UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




FORM 10-Q




(Mark One)




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





For the quarterly period ended December 31, 2014





o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934





For the transition period from ____________ to ____________




Commission file number:000-53875




Eco Building Products, Inc.


(Exact name of registrant as specified in its charter)




Colorado
20-8677788(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)





909 West Vista Way


Vista, California 92083


(Address of principal executive offices)(Zip Code)




(760) 732-5826


(Registrant’s telephone number, including area code)






(Former name, former address and former fiscal year, if changed since last report)






Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   o No




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes   o No




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company; as defined within Rule 12b-2 of the Exchange Act.


o Large accelerated filer          o Accelerated filer          o Non-accelerated filer          x Smaller reporting company





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes   x No




The number of shares outstanding of each of the issuer's classes of common equity as of February 19, 2015: 9,626,771,777 shares of common stock.






1
 Table of Contents






Eco Building Products, Inc.
 
 Contents


PageNumberPART I - FINANCIAL INFORMATIONItem 1.
Financial Statements.Condensed Consolidated Balance Sheets as of December 31, 2014 and June 30, 2014
3Condensed Consolidated Statements of Operations for the three months and six months endedDecember 31, 2014 and 2013
4Condensed Consolidated Statements of Cash Flows for the six  months endedJune 30, 2014 and 2013
5Notes to the Condensed Consolidated Financial Statements
6Item 2.
Management's Discussion and Analysis of Financial Conditionand Results of Operations.
16Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
21Item 4.
Controls and Procedures.
21Part II - OTHER INFORMATIONItem 1.
Legal Proceedings.
22Item 1A.
Risk Factors.
22Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
22Item 3.
Defaults Upon Senior Securities.
23Item 4.
Mine Safety Disclosures.
23Item 5.
Other Information.
23Item 6.
Exhibits.
23SIGNATURES
24











2
 Table of Contents






PART I - FINANCIAL INFORMATION
  Item 1.       Financial Statements.






ECO BUILDING PRODUCTS, INC.CONDENSED CONSOLIDATED BALANCE SHEETSDec 31


June 302014


2014(unaudited)ASSETSCURRENT ASSETSCash

$
75,543


$
375,066Accounts receivable, net of allowance for doubtful accounts of $1,607and $1,607, respectively


158,834



60,965Inventories, net


533,710



468,411Prepaid expenses


8,797



8,797Notes receivable - related party


98,669



98,669Other current assets


96,685



29,875Total current assets


972,238



1,041,783PROPERTY AND EQUIPMENT, net


891,984



869,424TOTAL ASSETS

$
1,864,222


$
1,911,207LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIESAccounts payable

$
1,018,868


$
1,368,452Payroll and taxes payable


3,186,544



3,207,637Accrued interest


95,874



89,412Other payables and accrued expenses


290,440



335,270Derivative Liability


18,530,817



20,504,553Convertible notes payable, net of debt discount


206,593



143,654Current maturities of notes payable


27,255



6,986Loans payable - other


639,398



943,850Total current liabilities


23,995,787



26,599,814LONG TERM LIABILITIESLoans payable - related parties


405,169



465,327Notes payable, less current maturities


78,385



2,703Total long term liabilities


483,554



468,030TOTAL LIABILITIES

$
24,479,341


$
27,067,844STOCKHOLDERS' DEFICITPreferred Stock, Series A, $0.001 par value, 30,000 shares authorized,30,000 shares issued and outstanding at Dec 31, 2014


30



30Preferred Stock, Series B, $0.001 par value, 9,250 shares authorized,-0- shares issued and outstanding at Dec 31, 2014


-



-Preferred Stock, Series C, $0.001 par value, 120,000 shares authorized,104,732 shares issued and outstanding at Dec 31, 2014


105



94Common stock, $0.001 par value, 10,000,000,000 shares authorized,9,655,432,712 and 3,203,510,143 shares issued and 9,626,771,777 and3,174,849,208 outstanding at Dec 31, 2014 and June 30, 2014 respectively

$
9,655,433


$
3,203,510Treasury Stock


(28,661
)


(28,661
)Declared Dividends


257,629



140,498Additional paid-in capital


43,349,882



46,504,278Accumulated deficit


(75,849,538
)


(74,976,386
)Total stockholders' deficit


(22,615,119
)


(25,156,637
)TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$
1,864,222


$
1,911,207





See accompanying notes to condensed consolidated financial statements


3
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ECO BUILDING PRODUCTS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS6 months ended Dec 31,


3 months ended Dec 31,2014


2013


2014


2013REVENUEProduct sale

$
1,653,115


$
719,397


$
777,366


$
316,347Labor sale


-



5,278



-



-TOTAL REVENUE


1,653,115



724,675



777,366



316,347COST OF SALESCost of sales - Product


1,341,154



520,444



561,302



257,442Cost of sales - Labor


-



2,325



-



-TOTAL COST OF SALES


1,341,154



522,769



561,302



257,442GROSS PROFIT


311,961



201,906



216,064



58,905OPERATING EXPENSESResearch and development


39,816



59,134



5,618



27,334Marketing


48,267



50,871



18,543



28,034Compensation and related expenses


1,084,329



1,207,363



512,856



840,781Rent - facilities


440,469



423,245



200,910



224,797Professional and consulting fees


390,832



266,209



206,301



203,572Other general and administrative expenses


655,707



550,586



345,034



276,994Total operating expenses


2,659,420



2,557,408



1,289,262



1,601,512LOSS FROM OPERATIONS


(2,347,459
)


(2,355,502
)


(1,073,198
)


(1,542,607
)OTHER INCOME (EXPENSE)Interest expense


(2,039,981
)


(7,291,515
)


(1,013,524
)


(4,683,244
)Gain on derivative liability


5,748,916



5,325,433



686,710



3,783,688Gain on settlement of debt


88,985



-



18,000



-Loss on extinguishment of debt


(243,496
)


-



-



-Derivative expense


(2,080,117
)


-



(23,201
)


-Total other income (expense)


1,474,307



(1,966,082
)


(332,015
)


(899,556
)INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES


(873,152
)


(4,321,584
)


(1,405,213
)


(2,442,163
)NET INCOME (LOSS)

$
(873,152
)

$
(4,321,584
)

$
(1,405,213
)

