Footnotes
to Consolidated Financial Statements
June
30, 2016
1.
Organization and Basis of Presentation
Organization
Eco
Building Products, Inc. (the “Company”) was incorporated in the state of Colorado under the name N8 Concepts, Inc.
on March 27, 2007.
On
October 19, 2009, the Company merged with Ecoblu Products, Inc., a Nevada Corporation (“ECOBLU”). For financial reporting
purposes, the acquisition was treated as a reverse acquisition whereby ECOBLU’s operations continue to be reported as if
it had actually been the acquirer.
ECOBLU
was organized May 20, 2009 in Nevada as a wholesale distributor and manufacturer of proprietary wood products coated with an eco-friendly
chemistry that is designed to protect against mold, rot, decay, termites and fire. The Company has also developed an affiliate
coating program that allows lumber companies to coat commodity lumber at their facilities contingent upon their stocking the Company’s
inventory and supporting the Company’s products.
On
April 8, 2011, the Company formed Red Shield Lumber, Inc. (“Red Shield”) in British Columbia, Canada. Red Shield was
formed for the purpose of opening a plant in Canada utilizing the Company’s coating process to support sales and distribution.
As of June 30, 2016, the wholly owned subsidiary has no operating activity and we do not expect this subsidiary to begin operations
in the near future.
On
May 31, 2011, the Company formed E Build & Truss, Inc. (“E Build”) on May 31, 2011 in the State of California.
E Build was formed for the purpose of operating the Company’s truss manufacturing activities. In April, 2015, E Build was
sold. See “Discontinued Operations” footnote 12.
In
December 2011, the Company formed Seattle Coffee Exchange (“Seattle”) in the State of California. This wholly-owned
subsidiary has not commenced its operations as of June 30, 2016, and the Company has no intention of operating Seattle Coffee
Exchange.
Going
Concern
The
Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles
generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities in the normal course of business. To date the Company has recorded an accumulated
deficit of $101,454,836, current year net loss of $26,578,322, recurring losses from operations and significant cash used in operating
activities over the last two years, and is dependent upon its ability to obtain future financing and successful operations. The
Company is experiencing negative working capital from operations.
Our
continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations.
Our future is dependent upon our ability to obtain financing and upon future profitable operations. The Company estimates the
current operational expenses of approximately two hundred and fifty thousand dollars a month is required to continue to operate.
This is achieved either through profit from sales, obtaining additional financing through the sale of its common stock and/or
through private placements, and trimming overhead expenses. The minimum operational expenses must be met in order to relieve the
threat of the company’s ability to continue as a going concern. There is no assurance that our current operations will be
profitable or we will raise sufficient funds to continue operating. The 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
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Eco Building Products, Inc. and its wholly owned subsidiaries,
E Build & Truss, Inc., Red Shield Lumber, Inc., and Seattle Coffee Exchange. Intercompany transactions and balances have been
eliminated in consolidation. E Build & Truss was sold in April of 2015. See footnote 12.
Accounts
Receivable
Accounts
receivable are reported at the customers’ outstanding balances less any allowance for doubtful accounts. Interest is not
accrued on overdue accounts receivable.
Allowance
for Doubtful Accounts
An
allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance
for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the
adequacy of the allowance based on historical write-off percentages, information collected from individual customers related to
past transaction history, credit-worthiness, changes in payments terms and current economic industry trends. Accounts receivable
are charged off against the allowance when collectability is determined to be permanently impaired. The allowance for doubtful
account was, $1,607 and $1,607, respectively, as of June 30, 2016 and June 30, 2015, correspondingly, bad debt expense was $13,985
and $138,216 for June 30, 2016 and June 30, 2015 respectively.
Inventories
Inventories
primarily consist of chemicals, labor and lumber and are stated at lower of first-in-first out (FIFO) cost or market (net realizable
value). Net realizable value is the respective inventory’s estimated selling price reduced by the cost of completion and
disposal. The Company also evaluates its inventories in an ongoing basis based on the demand of its inventories. If the Company
deemed that the inventories do not have demand, the Company reserves those slow moving inventories as obsolete inventories. As
of the fiscal year ended June 30, 2016 and June 30, 2015, the Company reserved $0 and $47,264 for obsolete inventory, respectively,
recorded in cost of sales in the Consolidated Statements of Operations.
Property
and Equipment
Property
and equipment are stated at cost. Property and equipment purchases with useful lives exceeding one year and major renewals and
improvements are charged to the asset accounts, 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
assets that range 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.
Long-Lived
Assets
The
Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “
Accounting for the Impairment or
Disposal of Long-Lived Assets
.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate.
The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result
from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an
impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value.
Accordingly, as of the fiscal years ended June 30, 2016 and 2015, the Company recorded on impairment expense of $0 and $207,172,
respectively.
Issuances
Involving Non-Cash Consideration
All
issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount equaling the market value
of the shares issued on the date the shares were issued for such services. The non-cash consideration received pertains to settlement
of accrued compensation, consulting and advisory services, debt cancellation, conversion of Preferred Series C shares and a related
party equipment purchase (See Note 8).
Stock-Based
Compensation
The
Company accounts for stock-based compensation under ASC Topic 505-50 “Equity-Based Payments to Non-Employees”. This
standard defines a fair value based method of accounting for stock-based compensation. In accordance with ASC Topic 505-50, the
cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting
period. The value of the stock-based award is determined using the Black-Scholes option-pricing model, whereby compensation cost
is the excess of the fair value of the award as determined by the pricing model at the grant date or other measurement date over
the amount that must be paid to acquire the stock. The resulting amount is charged to expense on the straight-line basis over
the period in which the Company expects to receive the benefit, which is generally the vesting period. Options are granted at
a price not less than the fair market value of the stock on the date of grant. Generally, options vest over periods not exceeding
four years and are exercisable for up to ten years from the grant date.
Earnings
(Loss) Per Share
The
Company reports earnings (loss) per share in accordance with ASC Topic 260-10,
“Earnings per Share.”
Basic
earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number
of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that
the denominator is increased to include the number of additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive. For the year-ended June 30, 2016, there was 226,787,983,333
common stock equivalents excluded from the diluted EPS calculation as their effect is anti-dilutive. For the year-ended June 30,
2015 there were 8,036,836,992 common stock equivalents that were included in the diluted EPS calculation.
Cash
and Cash Equivalents
For
purpose of the statements of cash flows, the Company considers cash and cash equivalents to include all stable, highly liquid
investments with maturities of three months or less.
