ECO Building Products, Inc. - FORM 10-Q

Attached files

file	filename
EX-10.6 - ECOBLU PRODUCTS 10Q, EMPLOYMENT AGREEMENT, VUOZZO - ECO Building Products, Inc.	ecobluexh10_6.htm
EX-31.1 - ECOBLU PRODUCTS 10Q, CERTIFICATION 302 - ECO Building Products, Inc.	ecobluexh31_1.htm
EX-32.1 - ECOBLU PRODUCTS 10Q, CERTIFICATION 906 - ECO Building Products, Inc.	ecobluexh32_1.htm
EX-10.5 - ECOBLU PRODUCTS 10Q, EMPLOYMENT AGREEMENT, CONBOY - ECO Building Products, Inc.	ecobluexh10_5.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ____________ to ____________

commission file number:333-145659

Ecoblu Products, Inc.

(Exact name of small business issuer as specified in its charter)

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

909 West Vista Way

Vista, California 92083

(Address of principal executive offices)

(760) 732-5826

(Registrants 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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

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 March 31, 2011: 177, 768,100 shares of common stock

Table of Contents

Ecoblu Products, Inc.

Contents

		Page
		Number

PART I	FINANCIAL INFORMATION

Item 1	Condensed Consolidated Financial Statements March 31, 2011

	Balance Sheet	3

	Statement of Operations	4

	Statement of Cash Flows	5

	Notes to the Interim Financial Statements	8

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4	Controls and Procedures	32

Part II	OTHER INFORMATION

Item 1	Legal Proceedings	33

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3	Defaults Upon Senior Securities	34

Item 4	[Removed and Reserved]	34

Item 5	Other Information	34

Item 6	Exhibits and Reports	34

SIGNATURES		35

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1 - Condensed Consolidated Financial Statements March 31, 2011

ECOBLU PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	March 31,			June 30,
	2011			2010

ASSETS (Note 6)
CURRENT ASSETS
Cash	$	2,171,209		$	385,534
Accounts receivable, net of allowance for doubtful accounts of $17,487 at
March 31, 2011 and $4,487 at June 30, 2010		18,423			5,477
Loan receivable - related party		-			23,500
Other receivables		-			5,886
Inventory		1,547,175			679,380
Prepaid loan fees		-			176,607
Other prepaid expenses		5,000			-
Deposit		-			45,155
Total current assets		3,741,807			1,321,539

PROPERTY AND EQUIPMENT, net		384,694			429,912

OTHER ASSETS
Equipment deposits - related party		161,618			161,618
Equipment deposits - other		91,732			-
Prepaid trademark costs		5,981			4,871
Total other assets		259,331			166,489

TOTAL ASSETS	$	4,385,832		$	1,917,940

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable	$	278,840		$	200,900
Payroll and taxes payable		383,274			106,580
Advances from related party		83,163			-
Other payables and accrued expenses		107,451			15,864
Notes payable - related party, including accrued interest		1,009,111			-
Convertible notes payable, including accrued interest and net of discount		-			341,681
Loans payable - related party, including accrued interest		242,084			-
Loans payable - other		136,691			44,500
Derivative and warrant liabilities		-			1,656,217
Total current liabilities		2,240,614			2,365,742

LONG TERM LIABILITIES
Convertible notes payable, including accrued interest and net of discount		-			407,779
Total long term liabilities		-			407,779

TOTAL LIABILITIES		2,240,614			2,773,521

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value, 500,000,000 shares authorized,
177,786,100 shares issued and outstanding at March 31, 2011
and 75,594,333 shares issued and outstanding at June 30, 2010		177,786			75,594
Additional paid-in capital		10,558,520			3,368,972
Common stock subscription receivable		(20,000	)		(20,000	)
Accumulated deficit		(8,571,088	)		(4,280,147	)
Total stockholders' equity (deficit)		2,145,218			(855,581	)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$	4,385,832		$	1,917,940

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

ECOBLU PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three months			Three months			Nine months			Nine months
	Ended			Ended			Ended			Ended
	March 31,			March 31,			March 31,			March 31,
	2011			2010			2011			2010

REVENUE
Product sales	$	16,513		$	9,207		$	739,112		$	9,207
Equipment and other sales		28,800			-			31,800			-

Total revenue		45,313			9,207			770,912			9,207

COST OF SALES		(41,644	)		(3,423	)		(678,268	)		(3,423	)

GROSS PROFIT		3,669			5,784			92,644			5,784

OPERATING EXPENSES
Research and development		95,831			26,624			140,795			32,599
Marketing		33,879			42,976			45,314			60,849
Compensation		289,270			44,078			640,642			76,540
Rent		89,216			248,974			323,106			373,319
Professional fees		319,711			168,432			631,193			220,562
Consulting		103,500			1,523,930			155,111			1,573,430
Other general and administrative expenses		213,122			42,237			453,391			73,146

Total operating expenses		1,144,529			2,097,251			2,389,552			2,410,445

LOSS FROM OPERATIONS		(1,140,860	)		(2,091,467	)		(2,296,908	)		(2,404,661	)

OTHER INCOME (EXPENSES)
Gain on settlement of lease		-			13,142			-			13,142
Gain (loss) on settlement of debt		-			(110,720	)		12,706			(110,720	)
Loss on modification of debt		-			-			(421,600	)		-
Change in fair value of derivative liability		213,491			(331,336	)		368,954			(331,336	)
Interest expense		(309,089	)		(15,669	)		(1,954,093	)		(16,704	)

Total other income (expenses)		(95,598	)		(444,583	)		(1,994,033	)		(445,618	)

LOSS BEFORE PROVISION FOR INCOME TAXES		(1,236,458	)		(2,536,050	)		(4,290,941	)		(2,850,279	)

PROVISION FOR INCOME TAXES		-			-			-			-

NET LOSS	$	(1,236,458	)	$	(2,536,050	)	$	(4,290,941	)	$	(2,850,279	)

NET LOSS PER COMMON SHARE - BASIC AND DILUTED		(0.01	)		(0.04	)		(0.04	)		(0.04	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		136,533,322			70,737,012			99,317,004			68,442,600

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents

ECOBLU PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine months			Nine months
	Ended			Ended
	March 31,			March 31,
	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,290,941	)	$	(2,850,279	)
Adjustment to reconcile net loss to net cash
used in operating activities:
Gain on settlement of lease		-			(13,142	)
Loss on modification of debt		421,600			-
(Gain) loss on settlement of debt		(12,706	)		110,720
Interest on amortization of debt discount		888,946			10,610
Interest on amortization of loan fees		176,606			221
Interest on repricing of warrants		140,981			-
Change in fair value of derivative liability		(368,954	)		331,336
Common stock issued for services		218,927			1,560,350
Common stock issued for payment of rent and lease settlement		80,000			95,000
Depreciation expense		54,594			1,177
Bad debt expense		13,000			-
Changes in operating assets and liabilities:
(Increase) in accounts receivable		(25,946	)		(6,257	)
Decrease in other receivables		5,886			-
(Increase) in inventory		(867,795	)		(661,211	)
Decrease (increase) in prepaid expenses		(5,000	)		1,200
Decrease (increase) in deposits		45,155			(20,000	)
Increase in accounts payable		120,785			344,768
Increase in rent payable		-			138,316
Increase in other payables and accrued expenses		368,282			29,044
Increase in deferred rent expense		-			19,445
Increase in accrued interest added to principal		17,427			5,873
Net cash used in operating activities		(3,019,153	)		(902,829	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(9,375	)		(402,048	)
Payments for equipment deposits - related party		-			(339,119	)
Payments for equipment deposits - other		(91,732	)		-
Payments for leasehold improvements		-			(54,922	)
Payments for prepaid trademark costs		(1,110	)		(4,871	)
Net cash used in investing activities		(102,217	)		(800,960	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock		5,000,000			728,500
Proceeds from debt issuances		770,500			2,031,500
Proceeds from related party advances and notes		873,118			-
Payments for redemption of common stock		-			(5,000	)
Repayments of debt issuances		(1,212,192	)		-
Repayments of related party advances and notes		(524,371	)		(11,200	)
Payment to related party for cancellation of warrants		(10	)		-
Payments of loan fees		-			(61,000	)
Net cash provided by financing activities		4,907,045			2,682,800

