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ECO BUILDING PRODUCTS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 December 31, 2012 included in this report and our audited consolidated financial statements and related notes for the year ended June 30, 2012 included in our Annual Report on Form 10-K filed on October 15, 2012 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) continue to trim 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 annual 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 that extend the life of framing lumber and other wood used in the construction of single-family homes, multi-story buildings as well as The Eco Shelter™ which serves as cost-effective housing for the world. Eco Building Products wood coatings are topically applied to lumber protecting the wood surface from mold, mildew, fungus, decay, wood rot, termites and Formosan termites. Eco's newest product, Eco Red Shield™ also serves as a fire inhibitor, now meeting class A - one hour ratings on structural lumber (Doug Fir), protecting lumber from fire, slowing ignition time and reducing the amount of smoke produced. 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 inhibit the growth and propagation of various molds 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 rebuilt due to rot and/or wood ingesting insects/termite damage preserving our forests. The following milestones contribute to the viability and acceptance of the Company's flag ship product Eco Red Shield; On July 2nd 2012 the Company was granted an Engineering Services Report (ESR 3255) from the International Code Commission (ICC-ES) providing evidence that Eco Red Shield meets building code requirements for wood ingesting organisms including Formosan termites and Wood-Rot Decay. This new certification renders Eco Red Shield equivalent to traditional pressure treated lumber typically used for sill plates, mounting against concrete, in above ground applications. On September 4th, 2012 the Company achieved QAI Laboratories (QAI) listing B1053-1, providing evidence that Eco Red Shield's fire protection qualities now meets building code requirements for Class "A" structural performance on all dimensional Douglas Fir lumber, making Eco Red Shield protected lumber equivalent to the traditionally accepted fire retardant treated wood (FRTW) for interior use. On October 29th ,2012 Eco Red Shield has been approved for use in Hawaii by the Department of Planning and Permitting Building Division, City and County of Honolulu. The basis of approval for use is in conjunction with the ICC-ES Engineering Services Report (ESR-3255) currently in effect. Hawaii approval MM2012-0060 will remain in effect for three years and subject to standard building department regulations. 17-------------------------------------------------------------------------------- Table of Contents On March 8th, 2013 Eco Red Shield™ protected lumber has been recognized for 'Material Excellence' and selected for inclusion into Material ConneXion's global material library, featuring the largest selection of sustainable materials and the only Cradle to Cradle materials library in the world. ECOB's material submission included physical samples that were sent to every Material ConneXion location worldwide. On or about April 15, 2013 the management made a decision to wind down the vertical labor portion of its business plan and start to relinquish all labor contracts. This part of our business plan was very successful creating product awareness as a vehicle to get Eco Red Shield vertical on several job sites. This was our plan as we knew the only way the national supply chain would recognize Eco Red Shield protected lumber was to take it vertical on every job E Build & Truss executed. Albeit part of our plan it was an impediment on our cash flow, our current move to relinquish all labor contracts has successfully transitioned the Company into the supply chain with only one five story labor project to complete by the end of May, 2013. On April 30th, 2013 Eco Red Shield was voted a GOLD winner for innovation at The Edison Awards April 25th event hosted at the Navy Pier in Chicago. Steve Conboy, President & Chief Executive Officer, Eco Building Products, Inc. (ECOB) joined hundreds of senior executives from some of the world's most recognized companies to acknowledge the hard work and commitment of all the 2013 Edison Award winners. Being recognized with an Edison Award has become one of the highest accolades a company can receive in the name of innovation and business. The awards are named after Thomas Alva Edison (1847-1931) whose inventions, new product development methods and innovative achievements literally changed the world, garnered him 1,093 U.S. patents, and made him a household name around the world. Throughout the course of the current quarter the Company has successfully created several accounts with The Home Depot, executing several supply buying agreements. These agreements allow the Company and The Home Depot to perform business in the capacity of web commerce, direct to store sales, direct to distribution sales and special order sales. Currently the Company has successfully launched the Eco Fire Break and the Christmas Tree Protection on The Home Depot web commerce site. The Eco Building Products line includes dimensional lumber, wall and floor panels, I-joists, GluLam Beams, LVL beams, truss lumber and trim. These products can be coated at our production facilities and at the mill or distributor with our proprietary formula and coating machines. Additionally the company has six authorized affiliates producing Eco Red Shield coated products. The Company sells concentrated coating materials to the affiliate network creating additional revenue streams. By supporting and providing value added lumber materials direct from our facilities and/or our affiliates, ECOB can create a compelling value package. Eco Red Shield has been awarded several accolades and has obtained industry certifications never before combined into a single product. The overall treatment methodology is cost effective making Eco Red Shield a low cost alternative with greater value. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, inventories, income taxes, warranty obligations and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions. Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates. We believe the following critical accounting policies reflect our more significant judgments used in the preparation of our consolidated financial statements. 18 -------------------------------------------------------------------------------- Table of Contents Lines of Credit with Detachable Warrants Warrants issued to obtain a line of credit are recorded at fair value at contract inception. When warrants are issued to obtain a line of credit rather than in connection with the issuance, the warrants are accounted for as equity, at the measurement date in accordance with ASC 505-50-25 "Equity-Based Payments to Non-Employees". The issuance of these warrants is equivalent to the payment of a loan commitment or access fee, and, therefore, the offset is recorded akin to debt issuance costs. The deferred fee is amortized on a straight-line basis over the stated term of the line of credit Issuances Involving Non-cash Consideration All issuances of the Company's stock for non-cash consideration have been assigned a dollar amount equaling the market value of the shares issued on the date the shares were issued for such services. Stock Based Compensation The Company accounts for stock options issued to employees and consultants under ASC 718 "Share-Based Payment". Under ASC 718, share-based compensation cost to employees is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee's requisite vesting period. The Company accounts for stock-based compensation to non-employees under ACS Topic 505-50 "Equity-Based Payments to Non-Employees." This standard defines a fair value based method of accounting for stock-based compensation. In accordance with ACS Topic 505-50, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using a mulit-nominal lattice model or the Black-Scholes option-pricing model, whereby compensation cost is the excess of the fair value of the award as determined by the pricing model at the grant date or other measurement date over the amount that must be paid to acquire the stock. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. Revenue Recognition and Concentration Risk We recognize revenue in accordance with Financial Accounting Standards Board ("FASB") - Accounting Standards Codification ("ASC") 605-10-S25 Revenue Recognition - Overall - Recognition. ASC 605-10-S25 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgment regarding the fixed nature of the fee charged for products delivered and the collectability of those fees. The application of these criteria has resulted in our generally recognizing revenue upon shipment (when title passes) to customers. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely impacted. All items sold, to end users, job sites and distributors are sold as is. We offer a replacement warranty for items that are deemed not acceptable at the time of delivery. We will offer the customer a maximum of a 30 day period of time to request a replacement item period. Any items that a customer wants to return for credit we charge a 25% restocking fee as this is stated in every quotation. These arrangements do not include any special payment terms (our normal payment terms are 30-45 days for our distributors), price protection or exchange rights. Returns are limited to our standard product warranty. Certain of our distributors have contracts that include limited inventory rotation rights that permit the return of a small percentage of the previous six months' purchases. Warranty Reserves. We offer customer a 10 year replacement warranty against Mold, wood-Rot and Termite damage for the value added portion of company's service such as the coating applied to the raw lumber. This warranty is backed by an 11 million dollar product liability policy in which the company maintains a deductible policy on it. As of current, the company has not yet experienced any warranty claim against this stated warranty policy. Inventory Valuation. We currently value our inventory at the average cost. We write down inventory for obsolescence or lack of demand, based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. On the contrary, if market conditions are more favorable, we may be able to sell inventory that was previously reserved. 19-------------------------------------------------------------------------------- Table of Contents Going Concern 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. Management plans to seek additional financing through the sale of its common stock and or through private placements. 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. 