Item
1. Financial Statements.
ECO
BUILDING PRODUCTS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September 30, 2016
|
|
|
June 30, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
|
28,250
|
|
|
|
45,153
|
|
Accounts Receivable
|
|
|
11,017
|
|
|
|
2,150
|
|
Inventory
|
|
|
43,556
|
|
|
|
51,357
|
|
Prepaid expenses
|
|
|
3,000
|
|
|
|
3,000
|
|
Other current assets
|
|
|
34,293
|
|
|
|
11,793
|
|
TOTAL CURRENT ASSETS
|
|
|
120,116
|
|
|
|
113,453
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
368,413
|
|
|
|
382,128
|
|
TOTAL ASSETS
|
|
|
488,529
|
|
|
|
495,581
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
1,430,571
|
|
|
|
1,460,792
|
|
Payroll and taxes payable
|
|
|
1,686,728
|
|
|
|
1,675,638
|
|
Accrued interest
|
|
|
913,370
|
|
|
|
749,766
|
|
Other payables and accrued expenses
|
|
|
239,908
|
|
|
|
241,156
|
|
Derivative liability
|
|
|
38,524,260
|
|
|
|
37,376,605
|
|
Convertible notes, net
|
|
|
1,356,121
|
|
|
|
1,116,088
|
|
Loans payable
|
|
|
1,830,220
|
|
|
|
1,831,220
|
|
TOTAL CURRENT LIABILITIES
|
|
|
45,981,178
|
|
|
|
44,451,265
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES RELATED TO DISCONTINUED OPERATIONS
|
|
|
1,148,229
|
|
|
|
1,148,229
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Preferred stock, Series C, $0.001 par value, 120,000 shares authorized, 97,002
and 97,090 shares issued and outstanding at September 30, 2016 and June 30, 2016, respectively
|
|
|
97
|
|
|
|
97
|
|
Preferred stock, Series D, $0.001 par value, 30,000 shares authorized, 20,947
shares issued and outstanding at September 30, 2016 and June 30, 2016
|
|
|
21
|
|
|
|
21
|
|
Common stock, $0.001 par value, 10,000,000,000 shares authorized, 39,024,120
and 37,564,120 shares issued and outstanding at September 30, 2016 and June 30, 2016, respectively
|
|
|
39,024
|
|
|
|
37,564
|
|
Treasury stock
|
|
|
(1,434
|
)
|
|
|
(1,434
|
)
|
Additional paid-in capital
|
|
|
56,338,448
|
|
|
|
56,314,675
|
|
Accumulated deficit
|
|
|
(103,017,034
|
)
|
|
|
(101,454,836
|
)
|
TOTAL STOCKHOLDERS’ DEFICIT
|
|
|
(46,640,878
|
)
|
|
|
(45,103,913
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND DEFICIT
|
|
|
488,529
|
|
|
|
495,581
|
|
See
accompanying notes to condensed consolidated financial statements
ECO
BUILDING PRODUCTS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
Three months ended
September 30, 2016
|
|
|
Three months ended
September 30, 2015
|
|
REVENUE
|
|
|
|
|
|
|
|
|
Product and coating sales
|
|
|
25,891
|
|
|
|
275,751
|
|
COST OF SALES
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
21,393
|
|
|
|
379,591
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT (LOSS)
|
|
|
4,498
|
|
|
|
(103,840
|
)
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
71,500
|
|
|
|
79,973
|
|
Marketing
|
|
|
3,000
|
|
|
|
31,924
|
|
Compensation and related expenses
|
|
|
183,169
|
|
|
|
110,361
|
|
Rent- facilities
|
|
|
17,819
|
|
|
|
20,763
|
|
Professional fees
|
|
|
74,547
|
|
|
|
129,575
|
|
Other general and administrative expenses
|
|
|
71,402
|
|
|
|
148,256
|
|
TOTAL OPERATING EXPENSES
|
|
|
421,437
|
|
|
|
520,852
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(416,939
|
)
|
|
|
(624,692
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest and amortization expense
|
|
|
(411,635
|
)
|
|
|
(434,091
|
)
|
Gain (loss) on derivative liability
|
|
|
92,586
|
|
|
|
(6,634,847
|
)
|
Derivative expense
|
|
|
(827,474
|
)
|
|
|
(283,603
|
)
|
Other expenses
|
|
|
(3,736
|
)
|
|
|
-
|
|
Other income
|
|
|
5,000
|
|
|
|
-
|
|
TOTAL OTHER INCOME (EXPENSE)
|
|
|
(1,145,259
|
)
|
|
|
(7,352,541
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES
|
|
|
(1,562,198
|
)
|
|
|
(7,977,233
|
)
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(1,562,198
|
)
|
|
|
(7,977,233
|
)
|
See
accompanying notes to condensed consolidated financial statements
ECO
BUILDING PRODUCTS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