$
(2,442,163
)NET INCOME (LOSS) PER COMMON SHARE - BASIC & DILUTED

$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.00
)WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDINGBasic -


4,974,301,318



1,057,489,398



6,363,429,751



1,057,489,398Diluted -


4,974,301,318



1,057,489,398



6,363,429,751



1,057,489,398




See accompanying notes to condensed consolidated financial statements


4
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ECO BUILDING PRODUCTS, INC.CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS6 months ended Dec 31,2014


2013Cash flows from operating activitiesNet Income (Loss)

$
(873,152
)

$
(4,321,584
)Adjustments to reconcile net income to net cash usedby operating activities:Depreciation and amortization expense


138,340



104,815OID expense


-



-Amortization of debt discount


795,900



3,574,500Initial interest expense on value of derivative (excess)


1,232,464



2,076,448Derivative expense


2,080,117



-Stock Based Compensation


27,292



700,000Common Stock issuance for services


-



143,278Shares reissued to officers from treasury


-



353,331Gain on derivative liability fair value adjustment


(5,748,916
)


(5,325,433
)Loss on extinguishment of Convertible Notes and Accounts Payable


243,496



-Gain on settlement of notes payable


(88,985
)


-Expense paid on behalf of the Company


1,221,457



175,615Assignment of accounts receivable to note payable holder


(473,703
)


-Changes in assets and liabilities:Accounts receivable


(97,869
)


142,498Inventory


(65,299
)


118,195Prepaid expenses


-



(26,500
)Notes receivable


-



-Accounts payable


224,588



188,456Payroll and taxes payable


(26,801
)


330,845Deferred Revenue


-



(140,000
)Other payable and accrued expenses


20,900



(44,053
)Accrued interest


38,280



627,271Net cash used by operating activities


(1,351,891
)


(1,322,318
)Cash flows from investing activitiesPurchase of property and equipment


(28,953
)


-Net cash used by investing activities


(28,953
)


-Cash flows from financing activitiesPayments on related party notes


(60,158
)


(73,980
)Proceeds from notes recievable payments


-



8,000Proceeds from short term notes payable


180,000



-Proceeds from convertible notes payable


-



780,000Proceeds from issuance of common stock


100,000



600,000Proceeds from related party line of credit advances


-



95,000Proceeds from Series C Preferred Stock


975,000



-Payments on convertible notes payable


(95,855
)


-Payments on notes payable


-



(112,096
)Payments on notes payable - vehicles loan


(17,666
)


(7,489
)Net cash provided by financing activities


1,081,321



1,289,435Net change in cash and cash equivalent


(299,523
)


(32,883
)Cash and cash equivalent at the beginning of year


375,066



38,719Cash and cash equivalent at the end of year

$
75,543


$
5,836Supplemental disclosures of cash flow Information:Cash Paid for Interest

$
8,333



-Supplemental disclosure of non-cash investing and financing activities:Common shares issued for conversion of notes payable

$
168,024


$
2,342,984Common shares issued for settlement of investor loans

$
12,000


$
-Common shares issued for settlement of Accounts Payable

$
9,015


$
-Preferred shares  issued for extinguishment of convertible notes payable & A/P

$
2,223,643


$
-Common shares issued for conversion of Series C Preferred Stock

$
5,070,922


$
-Convertible notes issued for assumption of notes payable

$
410,000


$
833,082Purchase of property & equipment with loans payable

$
105,284


$
-Declared dividends

$
117,131


$
-Debt Discount

$
1,144,731


$
1,748,200Common Shares issued for interest expense

$
500,000


$
-OID

$
93,473


$
-






See accompanying notes to consolidated financial statements


5
 Table of Contents






Eco Building Products, Inc.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited) DECEMBER 31, 2014





1.   Organization and Basis of Presentation





Basis of Presentation
 
 The accompanying condensed consolidated financial statements as of December 31, 2014, and for the three and six months ended December 31, 2014 and 2013 have been prepared by Eco Building Products, Inc (or “the Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014. 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 December 31, 2014 has been derived from the unaudited consolidated financial statements as of that date but does not include all of the information and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2014. The results of operations for the three and six months ended December 31, 2014 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 $75,849,538, 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 three 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.
  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 December 31, 2014 from preferred C shares convertible into 174.5 billion shares of common stock and convertible notes convertible into 12.6 billion shares of common stock (December 31, 2013 – 6.7 billion).  Accordingly, total common share equivalentsof187.2 billion were excluded in the computation of diluted net loss per share for the three and six months ended December 31, 2014, because the effect would be anti-dilutive.
   6
 Table of Contents
   Eco Building Products, Inc.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited) DECEMBER 31, 2014
 
 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 December 31, 2014, inventories consisted of the following:





Chemicals

$
142,102Lumber

$
418,372$
560,474





All of the Company’s inventories are pledged as collateral for the Company’s Senior Secured Notes (see Note 4). In addition, inventory is considered finished goods as the Company sells and markets the chemical and treated and untreated lumber. The chemicals and lumber include a $47,264 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 recorded property and equipment of $109,633 of which $105,284 was financed by the Company as an Auto Note Payable (see Note 4). Depreciation expense for the six months ending December 31, 2014 was $116,959.




Accrued Liabilities




As of December 31, 2014, the Company owed $1,434,878 in past due payroll taxes and accrued penalties. The Company has filed the necessary payroll tax reports with the impacted taxing authorities and is currently on a periodic payment plan. This amount is recorded within payroll and taxes payable on the accompanying consolidated balance sheet. Also at December 31, 2014, the Company owed $142,529 in past due sales tax in which it has filed the appropriate reports and is making periodic payments.  This amount is recorded in other payables and accrued expenses on the accompanying consolidated balance sheet.




Derivative Liabilities




During the six months ended December 31, 2014, the Company issued convertible preferred stock that can be converted to common stock in connection with raising equity and debt financing. As of December 31, 2014, 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 warrants and options.






7
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Eco Building Products, Inc.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited) DECEMBER 31, 2014





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 the Black-Scholes option pricing model 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 December 31, 2014 were as follows:




(1)  dividend yield of 0%(2)  expected daily volatility of  16.94% to 20.29%(3)  risk-free interest rate of 0.76% 1.09%(4)  expected life of 0.5 days to 3 years, and(5)  estimated fair value of the Company’s common stock of $0.0001 to $0.0024 per share.