NET INCREASE IN CASH AND CASH EQUIVALENTS		1,785,675			979,011

CASH AND CASH EQUIVALENTS - beginning of period		385,534			-

CASH AND CASH EQUIVALENTS - end of period	$	2,171,209		$	979,011

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ECOBLU PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine months		Nine months
	Ended		Ended
	March 31,		March 31,
	2011		2010

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid	$	730,133	$	-

Income taxes paid	$	-	$	-

NONCASH INVESTING AND FINANCING ACTIVITIES

	Nine Months Ended March 31, 2011

	During the nine months ended March 31, 2011, the Company was a party to an agreement whereby certain increments of a $127,000 convertible
	note payable were assigned by the original investor to a third party. The assignment agreement included modifications to the debt increments
	and embedded conversion features that were more favorable to the lender, resulting in a $161,667 loss on debt modification that was charged
	to operations. During the current nine month period, a total of $132,054 of debt increments were assigned to this third party and converted
	into 2,685,861 shares of the Company's common stock at prices ranging from $0.07 to $0.17 per share (See Note 6).

	During the nine months ended March 31, 2011, the Company was a party to an agreement whereby a $360,000 convertible note was assigned
	in full to the same third party as the note increments described above. The assignment agreement included modifications to the debt and its
	embedded conversion feature that were more favorable to the lender, resulting in a $259,933 loss on debt modification that was charged to
	operations. Pursuant to this debt modification, the Company recognized a derivative liability with an initial value of $247,364 due to a change in
	the exercise price of the embedded conversion feature from fixed to variable. During the current nine month period, debt totaling $385,991 was
	converted into 15,457,776 shares of the Company's common stock at prices ranging from $0.04 to $0.14 per share (See Note 6).

	During the nine months ended March 31, 2011, the Company issued 400,000 common shares as additional consideration for the cancellation of the
	Company's lease on its Texas facilities. These shares were valued at $80,000 (See Note 10).

	During the nine months ended March 31, 2011, the Company issued 1,274,000 shares of its common stock for consulting and advisory services
	valued at $108,840. During the same nine month period, the Company issued 500,000 shares for sales commisssions valued at $35,000
	(See Note 10).

	During the nine months ended March 31, 2011, the Company issued 736,106 shares of its common stock for legal services valued at $75,221
	(See Note 10).

	During the nine months ended March 31, 2011, the Company issued 138,024 shares of its common stock in exchange for the cancellation of
	debt due professionals and consultants. The Company valued the shares at $30,005 and recognized a net gain on the cancellation of
	indebtedness of $12,706 (See Note 10).

	During the nine months ended March 31, 2011, the Company had recognized derivative and warrant liabilities as a result of committed and
	outstanding common shares in excess of the number of shares authorized (See Notes 8 and 9). In January 2011, pursuant to a state-approved
	increase to the Company's authorized capital, derivative and warrant liabilities totaling $1,534,626 for the former excess shares were reclassified
	to additional paid-in capital.

	During the nine months ended March 31, 2011, the Company agreed to reduce the exercise price of 3,750,000 of its warrants from $0.40 per
	share to $0.20 per share. A total of $140,981 was charged to interest expense for the re-pricing of these warrants (See Note 10).

	In December 2010, SLM Holding PTE, Ltd. (SLM), a wholly owned subsidiary of MRL and related party, purchased convertible notes issued
	by the Company from a group of third party investors and a placement agent for the aggregate sum of $1,000,000 (see Note 6). In January 2011,
	SLM agreed to terminate 27,037,500 Series A through G warrants and beneficial conversion features related to these acquired notes for nominal
	consideration of $10. The beneficial conversion features formerly comprised all rights granted to the note holders to convert debt to 4,012,500
	shares of the Company's common stock.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ECOBLU PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


NONCASH INVESTING AND FINANCING ACTIVITIES (Continued)

	Nine Months Ended March 31, 2010

	During the nine months ended March 31, 2010, the Company issued a convertible note in the amount of $105,000 to a placement advisor for
	fees due on a $1,500,000 financing.

	During the nine months ended March 31, 2010, the Company transferred equipment and chemical inventories with a cost basis of
	$137,119 in consideration for the cancellation of the Company lease and amounts due the landlord on its Texas facilities. The Company
	recognized a net gain of $13,142 on the transaction.

	In connection with the above indicated $1,500,000 financing and the related $105,000 obligation due the placement advisor, the Company
	issued warrants with a relative fair value totaling $1,290,135 that was accounted for as discounts against the principal amounts due with an
	offsetting amount recorded to equity.

	During the nine months ended March 31, 2010, the Company issued a convertible note in consideration for $127,000. The Company
	recognized a beneficial conversion feature of $107,000 that was accounted for as a discount against the principal amount due with an
	offsetting amount recorded to equity.

	As of March 31, 2010, the Company recorded a derivative liability of $331,336 for the number of committed and outstanding shares in
	excess of the number of shares authorized.

	During the nine months ended March 31, 2010, the Company issued 4,105,000 shares of its common stock for consulting and advisory
	services valued at $1,560,300.

	During the nine months ended March 31, 2010, the Company issued 645,782 shares of its common stock in exchange for the cancellation
	of debt due professional and consultants. The Company valued the shares at $286,877 and recognized a net loss on the cancellation of
	indebtedness of $110,720.

	In March 2010, the Company issued 250,000 common shares as consideration towards rent due on its Colton facilities. The Company
	valued these shares at $95,000.

	During the nine months ended March 31, 2010, the Company issued 1,137,944 common shares to a related party in exchange for the
	purchase of equipment with a cost basis of $113,794.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

1. Organization and Basis of Presentation

Organization

Ecoblu Products, Inc. (“The Company”) was incorporated in the state of Colorado under the name N8 Concepts, Inc. on March 27, 2007.

On October 19, 2009, the Company merged with Ecoblu Products, Inc., a Nevada Corporation (“ECOBLU”). For financial reporting purposes, the acquisition was treated as a reverse acquisition whereby ECOBLU’s operations continue to be reported as if it had actually been the acquirer. Assets and liabilities continue to be reported at the acquiree’s historical cost because before the reverse acquisition, the Company had nominal assets, liabilities and operations.

ECOBLU was organized May 20, 2009 in Nevada as a wholesale distributor and manufacturer of proprietary wood products coated with an eco-friendly chemistry that is designed to protect against mold, rot, decay, termites and fire. The Company has also developed an affiliate coating program that allows lumber companies to coat commodity lumber at their facilities contingent upon their stocking the Company’s inventory and supporting the Company’s products.

Through December 2010, the Company was deemed to be in the development stage, as defined in Accounting Codification Standard (“ACS”) topic 915 Development Stage Entities. From inception through December 31, 2010, the Company had recorded revenues totaling $950,098. During the current three month period ended March 31, 2011, management determined that the Company exited the development stage. Thus, the Company is no longer required to report its stock issuances from inception, nor include inception-to-date information in its statements of operations and cash flows.

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. The Company is a development stage company presently generating minimal operating revenues and its viability is dependent upon its ability to obtain future financing and the success of its future operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company plans to fund its operations through the raising of capital from the sale of its equity instruments or issuance of debt. No assurances can be made that current or anticipated future sources of funds will enable the Company to finance future periods’ operations.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of March 31, 2011, and the results of its operations and cash flows for the three and nine months ended March 31, 2011 and 2010. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission (the “Commission”). The Company believes that the disclosures in the unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. The operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. For further information, refer to the financial statements and notes included in the Company’s Form 10-K for the year ended June 30, 2010.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Ecoblu Products, Inc. and its wholly owned subsidiary, Ecoblu Products, Inc. of Nevada. Intercompany transactions and balances have been eliminated in consolidation.

Accounts Receivable

Accounts receivable are reported at the customers’ outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable. All of the Company’s receivables are pledged as collateral for the Company’s $1,500,000 Senior Secured Notes (see Note 6).