Three months ended
September 30, 2016
|
|
|
Three months ended
September 30, 2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(1,562,198
|
)
|
|
|
(7,977,233
|
)
|
Adjustments to reconcile net loss to net cash used by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
13,715
|
|
|
|
52,679
|
|
Amortization of debt discount & deferred financing costs
|
|
|
269,033
|
|
|
|
271,689
|
|
Derivative expense
|
|
|
827,474
|
|
|
|
283,603
|
|
Common Stock issuance for interest and OID
|
|
|
-
|
|
|
|
11,750
|
|
Financing costs
|
|
|
-
|
|
|
|
34,943
|
|
Loss (Gain) on derivative liability fair value adjustment
|
|
|
(92,586
|
)
|
|
|
6,634,847
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,867
|
)
|
|
|
(64,095
|
)
|
Inventory
|
|
|
7,801
|
|
|
|
38,018
|
|
Prepaid expenses and other current assets
|
|
|
(22,500
|
)
|
|
|
(2,150
|
)
|
Accounts payable
|
|
|
(30,221
|
)
|
|
|
180,334
|
|
Payroll and taxes payable
|
|
|
11,090
|
|
|
|
(8,531
|
)
|
Other payable and accrued expenses
|
|
|
(1,248
|
)
|
|
|
(21,524
|
)
|
Accrued interest
|
|
|
163,604
|
|
|
|
92,140
|
|
Net cash used by operating activities
|
|
|
(424,903
|
)
|
|
|
(473,530
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
(176,209
|
)
|
Net cash used by investing activities
|
|
|
-
|
|
|
|
(176,209
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Payments on related party notes
|
|
|
-
|
|
|
|
(43,000
|
)
|
Proceeds from issuances of series D convertible preferred stock
|
|
|
-
|
|
|
|
415,500
|
|
Proceeds from convertible notes payable
|
|
|
409,000
|
|
|
|
-
|
|
Proceeds notes payable
|
|
|
-
|
|
|
|
542,500
|
|
Payments on notes payable
|
|
|
(1,000
|
)
|
|
|
(110,353
|
)
|
Payments on notes payable - vehicle loans
|
|
|
-
|
|
|
|
(6,368
|
)
|
Net cash provided by financing activities
|
|
|
408,000
|
|
|
|
798,279
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(16,903
|
)
|
|
|
148,540
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of year
|
|
|
45,153
|
|
|
|
40,306
|
|
Cash and cash equivalents at the end of year
|
|
|
28,250
|
|
|
|
188,846
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow Information:
|
|
|
|
|
|
|
|
|
Cash Paid for Interest
|
|
|
-
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common shares issued for settlement of investor loans
|
|
|
-
|
|
|
|
200,759
|
|
Shares issued for conversion of Pref C convertible preferred stock
|
|
|
26,693
|
|
|
|
-
|
|
Disposition of assets for assumption of liabilities - discontinued operations
|
|
|
-
|
|
|
|
1,372,050
|
|
Reclassification of Notes Payable - Related Party to Notes Payable
|
|
|
-
|
|
|
|
1,299,690
|
|
Reclassification of Notes Related Part Debt Discouit to Debt Discount
|
|
|
-
|
|
|
|
230,905
|
|
Debt discount on convertible notes
|
|
|
438,000
|
|
|
|
-
|
|
Original issue discount
|
|
|
41,833
|
|
|
|
-
|
|
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 September 30, 2016, and for the three months ended September 30,
2016 and 2015 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and
the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016. In the
opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair
statement have been included.
The
condensed consolidated balance sheet at September 30, 2016 has been derived from the unaudited consolidated financial statements
as of that date but does not include all the information and footnotes included in the Company’s Annual Report on Form 10-K
for the year ended June 30, 2016. The results of operations for the three months ended September 30, 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 $103,017,034 in recurring
losses from operations and significant cash used in operating activities over the last two years, and is dependent upon its ability
to obtain future financing and successful operations.
Our
continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations.