For the six months ended December 31, 2014, the Company issued $975,000 (for cash) and $1,077,213 (for settlement of convertible notes and accounts payable), additional to the convertible preferred C series shares with a stated value of $100 per share as further described below in Note 7 and recorded an increase of  derivative liabilities in the amount of $3,762,917 for the conversion features included therein. The Preferred C shares are convertible into the Company’s common shares, at the holder’s option, at conversion prices equal to 60% of the lowest VWAP closing price for the previous 20 days. The Company also issued one convertible note of $54,661 (net of conversions, settlements, and cash payment) and 400,000,000 warrants during the period for which $2,843,077 of additional derivative liabilities were recorded.




For all convertible notes described in the following paragraphs and for the options, warrants, and convertible preferred Series C shares described in Note 6, the fair value of the resulting derivative liability was $18,530,517 and $20,504,553 at December 31, 2014 and June 30, 2014 and, respectively.




A reconciliation of the derivative liabilities from June 30, 2014 to December 31, 2014 is:


Derivative

LiabilitiesBalance as of June 30, 2014


20,504,553Additions related to embedded conversion features of Warrants, Preferred Series C, Convertible Notes and Stock Options issued


6,605,994Decrease from extinguishment of convertible note for Preferred C shares


(781,319
)Conversion of convertible debt and Preferred Series C to common stock


(2,049,495
)Gain on decrease in value of derivative liabilities


(5,748,916
)Balance as of December 31, 2014

$
18,530,817





4.   Notes Payable





The following table summarizes the notes payable as of December 31, 2014.






8
 Table of Contents






Eco Building Products, Inc.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited) DECEMBER 31, 2014




As of December 31, 2014Description

Short term

Long termConvertible notes


$
758,204


$
—Auto notes payable



27,255



78,385Loan payable - related party



405,169



—Loans payable - other



639,398



—Total notes payable


$
1,809,972


$
78,385Discount to notes payable



(551,611
)


-Notes payable, net



1,356,800



--





Convertible notes




Inventory Note Payable - $833,333


On September 16, 2014, the Company entered into a Securities Purchase Agreement with Dominion Capital, LLC, whereby Dominion agreed to fund the Company with an aggregate of up to $750,000 in Subscription Amount corresponding to an aggregate of up to $833,333 in the form of a 10% Original Issue Discount Senior Secured Convertible Promissory Note due September 16, 2015 and a Common Stock Purchase Warrant for up to 400,000,000 shares. This funding will be used exclusively to purchase lumber and chemicals and is 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 $0.01 subject to certain adjustments. The Company will repay the Note in monthly installments, with the final payment due on October 16, 2015.  The Company plans on using the receivables from the sale of lumber and chemicals to comply with the terms of the repayment schedule. In the event of default, the Note is subject to an increase in the interest rate to eighteen percent (18%) per annum. In accordance with the Agreement, the Company issued a Common stock Purchase Warrant, allowing M2B Funding Corporation the right to purchase up to 400,000,000 shares of Common Stock on September 16, 2014 and expiring on September 16, 2019.  The exercise price per share of the Common Stock under this Warrant shall be $0.001.  The Warrant may be exercised in whole or in part, at such time by means of a cashless exercise.  The Common Shares cannot be sold and or assigned for a period of one year from the original Warrant issue date. The Company drew $286,085 during the period and recorded a discount of $286,085, of which $10,417 was amortized at the period end representing the fair value of the warrant issued. As of November 14, 2014 the company has drawn down $681,632.




Loan Payable – Other
  Auto Notes Payable
 The Company entered in an auto loan agreement on November 7, 2011 to purchase a vehicle. The remaining principal amount of the loan is $7,201. The loan is due on October 7, 2015. The Company is currently paying $690 auto payment per month.
  The Company entered in an auto loan agreement on July 21, 2014 to purchase a vehicle. The original principal amount of the loan is $105,284. The loan is due on November 13, 2019. The Company is currently paying $1,671 auto payment per month. Future short term minimum payments due of $20,054 and future long term minimum payments of approximately $78,385 from fiscal years 2016 through 2020.
  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.
  Inventory Note Payable - $500,000
 On February 14, 2015 the Company entered into a Note agreement for $500,000 for the purpose of purchasing inventory.  The note is secured by the Company’s inventory and is to be repaid out of the proceeds of the subsequent inventory sales.  The note was due May 14, 2014 and was extended until December 31, 2014.  The Note carries minimum interest of $45,000 for the initial term and an additional $45,000 of interest for the extension of the due date.  During the period ended December 31, 2014, no amount was repaid resulting in a principal balance due of $85,912 as of December 31, 2014.
   9
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 Eco Building Products, Inc.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited) DECEMBER 31, 2014
  Inventory Note Payable – up to $1,200,000
 On July 18, 2014, the Company signed a Secured Revolving Promissory Note for up to One Million Two Hundred Thousand Dollars ($1,200,000) with an investor to facilitate purchase of inventory for orders from the Company’s material customer. The note is secured by the inventory. Repayment of the note is facilitated by the assignment of the accounts receivable directly from the Company’s material customer to the investor. The initial term of the note is for six months with an option to extend for an additional six month period. The note will bear an 18% interest rate per annum with a maximum default interest of 24% per annum. Within three (3) Business Days after the date of this Note, the Company shall deliver to Payee a Warrant, in a form acceptable to Payee, exercisable for 18,000,000 shares of the Company’s Common Stock at a price per share equal to the closing price of the Common Stock on the trading day prior to the date of such Warrant. Upon receipt of such Warrant, Payee shall execute a 12-month lock-up agreement in customary form and reasonably acceptable to Payee, currently no warrant or lock up agreements have been issued or executed. During the six months ended December 31, 2014 the Company drew $459,214 in payments made on behalf of the Company to its suppliers and the Company’s customers repaid $253,265 during the six months ended December 31, 2014.  The balance of the note as of February 14, 2015 is $ 205,949.
  Note Payable - $150,000
 On April 11, 2014, the Company entered into a Note agreement for $250,000 for the purpose of funding operations and for general working capital.  The Company made a partial draw-down of the Note for $150,000.  The Note carries minimum interest of $22,500 and the note was due July 1, 2014 and was extended until December 31, 2014.
  Note Payable - $100,000
 On November 12, 2014, the Company entered into, with a private investor, a Promissory Note for $100,000 with an OID 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 250,000,000 restricted common shares. The note is due on May 15, 2015.
  Note Payable - $100,000
 On November 19, 2014, the Company entered into, with a private investor, a Promissory Note for $100,000 with annual interest of 6% for the purpose of funding operations and for general working capital.  In addition the Company issued 250,000,000 restricted common shares. The note is due on February 19, 2015.
  Loan Payable – Related Party
 
 See Note 5


5.   Related Party Transactions




Prior to December 31, 2014, the Company entered into a non-interest bearing note payable due on demand to its Chief Executive Officer who is also a Director and significant shareholder.  During the six months ending December 31, 2014, the Company paid $60,158, leaving a balance of $320,169 at December 31, 2014.




