling $3,501 during the nine months ended
March 31, 2016 and the discount balance is $10,388 at March 31, 2016. The balance of this note at March 31, 2016 is $13,889 plus
accrued interest of $770.
Convertible
Promissory Note - $27,500
On March
17, 2016, the Company entered into, with a private investor, a Convertible Promissory Note for $25,000, with an original
issue discount of $2,500, for net proceeds to the Company of $25,000 for the purpose of funding operations and for general
working capital. The maturity date is January 17, 2017. The Note is subject to an interest rate of approximately
9% per annum (24% default rate). The holder can convert into Series D Preferred Stock. The balance of this note at March 31, 2016
is $27,500 plus accrued interest of $114.
Convertible
Promissory Note - $27,500
On March 30, 2016,
the Company entered into, with a private investor, a Convertible Promissory Note for $27,500, with an original issue discount of
$2,500, for net proceeds to the Company of $25,000 for the purpose of funding operations and for general working capital. The
maturity date is January 30, 2017. The Note is subject to an interest rate of approximately
9% per annum (24% default rate). The holder can
convert into Series D Preferred Stock. The balance of this note at March 31, 2016 is $27,500 plus accrued interest of $8.
Loan Payable
– Other
Auto Notes Payable
The Company entered in an auto loan agreement on July 21, 2014
to purchase a vehicle. The principal amount of the loan is $105,284 and the interest rate 5.49%. The loan is due on November 13,
2019. The Company is currently paying auto payments of $1,671 per month. Future payments due total $85,425. Subsequent to March 31, 2016, the automobile
was returned to the lender and the payable was reduced to a $20,000, payable at $610 per month for thirty-six months. .
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.
Creditor claims amount owed is $360,000, which the Company disputes.
Inventory Note Payable - $500,000
On February
14, 2014 the Company entered into a Note agreement for $500,000 for the purpose of purchasing inventory. The note is secured
by the Company’s inventory and is to be repaid out of the proceeds of the subsequent inventory sales. The note was due
May 14, 2014 and was extended until March 31, 2016. The Note carries minimum interest of $45,000 for the initial term and an
additional $45,000 of interest for the extension of the due date. The Note has a default rate of 37%. During the period ended
March 31, 2016, no amount was repaid resulting in a principal balance due of $85,911 as of March 31, 2016. No payments have
been made after March 31, 2016.
Note Payable-$250,000
On April 11,
2014, the Company entered into a Note agreement in the amount of $250,000 for the purpose of funding operations and for
general working capital. The Note carries minimum interest of $22,500 with a default rate of 18% and the note was due July
1, 2014 and was extended until March 31, 2015. The Company made no draw-downs or payments on this note during the
nine months ended March 31, 2016. The balance due is $150,000 at March 31, 2016 plus the additional $36,150 as
accrued interest. No payments have been made after March 31, 2016.
Promissory Note-$100,000
On November 19, 2014, the Company entered
into a Promissory Note for $100,000 with annual interest of 6% for the purpose of funding operations and for general working capital. In
addition the Company issued 12,500,000 restricted common shares. The note was due on February 19, 2015. As of May 18, 2015 the
Company has extended the note to August 21, 2015 with the agreement to issue, prior to the new maturity date, an additional 25,000,000
common shares. Pursuant to the default provisions of the note, the Company issued an additional 15,000,000 common shares
during the nine months ended March 31, 2016. The balance due is $100,000 at March 31, 2016 plus $16,340 of accrued interest. No
payments have been made after March 31, 2016.
On January 16, 2015 the Company entered into an additional promissory note for $20,000
with annual interest of 6%. This note was due on July 16, 2015. In addition the Company issued 30,000,000 restricted common
shares. The balance due is $20,000 at March 31, 2016 plus $3,044 of accrued interest. No payments have been made after March
31, 2016.
Future Receivables Sale Agreement
Effective March 6, 2015, the Company
entered into an agreement whereby it sold a percentage of its future receivables in exchange for $75,000. Per the terms of this
agreement, the Company would repay a total of $102,750 via daily remittance of twelve percent (12%) of its accounts receivable
collections and other receipts from the sale of its products and services. Alternatively, the Company could elect to repay $120,750
total via a flat daily remittance of $1,038 (“Alternative Daily Amount”) until that amount is repaid in full. The Company
elected to repay $120,750 at the Alternative Daily Amount of $1,038, which gives the agreement the character of a $73,500 note.
The interest rate was imputed at 184.23% and the $102,750 purchase price was paid off in July 2015.