Our future is dependent upon our ability to obtain financing and upon future profitable operations. The Company estimates the
current operational expenses of approximately one hundred thousand dollars a month is required to continue to operate. This is
achieved either through profit from sales; or by management seeking additional financing through the sale of its common stock,
and/or through private placements. The minimum operational expenses must be met in order to relive the threat of the company’s
ability to continue as a going concern. There is no assurance that our current operations will be profitable or that we will raise
sufficient funds to continue operating. The Company continues to trim overhead expenses to meet revenues. The financial statements
do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification
of liabilities that might be necessary in the event we cannot continue in existence. These factors raise substantial doubt about
the Company’s ability to continue as a going concern.
If
current and projected revenue growth does not meet Management estimates, the Management may continue to choose to raise additional
capital through debt and/or equity transactions, reduce certain overhead costs through the deferral of salaries and other means,
and settle liabilities through negotiation. Currently, the Company does not have any commitments or assurances for additional
capital, nor can the Company provide assurance that such financing will be available to it on favorable terms, or at all. If,
after utilizing the existing sources of capital available to the Company, further capital needs are identified and the Company
is not successful in obtaining the financing, it may be forced to curtail its existing or planned future operations. The Company
has already taken steps to reduce expenses. Additionally, the Company has recently changed the product offering to better align
with our product certifications and the intended use. This has resulted in three products now marketed as “Sill Plate”
to meet the accolades of our TER 1511-09, “Advanced Framing Lumber” to meet the accolades of our TER 1511-10 which
includes the attributes of Sill Plate with the addition of our Fire Inhibitor. This product is meant for the full framing package
of a wood framed building and is sold as a value-added protection. Our third product is offered as “Fire Treatment or FT”
to meet the accolades of our TER 1510-01 which includes all of the prior two accolades and is the original formulation meeting
the IBC Section 2303.2 as an alternate material to the use of Fire Retardant Treated Wood (FRTW). This change has afforded the
company and its affiliates the ability to address each segment of the market increasing sales opportunities and allowing the Company
to make a consistent margin on every sale. Nevertheless, the Company continues to experience cash flow difficulties and there
is no assurance of when it may be profitable.
2.
Summary of Significant Accounting Policies
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 September 30, 2016 from preferred C shares
convertible into 1.6 billion shares of common stock, preferred D shares convertible into 349.1 million shares of common stock,
1.5 billion from stock options and convertible notes convertible into 431.2 million shares of common stock. Accordingly, total
common share equivalents of 3.9 billion were excluded in the computation of diluted net loss per share for the three months ended
September 30, 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 September 30, 2016, inventories consisted of the following:
Chemicals
|
|
$
|
43,556
|
|
|
|
$
|
-
|
|
|
|
$
|
43,556
|
|
All
the Company’s inventories are pledged as collateral for the Company’s Senior Secured Notes (see Note 4). In addition,
inventory is considered finished goods as the Company sells and markets the chemicals. The chemicals include a $0 reserve for
obsolete inventory.
Property
and Equipment
Property and equipment is stated at cost.
Property and equipment-related expenditures for items with useful lives exceeding one year and major renewals and improvements
are recorded as assets, while replacements and maintenance and repairs that do not improve or extend the lives of the respective
assets are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated
depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged
to income. Depreciation expense is recorded on a straight-line basis over the estimated useful lives of the assets, ranging from
(3) to seven (7) years. Leasehold improvements are depreciated over their useful life or the term of the related lease, whichever
is shorter. Depreciation expense is not recorded on idle property and equipment until such time as it is placed into service.
During the period, the Company purchased no new property and equipment. Depreciation expense for the three months ending September
30, 2016 was $13,715.
Accrued
Liabilities
As
of September 30, 2016, the Company owed $888,145 in past due payroll taxes and accrued penalties. These amounts are recorded within
payroll and taxes payable on the accompanying consolidated balance sheet. Also at June 30, 2016, the Company owed $64,694 in past
due sales tax in which it has filed the appropriate reports and is making periodic payments.
Derivative
Liabilities
During
the three months ended September 30, 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 September 30, 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 September 30, 2016 were as follows:
(1)
dividend yield of 0%
|
|
(2)
expected annual volatility of 89.4% to 209.2%
|
|
(3)
risk-free interest rate of 0.48% 1.00%
|
|
(4)
expected life of 0.62 years to 2.69 years, and
|
|
(5) estimated fair value of the Company’s
common stock of $0.01 per share.
|
For the three months
ended September 30, 2016, the Company issued an aggregate of $450,833 convertible debt as further described below in Note 4 and
recorded additional derivative liabilities of $1,265,474 for the conversion features included therein.