Credit
Risk
At
times, the Company maintains cash balances at a financial institution in excess of the $250,000 FDIC insurance limit.
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.
Convertible
Debentures
If
the conversion features of conventional convertible debt provides for a rate of conversion that is below market value, this feature
is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant
to ASC Topic 470-20
“Debt with Conversion and Other Options.”
In those circumstances, the convertible debt
is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of
the debt using the effective interest method. If a BCF is convertible into a variable number of shares it is accounted for as
a derivative liability.
Derivative
Financial Instruments
Derivative
financial instruments, as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”,
consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate,
security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments
may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and
subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.
The
Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However,
the Company has issued financial instruments including senior convertible notes payable, convertible preferred stock and
freestanding stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not
clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, in
certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.
The
Company estimates the fair values of derivative financial instruments using the Black-Scholes option valuation technique. Estimating
fair values of derivative financial instruments requires the development of significant and subjective estimates (such as volatility,
estimated life and interest rates) that may, and are likely to, change over the duration of the instrument with related changes
in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in
the trading market price of our common stock, which has a high-historical volatility. 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.
The
Company recorded derivative liability of $37,376,605 and $14,198,848 and a loss of $21,508,826 and a gain of $18,584,275 on derivative
valuation for the years ended June 30, 2016 and 2015, respectively.
Revenue
Recognition and Concentration Risk
The
Company records revenue when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria
(3) and (4) are based on management’s judgments regarding the fixed nature of the prices for the services performed and
the collectability of those amounts.
The
Company generally recognizes revenue from product sales, including equipment, at the time product is shipped and title passes
to the customer assuming all the other revenue recognition criteria stated above are satisfied. Contract revenue where labor services
are performed is generally recognized when the labor services are performed assuming all the other revenue recognition criteria
stated above is satisfied. Sales are recorded net of any applicable sales tax.
The
Company had product sales revenue of $445,980 with $207,338 revenue from one customer representing 46% of total sales for year
ended June 30, 2016. $125,535 revenue came from two customers representing, 28% of total sales. No long term fixed contracts control
any future sales to these customers.
The
Company had product sales revenue of $2,090,084, with $787,096 and $340,770 to two customers, representing 32% and 14% of total
sales for year ended June 30, 2015, respectively. No long term fixed contracts control any future sales to these customers.
Cost
of Revenues
Costs
of revenues include costs related to revenue recognized; such costs represent materials, labor, depreciation and amortization,
equipment rental, supplies, utilities, repair and maintenance. Certain expense reclassifications were made to the 2016 financial
statements to be consistent with the Company’s current accounting practices.
General
and Administrative Expenses
General
and administrative expenses include management and administrative personnel costs; corporate office costs; accounting fees, legal
expense, information systems expense, and product marketing and sales expense.
Research
and Development Expenses
Research
and development expenses, consist of expenses related to its wood coating process. These expenses also include the salary of the
Chief Technical Officer for the current period, it is charged to operations when incurred. We incurred $275,170 and $71,921 for
the years ended June 30, 2016 and 2015, respectively.
Advertising
Cost
Advertising
costs are charged to operations when incurred. During in the years ended June 30, 2016 and 2015 the Company incurred $75,431 and
$58,771 respectively in advertising and promotion costs.
Shipping
and Handling Costs
The
Company classifies shipping and handling costs associated with the receipt of product as part of cost of sales as reflected in
the statement of operations. The Company classifies costs associated with shipping product to customers as part of cost of goods
sold as reflected in the statement of operations.
Income
Taxes
The
Company accounts for its income taxes under the provisions of ASC Topic 740”
Income Taxes”
. The method of
accounting for income taxes under ASC 740 is an asset and liability method. The asset and liability method requires the recognition
of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and
financial reporting bases of other assets and liabilities.
Litigation
and Settlement Costs
Legal
costs are expensed as incurred. We are involved in disputes, litigation and other legal actions in the ordinary course of business.
We continually evaluate uncertainties associated with litigation and record a charge equal to at least the minimum estimated liability
for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial
statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial
statements and (ii) the loss or range of loss can be reasonably estimated. In the event of settlement discussions, this generally
occurs when an agreement in principle has been reached by both parties that include substantive terms, conditions and amounts.
If a settlement has more than one element, we account for the agreement as a multiple element arrangement and allocate the consideration
to the identifiable elements based on relative fair value. Past multiple element settlement agreements have included the licensing
of intellectual property for future use and payments related to alleged prior infringement.
Reclassifications
Certain
expenses previously included in general and administrative in the prior year have been reclassified to cost of goods sold to reflect
current accounting practices.
Recent
Accounting Pronouncements
In
April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, “Interest
– Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03), which resulted in the
reclassification of debt issuance costs from “Other Assets” to inclusion as a reduction of our reportable “Long-Term
Debt” balance on our consolidated balance sheets. Since ASU 2015-03 does not address deferred issuance costs for line-of-credit
arrangements, the FASB issued ASU No. 2015-15, “Interest – Imputation of Interest: Presentation and Subsequent Measurement
of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (ASU 2015-15), in August 2015. ASU 2015-15 allows a
company to defer debt issuance costs associated with line-of-credit arrangements, including arrangements with no outstanding borrowings,
classify them as an asset, and amortize them over the term of the arrangements. We elected to adopt ASU 2015-03 early, with full
retrospective application as required by the guidance, and ASU 2015-15, which was effective immediately. These standards did not
have a material impact on our consolidated balance sheets and had no impact on our cash flows provided by or used in operations
for any period presented.
3.
Balance Sheet Components
Inventories
Inventories
consisted of the following:
|
|
For the year ended
|
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Chemicals
|
|
$
|
51,357
|
|
|
$
|
160,920
|
|
|
|
|
|
|
|
|
|
|
Lumber
|
|
|
—
|
|
|
|
10,711
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,357
|
|
|
$
|
171,631
|
|
All
of the Company’s inventories are pledged as collateral for the Company’s Senior Secured Notes (see Note 5). In addition,
inventory is considered finished goods as the Company sells and markets chemicals and treated and untreated lumber.
Accrued
Liabilities
As
of June 30, 2016, the Company owed $719,568 in past due payroll taxes and accrued penalties. The Company has successfully made
an arrangement with the IRS for monthly payments for a $740,000 portion of the liability. These amounts are recorded within payroll
and taxes payable on the accompanying consolidated balance sheet. Also at June 30, 2016, the Company owed $65,349 in past due
sales tax in which it has filed the appropriate reports and is making periodic payments. Recently the Board of Equalization has
levied this debt against the bank account.