Note Payable-$20,000
On March 25, 2015, the Company entered
into a Promissory Note agreement in the amount of $20,000 with annual interest of 6% for the purpose of funding operations and
for general working capital. The note was due on April 24, 2015. Default interest of an additional 10% per annum on
the original loan amount accrues if the repayment term goes beyond 30 days. The balance due is $20,000 at March 31, 2016 plus $1,973
of accrued interest. No payments have been made after March 31, 2016. Additionally, the Company borrowed an additional
$3,000 from this same party at 0% and no terms of repayment.
Lease in Default - $151,275
Effective April 1, 2015 and up through
September 30, 2015, the Company has incurred $151,275 in a default on their facilities lease. The default rate on the lease is
10%. No repayments have been made during the nine months from June 30, 2015 to March 31, 2016, leaving a balance of $151,275 due
at March 31, 2016 plus accrued default interest of $11,397.
Note Payable-$60,000
On April 2, 2015, a shareholder loaned
the company $60,000 on a secured promissory note with a 6% per annum interest rate and a 30 day maturity date. Default
interest of an additional 10% per annum is incurred on this note if repayment is not made by July 2, 2015. The balance due
is $60,000 at March 31, 2016 plus $5,787 of accrued interest. No payments have been made after March 31, 2016.
Inventory Note Payable –
up to $1,200,000
On July 18, 2014, the Company signed
a Secured Revolving Promissory Note for up to One Million Two Hundred Thousand Dollars ($1,200,000) with an investor to facilitate
purchase of inventory for orders from the Company’s material customer. The note is secured by the inventory. Repayment of
the note is facilitated by the assignment of the accounts receivable directly from the Company’s material customer to the
investor. The initial term of the note is for six months with an option to extend for an additional six month period. The note
will bear an 18% interest rate per annum with a maximum default interest of 24% per annum. Within three (3) Business Days after
the date of this Note, the Company shall deliver to Payee a Warrant, in a form acceptable to Payee, exercisable for 18,000,000
shares of the Company’s Common Stock at a price per share equal to the closing price of the Common Stock on the trading day
prior to the date of such Warrant. Upon receipt of such Warrant, Payee shall execute a 12-month lock-up agreement in customary
form and reasonably acceptable to Payee, currently no warrant or lock up agreements have been issued or executed. The Company made
no additional borrowings or payments on this note during the nine months ended March 31, 2016. The balance of the note
as of March 31, 2016 is $183,456 plus accrued default interest of $48,869. No payments have been made after March 31, 2016.
Future Receivables Sale Agreement
- $225,000
Effective July 29, 2015, the Company
entered into an agreement whereby it sold a percentage of its future receivables in exchange for $220,500 ($225,000 less a $4,500
setup fee). The Company is to repay $309,375 via daily remittance of a percentage of its future accounts receivable collections
and other receipts from the sale of its products and services. Per the terms of the agreement, the Company made an alternative
election to repay the $309,375 via a flat daily remittance of $2,163 until that amount is repaid in full. The Company has accounted
for this agreement as a note payable with a maturity date of March 9, 2016 and an imputed interest rate of 123%. The balance of
the note is $87,164 at March 31, 2016.
Future Receivables Sale Agreement
- $70,000
Effective September
16, 2015, the Company entered into a second similar agreement whereby it sold a percentage of its future receivables in exchange
for $70,000. Per the terms of the agreement, the Company elected to repay $96,250 via a flat daily remittance of $1,019 until
that amount is repaid in full. The Company has not made payments on this note since January 2016. The Company has accounted
for this agreement as a note payable with a maturity date of February 18, 2016 and an imputed interest rate of 177%. The balance
of the note is $11,917 at March 31, 2016.
Future Receivables Sale Agreement
- $120,000
Effective
September 28, 2015, the Company entered into a third similar agreement whereby it sold a percentage of its future receivables
in exchange for $120,000. Per the terms of the agreement, the Company is to repay $153,000 via a flat daily remittance of
$1,196 until that amount is repaid in in full. The Company has not made payments on this note since January 2016. The
Company has accounted for this agreement as a note payable with a maturity date of April 5, 2016 and an imputed interest rate
of 98%. The balance of the note is $78,165 at March 31, 2016.
Settlement and Release Agreement
- $100,000
In July 2015, the Company entered into
a Settlement and Release Agreement (the “Settlement Agreement”) with Eco Prime, LLC. The Settlement Agreement resolves
any disputes arising from the Limited Asset Purchase Agreement entered into between the parties on March 19, 2014. Pursuant to
the terms of the Settlement Agreement, the Company paid One Hundred Thousand Dollars ($100,000) to acquire the assets from EcoPrime
and released each party from any liability under the March 2014 agreement. In order to fund the $100,000 payment, the Company entered
into a Promissory Note with a private investor dated July 14, 2015. Pursuant to the terms of the note, it had a 60-day maturity
and a flat 25% interest rate. The note was due on September 14, 2015 but, to date, has not been paid off and is currently in default.