For all convertible
notes described in the following paragraphs and for the warrants, and convertible preferred Series C and Series D shares described
in Note 7, the fair value of the resulting derivative liability was $38,524,260 and $37,376,605 at September 30, 2016 and June
30, 2016, respectively.
A
reconciliation of the derivative liabilities from June 30, 2016 to September 30, 2016 is:
|
|
Derivative
Liabilities
|
|
Balance as of June 30, 2016
|
|
|
37,376,605
|
|
Conversion of Preferred Series C to common stock
|
|
|
(25,233
|
)
|
Additions related to embedded conversion features of Convertible Debt
|
|
|
1,265,474
|
|
Gain on change in fair value of derivative liability
|
|
|
(92,586
|
)
|
Balance as of September 30, 2016
|
|
$
|
38,524,260
|
|
4.
Convertible Notes Payable and Loans Payable
The
following tables summarize notes payable as of September 30, 2016.
|
|
As of September
30, 2016
|
|
Description
|
|
Short term
|
|
|
Long term
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
1,897,879
|
|
|
|
—
|
|
Less discount to notes payable
|
|
|
(541,758
|
)
|
|
|
—
|
|
Convertible notes, net
|
|
|
1,356,121
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Loans payable – other
|
|
|
1,830,220
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,186,341
|
|
|
$
|
—
|
|
TYPE
|
|
ORIGNATION DATE
|
|
INTEREST RATE
|
|
|
DUE DATE
|
|
PRINCIPAL BALANCE
|
|
|
INTEREST BALANCE
|
|
Convertible
|
|
11/12/2014
|
|
|
18
|
%
|
|
05/15/2015
|
|
|
48,300
|
|
|
|
14,157
|
|
Convertible
|
|
09/16/2014 – 09/28/2016
|
|
|
18 – 22%
|
|
|
09/16/2015 – 09/07/2017
|
|
|
1,102,679
|
|
|
|
432,459
|
|
Convertible
|
|
03/17/2016 – 09/30/2016
|
|
|
24
|
%
|
|
01/17/2017 – 02/28/2017
|
|
|
746,900
|
|
|
|
67,500
|
|
Debt discount
|
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
(541,758
|
)
|
|
|
|
|
Secured Revolving Promissory Note
|
|
07/18/2014
|
|
|
24
|
%
|
|
01/18/2015
|
|
|
183,456
|
|
|
|
70,944
|
|
Non-convertible
|
|
03/31/2015
|
|
|
10
|
%
|
|
06/30/2015
|
|
|
151,275
|
|
|
|
18,892
|
|
Future receivables sale agreement
|
|
08/12/2015
|
|
|
0
|
%
|
|
03/09/2016
|
|
|
141,096
|
|
|
|
-
|
|
Non-convertible
|
|
07/17/2015
|
|
|
12
|
%
|
|
09/17/2015
|
|
|
85,000
|
|
|
|
23,162
|
|
Non-convertible
|
|
03/04/2016
|
|
|
0
|
%
|
|
Demand
|
|
|
377,000
|
|
|
|
7,313
|
|
Future receivables sale agreement
|
|
09/30/2015
|
|
|
0
|
%
|
|
04/05/2016
|
|
|
97,667
|
|
|
|
-
|
|
Non-convertible
|
|
03/24/2010
|
|
|
0
|
%
|
|
Demand
|
|
|
44,500
|
|
|
|
-
|
|
Non-convertible
|
|
02/14/2014 – 12/15/2015
|
|
|
24 – 37%
|
|
|
04/24/2014 – 04/15/2016
|
|
|
593,911
|
|
|
|
239,756
|
|
Non-convertible
|
|
11/21/2014 – 01/16/2015
|
|
|
18
|
%
|
|
07/16/2015 – 08/21/2015
|
|
|
120,000
|
|
|
|
30,214
|
|
Future receivables sale agreement
|
|
09/30/2015
|
|
|
0
|
%
|
|
02/18/2016
|
|
|
36,315
|
|
|
|
-
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
$
|
3,186,341
|
|
|
$
|
904,486
|
|
Convertible
Promissory Notes - $357,500
From July 8, 2016
through September 30, 2016 the Company issued thirteen Convertible Promissory Notes totaling $357,500, including an original issue
discount totaling $32,500. The net proceeds to the Company were $325,000 and the proceeds are for funding operations and for general
working capital. The maturity dates range between December 31, 2016 and February 28, 2017 for the Notes. The Notes will pay $32,500
in interest at maturity of the Notes. The holder can convert into Series D Preferred Stock. The balance of these notes at September
30, 2016 is $357,500 plus accrued interest of $32,500.