Prior to December 31, 2014, the Company entered into a non-interest bearing note payable due on demand to its Chief Executive Officer who is also a Director and significant shareholder.  During the six months ending December 31, 2014, the Company paid $60,158, leaving a balance of $320,169 at December 31, 2014.
  During the three months ended December 31, 2014, the Company had a 6% interest bearing note payable due to its Chief Technical Officer.  In the event of default, the note is subject to an increase in the interest rate to 10% per annual in default.  During the six months ended December 31, 2014, the Company made no payments under these notes, leaving a balance of $85,000 with $10,669 accrued interest at December 31, 2014.
  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.
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 Eco Building Products, Inc.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited) DECEMBER 31, 2014
  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




7.   Stockholders' Deficit




Preferred Stock




The Company is authorized to issue 500,000,000 shares of redeemable convertible preferred stock with a par value of $0.001 per share. During the year, the Company issued three series of 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. 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.








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Eco Building Products, Inc.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited) DECEMBER 31, 2014





On January 27, 2014 the Board of Directors issued Steve Conboy, the Company’s Chief Executive Officer, 11,000 shares of Class A Preferred Stock. On February 26, 2014 the Board of Directors issued Steve Conboy an additional 19,000 shares of Preferred Series A stock. The Voting Control Valuation of the Securities at issuance were valued at $1,221,000 based upon the industry control premiums and the Company’s market cap at the time of the transaction, which has been recorded as compensation expense during the year ended June 30, 2014. No further issuances during the period ended December 31, 2014.




Series B 12% Convertible Preferred Stock:


$925,000 Series B Preferred Stock Financing


During the year ended June 30, 2014, the Company issued a total of 9,250 shares of Preferred B stock. 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 at any time at 60% of the lowest VWAP of the 20 days leading up to conversion multiplied by the stated value of $100.●
The Preferred B Stock had a 12% per annum stated dividend rate, which is calculated daily on a 360 day year.●
The Preferred B Stock had a liquidation preference equal to the stated value of each share of Preferred Stock or $100 per share.





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




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 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.●
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 six months ended December 31, 2014.




Balance as of June 30, 2014,


94,394Preferred C Stock issued for cash


9,750Preferred C Stock issued for debt assumption


10,771Preferred C Stock converted into Common Stock


(10,183)Balance as of December 31, 2014


104,732






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Eco Building Products, Inc.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited) DECEMBER 31, 2014





Preferred C Stock converted to Common Stock


During the six months ended December 31, 2014, according to the conversion terms described above, the investors converted 10,183 shares of Preferred C Stock representing value of $5,070,923 into 5,070,922,569 shares of the Company’s Common Stock.




Preferred C Stock issued for cash


During the six months ended December 31, 2014, the investors purchased 9,750 shares of Preferred C Stock for $975,000 of cash.




Preferred C Stock issued for debt assumption


During the six months ended December 31, 2014, 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 owed to another investor was forgiven.




Preferred C Stock, have been valued similar to the convertible notes, comprising a part of the derivative liability which is calculated using the Black-Scholes option pricing model. The range of inputs (or assumptions) the Company used to value the derivative liabilities at date of issuances, conversion dates, and at December 31, 2014 and June 30, 2014 (See Note 3).




The Company has accrued $257,629 in preferred stock dividends as of December 31, 2014. These dividends accrued at 18% due to the fact that the Company did not have sufficient authorized and unissued shares available to settle all Preferred C Stock outstanding on an “if-converted” basis.




Common Stock Issuances




During the six months ended December 31, 2014, the Company issued a total of 6,451,922,569 shares of its common stock as follows:




15,000,000 shares were issued for $80,000 in accounts payable, valued at $30,000, the fair value of the shares issued on the date of issuance, resulting a gain of $50,000;




86,000,000 shares were issued for conversion of convertible debt and accrued interest with an aggregate carrying value of $168,024; and




30,000,000 shares were issued for conversion of $30,000 in short term notes payable and accrued interest, valued at $12,000, the fair value of the shares on the date of issuance resulting in a gain of $12,000;




5,070,922,569 shares were issued for conversion of 10,183 shares of convertible Preferred C stock as described above;




750,000,000 shares were issued for cash of $100,000; and




500,000,000 shares issued for interest expense and debt discount with an aggregate value of $76,190.




Treasury Stock




The Company held 28,660,935 shares of common stock as treasury stock as of June 30, 2014.  There was no change in treasury stock during the six months ended December 31, 2014.




Options




In November 2013, the Company granted options to its President to purchase 1,200,000 shares of its common stock and options to its Chief Technical Officer to purchase 800,000 shares of its common stock. The 2,000,000 options have an exercise price of $0.10 per share and expire in 5 years.




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Eco Building Products, Inc.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited) DECEMBER 31, 2014





In April 2011, the Company granted options to its President to purchase 800,000 shares of its common stock and options to its Chief Technical Officer to purchase 400,000 shares of its common stock. The 1,200,000 options have an exercise price of $0.10 per share and expire in five years. The options were valued at $113,520 using the Black-Scholes Option Model with a risk-free interest rate of 2.24%, volatility of 169.83%, and trading price of $0.10 per share. The $113,520 is being charged to operations over their two year vesting period.





In December 2013, the Company granted options to Emergent Capital to purchase 25,000,000 shares of its common stock.  The 25,000,000 options have an exercise price of $0.0012 per share and expire in 2 years.