As
of June 30, 2015, the Company owed $888,145 in past due payroll taxes and accrued penalties. The Company has successfully made
an arrangement with the IRS for monthly payments for a $740,000 portion of the liability. These amounts are recorded within payroll
and taxes payable on the accompanying consolidated balance sheet. Also at June 30, 2015, the Company owed $21,397 in past due
sales tax in which it has filed the appropriate reports and is making periodic payments.
4.
Property and Equipment
Property
and equipment consisted of the following:
|
|
For the year ended
|
|
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Machinery and equipment
(useful life of five to seven years)
|
|
$
|
904,066
|
|
|
$
|
904,066
|
|
Vehicles (useful life is three years)
|
|
|
—
|
|
|
|
103,090
|
|
Furniture (useful life of five years)
|
|
|
20,407
|
|
|
|
20,407
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and software (useful
life of three years)
|
|
|
3,694
|
|
|
|
11,580
|
|
Leasehold improvements
(useful life of three years)
|
|
|
—
|
|
|
|
88,737
|
|
|
|
|
928,167
|
|
|
|
1,127,880
|
|
Less accumulated
depreciation
|
|
|
(546,039
|
)
|
|
|
(535,201
|
)
|
|
|
$
|
382,128
|
|
|
$
|
592,679
|
|
Eco
Building Products disposed of obsolescent or non-working fixed assets during the year ending June 30, 2016, A loss of $171,354
was recorded as a result of the disposal of these assets.
Depreciation
charged to operations for the fiscal year ended June 30, 2016 and 2015 amounted to $150,104 and $211,884, respectively.
See
Note 12 for sale of E Build & Truss assets and discontinued operations.
5.
Notes Payable
The
following tables summarize the Company’s Notes Payable.
Description
|
|
As
of June 30, 2016
|
|
|
|
|
|
|
Convertible notes
|
|
$
|
1,447,046
|
|
Less discount
to convertible notes payable
|
|
|
(330,958
|
)
|
Convertible
notes, net
|
|
|
1,116,088
|
|
|
|
|
|
|
Notes payable
|
|
|
1,831,220
|
|
|
|
|
|
|
|
|
$
|
2,947,308
|
|
Description
|
|
As
of June 30, 2015
|
|
|
|
|
|
Convertible notes
|
|
$
|
1,060,779
|
|
Less discount
to convertible notes payable
|
|
|
(317,174
|
)
|
Convertible
notes, net
|
|
|
743,605
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable - related party
|
|
|
45,000
|
|
Notes payable
|
|
|
931,939
|
|
|
|
|
|
|
|
|
$
|
1,720,544
|
|
Convertible
Notes
The
following table is a roll-forward of the Company’s Convertible Notes from July 1, 2014 to June 30, 2016:
|
|
Gross
Convertible
Notes
Payable
|
|
|
Discount
on
Convertible
Notes
Payable
|
|
|
Net
Convertible
Notes
Payable
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2014
|
|
$
|
293,543
|
|
|
$
|
(149,889
|
)
|
|
$
|
143,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions from new
convertible notes issued for cash
|
|
|
80,000
|
|
|
|
(80,000
|
)
|
|
|
-
|
|
Original issue discount
|
|
|
96,515
|
|
|
|
|
|
|
|
96,515
|
|
Additions on convertible
inventory note
|
|
|
1,001,326
|
|
|
|
(1,001,326
|
)
|
|
|
-
|
|
Assignment and assumption
of debt
|
|
|
410,000
|
|
|
|
(410,000
|
)
|
|
|
-
|
|
Repayment of Convertible
Debt in cash
|
|
|
(124,559
|
)
|
|
|
-
|
|
|
|
(124,559
|
)
|
Conversion of convertible
notes – principal to common stock
|
|
|
(100,518
|
)
|
|
|
-
|
|
|
|
(100,518
|
)
|
Forgiveness of Convertible
Debt
|
|
|
(40,000
|
)
|
|
|
-
|
|
|
|
(40,000
|
|
Settlement of Convertible
Debt for common stock
|
|
|
27,513
|
|
|
|
-
|
|
|
|
27,513
|
|
Settlement of Convertible
Debt for Preferred C stock
|
|
|
(583,041
|
)
|
|
|
-
|
|
|
|
(583,041
|
)
|
Accretion
of discount to interest expense
|
|
|
-
|
|
|
|
1,324,041
|
|
|
|
1,324,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2015
|
|
|
1,060,779
|
|
|
|
(317,174
|
)
|
|
|
743,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions from new
convertible notes issued for cash
|
|
|
412,000
|
|
|
|
(383,000
|
)
|
|
|
29,000
|
|
Original issue discount
|
|
|
41,844
|
|
|
|
(41,844
|
)
|
|
|
-
|
|
Conversion of convertible
notes – principal to common stock
|
|
|
(67,577
|
)
|
|
|
-
|
|
|
|
(67,577
|
)
|
Accretion
of discount to interest expense
|
|
|
-
|
|
|
|
411,061
|
|
|
|
411,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
June 30, 2016
|
|
$
|
1,447,046
|
|
|
$
|
(330,958
|
)
|
|
$
|
1,116,088
|
|
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 $0.20 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 and is
subject to an increase in the interest rate to eighteen percent (18%) per annum. During the year ended June 30, 2016 this investor
converted a total of $35,877 into 219,321,375 shares of common stock. The Company recorded amortization of discounts totaling
$230,905 during the year, leaving the discount balance $0 at June 30, 2016. The balance of this note at June 30, 2016 is $944,902
plus accrued interest of $364,057.
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 year ended June 30, 2016 this investor converted $31,700 into 304,000,000 shares of common
stock. The Company recorded amortization of discounts totaling $69,918 during the year, leaving the discount balance $0 at June
30, 2016. The balance of this note at June 30, 2016 is $48,300 plus accrued interest of $11,966.
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 $9,043 during
the year, leaving the discount balance $5,124 at June 30, 2016. The balance of this note at June 30, 2016 is $14,167 plus accrued
interest of $1,990.
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 $8,267 during
the year, leaving the discount balance $5,900 at June 30, 2016. The balance of this note at June 30, 2016 is $14,167 plus accrued
interest of $1,819.
Senior
Convertible Note - $13,889
On
December 30, 2015, the Company entered into a convertible note for $13,889 (with an original issue discount of $1,389, for net
proceeds to the Company of $12,500). The note accrued interest at 22% per annum. The note matures one year from the date of issuance.