Senior
Convertible Notes - $93,333
From
June 25, 2016 through September 28, 2016, the Company entered into, with a private investor, a Senior Convertible Notes totaling
$93,333, including an original issue discount totaling $9,333, for net proceeds to the Company of $84,000 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 $10,590 during the three months ended September 30, 2016 and the discount balance is $82,743 at September 30, 2016. The
balance of this note at September 30, 2016 is $93,333 plus accrued interest of $2,329.
Loan
Payable – Other
Secured
Promissory Note - $44,500
At
June 30, 2012, the Company was indebted for $44,500 for amounts received in prior years for operating expenses in exchange for
a secured promissory note from a third party entered into during 2010. This amount is due on demand and non-interest bearing.
The Creditor claims amount owed is $360,000, which the Company disputes.
5.
Related Party Transactions
None.
6.
Fair Value of Assets and Liabilities
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market
(or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between
market participants at the measurement date. Further, entities are required to maximize the use of observable inputs and minimize
the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the
inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:
Level
1 — Quoted prices in active markets for identical assets or liabilities.
Level
2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities
in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other
than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation
or other means.
Level
3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets
or liabilities, and reflect the Company’s own assumptions about the assumptions market participants would use in pricing
the asset or liability developed based on the best information available in the circumstances.
Application
of Valuation Hierarchy
A financial instrument’s categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The
following is a description of the valuation methodology used to measure fair value, as well as the general classification of such
instruments pursuant to the valuation hierarchy.
Convertible Promissory Notes.
The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.
Loans Payable - Other.
The Company
assessed that the fair value of this liability approximates its carrying value due to its short-term nature.
Derivative Liabilities.
The
Company assessed that the fair value of these liabilities using observable inputs described in level 2 above. The methodology
described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective
of future fair values. If readily determined market values became available or if actual performance were to vary appreciably
from assumptions used, assumptions may need to be adjusted, which could result in material differences from the recorded carrying
amounts. The Company believes its method of determining fair value is appropriate and consistent with other market participants.
However, the use of different methodologies or different assumptions to value certain financial instruments could result in a
different estimate of fair value.
7.
Stockholders’ Deficit
The
Company is authorized to issue 500,000,000 shares of redeemable convertible preferred stock with a par value of $0.001 per share.
As of September 30, 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 September 30, 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 September
30, 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 September 30, 2016, the Company has accrued dividends on Preferred C Stock in the amount of $4,071,511.
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 three months ended September 30, 2016:
Balance as of June 30, 2016
|
|
|
97,090
|
|
Preferred C Stock issued for cash
|
|
|
—
|
|
Preferred C Stock converted into Common Stock
|
|
|
(88
|
)
|
Balance as of September 30, 2016
|
|
|
97,002
|
|
Preferred
C Stock converted to Common Stock
During the three
months ended September 30, 2016, according to the conversion terms described above, the investors converted 88 shares of Preferred
C Stock representing value of $8,800 into 146,000,000 (pre-split) 1,460,000 (post-split) shares of the Company’s Common
Stock.
Series
D 12% Convertible Preferred Stock:
On
March 31, 2015, the Company authorized 10,000 shares of a newly-created Series D 12% Convertible Preferred Stock, par value $0.001
per share (the “Preferred D Stock”). Effective July 2, 2015, the Company increased the number of authorized shares
to 20,000. Effective August 22, 2016, the Company increased the number of authorized shares to 30,000.
●
|
The
Preferred D Stock shall have no voting rights.
|
|
|
●
|
The
Preferred D Stock is convertible at any time at 60% of the lowest VWAP of the 30 days leading up to conversion multiplied
by the stated value of $100.
|
|
|
●
|
The
Preferred D Stock has a 12% per annum stated dividend rate, which is calculated daily on a 360 day year. Any dividends, whether
paid in cash or shares of Common Stock, that not paid within five trading days following a dividend payment date shall continue
to accrue and shall entail a late fee at 18% per annum. In addition, the dividend rate of 12% is subject to an adjustment
up to 18% if at any time the Company does not have an amount equal to or greater than 150% of the authorized but unissued
common shares that would be required (on an “if converted” basis) to settle the conversion of Preferred C Stock
outstanding. As of September 30, 2016, the Company has accrued dividends on Preferred D Stock in the amount of $436,932. The
amount of dividends has not yet been determined by the Company and the holders whether to be payable in cash, common stock
or additional shares of Preferred D Stock.
|
|
|
●
|
The
Preferred D Stock shall have a liquidation preference equal to the stated value of each share of Preferred Stock or $100 per
share.
|
Preferred
D Stock issued for cash
No
Preferred D Stock were purchased in the three months ended September 30, 2016.