The options were valued at $37,852 using the Black-Scholes Option Model with a risk free interest of 1.37%, volatility of 149%, and trading price of $0.001 per share. The $38,248 is being charged to operations over their two year vesting period.  Compensation charged to operation for the six months ended December 31, 2014 and 2013 on these options amounted to $27,292 and $0, respectively,




The following is a schedule of options outstanding as of December 31, 2014:


Options

Outstanding


Weighted

Average

Exercise Price

Weighted

Average

Remaining Life

Aggregate

Intrinsic

ValueBalance, June 30, 2014


28,200,000


$
0.01

3.00 Years

$
-Options granted


-



-

-


-Options cancellation/expired


-



-

-


-Balance, September 30, 2014


28,200,000


$
0.01

2.75 Years

$
-





As of December 31, 2014, 28,200,000 of the 28,200,000 options were fully vested.  Compensation expense of $3,680 remaining, will be recognized over the remaining vesting period.




Warrants




In September 2014, the Company issued a Common stock Purchase Warrant in conjunction with the $833,333 Inventory Note payable to M2B Funding Corporation.  The Warrant provides M2B Funding the right to purchase up to 400,000,000 shares of Common Stock at an exercise price per share of $0.001. Any Common Shares acquired by exercise of this warrant cannot be sold and or assigned for a period of one year from the original Warrant issue date of September 16, 2014.  The Warrant expires on September 15, 2019.  For the period ended December 31, 2014, the Company a derivative liability of $438,579 representing the fair value input disclosed in note 3. The weighted average exercise price of $0.001 and the average remaining life is 4.71 years.




8.   Commitments and Contingencies




Purchase commitments




On January 18, 2011, the Company entered into an AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Newstar Holdings Pte Ltd inventors and owners of technical data and intellectual property for a protective coating in order to obtain an exclusive supply, marketing and distribution rights of the coating product. The product is a non-toxic non-corrosive fire inhibitor. Pursuant to the Agreement, the Company guaranteed it will purchase a minimum of nine hundred fifty (650) gallon totes of product in the first two-year period at a cost of $1,815,450 for the first two years. The Company is required to increase the minimum quantities in the third year to 842 totes making the total purchase commitment $2,351,706 for year three. In the fourth year the Company is required to increase the minimum quantities to 1,264 totes making the total purchase commitment $3,530,352 for year four. There are no penalty clauses other than cancellation of the agreement if the minimum purchase commitments are not met. The Company and Newstar Holdings are currently in negotiations to modify the current contract to accurately reflect the anticipated future business volumes. Both parties have engaged in the efforts to manufacture additional product to optimize supply chain and meet Company demands. Albeit the Company has not met the stated quantity purchases both parties have reaffirmed their intent to continue the business relationship and confirm the current contract is still in effect and a default situation does not exist. If the agreement were to be cancelled it would have a significant impact on the Company’s operations until a replacement product could be arranged.






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Eco Building Products, Inc.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited) DECEMBER 31, 2014





On March 5, 2014, the Company entered into a first amendment to the AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Newstar Holdings Pte Ltd inventors and owners of technical data. The amendment modified the current agreement in the following manner;




All parties agree;




The “Buyer” has changed their corporate name from EcoBlu Products, Inc to Eco Building Products, Inc. and this change has no impact on the validity or assignment of the contract other than a corporate name change.




To modify section 1.3 Rights to use Product Technology - sub section (A) to substitute the sentence defining “of and rights within the USA and Canada to use the Product as a component of the Enhanced Products” to now state “of and rights within the Entire World to use the Product as a component of the Enhanced Products” the change from USA and Canada to Entire World or Worldwide also effects language in section D.




All parties agree that the original agreement referenced hereto and the modifications as defined in this Amendment are in good standing.




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.




Matters in litigation during the current period include the case of Trical Construction, Inc. v. Eco Building Products.  The nature of the litigation involved Trical’s claim that it suffered various construction delays and other damages from Eco Building Products in connection with the construction of a 77 unit apartment building.  The matter was ultimately resolved by settlement on August 1, 2014 in the amount of $180,564, with payment of $30,000 by Eco Building Products to Trical on that date and scheduled payments of $10,000 each month beginning on November 1, 2014 through February 1, 2016. This amount has been recorded on the balance sheet under other payables and accrued expenses.




The Company has received a formal inquiry from the Depository Trust Corporation DTC to review the prior five year DTC stock transactions requesting our legal counsel provide a review and opine over the compliance of such issuances.  The Company and legal staff have engaged discussions with DTC and continues to comply with their requests.  A formal response to the inquiry was sent to the DTC on November 11, 2014. The Company feels confident that we have complied and no further information inquiry from the DTC has been lodged.




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




On January 26, 2015, by mutual agreement the Company and Emergent Capital have formally agreed to immediately expire and terminate the options granted to Emergent Capital to purchase 25,000,000 shares of its common stock.












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Item 2.       Management's Discussion andAnalysis 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 and six months ended December 31, 2014 included in this report and our audited consolidated financial statements and related notes for the year ended June 30, 2014 included in our Annual Report on Form 10-K filed on October 14, 2014 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 ShieldTM and Eco Clear ShieldTM, that extend the lifecycle of framing lumber and other wood products used in the construction of single-family homes, multi-story buildings, as well as The Eco ShelterTM representing a cost-effective global housing solution. The Company has expanded its’ product offering to include Eco Fire BreakTM, Eco Disaster BreakTM, Eco Armor PaintTM, Eco D-FenceTM, Eco Disaster CleanerTM, Eco Flood CaulkTM, Eco TrimTM, and Eco Christmas Tree ProtectionTM.





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 ShieldTM 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.





The Eco Building Products’ line includes dimensional lumber, wall and floor structural panels, I-joists, GluLam Beams, LVL beams, truss lumber and trim. These products are currently coated at the Company’s core production facilities, and can be applied at the mill or distributor, with our proprietary formula and coating machines under the governance of ECOB’s extensive quality control program, which is audited by QAI Laboratories, an independent third-party testing, inspection and certification organization which serves industries worldwide.