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 $6,964 during the year, leaving the discount balance $6,925 at June 30, 2016.
The balance of this note at June 30, 2016 is $13,889 plus accrued interest of $1,532.
Senior
Convertible Note - $22,222
On
June 30, 2016, the Company entered into a convertible note for $22,222 (with an original issue discount of $2,222, for net proceeds
to the Company of $20,000). The note accrued interest at 12% per annum. The note matures one year from the date of issuance. 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 $0 during the year, leaving the discount balance $22,222 at June 30, 2016.
The balance of this note at June 30, 2016 is $22,222 plus accrued interest of $0.
Convertible
Promissory Notes - $389,400
From
March 17, 2016 through June 30, 2016, the Company entered into multiple (14) convertible notes totaling $389,400 (with an original
issue discount of $35,400, for net proceeds to the Company of $354,000). The Notes are subject to upfront interest of $2,500 for
each note and at default is subject to 24% default rate (most notes default in December of 2016 and some in March of 2017). The
holder can convert into Series D Preferred Stock. The Company recorded amortization of discounts totaling $69,613 during the year,
leaving the discount balance $290,787 at June 30, 2016. The balance of this notes at June 30, 2016 is $389,400 plus accrued interest
of $35,000.
Derivative
Liabilities:
During
the years ended June 30, 2016 and 2015, the Company issued convertible notes, convertible preferred stock, warrants, and stock
options that can be converted to common stock in connection with raising equity and debt financing and granting compensation.
As of June 30, 2016 and 2015, the Company’s number of potential common shares plus the number of actual common shares outstanding
(“Committed Shares”) exceeded the number of common shares authorized to issue in accordance with ASC 815-40-19 “Contracts
in Entity’s Own Equity”. The number of outstanding common shares plus the potential common share liability has exceeded
the amount of authorized shares, therefore the Company has to employ ASC 815-40-19 (“ASC 815”) to value common share
equivalents potentially issuable to settle conversions of convertible notes, convertible preferred shares and exercise of options
and warrants.
The
Company values its derivative financial instruments, consisting primarily of embedded conversion features for its stock options,
warrants, convertible debt, and convertible preferred stock 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. During the current fiscal year, with the increase in issuance of Preferred D and Convertible Notes that have a conversion
price predicated on the stock price the fair value of these derivative financial instruments was determined using a path-dependent
Monte Carlo simulation. In the year ended June 30, 2015 the fair values of the embedded conversion features for the stock options,
warrants, convertible debt, and convertible preferred stock were determined using the Black-Scholes option pricing model. The
Company changed from the Black Scholes method to the Monte Carlo method as the Company considered the Monte Carlo methodology
to be clearly defined in the accuracy of variables and iterations.
The
ranges of inputs (or assumptions) the Company used to value the derivative liabilities at note or equity issuance, conversion
dates, and at period end during the year ended June 30, 2016 were as follows:
(1)
|
dividend
yield of 0%
|
|
|
(2)
|
expected
annual volatility of 168.43% to 351.61%
|
|
|
(3)
|
risk-free
interest rate of 0.24% to 1.33%
|
|
|
(4)
|
expected
life of 0.33 to 3.24 years, and
|
|
|
(5)
|
estimated
fair value of the Company’s common stock of $0.0001 to $0.0021 per share.
|
For
the year ended June 30, 2016, the Company issued an aggregate of $453,844 of convertible notes net of debt discount, including
$64,445 in new senior convertible notes with one year maturities, and $389,399 in convertible promissory notes that mature from
to December 30, 2016 to January 30, 2017. The senior convertible notes are convertible into the Company’s common shares,
at the holder’s option, at conversion prices equal to 60% of the stock’s lowest volume weighted average trading price
in the 25 trading days immediately prior to the date of conversion. The senior convertible notes are convertible into the Company’s
common shares, at the holder’s option into the Company’s Preferred Series D.
The
ranges of inputs (or assumptions) the Company used to value the derivative liabilities at note or equity issuance, conversion
dates, and at period end during the year ended June 30, 2015 were as follows:
(1)
|
dividend
yield of 0%
|
|
|
(2)
|
expected
daily volatility of 13.24% to 36.98%
|
|
|
(3)
|
risk-free
interest rate of 0.23% to 1.85%
|
|
|
(4)
|
expected
life of 0.5 days to 3 years, and
|
|
|
(5)
|
estimated
fair value of the Company’s common stock of $0.002 to $0.046 per share.
|
For
the year ended June 30, 2015, the Company issued an aggregate of $913,333 of convertible promissory notes net of debt discount,
including $100,000 in new convertible notes, and increasing existing notes outstanding balances by $236,175 for additional fees
and conversion terms, to various creditors that mature from to September 16, 2014 to May 14, 2015. 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” ranging from $0.002 to $0.20 or (b) an amount ranging from 50% to 60% of the stock’s trading price, defined
as the lowest average or actual (range of) (1) one to (5) five trading prices of the (range of) 1 to 20 trading days immediately
prior to the date of conversion.
For
all convertible notes described in the paragraphs above and for the options, warrants and convertible preferred Series C and Series
D shares described in Note 8, the fair value of the resulting derivative liability was $37,376,605 and $14,198,848 at June 30,
2016 and June 30, 2015, respectively, with corresponding debt discounts with an aggregate balance of $330,958 and $317,174, respectively.
The
following is a roll-forward of derivative liabilities from June 30, 2014 to June 30, 2016:
Balance as of June 30, 2014
|
|
$
|
20,504,553
|
|
|
|
|
|
|
Additions related to embedded conversion
features of convertible notes issued
|
|
|
3,400,061
|
|
Additions related to embedded conversion
features of Preferred C Stock issued
|
|
|
3,804,541
|
|
Additions related to embedded conversion
features of Preferred D Stock issued
|
|
|
8,260,305
|
|
Additions related to embedded conversion
features of warrants issued
|
|
|
438,590
|
|
Additions related to embedded conversion
features of stock options issued
|
|
|
27,292
|
|
Decrease from extinguishment of convertible
note for Preferred C shares
|
|
|
(781,319
|
)
|
Conversion of convertible debt to common
stock
|
|
|
(165,713
|
)
|
Conversion of Preferred C shares to
common stock
|
|
|
(2,701,837
|
)
|
Other decreases
|
|
|
(3,350
|
)
|
Gain on decrease
in value of derivative liabilities
|
|
|
(18,584,275
|
)
|
Balance as of June 30, 2015
|
|
|
14,198,848
|
|
|
|
|
|
|
Additions related to embedded conversion
features of convertible notes issued
|
|
|
1,232,428
|
|
Additions related to embedded conversion
features of Preferred D Stock issued
|
|
|
2,390,099
|
|
Decrease from Recapture of Preferred
C shares for unpaid balance associated with an assumption and assignment of liabilities
|
|
|
(1,121,587
|
)
|
Conversion of convertible debt to common
stock
|
|
|
(130,762
|
)
|
Conversion of Preferred C shares to
common stock
|
|
|
(701,247
|
)
|
Loss on increase
in value of derivative liabilities
|
|
|
21,508,826
|
|
|
|
|
|
|
Balance as of June 30, 2016
|
|
$
|
37,376,605
|
|
Notes Payable – Other at June
30, 2016 consist of:
Auto
Notes Payable
In
April, 2016 the company defaulted on auto loan resulting in a repossession and disposition of $51,000 with a remaining balance
due with fees of $20,123 which is now being paid on a monthly payment of $635 and is being recorded in other – payables
and accrued expenses.