Common
Stock
On October 19, 2016,
the Directors of the Company, after receiving the majority vote of the Company’s Shareholders through a Shareholder Vote
on October 5, 2016, approved (i) a reverse split of 100 for 1 of shares of Common Stock of the Company from 3,969,461,958 shares
of common stock to 39,694,620 shares of common stock.
During the three months ended September 30, 2016, the Company issued a total of 146,000,000
(pre-split) 1,460,000 (post-split) shares of its common stock for conversion of 88 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 three months ended September 30, 2016.
Warrants
In connection with one of the convertible
notes outstanding at September 30, 2016 with a balance of $944,902 (Note 4), the Company issued a Common Stock Purchase Warrant,
allowing M2B Funding Corporation the right to purchase up to 200,000 shares (post-split) of Common Stock on September 16, 2014
and expiring on September 16, 2019. The exercise price per share of the Common Stock under these warrants is $2.00 (post-split)
subject to certain adjustments. The warrants were valued at $1,996 using the Black-Scholes Option Model with a risk free interest
rate of 1.11%, volatility of 207.07%, and trading price of $0.01 per share.
The
following is a schedule of warrants outstanding as of September 30, 2016:
|
|
Warrants
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2016
|
|
|
200,000
|
|
|
$
|
2.0
|
|
|
3.21 Years
|
Warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
|
|
Warrants cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
Balance, September 30, 2016
|
|
|
200,000
|
|
|
$
|
2.0
|
|
|
2.96 Years
|
As
of September 30, 2016, all the 200,000 (post-split) warrants were fully exercisable.
Options
In
November 2013, the Company granted options to its Chief Technical Officer to purchase 800,000 shares of its common stock. The
800,000 options have an exercise price of $0.10 per share and expire in 5 years. As of September 30, 2016, 800,000 options to
the Chief Technical Officer remain outstanding.
The
Company granted options to its former Chief Executive Officer as in connection with his termination agreement that was effective
June 15, 2015. A total of 5,786,227 options were granted based on the number of shares of Common Stock equal to one percent (1%)
of the total number of shares outstanding on the date of grant. The options have an exercise price equal to the closing bid price
on the date of grant ($0.0038 per share) and an expiration date of ten (10) years from the date of issuance. A total of 5,786,227
options were granted under these terms. The options vest fifty percent (50%) on the effective date of the agreement, with the
remaining fifty percent (50%) vesting six (6) months after the effective date of the agreement. The options were valued at $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 $0.0038.
The
following is a schedule of options outstanding as of September 30, 2016:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Life
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2016
|
|
|
6,586,228
|
|
|
$
|
0.0089
|
|
|
|
8.1
Years
|
|
|
$
|
-
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Options cancellation/expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, September 30, 2016
|
|
|
6,586,228
|
|
|
$
|
0.0089
|
|
|
|
7.85
Years
|
|
|
$
|
-
|
|
As
of September 30, 2016, 6,586,228 of the 6,586,228 options are exercisable. Compensation expense of $0 remaining, will be recognized
over the remaining vesting period.
8.
Commitments and Contingencies
Legal
Proceedings
Except
as disclosed below, we are currently not involved in any litigation that we believe could have a materially adverse effect on
our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by
any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive
officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our
subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as
such, in which an adverse decision could have a material adverse effect.
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 $151,273 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.
9.
Subsequent Events
From
October 1, 2016 to November 18, 2016, the Company issued to investors a total of 333,333,333 (pre-split) or 3,333,333 (post-split)
common shares converted from 200 preferred C shares.
From
October 1, 2016 to November 18, 2016, the Company issued 112,429,000 (pre-split) or 1,124,290 (post-split) common shares from
conversions of debt amounting $6,109.
From
October 1, 2016 to November 18, 2016, the Company issued convertible notes in the total amount of $119,100 in which inclusive
of an original issue discount of $11,100.
From October 14,
2016 through November 4, 2016 the Company issued three Convertible Promissory Notes totaling $82,500, including an original issue
discount totaling $7,500. The net proceeds to the Company were $75,000. The maturity date is February 28, 2017 for the Notes.
The Notes will pay $7,500 in interest at maturity of the Notes. The holder can convert into Series D Preferred Stock.