Allowance for Doubtful Accounts

An allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages and information collected from individual customers. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired.

Inventories

Inventories primarily consist of chemicals and lumber and are stated at lower of first-in-first out (FIFO) cost or market (net realizable value). Net realizable value is the estimated selling price in the ordinary course of business. As of March 31, 2011, there were no write-downs of inventory to net realizable value.

Property and Equipment

Property and equipment are stated at cost. Property and equipment purchases with useful lives exceeding one year and major renewals and improvements are charged to the asset accounts, while replacements and maintenance and repairs that do not improve or extend the lives of the respective assets are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income. Depreciation expense is recorded on a straight-line basis over the estimated useful lives of assets that range from 3 to 7 years. Leasehold improvements are depreciated over their useful life or the term of the related lease, whichever is shorter. Depreciation expense is not recorded on idle property and equipment until such time as it is placed into service.

Long-Lived Assets

The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value. At March 31, 2011, the Company determined that none of its long-term assets were impaired.

Issuances Involving Non-cash Consideration

All issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount equaling the market value of the shares issued on the date the shares were issued for such services. The non-cash consideration received pertains to debt placement fees, consulting and advisory services, debt cancellation, rent, and a related party equipment purchase (See Note 7).

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

Stock Based Compensation

The Company accounts for stock-based compensation under ACS Topic 505-50. 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 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.

Loss Per Share

The Company reports earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed conversion of warrants and debt to purchase common shares would have an anti-dilutive effect. At March 31, 2011, there were no potential dilutive common shares outstanding. Potential common shares at March 31, 2010 that have been excluded from the computation of diluted net loss per share included convertible debt of $2,092,000 convertible into 6,457,050 shares of common stock and warrants exercisable into 27,037,500 shares of common stock.

Cash and Cash Equivalents

For purpose of the statements of cash flows, the Company considers cash and cash equivalents to include all stable, highly liquid investments with maturities of three months or less.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affects the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Convertible Debentures

If the conversion feature of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method. If a BCF is convertible into a variable number of shares it is accounted for as a derivative liability.

Revenue Recognition and Concentration Risk

The Company recognizes revenue from product sales at the time product is shipped and title passes to the customer. Revenues earned on non-refundable licensing fees are recognized when the licensing fees are received.

The Company had product sales revenue of $209,078 and $204,322 to two customers, representing 27% and 27% of total sales for the nine months ended March 31, 2011, respectively. There were no concentrations during the nine months ended March 31, 2010.

Shipping and Handling Costs

The Company classifies shipping and handling costs associated with the receipt of product as part of cost of sales as reflected in the statement of operations.

The Company classifies costs associated with shipping product to customers as part of selling expense as reflected in the statement of operations.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

Income Taxes

The Company accounts for its income taxes under the provisions of ASC Topic 740 ”Income Taxes”. The method of accounting for income taxes under ASC 740 is an asset and liability method. The asset and liability method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of other assets and liabilities.

Recent Accounting Pronouncements

In April 2011, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update No. 2011-04 (ASU 2011-04), Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s shareholders’ equity in the financial statements. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company does not expect the provisions of ASU 2011-04 to have a material effect on its financial position, results of operations or cash flows.

In April 2011, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update No. 2011-03 (ASU 2011-03), Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements. The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments do not affect other transfers of financial assets. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company does not expect the provisions of ASU 2011-03 to have a material effect on its financial position, results of operations or cash flows.

In April 2011, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update No. 2011-02 (ASU 2011-02), Receivables (Topic 310) A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update apply to all creditors, both public and nonpublic, that restructure receivables that fall within the scope of Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors. The amendments to Topic 310 clarify the guidance on a creditor's evaluation of (a) whether it has granted a concession and (b) whether a debtor is experiencing financial difficulties. There is currently diversity in practice in identifying restructurings of receivables that constitute troubled debt restructurings for a creditor. The clarifying guidance in this Update should result in more consistent application of U.S. GAAP for debt restructurings. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Company does not expect the provisions of ASU 2011-02 to have a material effect on its financial position, results of operations or cash flows.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

In January 2011, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2011-01 (ASU 2011-01), Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update apply to all public-entity creditors that modify financing receivables within the scope of the disclosure requirements about troubled debt restructurings in Update 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Company does not expect the provisions of ASU 2011-01 to have a material effect on its financial position, results of operations or cash flows.

In December 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-29 (ASU 2010-29), Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect the provisions of ASU 2010-29 to have a material effect on its financial position, results of operations or cash flows.

In December 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-28 (ASU 2010-28), Intangibles-Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. This Update modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company’s adoption of the provisions of ASU 2010-28 did not have a material effect on its financial position, results of operations or cash flows.

In August 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-22 (ASU 2010-22), Accounting for Various Topics -- Technical Corrections to SEC Paragraphs - An announcement made by the staff of the U.S. Securities and Exchange Commission. This Accounting Standards Update amends various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics. The Company adoption of the provisions of ASU 2010-22 did not have a material effect on its financial position, results of operations or cash flows.

In August 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-21 (ASU 2010-21), Accounting for Technical Amendments to Various SEC Rules and Schedules: Amendments to SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The Company adoption of the provisions of ASU 2010-21 did not have a material effect on its financial position, results of operations or cash flows.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

In July 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-20 (ASU 2010-20), Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The amendments in this Update are to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The disclosures about activity that occurs during the reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company adoption of the provisions of ASU 2010-20 did not have a material effect on its financial position, results of operations or cash flows.

3. Inventories

As of March 31, 2011, inventories consist of the following:

Chemicals	$	528,639
Lumber		1,018,536
	$	1,547,175

All of the Company’s inventories are pledged as collateral for the Company’s $1,500,000 Senior Secured Notes (see Note 6).

4. Prepaid Loan Fees

In March 2010, the Company received $1,500,000 from Iroquois Master Fund, Ltd through the issuance of senior convertible notes and warrants (See Note 6). In connection with this financing, the Company incurred loan fees totaling $202,000 of which $105,000 was due to the Placement Agent and evidenced by a convertible promissory note. The Company also issued 100,000 shares of its common stock to the Placement Agent as partial consideration for its services. The common shares were valued at their respective market value on date the loan closed of $36,000 and were included in loan fees. The remaining fees of $61,000 were paid from the proceeds received.

In May 2010, the Company issued additional common shares to the placement agent and other parties valued at $36,000 in connection with the above financing.

The $238,000 total prepaid loan fees were amortized over the one year term of the underlying notes. Amortization charged to interest expense for the three months and nine months ended March 31, 2011 totaled $57,637 and $176,606, respectively. The balance of prepaid loan fees was $0 at March 31, 2011. On January 12, 2011, the related notes were subject to a substantial modification of terms and accounted for as an extinguishment of debt with a related party, pursuant to ASC Topic 470-50 “Modifications and Extinguishments” (see Note 6).

5. Property and Equipment

Property and equipment as of March 31, 2011 consists of the following:

Machinery and equipment (useful life of 7 years)	$	378,500
Furniture (useful life of 5 years)		18,223
Computer equipment (useful life of 3 years)		3,685
Research & development equipment (useful life of 5 years)		10,789
Leasehold improvements (useful life of 3 years)		63,675
		474,872
Less accumulated depreciation		(90,178	)
	$	384,694

Depreciation charged to operations for the three and nine months ended March 31, 2011 amounted to $18,198 and $54,594, respectively. Depreciation charged to operations for the three and nine months ended March 31, 2010 amounted to $1,177 and $1,177, respectively. All of the Company’s property and equipment are pledged as collateral for the Company’s $1,500,000 Senior Secured Notes (see Note 6).

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

6. Notes Payable

Convertible Notes - $1,500,000 Financing

On March 26, 2010, the Company entered into a definitive agreement with accredited investors to borrow $1,500,000 in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due March 26, 2011.

The Notes bear interest at an annual rate of 8% payable quarterly. At the Company's option, the interest can be paid in either cash or, subject to the satisfaction of certain customary conditions, registered shares of the Company’s common stock. The effective conversion price for a payment in shares is determined from a computation based on 85% of the volume weighted average price of the Company’s common stock for each of the twenty (20) consecutive Trading Days immediately preceding the applicable installment date.