Secured
Promissory Note - $44,500
At
June 30, 2012, the Company was indebted for $44,500 for amounts received in prior years for operating expenses in exchange for
a secured promissory note from a third party entered into during 2010. This amount is due on demand and non-interest bearing.
The balance of this note at June 30, 2016 is $44,500 and accrued interest of $0. Creditor claims amount owed is $360,000, which
the Company disputes.
Inventory
Note Payable – up to $1,200,000
On
July 18, 2014, the Company signed a Secured Revolving Promissory Note for up to One Million Two Hundred Thousand Dollars ($1,200,000)
with an investor to facilitate purchase of inventory for orders from the Company’s material customer. The note is secured
by the inventory. Repayment of the note is facilitated by the assignment of the accounts receivable directly from the Company’s
material customer to the investor. The initial term of the note is for six months with an option to extend for an additional six-month
period. The note will bear an 18% interest rate per annum with a maximum default interest of 24% per annum. Within three (3) Business
Days after the date of this Note, the Company shall deliver to Payee a Warrant, in a form acceptable to Payee, exercisable for
900,000 shares of the Company’s Common Stock at a price per share equal to the closing price of the Common Stock on the
trading day prior to the date of such Warrant. Upon receipt of such Warrant, Payee shall execute a 12-month lock-up agreement
in customary form and reasonably acceptable to Payee, currently no warrant or lock-up agreements have been issued or executed.
During the year ended June 30, 2015 the Company drew $504,593 in payments made on behalf of the Company to its suppliers and the
Company’s customers repaid $321,137 during the year ended June 30, 2015. The balance of this note at June 30, 2016 is $183,456
and accrued interest of $59,846.
Note
Payable - $20,000
On
March 25, 2015, the Company entered into a note agreement for $20,000. The note was due April 24, 2015. The Note carries a default
interest rate of 10%. The balance of this note at June 30, 2016 is $20,000 and accrued interest of $2,471.
Note
Payable - $500,000
On
February 14, 2014 the Company entered into a note agreement for $500,000. 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 a default rate of 37%. The balance of this
note at June 30, 2016 is $85,911 and accrued interest of $76,443.
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%. The balance of this note at June 30, 2016 is $151,275 and accrued interest of $15,169.
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. The Note carries a default interest rate of 10%. The balance of this note at June 30, 2016 is $60,000 and accrued
interest of $7,282.
Note
Payable - $250,000
On
April 11, 2014 the Company entered into a note agreement for $250,000. The note was due July 1, 2014 and was extended until March
31, 2015. The Note carries minimum interest of $22,500 with a default rate of 18%. The balance of this note at June 30, 2016 is
$150,000 and accrued interest of $77,400.
Note
Payable - $100,000
On
November 19, 2014, the Company entered into a note for $100,000 with annual interest of 6. The note was due on February 19, 2015
and extended to August 21, 2015. Pursuant to the default provisions of the note, the note will accrue interest at 18% per annum.
The balance of this note at June 30, 2016 is $100,000 and accrued interest of $20,828.
Note
Payable - $20,000
On
January 16, 2015, the Company entered into a note for $20,000 with annual interest of 6%. The note was due on April 17, 2015 and
extended to July 17, 2015. Pursuant to the default provisions of the note, the note will accrue interest at 18% per annum. The
balance of this note at June 30, 2016 is $20,000 and accrued interest of $3,942.
Future
Receivables Sale Agreement - $75,000
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 $102,750 total via a flat daily remittance of $1,038 (“Alternative Daily Amount”) until that amount
is repaid in full. The Company has accounted for this agreement as a note payable with an estimated maturity date of July 30,
2015, resulting in an imputed interest rate of 184%. The balance of this note at June 30, 2016 is $0.
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 an estimated maturity date of March 9, 2016, resulting in
an imputed interest rate of 123%. The balance of this note at June 30, 2016 is $141,096.
Settlement
and Release Agreement - $100,000
On
July 17, 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 this note
at June 30, 2016 is $85,000 and accrued interest of $18,020.
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.
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 an estimated maturity date of February 18, 2016, resulting in an imputed interest rate
of 177%. The balance of this note at June 30, 2016 is $36,315.
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 an estimated maturity date of April 5, 2016, resulting in an imputed interest rate of
98%. The balance of this note at June 30, 2016 is $96,165.
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 of this note at June 30, 2016 is $275,000 and accrued
interest of $35,803.
Assignment
and Assumption Agreement - $377,000
On
March 4, 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 $7,313. This resulted in a gain on settlement of $744,587.
Loans
Payable – Related Party
None
6.
Related Party Transactions
See
also Note 5 for Loans payable – related parties and equity issuances in Note 8.
Employment
Agreement –Chief Executive Officer
Mr.