By supporting and providing value added lumber materials direct from our facilities or the distributors and manufacturer, ECOB can create a compelling value package. This package is offered to builders via direct-to-builder sales or retail “pull-through” sales, and provides the protection of ECOB coatings at a price that compares favorably to raw, untreated wood. Eco Red Shield coated lumber currently for sale as “Advanced Framing Lumber” at select stores, on the shelf at The Home Depot, has a retail sales price approximately 15% to 18% above the equivalent non-treated products, dependent on store location and commodity pricing.




The following milestones contribute to the viability and acceptance of the Company’s flagship product Eco Red Shield:


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During the month of April 2013, the Company made a decision to wind down E-Build & Truss along with the current projects and cease procurement of additional labor contracts, moving away from the framing and labor side of production home building. This objective as set forth in the Company’s business plan was aimed at securing framing/labor contracts to market Eco Red Shield protection, which ultimately deemed itself to be successful. The Company is however still in full production of the truss plant and actively pursuing truss business. Winding down the labor portion of the business allowed the company to preserve capital and better manage cash flow, focusing on more lucrative business opportunities. During this time, the company was in the final stages of negotiations with The Home Depot to embark on a pilot program test marketing Eco Red Shield via in store retail and special order sales programs. This effort was mainly focused around the devastated areas of the highly impacted super storm Sandy rebuild in Metro New York, Long Island New York and the State of New Jersey. Eco Red Shield protection offers so many advantages to homebuilding/rebuilding and is considered to be a defensive measure against the elements during events such as hurricanes, fires and flooding. ECOB focused an enormous effort towards meeting The Home Depot’s requirements required to maximize the opportunity put forth to test the consumer market for product acceptance. At this time, the Company feels comfortable that Eco Red Shield has made significant impact in the acceptance of the market place. The initial pilot program with The Home Depot concluded at the end of October 2013 in preparation for a follow-on retail program expansion to commence in the spring of 2014. On April 26, 2013, Eco Red Shield lumber coatings was awarded an Edison Award GOLD for excellence and innovation in the field of Materials Science. Being recognized with an Edison Award has become one of the highest accolades a company can receive in the name of innovation and business. Countless hours of hard work and determination have resulted in the robust formulation known as Eco Red Shield. The Company set out to accomplish a task not knowing all of the challenges that would be faced in the wake of changing an entire Industry, ECOB’s testing protocols resulted in high scores proving our methodology of wood treatment providing superior efficacy in the defense of lumber products against termites, wood rot decay and value added mold and fire. In support of the continued growth in the Northeastern U.S., on August 2, 2013, the Company opened doors for a new coating facility in Fair Lawn, New Jersey. This strategically located facility is complete with rail service and a lumber yard that to this day has supported the continued growth in the region supporting contractor sales and the Company’s business relationship with The Home Depot. This new facility opening arrived on the heels of the fledgling Super Storm Sandy Rebuild.





On November 6, 2013, the Company unveiled Eco Armor – Defensive Paint as a result of collaboration between Eco Building Products and the largest paint recycler in North America, Visions Paint Recycling, LLC. Together, we have been successful in bringing this uniquely blended defensive paint to market, further enhancing the Company’s existing family of defensive products. Eco Armor complements existing lumber protection by adding valuable UV and moisture protection. To date, this new product has assisted the Company in capturing business with Jacuzzi, providing finished goods which are used in the fabrication of structural spa skirts. This niche business opportunity provides great business for the Company’s Colton, CA facility.





On March 14, 2014, the Company began supporting a new niche business channel by way of Jacuzzi®, one of the world’s leading spa manufacturers. Eco Building Products continues to support this business opportunity by providing superior finished goods complete with ECOB’s coatings technology and Eco Armor Paint. This California based company is always looking to lead the world in innovation and it was for this reason they selected ECOB as the advanced framing lumber technology for the fabrication of their skirt structures. ECOB produces approximately 40 truckloads of finished goods for export into Mexico each month.





On or around March 26, 2014 the Company purchased automated coating equipment from a previously owned and operated Eco Affiliate in Augusta, Georgia. The newly acquired facility and equipment is fully-functional and complete with automation, enabling the Company to obtain increased output rate. In addition to the automated line, ECOB will refurbish the existing production line under the provisions of the Company’s current quality control program, complete with post-conditioning tunnels in an effort to produce the highest quality finished goods. Moreover, this increased production capacity and strategically located facility will allow ECOB to reinforce its market position in the Northeastern and Southern U.S. to meet the growing demand for Eco Red Shield protected lumber.





On April 1, 2014, The Home Depot in concert with Eco Building Products activated the remaining New York and New Jersey HD retail locations for inclusion into the Eco Red Shield retail and special order program. The phase of the expansion saw an increase to 107 active stores across this market region. This increase in active stores is certain to support increased growth and acceptance of this advanced framing lumber product in the region, whilst paving the way for future markets across the country. On or about August 1, 2014, the Company completed the expansion into the remaining stores in this market providing direct-to-store support for retail sales with 2 SKUs on the shelf (2x4-96” Premiums KD DF Stud and 4x8x15/32” Rated Sheathing CDX 4-Ply) and a comprehensive special order sales program. The Company continues to grow with The Home Depot and is currently in the planning phase for the next retail and special order expansion to commence.






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On April 21, 2014 the Company took appropriate steps and measures to begin producing the proprietary substrate fire inhibitor here in the U.S, resulting in all constituents now being blended and originating from U.S. points of manufacturing. The Company takes pride in producing everything that goes into our Intellectual Property right here in America, as it has been our goal since inception, that our red lumber will one day be recognized as the true American Brand of Lumber.





On or around December 30, 2014 the Company expanded the in store stocking regions with The Home Depot to now include 6 regional stores located throughout Oregon and Washington State. This was driven by market demand and the presence of our manufacturing site in the region.





In the execution of the Company’s business plan, it has been observed that the traditional wood treating market has demonstrated resistance of market acceptance for Eco Red Shield technology as a competitive product or alternative. The Company views this resistance in a positive manner as this perception of competition is misplaced. Eco Red Shield technology was developed to provide protection for the entire super structure of wood framed construction not typically employed by traditional wood treatment process. The traditional treatment industry comprises approximately 6 to 8 percent of the entire industry. Eco Red Shield was developed to provide a low cost protection for the other 94 percent of the market currently not employing any protection for lumber products. The Company recognized this market segment as a greater opportunity than trying to compete with a smaller segment of the industry. Albeit our building code approvals allow Eco Red Shield to compete, very few of our sales target this market segment.  We have positioned Eco Red Shield to be an Advanced Framing Material to service the much larger segment of traditional raw lumber products. The Company feels that the paradigm shift towards full framing protection has happened and the category within the industry has been created and will never go away.  It is now time for Eco Building Products to capitalize on the opportunity in which we have fought so hard and successfully created.