Pursuant to the original terms, the holders were able convert the Notes into shares of common stock at a conversion price of $0.40 at any time which upon full conversion of the Notes would have resulted in the issuance of 3,750,000 shares of common stock.

In connection with the issuance of the original Notes, the Company issued seven different series of warrants to the investors to purchase a total of 26,250,000 shares of its common stock at exercise prices ranging from $0.40 per share to $0.60 per share. The majority of the warrants expire five years from their respective date of issuance. The warrants allowed for cashless exercise.

During the nine months ended March 31, 2011, the Company agreed to reduce the exercise price of 3,750,000 of these warrants from $0.40 per share to $0.20 per share. A total of $140,981 was charged to interest expense for the re-pricing of these warrants.

Beginning June 26, 2010, the Notes amortize in ten monthly installments. The amortization payments can be made in, at the Company’s option, either cash or, subject to the satisfaction of certain customary conditions, registered shares of common stock. The first installment payment of $75,000 was made in June 2010. Two installment payments of $158,413 each were made in August 2010. Another installment payment of $336,494 was made in October 2010, which included the September and October installments of $158,413 each, plus penalties and interest associated with the late payment and registration delay (as described below).

The Company also entered into a Security Agreement to secure payment and performance of the Company's obligations under the Notes pursuant to which the Company granted the investors a security interest in all of its assets.

The Company also executed a Registration Rights Agreement pursuant to which the Company was required to file a registration statement within 30 days of the Closing Date, and the Company was to use its reasonable best efforts to cause the registration statement to be declared effective within 90 days of the Closing Date (120 days in the event the SEC reviews the registration statement). If the registration statement was not declared effective within the 120 days, the Company was obligated to pay the investors “Registration Delay Payments” equal 1% of 67% of each investor’s original principal amount as stated in such investor’s Note. The registration delay payment obligation accrued at a rate of $10,050 in each thirty-day period that the registration statement remained not effective commencing on August 23, 2010. Interest would accrue on any unpaid Registration Delay Payment at a rate of 1.5% per month. Pursuant to the Exchange Agreement described in the next paragraph, the Registration Delay Payment obligation has been extinguished.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

Pursuant to ASC Topic 470-20, “Debt with Conversion and Other Options,” the convertible notes were recorded net of discounts that include the relative fair value of the warrants and the Notes’ beneficial conversion features totaling $1,500,000. The discounts were amortized and charged to operations over the life of the debt using the effective interest method. The initial value of the warrants of $1,221,600 was calculated using the Black-Scholes Option Model with a risk free interest rate ranging from 1.04% to 2.59%, volatility of 108.37%, and trading price of $0.36 per share. The beneficial conversion feature of $278,400 was calculated pursuant to ASC Topic 470-20 using a trading price of $0.36 per share and an effective conversion price $0.0742 per share. Amortization of the discounts charged to operations for the nine months ended March 31, 2011 amounted to $747,257.

Interest charged to operations on the principal balance of the notes (including penalties and interest associated with the late payment and registration delay) for the nine months ended March 31, 2011 totaled $460,590.

The $1,500,000 discount was originally offset to liabilities pursuant to ASC Topic 815-40-25,”Contracts in Entity’s Own Equity.” On the date the proceeds were received, the number of the Company’s authorized but unissued common shares were insufficient to meet all of the Company’s commitments for share issuances under the terms of its convertible notes, options and warrant agreements, thereby requiring liability accounting. As discussed in Note 8, on the valuation date of January 11, 2011, the former derivative liability was reclassified to additional paid-in capital due to the Company’s effective increase in its authorized shares and elimination of the warrants and conversion feature of the New Notes.

On October 27, 2010, the Company entered into a separate Exchange Agreement with each of the investors whereby in exchange for each investor’s Note it issued to each investor a Senior Secured Convertible Note (each a “New Note” and collectively, the “New Notes”) which were convertible into shares of the Company’s common stock. Pursuant to the terms of each Exchange Agreement, the Company was also no longer obligated to register the shares of common stock issuable upon conversion of the New Notes or upon exercise of the warrants. In addition, the related Registration Delay Payment obligation described in the above paragraph has been extinguished by this Exchange Agreement.

Effective November 10, 2010, the Company filed a request with the SEC to withdraw the registration statement.

The aggregate original principal amount of all New Notes on the October 27, 2010 debt exchange date was $1,287,834. Pursuant to the terms thereof, each of the New Notes amortizes in six equal installments (November 24, 2010, December 23, 2010, January 24, 2011, February 22, 2011, March 22, 2011, and March 26, 2011). The Company may pay each monthly installment amount due under each of the New Notes, at its option, in cash or, subject to the satisfaction of customary equity conditions, in shares of the Company’s common stock. If the Company elected to make payment in shares of its common stock, the number of shares issued by the Company would be determined by dividing the installment amount being converted by the lowest of (a) the conversion price then in effect, (b) 70% of the average of the 3 lowest closing bid prices of our common stock during the 20 consecutive trading day period immediately preceding the applicable installment date and (c) 70% of the closing bid price of our common stock on the trading day immediately preceding the applicable installment date. The New Notes continued to be secured by all of the assets of the Company.

As discussed below, the Notes were purchased by a related party in December 2010 and the related warrants and conversion features were cancelled. The balance of the Notes at March 31, 2011 was $1,009,111.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

Placement Agent Loan Fees

In addition, the Company engaged a placement agent with respect to the Notes. Accordingly, as consideration for the placement agent’s services, the placement agent received compensation equal to 7% of the aggregate amount raised in the form of the Notes in the aggregate amount of $105,000 with a voluntary conversion price of $0.40 which was convertible into 262,500 shares of common stock and also include seven different series of warrants to purchase a total of 787,500 shares of its common stock at exercise prices ranging from $0.40 per share to $0.60 per share. The convertible notes were recorded net of discounts that include the relative fair value of the warrants and the Notes’ beneficial conversion features totaling $105,000. The discounts are amortized and charged to operations over the life of the debt using the effective interest method. The initial value of the warrants of $68,535 was calculated using the Black-Scholes Option Model with a risk free interest rate ranging from 1.04% to 2.59%, volatility of 108.37%, and trading price of $0.36 per share. The beneficial conversion feature of $36,465 was calculated pursuant to ASC Topic 470-20 using a trading price of $0.36 per share and an effective conversion price $0.1389 per share. Amortization of the discount charged to operations for the nine months ended March 31, 2011 amounted to $52,308.

The majority of the warrant expired in five years from their respective date of issuance. The warrants allowed for cashless exercise.

In March 2010, the placement agent was also issued 100,000 shares of the Company’s common stock valued at $36,000. The placement agent was also entitled to compensation equal to 7% for any gross proceeds the Company receives from the exercise of any of the Warrants.

In May 2010, the Company issued additional common shares to the placement agent and other parties valued at $36,000 in connection with the same financing.

Interest charged to operations on the principal balance of this note through October 27, 2010 totaled $2,149. Effective with the October 27, 2010 Exchange Agreement described above, the balance of this note was reclassified and combined with the balances of the other convertible notes from the original $1,500,000 financing.

The $105,000 discount was offset to liabilities pursuant to ASC Topic 815-40-25,”Contracts in Entity’s Own Equity.” On the date the proceeds were received, the number of the Company’s authorized but unissued common shares were insufficient to meet all of the Company’s commitments for share issuances under the terms of its convertible notes, options and warrant agreements, thereby requiring liability accounting. As discussed in Note 8, on the valuation date of January 11, 2011, the former derivative liability was reclassified to additional paid-in capital due to the Company’s effective increase in its authorized shares.

As discussed below, the note was purchased by a related party in December 2010 and the related warrants and conversion features were cancelled in January 2011.