Comery was appointed as our Chief Executive Officer as of June 15, 2015. We do not have a formal Employment Agreement finalized
with Mr. Comery at this point but we are working towards finalizing it. The Compensation Committee has, however, met and approved
the major points of his compensation. Mr. Comery is earning an annual salary of $250,000, provided that the Compensation Committee
has agreed to determine whether this should be increased to $275,000 beginning when the quarterly net income is positive. The
Company will also pay compensating him $1,700 per month for medical benefits and a $500 per month car allowance. In addition,
the Compensation Committee agreed to a $15,000 one-time reimbursement for relocation expenses. Lastly, Mr. Comery will be eligible
to participate in the Employee Incentive Compensation Plan upon the Board’s discretion.
|
(a)
|
Annual
salary of $250,000
|
|
|
|
|
(b)
|
If
the Compensation Committee has agreed to determine whether Tom Comery salary should be increased to $275,000 beginning when
the quarterly net income is positive.
|
|
|
|
|
(c)
|
The
Company will compensate Tom Comery $1,700 per month for medical benefits and a $500 per month car allowance.
|
|
|
|
|
(d)
|
The
Compensation Committee has agreed to a $15,000 one-time reimbursement for relocation expenses. Mr. Comery will be eligible
to participate in the Employee Incentive Compensation Plan upon the Board’s discretion
|
Employment
Agreement –Chief Technical Officer
Effective
November 1, 2013, the Company entered into an employment agreement with its Chief Technical Officer or “CTO” for a
term of five (5) years and shall be renewed automatically for succeeding terms of one (1) year each (“Renewal Terms”)
unless either party gives notice to the other at least 30 days prior to the expiration of any term of said party’s intention
not to renew this Agreement. Key provisions of the agreement include:
|
(a)
|
Annual
salary of $250,000
|
|
|
|
|
(b)
|
Cash
bonus of $250,000 in the event that gross sales for the fiscal year ending June 30, 2014 exceed $25,000,000, subject to certain
limitations. If the company achieves 80% of the bonus target then the employee is entitled to 50% of the defined bonus for
the defined period.
|
|
|
|
|
(c)
|
Additional
cash bonus of $250,000 in the event that gross sales for the fiscal year ending June 30, 2015 exceed $50,000,000, subject
to certain limitations. In addition, when the aforementioned gross sales targets are obtained the employee will be eligible
for a 20% increase in salary year over year.
|
|
|
|
|
(d)
|
Option
grants to purchase 40,000 (800,000 pre-split) shares of the company’s common stock at an exercise price of $2.00 per
share ($0.10 pre-split), expiring April 1, 2016 (five-year life). Such options will vest over a two-year period. These options
were valued at $4,656, as determined using the Black-Scholes option-pricing model using a risk free rate of 1.37%, volatility
of 149% and a trading price of the underlying shares of $0.16 ($0.008 pre-split).
|
|
|
|
|
(e)
|
Severance
pay is due the CTO upon separating from service, with or without cause, equaling his then current monthly salary multiplied
by the number of full years that he has been employed with the Company prior to separation.
|
Accrued
compensation due the Chief Technical Officer at June 30, 2016 totaled $689,930. Compensation charged to operations during the
year ended June 30, 2016 on option grants totaled $0.
Accrued
compensation due the Chief Technical Officer at June 30, 2015 totaled $634,011. Compensation charged to operations during the
year ended June 30, 2015 on the option grants totaled $554. The CTO also had 20,000 (400,000 pre-split) options granted from a
previous employment agreement.
7.
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
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.
8.
Stockholders’ Deficit
Preferred
Stock
Series
A Preferred Stocks:
On
January 27, 2014 the Board of Directors authorized 30,000 shares of Class A Preferred Stock with a par value of $0.001 per share.
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.
|
As
of June 30, 2016 and 2015, there was no Series A Preferred Stock issued or outstanding.
Series
B 12% Convertible Preferred Stock:
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 with a par value of $0.001, for
a total authorized and issued amount of 9,250.
The
terms of the Preferred B Stock are as follows:
|
●
|
The Preferred B Stock shall have no voting rights.
|
|
|
|
|
●
|
The Preferred B Stock convertible at any time at 60% of the lowest VWAP of the 20 days leading up to conversion multiplied by the stated value of $100.
|
|
|
|
|
●
|
The Preferred B Stock has a 12% per annum stated dividend rate, which is calculated daily on a 360-day year.
|
|
|
|
|
●
|
The Preferred B Stock shall have a liquidation preference equal to the stated value of each share of Preferred Stock or $100 per share.
|
As
of June 30, 2016 and 2015, there was no Series B Preferred Stock issued or outstanding.
Series
C 12% Convertible Preferred Stock:
On
May 30, 2014, the Company authorized 120,000 shares of a newly-created Series C 12% Convertible Preferred Stock, par value $0.001
per share (the “Preferred C Stock”).
The
terms of the Preferred C Stock are as follows:
|
●
|
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 June 30, 2016, the Company has accrued dividends on Preferred C Stock in the amount of $3,628,584. 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.
|
Preferred
C Stock converted to Common Stock
During
the year ended June 30, 2016, according to the conversion terms described above, the investors converted 3,580 shares of Preferred
C Stock representing value of $358,042 into 2,624,467,768 shares of the Company’s Common Stock. The Company had 97,090 and
104,440 shares of Preferred C stock issued and outstanding as of June 30, 2016 and 2015, respectively.
Preferred
C Stock issued for cash
During
the year ended June 30, 2016, the investors purchased 0 shares of Preferred C Stock for $0 of cash. During the year ended June
30, 2015, the investors purchased 10,000 shares of Preferred C Stock for $1,000,000 of cash.
Preferred
C Stock issued for debt assumption
During
the year ended June 30, 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. This resulted in a gain on settlement of $744,587. During the year ended June 30, 2015,
at total of 10,771 shares of Preferred C Stock were issued to investors for debt assumption. In exchange for 4,941 of these shares,
$494,172 of accounts payable was assumed by one investor. Additionally, in exchange for the remaining 5,830 shares, a convertible
note with a balance of $590,428 was exchanged for Preferred C shares by the same investor.
Preferred
C Stock, have been valued similar to the convertible notes, comprising a part of the derivative liability which is calculated
using the Monte Carlo simulation model. The range of inputs (or assumptions) the Company used to value the derivative liabilities
at date of issuances, conversion dates, and at period end during the years ended June 30, 2016 and June 30, 2015 are disclosed
under the derivative liabilities section (See Note 5).
The
following table provides the activity of the Company’s preferred C stock for the year ended June 30, 2016:
Balance as of June 30, 2015
|
|
|
104,440
|
|
|
|
|
|
|
Preferred C Stock issued for cash
|
|
|
-
|
|
Preferred C Stock cancelled for debt
|
|
|
(3,770
|
)
|
Preferred C Stock
converted into Common Stock
|
|
|
(3,580
|
)
|
|
|
|
|
|
Balance as of June 30, 2016
|
|
|
97,090
|
|
During
the year ended June 30, 2016, according to the conversion terms described above, the investors converted 3,580 shares of Preferred
C Stock representing value of $358,042 into 2,624,467,768 shares of the Company’s Common Stock.