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.


Fair Value Policy
 
 Management believes there have been no significant changes during the six months ended December 31, 2014 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 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For a description of those accounting policies, please refer to our 2014 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 generated minimal operating revenues, losses from operations, significant cash used in operating activities, and is dependent upon its ability to obtain future financing and successful operations.






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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 four 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 we will raise sufficient funds to continue operating. The Company continues to trim overhead expenses to meet revenues. Utilization of the credit facilities secured in the period have allowed the company to increase sales of finished goods resulting in higher gross revenues and increasing profits. We expect the company will continue to gain market share having an inventory of finished goods ready for immediate sales resulting in a continued trend towards profitability. The Company has focused primarily on the direct sales of finished goods (Home Depot), coating services and chemical sales to affiliates. We have expanded to include wholesale lumber sales to other lumber yards within various regions. 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 and Six Months Ended December 31, 2014 as Compared to the Three and Six Months Ended December 31, 2013





Revenues and Cost of Sales - For the three months ended December 31, 2014, we had total revenues of $777,366 from product sales, as compared to $316,347 in revenues of product sales for three month period ended December 31, 2013.  The increase in revenue is mainly attributed to the ability to utilize the credit facility to increase inventory positions and the expansion of The Home Depot stocking stores. Sales have been increasing week over week with our retail partner as a contributing factor and trend indicator.  Our gross margin for the three months ended December 31, 2014 was $216,064. This is compared to gross margin for the three months ended September 30, 2013 of $58,905.





For the six months ended December 31, 2014, we had total revenues of $1,653,115 from product sales, as compared to $724,675 in revenues from product sales for six month period ended December 31, 2013. Our gross margin for the six months ended December 31, 2014 was $311,961. This is compared to our gross margin for the six ended December 31, 2013 of $201,906.





Operating Expenses - For the three months ended December 31, 2014, our total operating expenses were $1,289,262.  This is compared to $1,601,512 for the three months period ended December 31, 2013. Included in our operating expenses for the three months ended December 31, 2014 were compensation and related costs of $512,856. Professional fees included in our operating expenses for the three months ended December 31, 2014 amounted to $206,301.  Other significant operating costs we incurred during the three months ended December 31, 2014 included rent of $200,910, marketing of $18,543, research and development of $5,618, and other general and administrative costs of $345,034. Our operating expenses for the three months ended December 31, 2013 consisted of $840,781 of compensation and related costs, $203,572 of professional and consulting fees, $224,797 of rent expense, $27,334 of research and development expense, $28,034 of marketing expense, and $276,994 other general and administrative expenses.





For the six months ended December 31, 2014, our total operating expenses were $2,659,420. This is compared to $2,557,408 for the six month period ended December 31, 2013. Included in our operating expenses for the six months ended December 31, 2014 were compensation and related costs of $1,084,329. Professional fees included in our operating expenses for the six months ended December 31, 2014 amounted to $390,832. Other significant operating costs we incurred during the six months ended December 31, 2014 included rent of $440,469, marketing of $48,267, research and development of $39,816, and other general and administrative costs of $655,707. Our operating expenses for the six months ended December 31, 2013 consisted of $1,207,363 of compensation and related costs, $266,209 of professional and consulting fees, $423,245 of rent expense, $59,134 of research and development expense, $50,871 of marketing expense, and $550,586 of other general and administrative expenses.






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Other Income and Expenses - For the three months ended December 31, 2014 we had other expenses that included interest expense of $1,013,524.  We incurred $686,710 for the gain on derivative of our convertible notes payable significantly due to the conversion to common shares and the decrease in the stock price from $0.0024 as of June 30, 2014 to $0.0001 as of December 31, 2014. This is compared to the three months ended December 31, 2013, in which our other income and expenses included interest expense of $4,683,244 and gain on derivative liability of $3,783,688 includes $18,000 gain on settlement of debt in current period and loss of $0 on modification of debt related to the fair value of the common stocks granted to the debtors who assumed the loan that we have previously written off.





For the six months ended December 31, 2014 we had other expenses that included interest expense of $2,039,981. We incurred $5,748,916 for the gain on derivative of our convertible notes payable. This is compared to the six months ended December 31, 2013, in which our other expenses that included interest expense of $7,291,515. We incurred $5,325,433 for the gain on derivative of our convertible notes payable.





Overall the Company has adjusted the expense to better align with revenue.  The increase in revenue can be attributed to many factors to include the expansion of The Home Depot sales, penetration of the modular industry and the addition of lumber companies such as Builder General. The company secured a line of credit enabling the company’s ability to build an inventory position to service our demand selling finished goods as opposed to coating service only. As the Company continues to push into higher volumes and finished good sales we expect our purchasing power to allow for greater gross margin expansion. It is our expectation to continue to expand our borrowing base, potentially at favorable rates, to allow the company to facilitate increased demand and expansion. The Company continues to manage the overhead to allow for the anticipated volume minimizing costs.





Liquidity and Capital Resources





On December 31, 2014, we had $75,543 cash on hand.  During the six months ended December 31, 2014, net cash used in our operating activities amounted to $478,710, which consisted of $795,900 amortization of debt discount, $5,748,916 gain on derivative liability fair value adjustment significantly due to the conversion to common shares and the decrease in stock price, $1,232,464 of initial interest expense on value of derivative, $38,280 increase in accrued interest, $27,292 stock based compensation, and $20,900 increase in other payable and accrued expenses, and $138,340 in depreciation & amortization expenses.  Net cash used during the same period for our investing activities totaled $28,953, which was used for the purchase of property and equipment.Cash of $1,081,321 was provided by financing activities during the same period, $975,000 proceeds from issuance of preferred C stock, $100,000 proceeds from issuances of common stock and $180,000 proceeds from short term notes payable, offset by $95,855 repayment of third party convertible notes payable, $17,666 repayment of vehicles loan, and $60,158 repayment of related party notes payable.