The note incurs additional default interest of 6%. The balance of the note at March 31, 2016 is $85,000 plus accrued interest of
$32,087.
In connection with this agreement, the Company borrowed an additional $32,000 from this same party at 0% in a short-term
bridge financing arrangement which has been repaid.
Promissory Note-$275,000
On December 15, 2015, a shareholder
loaned the company $275,000 on a promissory note with a 24% per annum interest rate with monthly payments of $25,000 commencing
in April 2016 until paid in full. The balance due is $275,000 at March 31, 2016. Accrued interest is $19,348.
Assignment and Assumption Agreement
- $377,000
In
March 2016, the Company recaptured unpaid balance associated with an assumption and assignment of liabilities for the
issuance of Preferred C shares that was entered into on May 15, 2014. Pursuant to the terms of the Recapture Agreement, the
Company entered into a promissory demand note bearing interest a 6% for the unpaid balance of $377,000, and cancelled 3,770
Preferred C shares previously issued. Accrued interest is $1,673. This resulted in a gain on settlement of $744,587.
Loans Payable – Related Party
At March 31, 2016, the Company had interest bearing notes payable
due to its Chief Technical Officer with a balance of $2,000. During the nine months ending March 31, 2016, the Company made payments
totaling $43,000 under this note.
5. Related Party Transactions
See Note 4, Loans Payable and
Note 7, Stockholder’s Deficit.
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 Promissory Notes.
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 Liabilities.
The Company assessed
that the fair value of these liabilities using observable inputs described in level 2 above. The methodology described above may
produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values.
If readily determined market values became available or if actual performance were to vary appreciably from assumptions used, assumptions
may need to be adjusted, which could result in material differences from the recorded carrying amounts. The Company believes its
method of determining fair value is appropriate and consistent with other market participants. However, the use of different methodologies
or different assumptions to value certain financial instruments could result in a different estimate of fair value
7. Stockholders' Deficit
Preferred Stock
The Company is authorized to issue 500,000,000
shares of redeemable convertible preferred stock with a par value of $0.001 per share. As of March 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 March 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 March 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, 2016, the Company has accrued dividends on Preferred
C Stock in the amount of $3,202,966. 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, 2016:
Balance as of June 30, 2015
|
|
|
104,440
|
|
Preferred C Stock issued for cash
|
|
|
—
|
|
Preferred C Stock converted into Common Stock
|
|
|
(3,411
|
)
|
Preferred C Stock Rescinded
|
|
|
(3,770
|
)
|
Balance as of December 31, 2015
|
|
|
97,259
|
|
Preferred C
Stock converted to Common Stock
During the nine
months ended March 31, 2016, according to the conversion terms described above, the investors converted 3,411 shares of Preferred
C Stock representing value of $341,042 into 2,342,801,103 shares of the Company’s Common Stock.
Preferred C Stock recorded
The Company issued a note payable in the amount of $377,000
in exchange for 3,770 shares of Preferred C Stock. This resulted in a gain on settlement of $744,587.
Series D
12% Convertible Preferred Stock:
On March 31,
2015, the Company authorized 10,000 shares of a newly-created Series D 12% Convertible Preferred Stock, par value $0.001 per
share (the “Preferred D Stock”). Effective July 2, 2015, the Company increased the number of authorized shares to
20,000. The Company is in the process of increasing authorized shares to 30,000.
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The Preferred D Stock shall have no voting rights.
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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.
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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, 2016, the Company has accrued dividends on Preferred
D Stock in the amount of $245,061. 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.
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The Preferred D Stock shall have a liquidation preference
equal to the stated value of each share of Preferred Stock or $100 per share.
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Preferred D Stock issued for cash
During the nine months
ended March 31, 2016, investors purchased 10,718 shares of Preferred D Stock for $1,071,832 of cash.
Common Stock
Issuances
During the nine
months ended March 31, 2016, the Company issued a total of 2,881,122,478 shares of its common stock as follows:
523,321,375 shares
were issued for conversion of convertible debt and accrued interest with an aggregate value of $67,577;
15,000,000 shares
were issued pursuant to default provisions of a note payable with an aggregate value of $11,750; and
2,342,801,103
shares were issued for conversion of 3,411 shares of convertible Preferred C stock as described above.
Treasury Stock
The Company held 1,433,047 shares of common
stock as treasury stock as of June 30, 2015. There was no change in treasury stock during the nine months ended March 31, 2016.