Purchase of Convertible Notes by Related Party

In December 2010, SLM Holding PTE, Ltd. (SLM), a wholly owned subsidiary of Manhattan Resources Limited (MRL) and related party, purchased the New Notes and the Placement Agent notes. On January 12, 2011, SLM agreed to terminate 27,037,500 Series A through G warrants and conversion features related to these acquired notes for nominal consideration of $10. The conversion features formerly comprised all rights granted to the note holders to convert debt to 4,012,500 shares of the Company's common stock. The termination of the warrants and conversion features was deemed a substantial modification of terms and accounted for as an extinguishment of debt pursuant to ASC Topic 470-50 “Modifications and Extinguishments.” The unamortized discount from the warrants and beneficial conversion features totaled $392,647 on January 12, 2011, and this amount was written off to additional paid-in capital since the transaction was consummated with a related party. In addition, the payment terms of note were modified awhcih required on the note to be paid down to $1.0 million in February 2011 with the remainder of the note incurring monthly interest at 8% per annum with the principal balance due when the $5.0 million credit facility is authorized, see Note 10. As of March 31, 2011, amounts payable on the note including accrued interest were $1,009,111.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

Convertible Note - $127,000 Financing

The Company received $127,000 evidenced by a promissory note that is assessed interest at rate of 5% per annum commencing on December 22, 2009. The note matures on December 22, 2012, when the outstanding principal and accrued interest become fully due and payable. Prior to maturity, the holder has the right to convert the balance owed into 600,000 shares of the Company’s common stock.

Pursuant to ASC Topic 470-20, “Debt with Conversion and Other Options,” the convertible note was recorded net of a discount that includes a beneficial conversion feature (“BCF”) amounting to $107,000. The discount was amortized and charged to operations over the life of the debt using the effective interest method. The initial value of the BCF of $107,000 was calculated as the difference between the market value of the 600,000 potential conversion shares at December 22, 2009 (600,000 shares multiplied by the stock price of $0.39 per share, or $234,000), less the effective cost of the conversion at such date (the note balance, or $127,000).

During the nine months ended March 31, 2011, the Company was a party to an agreement whereby increments of the $127,000 convertible note payable were assigned by the original investor to a third party. The assignment agreement included modifications to the debt increments and embedded conversion features that were more favorable to the lender, resulting in a $161,667 loss on debt modification that was charged to operations. Such modifications included an increase in the interest rate to 12%, a shortening of the increments’ maturities to March 10, 2011, and a change in the conversion price to 50% of the lowest trading price for 5 trading days prior to conversion. During the current nine month period, a total of $132,054 of debt increments (inclusive of accrued interest) were assigned to this third party and converted into 2,685,861 shares of the Company's common stock at prices ranging from $0.07 to $0.17 per share. As of March 31, 2011, the entire note balance was converted to common stock.

For the nine months ended March 31, 2011, interest totaling $1,748 was accrued and charged to operations. During the same period, discount amortization charged to operations totaled $89,382. The net note balance at March 31, 2011 was $0.

Convertible Note - $360,000 Financing

The Company received $360,000 evidenced by a promissory note that is assessed interest at rate of 5% per annum commencing on February 11, 2010. The note matures on February 11, 2013, when the outstanding principal and accrued interest become fully due and payable. Prior to maturity, the holder has the right to convert 110% of the balance owed into cashless warrants to purchase the Company’s common stock at an exercise price of $0.50 per share. Interest charged to operations on the principal balance of the notes for the nine months ended March 31, 2011 totaled $6,568. The balance of the note at March 31, 2011 was $0, due to the conversions of the entire note balance to common stock as described below.

During the nine months ended March 31, 2011, the Company was a party to an agreement whereby a $360,000 convertible note was assigned in full to the same third party as the note increments described above. The assignment agreement included modifications to the debt and its embedded conversion feature that were more favorable to the lender, resulting in a $259,933 loss on debt modification that was charged to operations. Such modifications included an increase in the interest rate to 12%, a shortening of the maturity to March 10, 2011, and a change in the conversion price to 50% of the lowest trading price for 5 trading days prior to conversion. Pursuant to this debt modification, the Company recognized a derivative liability with an initial value of $247,364 due to a change in the exercise price of the embedded conversion feature from fixed to variable (See Note 8).

During the current nine month period, debt totaling $385,991 was converted into 15,457,776 shares of the Company’s common stock at prices ranging from $0.04 to $0.14 per share.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

Loans Payable - Other

As of March 31, 2011, the Company received $44,500 in advances from the same party that originally held the $360,000 note payable described above. As of the date these financial statements were issued, no terms for repayment have been agreed to between the Company and this third party.

In December 2010, the Company had received $200,000 in advances from an unrelated third party. In March 2011, the Company negotiated terms with this party to repay a total of $300,000, and has imputed interest on the balance due based on these negotiated terms. The balance of this loan payable at March 31, 2011, including accrued interest, is $92,191. During the nine months ended March 31, 2011, the Company has made repayments totaling $200,000, which includes interest of $86,311 and principal of $113,689.

During the nine months ended March 31, 2011, the Company received a $570,500 short-term loan from Manhattan Resources Limited, partially secured by inventory purchased from Megola, Inc., valued at $303,750. This loan was repaid in full in February 2011 in the amount of $739,200. The Company has entered into a separate $5,000,000 revolving credit and warrant purchase with Manhattan Resources Limited, effective February 14, 2011 (see Note 13).

7. Related Party Transactions

At March 31, 2011, the Company had a note payable due to its President with a balance of $242,084, including accrued interest. This note is due on demand and accrues interest at 9% per annum. Any unpaid principal after the date that demand is made accrues interest at 18% per annum. A total of $15,612 of interest was accrued on this note during the nine months ended March 31, 2011 and was charged to operations. During the same nine month period, borrowings on this note totaled $755,592 and principal repayments totaled $505,620.

At March 31, 2011, the Company had $121,154 payable to its President and $109,615 payable to its General Manager for deferred compensation liabilities. These amounts are included in payroll and taxes payable in the accompanying balance sheet.

As of March 31, 2011, a total of $363,500 (or approximately 77%) of the Company’s Property and Equipment has been purchased from two related entities that are controlled by the Company’s President, who is also a majority shareholder.

During the nine months ended March 31, 2011 and 2010, the Company made inventory purchases totaling $7,478 and $400,886, respectively, from companies controlled by the Company’s President.

In January 2010, the Company entered into a lease of a manufacturing facility in Colton, California for nine months. These facilities were previously leased and utilized by a company controlled by the Company’s President and majority shareholder.

At March 31, 2011, the Company had advances payable of $83,163 to a Company officer who is also a significant shareholder. Such advances bear no interest and are due on demand. During the nine months ended March 31, 2011, the Company received advances totaling $171,500 from this officer and has repaid $88,337 during the same nine month period.

During the nine months ended March 31, 2011, the Company’s sales revenue included $62,709 from related parties.

These related party transactions are not considered to have occurred at arm’s length.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

8. Derivative and Warrant Liabilities

During the nine months ended March 31, 2011, the Company decreased its derivative and warrant liabilities and made a correlating credit to operations in the amount of $368,954 pursuant to ASC 815-40-19 “Contracts in Entity's Own Equity,” as the number of Company’s potential common shares plus the number of actual common shares outstanding (“Committed Shares”) at the valuation date exceeded the number of common shares the Company had authorized to issue. The shortage in the number of committed shares over the number of authorized but unissued shares at the final valuation date of January 11, 2011 totaled 26,086,100. The total liabilities of $1,534,627 at the valuation date are the maximum amount management believes it would have been liable for if the Company were required to meet all its committed share obligations.

On the valuation date of January 11, 2011, the $1,534,627 former derivative liability was reclassified to additional paid-in capital due to the Company’s (a) increase in the number of its authorized shares to meet all of its committed share obligations, (b) reporting of such action to its shareholders and the Securities and Exchange Commission (the SEC) via an effective information statement, and (c) submission of amended articles of incorporation and receipt of approval from the State of Colorado. On September 9, 2010, the Company’s Board of Directors approved a resolution to increase the number of authorized shares from 100,000,000 to 500,000,000. In October 2010 the Company filed a Schedule 14C Information Statement with the SEC stating the same, which was declared effective by the Commission in November 2010. The Company submitted the necessary amended articles of incorporation to the State of Colorado in December 2010, which were approved by Colorado on January 11, 2011.