If current and projected revenue growth does not meet management estimates and proceeds received from future financing are insufficient, we may 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, 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.






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Item 3.       Quantitative and Qualitative Disclosures About Market Risk.




We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.




Item 4.       Controls and Procedures.




Evaluation of Disclosure Controls and Procedures




As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” pursuant to Exchange Act Rule 13a-15(e) as of September 30, 2013 and all interim subsequent periods. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.




Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations. Our internal controls framework is based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our principal executive officer and our principal financial officer has concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are not effective in ensuring that information required to be disclosed in our Exchange Act reports is recorded, processed, and summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms to allow timely decisions regarding required disclosure.  The material weakness and significant deficiency identified by our management as of September 30, 2013 and all interim subsequent periods relates to the ability of the Company to record transactions and provide disclosures in accordance with U.S. GAAP. We did not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of U.S. GAAP commensurate with our financial reporting requirements. Our staff needs substantial training to meet the demands of a U.S. public company and our staff’s understanding of the requirements of U.S. GAAP-based reporting are inadequate.




Material Weaknesses




During the period ended December 31, 2014, we determined that because of the limited personnel, lack of segregation of duties and manual process related to the tracking and valuation of our inventory, management determined that a material weakness existed in the processes, procedures and controls related to the preparation of our financial statements.  This material weakness could result in the reporting of financial information and disclosures in future consolidated annual and interim financial statements that are not in accordance with generally accepted accounting principles.




The Company expects to take the following steps to remedy these weaknesses:


1.     Continue the implementation and training of an ERP system in which will improve the segregation of duties issues and automate the tracking of costs related to inventory.


2.     Hire additional staff to assist the Controller to implement procedures improving the transaction processing, reconciliation and reporting process of inventory.


3.     Hire a Principle Financial Officer to solely act in the capacity of CFO and relieve the current duties as performed by the Principle Executive Officer.


4.     The Company is actively pursuing Directors & Officers insurance to allow the company to expand the board of directors creating better corporate governance.






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The Company expects to remediate these weaknesses prior to the completion of the quarter ended March 31, 2015.




The Company deemed that the internal control over financial reporting for the Company as of December 31, 2014 is not effective.




Remediation Initiative




We intend to provide U.S. GAAP training sessions to our accounting team and intend to increase the amount of training that each member of our accounting team receives. The training sessions will be organized to help our corporate accounting team gain experience in U.S. GAAP reporting and to enhance their awareness of new and emerging pronouncements with potential impact over our financial reporting.




Changes in Internal Controls




During the period covered by this report, there was no significant change in our internal controls over financial reporting or in other factors that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.




PART II - OTHER INFORMATION




Item 1.       Legal Proceedings.




Except as disclosed below, we are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.




The only litigation during the current period was the case of Trical Construction, Inc. v. Eco Building Products.  The nature of the litigation involved Trical’s claim that it suffered various construction delays and other damages from Eco Building Products in connection with the construction of a 77 unit apartment building.  The matter was ultimately resolved by settlement on August 1, 2014 in the amount of $180,564.50, with payment of $30,000 by Eco Building Products to Trical on that date and scheduled payments of $10,000 each month beginning on November 1, 2014 through February 1, 2016.




The Company has received a formal inquiry from the Depository Trust Corporation DTC to review the prior five year DTC stock transactions requesting our legal counsel provide a review and opine over the compliance of such issuances.  The Company and legal staff have engaged discussions with DTC and continues to comply with their requests.  A formal response to the inquiry was sent to the DTC on November 11, 2014.




Item 1A.    Risk Factors.




We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.




Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds.




See comments on Note 7, Common Stock Issuances -




During the six months ended December 31, 2014, the Company issued a total of 6,451,922,569 shares of its common stock as follows:




15,000,000 shares were issued for $80,000 of accounts payable, valued at $30,000, the fair value of the shares issued on the date of issuance resulting in a gain of $50,000;




86,000,000 shares were issued for conversion of convertible debt and accrued interest with an aggregate carrying value of $168,024; and




30,000,000 shares were issued for conversion of $30,000 of short term notes payable and accrued interest valued at $12,000 , the fair value of the shares on the date of issuance resulting in a gain of $12,000; and






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5,070,922,569 shares were issued for conversion of 10,183 shares of convertible Preferred C stock as described above; and




750,000,000 shares were issued for cash of $100,000; and




500,000,000 shares issued for interest expense and debt discount with an aggregate value of $76,190.




According to the conversion terms described under Note 7 of the Financial Footnotes, investors converted 10,183 shares of Preferred C Stock representing value of $5,070,923 into 5,070,922,569 shares of the Company’s Common Stock.




The securities described above were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act and Regulation D promulgated thereunder, as applicable, relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.




All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock, warrants and options described in this Item 2 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.




Item 3.       Defaults Upon Senior Securities.




None.




Item 4.       Mine Safety Disclosures




Not applicable.




Item 5.       Other Information.




None.




Item 6.       Exhibits.




Number

Exhibit Title

Filing Method3.1

Articles of Incorporation, filed as exhibit 3.1.1 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.

Incorporated by Reference3.2

Bylaws, filed as exhibit 3.2 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.

Incorporated by Reference3.3

Amended  Articles of Incorporation ; filed as exhibit 3.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on October 22, 2009.

Incorporated by Reference3.4

Amended  Articles of Incorporation ; filed as exhibit 3.3 with the registrant’s Annual Report on Form 10-K; filed with the Securities and Exchange Commission on September 28, 2011.

Incorporated by Reference31.1

Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith32.1*

Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Furnished herewith


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101.INS

XBRL Instance Document

Filed herewith101.SCH

XBRL Taxonomy Schema

Filed herewith101.CAL

XBRL Taxonomy Calculation Linkbase

Filed herewith101.DEF

XBRL Taxonomy Definition Linkbase

Filed herewith101.LAB

XBRL Taxonomy Label Linkbase

Filed herewith101.PRE

XBRL Taxonomy Presentation Linkbase

Filed herewith


*In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.
   SIGNATURES
  Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reported to be signed on its behalf by the undersigned thereunto duly authorized.


Date: February 19, 2015
By:
/s/ Steve ConboySteve Conboy, President, Chief Executive Officer, Chief Financial Officer, and Director(Principal Executive Officer and Principal Financial and Accounting Officer)