On October 19, 2016, the Directors of the Company, after receiving the majority vote
of the Company’s Shareholders through a Shareholder Vote on October 5, 2016, approved (i) a reverse split of 100 for 1 of
shares of Common Stock of the Company from 3,969,461,958 shares of common stock to 39,694,620 shares of common stock.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following management’s discussion and analysis should be read in connection with the information presented in our unaudited
condensed consolidated financial statements and related notes for the three months ended September 30, 2016 included in this report
and our audited consolidated financial statements and related notes for the year ended June 30, 2016 included in our Annual Report
on Form 10-K filed on October 17, 2016 with the Securities and Exchange Commission.
Forward-Looking
Statements
Certain
statements concerning our plans and intentions included herein may constitute forward-looking statements. There are a number of
factors that may affect our future results, including, but not limited to, (a) our ability to obtain additional funding for operations,
(b) the continued availability of management to develop the business plan and (c) continued cease of the labor portion of our
business with E Build & Truss and focus on ramping the supply side which yields higher profits (d) successful development
and market acceptance of our products.
This
quarterly report may contain both historical facts and forward-looking statements. Any forward-looking statements involve risks
and uncertainties, including, but not limited to, those mentioned above. Moreover, future revenue and margin trends cannot be
reliably predicted.
Overview
Eco
Building Products, Inc., or “ECOB”, has developed a line of eco-friendly protective wood coatings, Eco Red Shield
TM
and Eco Clear Shield
TM
, that extend the lifecycle of framing lumber and other wood products used in
the construction of single-family homes and multi-story buildings. The Company has changed its’ product offering breaking
up the wood treatment into three different categories to include Eco Red Shield Sill Plate (SP), Eco Red Shield Advanced Framing
Lumber (AFL) and Eco Red Shield Fire Treated (FT). These newly created categories allow the customer to choose the level of protection
at fair market prices and allows the Company to make significantly better margins on each product. Additionally, the Company has
advanced the development and implementation of the Eco D-Fence product line.
Eco
Building Products wood coatings are topically applied to a wide range of lumber products providing protection from mold, mildew,
fungus, decay, wood rot, wood ingesting insects, including Formosan termites. Eco Red Shield™ (AFL & FT) also serves
as a fire inhibitor; significantly increasing treated lumber’s resistance to fire, by way of decreasing the smoke (fire
gases) index, slowing ignition time and flame spread.
The
ECOB system of coatings is eco-friendly and remains chemically stable over time. The coatings emit virtually zero volatile organic
compounds (VOCs), do not leech heavy metals or toxins into groundwater, and do not allow for the growth and propagation of various
molds on the cured film surface, that have the potential to contaminate occupant indoor air quality. More importantly, ECOB coatings
prevent the degradation of structural lumber that potentially requires existing homes to be periodically renovated resultant of
rot and/or insect damage, thereby indirectly preserving our forests.
In
early 2015, the Company changed its business model to focus on coating services only and chemical sales. The Company no longer
purchases lumber for coating and resells the treated lumber. Customers have their lumber shipped to one of three facilities: (i)
Fair Lawn, New Jersey, (ii) Tacoma, Washington; or (iii) Augusta, Georgia. In January 2016, the Company further consolidated operations
with the closure of New Jersey and Tacoma facilities and focus mainly on the sale of chemicals to our affiliate network.
In
January of 2016 Management took steps to narrow its focus to chemical product development, manufacturing and sales. Effectively
re-engineering its entire business model and closing its treating operations. While Eco’s chemistry can be applied to many
diverse materials, to-date it has purposefully limited its attention to the various wood preservation markets. The Company views
its current targeted market opportunity in two large sectors:
1)
The overall softwood lumber market for which there has been no cost-effective protection chemistry or technology heretofore and
2)
the traditional wood preservation market. We believe Eco Building Products is uniquely positioned to disrupt both sectors. Eco
Building Products chemistry can be applied to any wood substrate where the end-user desires protection against the risks associated
with mold, wood rot, termites and fire and hence the market opportunity is extremely large.
Critical
Accounting Policies
The
preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles in
the United States of America, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and various other factors
that we believe are reasonable under the circumstances. We consider our accounting policies related to revenue recognition, stock-based
compensation, goodwill and purchased-intangible assets and accounting for income taxes to be critical accounting policies. A number
of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to estimate
the best evidence of selling price for revenue recognition, the calculation of stock-based compensation expense, evaluation of
the potential impairment of goodwill and purchased-intangible assets and the income tax related balances. We base our estimates
and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
Actual results could differ materially from these estimates.