The liabilities previously consisted of four components.

The first component is valuing the shortage of common shares of 7,725,000 using the fair value of Series A and E warrants at the valuation date of $0.0731 per share. The fair value of the Series A and E Warrants of $564,698 was calculated using the Black-Scholes Option Model with a risk free interest rate of 2.01%, volatility of 160.36%, exercise price of $0.40 per share, and trading price of $0.09 per share. This component was classified as a current liability, due to the underlying warrants being immediately exercisable.

The second component is valuing the shortage of common shares of 7,725,000 using the fair value of Series B and F warrants at the valuation date of $0.0715 per share. The fair value of the Series B and F Warrants of $552,338 was calculated using the Black-Scholes Option Model with a risk free interest rate of 2.01%, volatility of 160.36%, exercise price of $0.50 per share, and trading price of $0.09 per share. This component was classified as a current liability, due to the underlying warrants being immediately exercisable.

The third component is valuing the shortage of common shares of 7,725,000 using the fair value of Series C and G warrants at the valuation date of $0.0702 per share. The fair value of the Series C and G Warrants of $542,295 was calculated using the Black-Scholes Option Model with a risk free interest rate of 2.01%, volatility of 160.36%, exercise price of $0.60 per share, and trading price of $0.09 per share. This component was classified as a current liability, due to the underlying warrants being immediately exercisable.

The fourth and final component is valuing the shortage of common shares of 2,911,100 using the fair value of Series D warrants at the valuation date of $0.0305 per share. The fair value of the Series D Warrants of $88,788 was calculated using the Black-Scholes Option Model with a risk free interest rate of 0.29%, volatility of 166.66%, exercise price of $0.20 per share, and trading price of $0.09 per share. This component was classified as a current liability, due to the underlying warrants being immediately exercisable.

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Ecoblu Products, Inc.

Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

9. Fair Value of Assets and Liabilities

Determination of Fair Value

The Company’s financial instruments consist of convertible notes payable, loans payable and a derivative liability. The Company believes all of the financial instruments’ recorded values approximate their fair values because of their nature and respective durations.

The Company complies with the provisions of ASC No. 820-10 (ASC 820-10), “Fair Value Measurements and Disclosures.” ASC 820-10 relates to financial assets and financial liabilities. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions, about market participant assumptions, that are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820-10 are described below:

Level 1. Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, 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; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3. Inputs that are both significant to the fair value measurement and unobservable. These inputs rely on management's own assumptions about the assumptions that market participants would use in pricing the asset or liability. The unobservable inputs are developed based on the best information available in the circumstances and may include the Company's own data.

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Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

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.

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.

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.

The following table presents the fair value of financial instruments that are measured and recognized on a non-recurring basis classified under the appropriate level of the valuation hierarchy described above, as of March 31, 2011:

Liabilities measured at fair value at March 31, 2011:	Level 1		Level 2		Level 3		Total
Nonrecurring:
Advances from related party	$	--	$	83,163	$	--	$	83,163

Notes payable – related party	$	--	$	1,009,111	$	--	$	1,009,111

Loans payable – related party	$	--	$	242,084	$	--	$	242,084

Loans payable - other	$	--	$	136,691	$	--	$	136,691

10. Stockholders' Deficit

Common Stock Issuances

During the nine months ended March 31, 2011, the Company issued a total of 102,191,767 shares of its common stock of which 81,000,000 shares were issued for cash (as described below), 2,685,861 shares were issued for debt conversions of increments totaling $132,054 on the Company’s $127,000 note payable, which included related losses on debt modification totaling $161,667. During the same nine month period, another 15,457,776 shares were issued for debt conversions totaling $385,991 on the Company’s $360,000 note payable. In addition, 400,000 shares valued at $80,000 were issued as additional consideration for the cancellation of the Company’s lease on its Texas facilities, 1,274,000 shares valued at $108,840 were issued for consulting and advisory services, 500,000 shares valued at $35,000 were issued for sales commissions, 736,106 shares valued at $75,221 were issued for legal services, and 138,024 shares were issued to various consultants and advisors in connection with the cancellation of $42,711 of debt due them. The 138,024 common shares were valued at $30,005 resulting in a net gain from the cancellation of indebtedness of $12,706 that was credited to operations.

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Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

Investment Agreement and Loan Agreement with MRL

On February 14, 2011, the Company entered into an investment agreement (the “Investment Agreement”) with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL (the “Investment Agreement”).

Also, on February 14, 2011, the Company also entered into a revolving credit and warrant purchase agreement (the “Credit and Warrant Agreement”) with MRL. A summary of the material terms of these two agreements are as follows:

(i) Pursuant to the terms of the Investment Agreement, LTK will subscribe for 81,000,000 shares in the Company (“Sale Shares”), representing approximately 45.5 percent of the Company’s resulting total issued and outstanding common shares, for an aggregate consideration of $5,000,000. LTK will sell the Sale Shares to MRL, for the same consideration, subject to approval from shareholders of MRL.

(ii) Pursuant to the terms of the Credit and Warrant Agreement, MRL will extend a $5,000,000 revolving facility (the “Loan Facility”). In consideration of the Loan Facility, the Company will issue MRL a warrant to subscribe for 50,000,000 common shares at an exercise price of $0.10 per share (the “Warrant”).

In the event MRL purchases the Sale Shares from LTK and if they fully exercised the Warrant which would be granted upon final approval of the Credit and Warrant Agreement, both of which are subject to MRL shareholder approval, MRL would acquire an aggregate of 131,000,000 Shares representing approximately 54.5 percent of the resulting total issued and outstanding common equity of the Company, for an aggregate consideration of $10,000,000. As of the date of these financial statements, the Loan Facility is not yet effective, and no warrants have been issued to MRL due to the remaining approval requirements.

On February 16, 2010, the Company received $5,000,000 from LTK pursuant to the Investment Agreement.

Pursuant to the terms of the Investment Agreement, LTK subscribed for 81,000,000 shares in the Company, representing approximately 45.5 percent of the Company’s resulting total issued and outstanding common equity, for an aggregate consideration of $5,000,000. LTK will sell the Sale Shares to MRL, for the same consideration, subject to approval from shareholders of MRL.

Warrants

The following is a schedule of warrants outstanding as of March 31, 2011:

	Warrants Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
Balance, June 30, 2010		27,037,500	$	0.49	4.24 Years	$	-
Warrants granted		-	$	-	-	$	-
Warrants expired		-	$	-	-	$	-
Warrants cancelled		(27,037,500)	$	0.46	3.74 Years	$	-
Balance, March 31, 2011		-	$	-	-	$	-

During the nine months ended March 31, 2011, the Company agreed to reduce the exercise price of 3,750,000 of its warrants from $0.40 per share to $0.20 per share. A total of $140,981 was charged to interest expense for the re-pricing of these warrants.

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Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

In December 2010, SLM Holding PTE, Ltd. (SLM), a wholly owned subsidiary of MRL and related party, purchased convertible notes issued by the Company from a group of third party investors and a placement agent for the aggregate sum of $1,000,000 (see Note 6). In January 2011, SLM agreed to terminate 27,037,500 Series A through G warrants and conversion features related to these acquired notes for nominal consideration of $10. The conversion features formerly comprised all rights granted to the note holders to convert debt to 4,012,500 shares of the Company's common stock.

11. Income Taxes

As of March 31, 2011, for income tax purposes the Company has an unused net operating loss carryforward of approximately $4,159,000, which may provide future federal tax benefits of approximately $1,414,000, and which expires in various years through 2030.

An allowance of $1,414,000 has been provided at March 31, 2011 to reduce the tax benefits accrued by the Company for these operating losses to zero as it cannot be determined when, or if, the tax benefits derived from these losses will materialize.

Utilization of the net operating loss carryforward is subject to significant limitations imposed by the change in control under Internal Revenue Code Section 382, limiting its annual utilization to the value of the Company at the date of change in control multiplied by the federal discount rate.

12. Commitments and Contingencies

Real Estate Lease – Vista, California

In June 2009, the Company entered into an agreement to lease warehouse and office facilities for three years. The details on the lease are as follows:

1.	Base rentals - $5,500 per month beginning October 1, 2009.
2.	Base rentals increase to $6,000 monthly beginning October 1, 2010 and $6,500 monthly beginning October 1, 2011.