Warrants
As discussed in
Note 4, the Company issued a Common Stock Purchase Warrant, allowing M2B Funding Corporation the right to purchase up to 20,000,000
shares of Common Stock on September 16, 2014 and expiring on September 16, 2019. The exercise price per share of the Common Stock
under these warrants is $0.02 subject to certain adjustments. The 20,000,000 warrants were valued at $1,233 using the Black-Scholes
Option Model with a risk free interest rate of 1.11%, volatility of 207.07%, and trading price of $0.0001 per share.
The following
is a schedule of warrants outstanding as of March 31, 2016:
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Warrants
Outstanding
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Weighted
Average
Exercise
Price
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Weighted
Average
Remaining
Life
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Balance, June 30, 2015
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20,000,000
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$
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0.02
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4.21 Years
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Warrants issued
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-
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-
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Warrants expired
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-
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-
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Warrants cancelled
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-
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-
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-
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Balance, March 31, 2016
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20,000,000
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$
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0.02
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3.46 Years
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Options
In December 2013,
the Company granted options to Emergent Capital to purchase 25,000,000 shares of its common stock. The 25,000,000 options have
an exercise price of $0.0012 per share and expire in 2 years. On January 26, 2016, by mutual agreement the Company and Emergent
Capital have formally agreed to immediately expire and terminate the options granted to Emergent Capital to purchase 25,000,000
shares of its common stock.
The options were valued at $37,852 using
the Black-Scholes Option Model with a risk free interest of 1.37%, volatility of 149%, and trading price of $0.001 per share. The
$38,248 is being charged to operations over their two year vesting period. Compensation charged to operation for the
nine months ended March 31, 2015 on these options amounted to $27,292.
The following is a schedule of options
outstanding as of March 31, 2016:
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Options
Outstanding
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Weighted
Average
Exercise
Price
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Weighted
Average
Remaining
Life
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Aggregate
Intrinsic
Value
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Balance, June 30, 2015
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6,986,227
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$
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0.02
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4.45 Years
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$
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-
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Options granted
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-
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-
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-
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Options cancellation/expired
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-
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|
.00
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|
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-
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|
|
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-
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Balance, March 31, 2016
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6,986,227
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$
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0.02
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2.75 Years
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$
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-
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As of March 31, 2016, 6,986,227
options were fully vested.
8. Commitments and Contingencies
Legal Proceedings
On June 4, 2013, Trical Construction, Inc.
filed a complaint against the Company in Superior Court of California, County of Los Angeles. The nature of the litigation involved
Trical’s claim that it suffered various construction delays and other damages from Eco Building Products in connection with
the construction of a 77 unit apartment building. The matter was ultimately resolved by settlement on August 1, 2014 in the amount
of $180,564, with payment of $30,000 by Eco Building Products to Trical on that date and scheduled payments of $10,000 each
month beginning on November 1, 2014 through February 1, 2016. This was amended on April 15, 2015, extending payments to October
2016 and reducing the payment amount to $2,500 per month. The balance on this settlement is $123,065 at March 31, 2016 and no payments
have been made since June 15, 2015. The Company is in default on this settlement agreement.
On October 6, 2015, the landlord for the
former Vista, CA location filed a complaint against us in the Superior Court of California, County of San Diego for a Breach of
Contract for a Promissory Note that we issued to him in connection with unpaid lease payments that we owed in the amount of $151,272
under the terms of the lease that we entered into for our Vista, CA location.
The Company is a co-defendant in a legal
action filed October 22, 2015 for past-due fees for professional services in the amount of $194,569. The outcome cannot be determined
at this time.
On June 1, 2016, a default judgment in
the amount of $17,369 was entered against the Company for unpaid legal fees. The Company is negotiating payment terms with the
plaintiff.
From time to time
the Company may be named in claims arising in the ordinary course of business. Currently, no legal proceedings or claims, other
than those disclosed above, are pending against or involve the Company that, in the opinion of management, could reasonably be
expected to have a material adverse effect on its business and financial condition.
9. Subsequent Events
From April
3, 2016 to 8, August 18, 2016 the Company issued promissory notes convertible into series D preferred shares to investors for
a total of $479,000 in gross proceeds. The notes bear interest between 13% and 21% and are all due in full with interest
between December 31, 2016 and January 31, 2017. The notes include an original issue discount of 10%.
From
April 1, 2016 to August 18, 2016, according to the conversion terms of the series C preferred shares, certain investors
converted 169 shares of Preferred C Stock representing total face value of $17,000 into 281,666,665 shares of the
Company’s Common Stock.