Management
believes there have been no significant changes during the three months ended September 30, 2016 to the items that we disclosed
as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results
of Operations in our 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For a description of those
accounting policies, please refer to our 2016 Annual Report on Form 10-K.
Going
Concern
The Company’s financial statements are
prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States
of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. To date the Company has recorded an accumulated deficit of $103,017,034 in recurring
losses from operations and significant cash used in operating activities over the last two years, and is dependent upon its ability
to obtain future financing and successful operations.
Our
continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations.
Our future is dependent upon our ability to obtain financing and upon future profitable operations. The Company estimates the
current operational expenses of approximately one hundred thousand dollars a month is required to continue to operate. This is
achieved either through profit from sales; or by management seeking additional financing through the sale of its common stock,
and/or through private placements. The minimum operational expenses must be met in order to extinguish the threat of the company’s
ability to continue as a going concern. There is no assurance that our current operations will be profitable or that we will raise
sufficient funds to continue operating. The Company continues to trim overhead expenses to meet revenues. The financial statements
do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification
of liabilities that might be necessary in the event we cannot continue in existence. These factors raise substantial doubt about
the Company’s ability to continue as a going concern.
Financial
Condition and Results of Operations
Results
of Operations for the Three Months Ended September 30, 2016 as Compared to the Three Months Ended September 30, 2015
Revenues
- For the three months ended September 30, 2016, we had total revenues of $25,891 of which $18,000 was to one customer, as
compared to $275,571 in revenues for the three month period ended September 30, 2015. The decrease in revenue is mainly attributed
to the change in the business model to chemical sales only.
Cost of Sales and Gross Profit (Loss)
-The
gross profit for the three months ended September 30, 2016 and gross loss for September 30, 2015 was $4,498 and $(103,840), respectively.
The gross profit can be attributed to the change in the business model to a chemical supplier only, the loss for 2015 can be attributed
to pricing products below cost, production worker over-staffing, plant consolidation and closing costs and excess capacity in
all of our production facilities.
Operating
Expenses
- For the three months ended September 30, 2016, our total operating expenses were $421,437. This is compared to
$520,851 for the three months period ended September 30, 2015. Included in our operating expenses for the three months ended September
30, 2016 were compensation and related costs of $183,169. Professional fees included in our operating expenses for the three months
ended September 30, 2016 amounted to $74,547. Other significant operating costs we incurred during the three months ended September
30, 2016 included marketing of $3,000, research and development of $71,500 and other general and administrative costs of $71,402.
Our operating expenses for the three months ended September 30, 2015 consisted of $520,851. Compensation and related costs of
$110,361, professional and consulting fees of $129,575, research and development expense of $79,973, marketing expense of $31,924,
and $148,255 of other general and administrative expenses. The significant reduction in expenses year over year can be attributed
to a reduction in head count and other expense reductions by the new management.
Other
Income and Expenses
- For the three months ended September 30, 2016, we had other expenses that included interest and
amortization expense of $411,635. We recorded $92,586 for the gain on derivative of our convertible notes payable and convertible
Preferred C stock and derivative expense of $827,474 as of September 30, 2016. This is compared to the three months ended September
30, 2015, in which our interest and amortization expense of $434,091, loss on derivative liability of $6,634,847 and derivative
expense of $283,603.
Liquidity
and Capital Resources
On September 30, 2016, we had $28,250 in cash
on hand. During the three months ended September 30, 2016, net cash used in our operating activities amounted to $424,903. Net
cash used during the same period for our investing activities totaled $0. During the same period, we received proceeds resulting
in net cash from financing activities of $408,000.
The
following table sets forth selected cash flow information for the year ended September 30, 2016:
Net cash used in operating activities
|
|
$
|
(424,903
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
408,000
|
|
|
|
|
|
|
Net change in cash
|
|
$
|
(16,903
|
)
|
Currently,
we do not have any commitments or assurances for additional capital, nor can we provide assurance that such financing will be
available to us on favorable terms, or at all. If, after utilizing the existing sources of capital available to us, further capital
needs are identified and we are not successful in obtaining the financing, we may be forced to curtail our existing or planned
future operations.
We
may continue to incur operating losses over the next three months. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in our stage of development. Such risks include, but are not limited to,
an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things,
continue to grow our customer base, implement and successfully execute our business and marketing strategy, continue to develop
and upgrade technology and products, respond to competitive developments, and attract, retain and motivate qualified personnel.
There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse
effect on our business prospects, financial condition and results of operations.
Off
Balance Sheet Arrangements
We
have no off-balance sheet arrangements or financing activities with special purpose entities.