3.	Company is responsible to pay its proportionate share of property taxes, insurance and common area maintenance – estimated at $875 per month
4.	Termination date – September 30, 2012.

5.	Renewal Option – one option for an additional three year period.
6.	Security Deposit - $5,500.

7.	Rent for month six (March 2010) shall be discounted to by 50%
8.	Rent for month twelve (March 2011) shall be discounted by 50%

Rent expense related to this lease was $61,019 and $25,225 for the nine months ended March 31, 2011 and 2010, respectively.

Effective January 1, 2011, the Company entered into a one-year sublease with a related party for 460 square feet in this Vista facility at $900 per month.

Real Estate Lease – Colton, California

In January 2010, the Company entered into a lease of a manufacturing facility in Colton, California for nine months. This lease was renewed effective November 1, 2010 for one year at a rate of $17,391 per month. These facilities were previously leased and utilized by a company controlled by the Company’s President and majority shareholder (see Note 7). Rent expense related to this lease was $148,778 and $52,173 for the nine months ended March 31, 2011 and 2010, respectively.

Total sublease income from the Company’s related party lease is expected to be $8,100 over the next twelve months.

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Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

Purchase, Distribution & Services Agreement #1

On August 24, 2009, the Company entered into a Purchase, Distribution & Services Agreement, (the “Agreement”) with the owner of technical data and intellectual property for a protective coating, in order to obtain an exclusive supply of the product, use of the technical data, intellectual property and other information relating to the product and use of the trademarks, together with certain distribution, marketing and sales rights. Pursuant to the Agreement, the Company has guaranteed it will purchase a minimum of fifty (50) 275 gallon totes of product in the first twelve month period. The Company is required to increase the minimum quantities by 25% in the second year, to 62.5 totes. The initial term of the agreement is two years and will renew for additional one year terms without further action unless otherwise terminated.

With regard to the above agreement, the Company has learned from third parties that the seller's formula contains a toxic and carcinogenic contaminant known as chlorothalonil. After confronting the manufacturer, it was confirmed the toxin exists in the product. The Company’s management does not know how long the toxin has been in the solution. Testing and investigation is ongoing. The seller has indicated nothing as to removing the toxin and is continuing its own investigation of its liabilities.

The Company has not made all of its original purchase commitments in this agreement, due to non-performance by the seller and the existence toxins as described above. Further, the Company has temporarily discontinued selling the product and is pursuing alternative solutions internationally. Management believes that the issue has been isolated to the concentrate form and is not affecting the end user coated product. The Company is currently in the discovery phase of determining the overall impact of this issue, but legal counsel has advised the Company that the seller is responsible for any liabilities generated from the use of the product.

Purchase, Distribution & Services Agreement #2

On July 26, 2009, the Company entered into an AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Megola, Inc., the owner of technical data and intellectual property for a protective coating in order to obtain an exclusive supply of the product, together with certain distribution, marketing and sales rights. The product is a non-toxic non-corrosive fire inhibitor. Pursuant to the Agreement, the Company guaranteed it will purchase a minimum of four hundred fifty five (455) two hundred and forty five (245) gallon totes of product in the first twelve month period. The Company was required to increase the minimum quantities in the second year, to 842 totes and in the third year to 1,263 totes.

The current agreement expired on November 11, 2010. In December 2010, the Company purchased 37,500 gallons of AF21 at a total price of $303,750. This inventory was used as partial security for the Company’s $570,500 short-term borrowing from Manhattan Resources Limited (see Note 6). As of the date of these financial statements, the Company has no obligation to purchase additional inventory from Megola, Inc.

Purchase, Distribution & Services Agreement #3

On January 18, 2011, the Company entered into an AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Newstar Holding Pte Ltd, a Singapore Corporation, and Randall Hart, an Indonesian National, the inventors and owners of technical data and intellectual property for a protective coating in order to obtain an exclusive supply of the product, together with certain distribution, marketing and sales rights. The product is a non-toxic non-corrosive fire inhibitor. Pursuant to the Agreement, the Company guaranteed it will purchase a minimum of six hundred fifty (650) two hundred and forty five (245) gallon totes of product in the first two-year period at a cost of $11.40 per gallon, making the total purchase commitment $1,815,450 for the first two years. The Company is required to increase the minimum quantities in the third year to 842 totes at $11.40 per gallon, 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 at $11.40 per gallon, making the total purchase commitment $3,530,352 for year four.

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Notes To Condensed Consolidated Financial Statements

March 31, 2011

(Unaudited)

Legal Proceedings

The Company has filed a legal action against the company with which it has signed a Purchase, Distribution and Services Agreement, for lack of performance in the delivery of chemical product and protection of sales territory (see Purchase, Distribution & Services Agreement #1, described above).

The Company is involved in a proceeding in Colorado for Express Employment vs. N8 Concepts, Inc. (the predecessor to EcoBlu Products, Inc.). This is related to alleged temporary labor provided that was not paid. N/8Ecoblu has no contract with Express Employment and the complaint claims breach of contract damages. The Company settled this action in May 2011 with a payment to the plaintiff for $30,433. This amount has been accrued in the financial statements at March 31, 2011 in other payables and accrued expenses.

The Company accrues the legal costs associated with loss contingencies as the associated legal services are rendered.

13. Subsequent Events

Employment Agreement – President and Chief Executive Officer

Effective April 1, 2011, the Company entered into an employment agreement with its President and Chief Executive Officer for a term of two years. Key provisions of the agreement includes

(a)

Annual salary of $300,000

(b)

Cash bonus of $300,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $34,000,000, subject to certain limitations.

(c)

Additional cash bonus of $300,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $92,000,000, subject to certain limitations. In the event that gross sales for the prior fiscal year are with 35% of the $92,000,000 target, the target shall be adjusted up so that a minimum sales increase must be achieved for the bonus to vest.

(d)

Option grants to purchase 800,000 shares of the company’s common stock at an exercise price of $0.10 per share, expiring April 1, 2016 (five-year life). Such options will vest over a two-year period. These options were valued at $75,680, as determined using the Black-Scholes option-pricing model using a risk free rate of 2.24%, volatility of 169.83% and a trading price of the underlying shares of $0.10.

Employment Agreement –Chief Technical Officer and Director

Effective April 1, 2011, the Company entered into an employment agreement with its Chief Technical Officer and Director for a term of two years. Key provisions of the agreement includes

(e)

Annual salary of $250,000

(f)

Cash bonus of $250,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $34,000,000, subject to certain limitations.

(g)

Additional cash bonus of $250,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $92,000,000, subject to certain limitations. In the event that gross sales for the prior fiscal year are with 35% of the $92,000,000 target, the target shall be adjusted up so that a minimum sales increase must be achieved for the bonus to vest.

(h)

Option grants to purchase 400,000 shares of the company’s common stock at an exercise price of $0.10 per share, expiring April 1, 2016 (five-year life). Such options will vest over a two-year period. These options were valued at $37,840, as determined using the Black-Scholes option-pricing model using a risk free rate of 2.24%, volatility of 169.83% and a trading price of the underlying shares of $0.10.

Stock Issuances

In April 11, 2011, the Company issued 250,000 shares for legal services.

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Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

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) 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.

Results of Operations for the Three-Months Ended March 31, 2011 as Compared to the Three-Months Ended March 31, 2010

Revenues and Cost of Sales - For the three-months ended March 31, 2011 we had total revenues of $45,313 from product and equipment sales, as compared to $9,207 in revenues from product sales for the three-month period ended March 31, 2010. Our cost of sales and gross profit for the three-months ended March 31, 2011 was $41,644 and $3,669, respectively, as compared to cost of sales and gross profit of $3,423 and $5,784, respectively, for the three-month period ended March 31, 2010.

Product sales were impacted during the period related to implementing the change to Red Shield Lumber products as a result of our discontinuation of the Bluwood chemistry. We have begun preparations for sales of the new Red based products and have significantly increased our inventory of products processed with our new proprietary Red coatings. Sales had only recently begun in the prior comparative period.