Series
D 12% Convertible Preferred Stock:
On
March 31, 2015, the Company authorized 10,000 shares of a newly-created Series D 12% Convertible Preferred Stock, par value $0.001
per share (the “Preferred D Stock”). Effective July 2, 2015, the Company increased the number of authorized shares
to 20,000. Effective August 22, 2016, the Company increased the number of authorized shares to 30,000.
The
terms of the Preferred D Stock are as follows:
|
●
|
The
Preferred D Stock shall have no voting rights.
|
|
|
|
|
●
|
The
Preferred D Stock is convertible at any time at 60% of the lowest VWAP of the 30 days leading up to conversion multiplied
by the stated value of $100.
|
|
|
|
|
●
|
The
Preferred D Stock has a 12% per annum stated dividend rate, which is calculated daily on a 360 day year. Any dividends, whether
paid in cash or shares of Common Stock, that not paid within five trading days following a dividend payment date shall continue
to accrue and shall entail a late fee at 18% per annum. In addition, the dividend rate of 12% is subject to an adjustment
up to 18% if at any time the Company does not have an amount equal to or greater than 150% of the authorized but unissued
common shares that would be required (on an “if converted” basis) to settle the conversion of Preferred C Stock
outstanding. As of June 30, 2016, the Company has accrued dividends on Preferred D Stock in the amount of $339,235. The amount
of dividends has not yet been determined by the Company and the holders whether to be payable in cash, common stock or additional
shares of Preferred D Stock.
|
|
|
|
|
●
|
The
Preferred D Stock shall have a liquidation preference equal to the stated value of each share of Preferred Stock or $100 per
share.
|
Preferred
D Stock issued for cash
During
the year ended June 30, 2016, investors purchased 10,968 shares of Preferred D Stock for $1,096,632 of cash. During the year ended
June 30, 2015, investors purchased 9,979 shares of Preferred D Stock for $1,096,632 of cash.
The
following table provides the activity of the Company’s preferred D stock for the year ended June 30, 2016:
Balance as of June 30, 2015
|
|
|
9,979
|
|
|
|
|
|
|
Preferred D Stock issued for cash
|
|
|
10,968
|
|
Preferred C Stock
converted into Common Stock
|
|
|
-
|
|
|
|
|
|
|
Balance as of June 30, 2016
|
|
|
20,947
|
|
Common
Stock
During
the year ended June 30, 2016, the Company issued a total of 3,147,789,143 shares of its common stock as follows:
|
|
Shares
|
|
|
Amount
|
|
Shares issued for convertible
debt conversions
|
|
|
523,321,375
|
|
|
|
67,577
|
|
Shares issued
for conversion of Preferred C shares
|
|
|
2,624,467,768
|
|
|
|
358,042
|
|
Total
|
|
|
3,147,789,143
|
|
|
$
|
425,619
|
|
During
the year ended June 30, 2015, the Company issued a total of 448,447,307 shares of its common stock as follows:
|
|
Shares
|
|
|
Amount
|
|
Shares issued for cash
|
|
|
37,500,000
|
|
|
$
|
100,000
|
|
Shares issued for convertible debt conversions
|
|
|
14,598,450
|
|
|
|
88,118
|
|
Shares issued in settlement of debt
|
|
|
12,250,000
|
|
|
|
109,000
|
|
Shares issued for interest expense and
debt discount
|
|
|
55,000,000
|
|
|
|
262,678
|
|
Shares issued
for conversion of Preferred C shares
|
|
|
329,098,857
|
|
|
|
10,725
|
|
Total
|
|
|
448,447,307
|
|
|
$
|
570,521
|
|
Treasury
Stock
As
of June 30, 2016 and 2015, the Company held 1,433,046 shares of common stock as treasury stock.
Warrants
As
discussed in note 5, 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 these warrants is $0.02 subject to certain adjustments. The 20,000,000 warrants were valued using the
Black-Scholes Option Model with a risk free interest rate of 1.78%, volatility of 261.05%, and trading price of $0.022 per share.
As of June 30, 2016 the warrants had a value of $1,767.
The
following is a schedule of warrants outstanding as of June 30, 2016:
|
|
Warrants
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2014
|
|
|
25,000,000
|
|
|
$
|
0.00
|
|
|
|
1.42
|
|
Warrants issued
|
|
|
20,000,000
|
|
|
|
0.02
|
|
|
|
5.0
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants cancelled
|
|
|
(25,000,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Balance, June
30, 2015
|
|
|
20,000,000
|
|
|
$
|
0.02
|
|
|
|
4.21
years
|
|
Warrants issued
|
|
|
-
|
|
|
$
|
|
|
|
|
-
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, June
30, 2016
|
|
|
20,000,000
|
|
|
$
|
0.02
|
|
|
|
3.21
years
|
|
As
of June 30, 2016, all of the 20,000,000 warrants were fully exercisable.
Options
Prior
to June 30, 2015, the Company granted options to its Chief Technical Officer to purchase 1,200,000 shares of its common stock.
The 1,200,000 options have an exercise price of $0.10 per share and expire in 5 years. As of June 30, 2016, 800,000 options to
the Chief Technical Officer remain outstanding.
As
discussed in note 6, the Company granted options to its Chief Executive Officer as in connection with his termination agreement.
A total of 5,786,227 options were granted based on the number of shares of Common Stock equal to one percent (1%) of the total
number of shares outstanding on the date of grant. The options have an exercise price equal to the closing bid price on the date
of grant ($0.0038 per share) and an expiration date of ten (10) years from the date of issuance. A total of 5,786,227 options
were granted under these terms. The options vest fifty percent (50%) on the effective date of the agreement, with the remaining
fifty percent (50%) vesting six (6) months after the effective date of the agreement. The options were valued at $21,987, as determined
using the Black-Scholes option-pricing model using a risk free rate of 2.35%, volatility of 257% and a trading price of the underlying
shares of $0.038.
The
following is a schedule of options outstanding as of June 30, 2016:
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2014
|
|
3,200,000
|
|
|
$
|
0.001
|
|
|
|
3
years
|
|
|
|
-
|
|
Options granted
|
|
5,786,228
|
|
|
$
|
0.0038
|
|
|
|
|
|
|
|
-
|
|
Options cancelled/expired
|
|
(200,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, June 30, 2015
|
|
6,986,228
|
|
|
$
|
0.089
|
|
|
|
2
years
|
|
|
$
|
-
|
|
Options cancelled / expired
|
|
(400,000
|
)
|
|
$
|
0.0038
|
|
|
|
|
|
|
|
-
|
|
Balance, June 30, 2016
|
|
6,586,228
|
|
|
$
|
0.0089
|
|
|
|
8.10
Years
|
|
|
$
|
-
|
|
As
of June 30, 2016, a total of 6,586,228 of the 6,586,228 options were fully vested. Compensation expense of $0 remaining, will
be recognized over the remaining lives of the options.