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. Financial Condition and Results of Operations The table below sets forth the data from our Condensed Consolidated Statement of Operations as a percentage of revenue for the periods indicated: Results of Operations for the Three Months Ended March 31, 2013 as Compared to the Three Months Ended March 31, 2012 Revenues and Cost of Sales - For the three months ended March 31, 2013 we had total revenues of $1,717,001 from product sales, as compared to $1,089,724 in revenues from product and equipment sales for three month period ended March 31, 2012. Our cost of sales and gross profit for the three months ended March 31, 2012 was $1,635,217 and $81,784, respectively. This is compared to our cost of sales and gross profit for the three months ended March 31,2013 of $1,010,638 and $79,086, respectively. Sales margins continue to remain flat; however gross sales have not yet developed to sufficient levels to improve efficiencies Operating Expenses - For the three months ended December 31, 2012, our total operating expenses were $398,378 recording the retirement of 16,900,000 shares issued as compensation expense in June 2012. On March 30, 2013 the President & CEO of the Corporation has determined that it is in the best interests of the Corporation and its shareholders that the stock issuance approved by the board and transacted on June 5th 2012 providing employee stock options shall be cancelled effective immediately. Furthermore the board confirms that the share certificates issued were never presented, promised or distributed to the employee's or otherwise and all stock certificates were held in the possession of the company at all times. The board consents to take the following action to retire SIXTEEN MILLION NINE HUNDRED THOUSAND (16,900,000) shares of common stock into the authorized but unissued treasury of the corporation. The results of this transaction caused the compensation & related expenses to be negative ($476,308) for the 3 months ended March 31, 2013. This is compared to $1,894,772 for the three month period ended March 31, 2012. Included in our operating expenses for the three months ended March 31, 2013 were compensation and related costs of ($476,308). Professional fees included in our operating expenses for the three months ended March 31, 2013 amounted to ($10,782). Other significant operating costs we incurred during the three months ended December 31, 2012 included rent of $243,332, consulting fees of $111,580, marketing of $54,246, research and development of $10,233, and other general and administrative costs of $462,982. Our operating expenses for the three months ended March 31, 2012 consisted of $556,619 of compensation and related costs, $429,251 of professional fees, $109,179 of rent expense, $47,643 of consulting fees, $86,160 of research and development expense, $12,369 of marketing expense, and $384,584 of other general and administrative expenses. Other Income and Expenses - For the three months ended March 31, 2013 we had other expenses that included interest expense of $374,340. We incurred $508,591 for the loss on modification of our convertible notes payable as the Company issued 64.9 million shares for the three months ended March 31, 2013 in order to offset the loan that owed to the third party lender in prior years. This is compared to the three months ended March 31, 2012, in which our other income and expenses included interest income of $95,272 and loss on modification of 300,000. Liquidity and Capital Resources On March 31, 2013, we had $-0- cash on hand. During the nine months ended March 31, 2013, net cash used in our operating activities amounted to $3,880,136. Net cash used during the same period for our investing activities totaled $55,136 which was used for the purchase of property and equipment. In January and February 2013, the note holders completed the six months holding periods and start the conversion of the note to common stock thereby terminating the requirement to collateralize the note (see "NOTE 12 - Subsequent event" for more information. During the nine month ending March 31, 2012, net cash used in our operating activities amounted to $4,015,164. Cash of $393,331 was used by investing activities during the same period, which consisted of $529,391 of purchasing of property and equipment, $25,000 of purchasing of software license, $10,990 purchase of intangible assets and $172,050 payments for equipment deposits - related party. Cash of $4,488,884 was provided by financing activities during the same period, which consisted of $5,024,845 proceeds from related party line of credit advances, less repayment of related party advances and notes of $1,526,434, proceeds from issuance of common stock during this period was $990,473. 20 -------------------------------------------------------------------------------- Table of Contents During the year ended June 30, 2011, we entered into an investment agreement and a revolving line of credit and warrant purchase agreement with Manhattan Resources Limited, a Singapore Corporation ("MRL") and Dato' Low Tuck Kwong ("LTK"), a controlling shareholder of MRL. Under the investment agreement, we received $5,000,000 in exchange for issuing 81,000,000 shares of its common stock. Effective July 26, 2011, we obtained the ability to borrow up to an additional $5,000,000 on the revolving credit and warrant purchase agreement, in exchange for the issuance of warrants to purchase 50,000,000 shares of our common stock at $0.10 per share to MRL as a loan facility fee. Of this amount $3,000,000 was borrowed in July 2011 and $2,000,000 was borrowed subsequent to November 30, 2011. As of the date of this filing we had cash on hand of $100,049 and $5,000,000 of capital available to them under the MRL line of credit, of which the entire $5,000,000 was borrowed during July and December, 2011. Since the Company had borrowed the entire $5,000,000 line of credit during the three months ended December 31, 2011, as of the date of this filing, no capital was available . If current and projected revenue growth does not meet management estimates, 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 twelve 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, obtain a 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. |