Operating Expenses - For the three-months ended March 31, 2011 our total operating expenses were $1,144,529, as compared to total operating expenses of $2,097,251 for the three-months ended March 31, 2010.

The resulting decrease in operating expenses over the prior period is primarily the result of a dramatic reduction in consulting expenses of approximately $1.4 million.

Results of Operations for the Nine -Months Ended March 31, 2011 as Compared to the Nine -Months Ended March 31, 2010

Revenues and Cost of Sales - For the nine-months ended March 31, 2011 we had total revenues of $770,912 from product and equipment sales, as compared to $9,207 in revenues from product sales for the nine-month period ended March 31, 2010. Our cost of sales and gross profit for the nine-months ended March 31, 2011 was $678,268 and 92,644, respectively, as compared to cost of sales and gross profit of $3,423 and $5,784, respectively, for the nine-month period ended March 31, 2010.

Sales had only recently begun in the prior comparative period.

Operating Expenses - For the nine -months ended March 31, 2011 our total operating expenses were $2,389,552, as compared to total operating expenses of $2,410,445 for the nine-months ended March 31, 2010.

Although the two comparative periods are similar in total expense, the prior period had substantial consulting expenses and nominal sales; where the current period had substantial expenses related to significant product sales.

Other Income (Expenses) - For the nine -months ended March 31, 2011 we had other income (expenses) that included a $12,706 gain on the settlement of debt, a ($421,600) loss on the modification of debt, $368,954 change in the fair value of our derivative liabilities, and interest expense of ($1,954,093). This is compared to the nine-month period ended March 31, 2010, in which our other income (expenses) was ($445,618) primarily related to a ($331,336) change in the fair value of our derivative liabilities.

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Liquidity and Capital Resources

On March 31, 2011, we had $2,171,209 cash on hand. Our operating activities used $3,019,153 and our investing activities used $102,217 of net cash in the nine-month period ended March 31, 2011. During the same period, we received proceeds resulting in net cash from financing activities of $4,907,045 primarily from the issuance of common stock and issuance of debt.

On March 31, 2010, we had $979,011 cash on hand. Our operating activities used $902,829 and our investing activities used $800,960 of net cash in the nine-month period ended March 31, 2010. During the same period, we received proceeds resulting in net cash from financing activities of $2,682,800 primarily from the issuance of common stock and issuance of debt.

We have completed a significant financing through the sale of our common equity. This financing of $5,000,000 was sufficient to satisfy our short term cash requirements. Since inception, we have predominantly financed cash flow requirements through the issuance of common stock for cash.

We currently have a pending credit facility for an additional $5,000,000 which may become available to us upon final approvals by the issuing entity.

We may continue to incur operating losses over the next twelve months. Our operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages 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.

Plan of Operation

EcoBlu Products, Inc. is a manufacturer of proprietary wood products treated with an eco-friendly proprietary chemistry that protects against fire, mold/mycotoxins, fungus, rot-decay, wood ingesting insects and termites with EcoBlu's WoodSurfaceFilm™ and FRC™ technology (Fire Retardant Coating). EcoBlu products, "Good Wood™" utilizing patent pending technology is the ultimate in wood protection, preservation, and fire safety to building components constructed of wood, from joists, beams and paneling, to floors and ceilings. EcoBuilding Products, Inc. is a registered DBA of EcoBlu Products, Inc.

The Company is committed to the development, marketing and sales of environmentally-responsible building materials. We have agreements authorizing us to coat wood products with various proprietary chemicals to inhibit fire, water damage, degradation from certain pest infestation and other effects. We operate from leased facilities in Colton and San Diego, California. The Company sells our value added chemically treated wood products in various regions of the United States, Canada and Mexico.

Over the next twelve months the Company intends to continue to expand marketing efforts to develop sales of products. Our recent financing activities have provided the operating capital needed to develop our sales of our products.

EcoBlu Products, Inc. continues to develop the affiliate coating program. This program is designed to allow lumber companies to coat commodity lumber at their facilities contingent upon their stocking inventory and supporting our line of engineered wood products.

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Critical Accounting Policies

Accounts Receivable

Allowance for Doubtful Accounts

Inventories

Property and Equipment

Long-Lived Assets

Issuances Involving Non-cash Consideration

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Stock Based Compensation

Loss Per Share

Cash and Cash Equivalents

For purpose of the statements of cash flows, the Company considers cash and cash equivalents to include all stable, highly liquid investments with maturities of three months or less.

Use of Estimates

Convertible Debentures

Revenue Recognition and Concentration Risk

Shipping and Handling Costs

The Company classifies shipping and handling costs associated with the receipt of product as part of cost of sales as reflected in the statement of operations.

The Company classifies costs associated with shipping product to customers as part of selling expense as reflected in the statement of operations.

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Income Taxes

Recent Accounting Pronouncements

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Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements or financing activities with special purpose entities.

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

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2011. This evaluation was carried out under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of March 31, 2011, our disclosure controls and procedures were effective.

We have made the determination that our disclosure controls and procedures were effective, due to the small scale of our operations, we anticipate that when operational activities expand it will be necessary to add additional controls and procedures to ensure effectiveness.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures 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 management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

Changes in Internal Controls

During the period covered by this report, there was no 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.

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Part II - OTHER INFORMATION

Item 1 - Legal Proceedings

EcoBlu v. Bluwood USA

On August 23, 2010, the Company filed a legal action in The Superior Court San Diego, County of San Diego, Case # 37-2010-00058482-CU-MC-NC, against Bluwood USA, Inc., for failure of perform pursuant to the Purchase, Distribution and Services Agreement in the delivery of chemical product and protection of sales territory. One named individual in the suit filed a motion to dismiss based on lack of personal jurisdiction which was denied on February 4, 2011. The case is presently in the discovery phase.

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.

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

None, that have not been previously reported.

Item 3 - Defaults Upon Senior Securities

None, for the period ending March 31, 2011.

Item 4 - [Removed and Reserved]

Item 5 - Other Information

None.

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Item 6 - Exhibits and Reports

Exhibits

Ecoblu Products, Inc. includes by reference the following exhibits:

3.1	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.
3.2	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.
3.3	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
4.12	Convertible Promissory Note, dated December 22, 2009; filed as exhibit 10.5 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 2010
4.13	Convertible Promissory Note, dated February 11, 2010; filed as exhibit 10.6 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 2010
10.1	Investment Agreement – between Ecoblu Products, Inc., Manhattan Resources Limited and Dato’ Low Tuck Kwong , dated February 14, 2009, filed as exhibit 10.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on February 16, 2011.
10.2	Revolving Credit and Warrant Agreement – between Ecoblu Products, Inc. and Manhattan Resources Limited, dated February 14, 2009, filed as exhibit 10.2 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on February 16, 2011.
10.3	Warrant Termination Agreement – between Ecoblu Products, Inc. and SLM Holding PTE, Ltd., dated January 12, 2011; filed as exhibit 10.3 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on February 16, 2011.
10.4	Hartindo AF21 Product, Purchase, Sales, Distribution & Service Agreement, between Ecoblu Products, Inc. and Newstar Holdings Pte Ltd, dated January 18, 2011; filed as exhibit 10.8 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 2011.

Ecoblu Products, Inc. includes herewith the following exhibits:

10.5	Employment Agreement – between Ecoblu Products, Inc. and Steve Conboy, Effective April 1, 2011.
10.6	Employment Agreement – between Ecoblu Products, Inc. and Mark Vuozzo, Effective April 1, 2011.
31.1	Certification of Principal Executive Officer and Principal Financial Officer (Rule 13a-14(a)/15(d)-14(a))
32.1	Certification of Principal Executive Officer and Principal Financial Officer (18 U.S.C. 1350)

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Ecoblu Products, Inc.


Date: May 20, 2011	By:	/s/ Steve Conboy
		Steve Conboy, President
		Principal Executive Officer
		Principal Financial Officer

ECO Building Products, Inc. - FORM 10-Q - May 20, 2011

Attached files

ECO Building Products, Inc. Reports