9.
Income Taxes
Deferred
income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and liabilities.
The
effective tax rate on the net loss before income taxes differs from the U.S. statutory rate as follows:
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Current expense – Benefit
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current expense
(benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred Benefit
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total deferred benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
U.S statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
Permanent differences
|
|
|
43.00
|
%
|
|
|
43.00
|
%
|
Less valuation allowance and other
|
|
|
-48.3
|
%
|
|
|
-48.3
|
%
|
Effective tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
significant components of deferred tax assets and liabilities are as follows:
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Bad
debt reserve
|
|
$
|
59,215
|
|
|
$
|
59,215
|
|
Stock based compensation
|
|
|
4,179,570
|
|
|
|
4,179,570
|
|
Net operating losses
|
|
|
34,494,644
|
|
|
|
25,458,015
|
|
Inventories
|
|
|
245,487
|
|
|
|
245,487
|
|
Payroll and taxes
payable
|
|
|
3,321,045
|
|
|
|
2,751,328
|
|
|
|
|
32,693,615
|
|
|
|
32,693,615
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
644,734
|
|
|
|
453,938
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
41,650,988
|
|
|
|
32,239,676
|
|
Less valuation allowance
|
|
|
(41,650,988
|
)
|
|
|
(32,239,676
|
)
|
Deferred tax asset - net valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company has incurred operating losses of $101,454,836 which, if unutilized, will expire through to 2036. Future tax benefits,
which may arise as a result of these losses, have not been recognized in these financial statements, and have been offset by a
valuation allowance.
10.
Commitments and Contingencies
Lease
commitments
Real
Estate Lease – San Diego, California
In
February 2016, the Company entered into an agreement to lease office facilities with a small warehouse at our San Diego, CA location.
The term of the lease is for three years. The initial monthly installment of base rent amount was calculated by multiplying the
initial monthly base rental rate per rentable square foot amount by the number of rentable square feet of space in the premises.
In all subsequent base rent payment periods during the lease term commencing on March 1, 2017, the calculation of each monthly
installment of base rent amount
reflects
an annual increase of three and one half percent (3.5%). The details on the lease are as follows:
|
●
|
Base
rentals - $2,807 per month.
|
|
|
|
|
●
|
Base
rental increase of 3.5% per year.
|
|
|
|
|
●
|
Company
is responsible to pay its proportionate share of common area maintenance – estimated at $963 per month
|
|
|
|
|
●
|
Termination
date – April 30, 2019
|
|
|
|
|
●
|
Renewal
Option – Yes
|
|
|
|
|
●
|
Security
Deposit - $9,333.
|
Rent
expense related to this lease was $17,966 and $0 for the fiscal year ended June 30, 2016 and 2015, respectively.
Real
Estate lease-Augusta Georgia
In
July 2016, the company entered a lease for a manufacturing facility in Augusta, Georgia.
|
●
|
Augusta,
Georgia (Periodic Month to Month Tenancy as of July, 2016)
|
|
|
|
|
●
|
Month
to month agreement was entered into and agreed upon.
|
|
|
|
|
●
|
We
pay a monthly lease payment of $3,000.
|
|
|
|
|
●
|
We
can use the premises for processing and treatment of wood and wood products, but is currently
used as a storage facility
|
Rent
Disclosure:
|
|
San
Diego, CA
|
|
2016
|
|
|
54,281
|
|
2017
|
|
|
45,621
|
|
2018
|
|
|
46,813
|
|
2019
|
|
|
40,889
|
|
Thereafter
|
|
|
|
|
|
|
|
187,604
|
|
Purchase
commitments
Legal
Proceedings
Except
as disclosed below, we are currently not involved in any litigation that we believe could have a materially adverse effect on
our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by
any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive
officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our
subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as
such, in which an adverse decision could have a material adverse effect.
At
June 30, 2016, the Company owed approximately $730,000 in past due federal and state payroll taxes, of which approximately $660,000
is due to the Internal Revenue Service (IRS). The Company subsequently paid $25,000 to the IRS under a $20,000 per month payment
arrangement which the Company is in default. The Company continues to negotiate with the IRS to re-establish a payment plan for
past due taxes. Currently the IRS has acknowledged the situation and so far, has set an expectation that we must stay current
with our federal and state taxes. The Company continues to stay current with state and federal payroll tax liabilities. No such
arrangement exists for State tax purposes.
On
October 6, 2015, the landlord for the Vista, CA location filed a complaint against us in the Superior Court of California, County
of San Diego for a Breach of Contract for a Promissory Note that we issued to him in connection with unpaid lease payments that
we owed in the amount of $151,272.65 under the terms of the lease that we entered into for our Vista, CA location. As of June
30, 2016, no payments have been made against this obligation.
On
May 27, 2016, the prior landlord of the Tacoma, WA, facility obtained a judgment for the collection of unpaid rent in the
amount of 168,998 inclusive of interest & attorney fees.
On
or about October 15, 2016, A Summons & Complaint has been filed for the sum of $31,118 pertaining to a default on a contract
with World Global Financing.
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.
11.
Subsequent Events
On
July 17, 2016, The Company issued 55,875,000 shares of common stock in lieu of $5,588 of accrued interest of the convertible note
dated November 21, 2014.
On
July 17, 2016, The Company issued 11,175,000 shares of common stock in lieu of $1,118 of accrued interest of the convertible
note dated January 16, 2015.
From
July 1, 2016 to October 13, 2016, according to the conversion terms of the series C preferred shares, the investors converted
87 shares of Preferred C Stock representing a value of $8,760 into 146,000,000 shares of the Company’s Common Stock.
12.
Discontinued Operations
On
April 15, 2015, the company completed the sale of E Build & Truss to former employees of the company. In exchange for certain
assets, the purchaser accepted $112,102 of liabilities related to E Build and Truss. As such, this has been accounted for as a
discontinued operation in the June 30, 2015 financial statements. The company has recorded a loss from discontinued operations
of $216,164 as a result of this transaction, which is comprised of $363,500 in revenues, $44,702 in gain on asset sale and $624,366
in costs and expense. Included in the $1,148,229 of liabilities from discontinued operations in 2015 are $205,113 in accounts
payable and $943,116 in accrued expenses related to E Build and Truss.