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EX-32.1 - ECO BUILDING PRODUCTS 10Q, CERTIFICATION 906 - ECO Building Products, Inc.ecobuildingexh32_1.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q /A
Amendment #1
 
(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
For the transition period from _______________ to _______________
 
Commission file number:   000-53875
 
Eco Building 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.
 
o Large accelerated filer          o Accelerated filer          o Non-accelerated filer          x Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes x No
 
The number of shares outstanding of each of the issuer's classes of common equity as of November 19, 2012:   318,022,903 shares of common stock.
 
Explanatory Note for Amendment 1:
This amendment 1 to our Quarterly report furnishes the XBRL presentation not filed with the original 10Q filed on August 22, 2011. Only minor revisions were made to the original filing regarding rounding errors to Note 3 - Inventories.
 
 
 
 
 
 
1

 
 
 
Eco Building Products, Inc.

Contents
 
   
Page
   
Number
     
PART I
FINANCIAL INFORMATION
 
     
Item 1
Unaudited Condensed Consolidated Financial Statements
 
 
September 30, 2012
 
     
 
Condensed Consolidated Balance Sheet
3
     
 
Condensed Consolidated Statement of Operations
4
 
 
 
 
Condensed Consolidated Statement of Cash Flows
7
     
 
Notes to the Interim Financial Statements
9
     
Item 2
Management's Discussion and Analysis of Financial Condition
 
 
and Results of Operations
23
     
Item 3
Quantitative and Qualitative Disclosures About Market Risk
28
     
Item 4
Controls and Procedures
28
     
Part II
OTHER INFORMATION
 
     
Item 1
Legal Proceedings
29
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
29
     
Item 3
Defaults Upon Senior Securities
30
     
Item 4
Mine Safety Disclosures
30
     
Item 5
Other Information
30
     
Item 6
Exhibits and Reports
30
     
SIGNATURES
 
32

 
 
 
 
2

 
 
 
 
 ECO BUILDING PRODUCTS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 
             
  (Unaudited)
 
             
   
September 30
   
June 30
 
   
2012
   
2012
 
         
 
 
 ASSETS
           
CURRENT ASSETS
           
Cash
  $ 3,394     $ 111,251  
Accounts receivable, net of allowance for doubtful accounts of $18,727 at
         
September 30, 2012 and June 30, 2012
    1,169,337       666,223  
Inventories
    1,089,987       922,646  
Prepaid loan facility fee - related party, current portion
    1,008,383       1,008,383  
Prepaid expenses
    15,796       7,297  
Deposits
    7,100       7,100  
Other current assets
    1,110       -  
Total current assets
    3,295,107       2,722,900  
                 
PROPERTY AND EQUIPMENT, net
    1,187,948       1,207,035  
                 
OTHER ASSETS
               
Accounts receivable - long-term portion
    -       -  
Intangible assets
    15,471       16,325  
Prepaid loan facility fee - related party
    826,765       1,078,861  
Equipment deposits - related party
    -       -  
Total other assets
    842,236       1,095,186  
                 
TOTAL ASSETS
  $ 5,325,291     $ 5,025,121  
                 
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 448,411     $ 426,179  
Payroll and taxes payable
    1,762,164       1,594,848  
Advances from related party
    -       -  
Other payables and accrued expenses
    495,811       336,287  
Deferred revenue
    -       33,640  
Current maturities of notes payable
    8,278       8,670  
Line of credit payable - related party
    1,666,667       1,666,667  
Loans payable - related party
    336,935       201,480  
Loans payable - other
    144,500       44,500  
Convertible notes net of loan discount
    1,340,206       -  
Total current liabilities
    6,202,972       4,312,271  
                 
LONG TERM LIABILITIES
               
Line of credit payable - related party
    3,333,333       3,333,333  
Notes payable, less current maturities
    13,608       17,295  
Total long term liabilities
    3,346,941       3,350,628  
                 
TOTAL LIABILITIES
    9,549,913       7,662,899  
                 
STOCKHOLDERS' EQUITY
               
Common stock, $0.001 par value, 500,000,000 shares authorized,
         
311,322,033 shares issued and outstanding at September 30, 2012
         
and 290,961,669 shares issued and outstandingJune 30, 2012
    235,522       216,162  
Additional paid-in capital
    19,918,439       18,578,613  
Accumulated deficit
    (24,378,583 )     (21,432,553 )
Total stockholders' equity
    (4,224,622 )     (2,637,778 )
 
               
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 5,325,291     $ 5,025,121  
 
 
 
See accompanying notes to condensed consolidated financial statements
 
 
3

 
 
 
 ECO BUILDING PRODUCTS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
  (Unaudited)
 
             
             
   
3-month ended
   
3-month ended
 
   
September 30
   
September 30
 
   
2012
   
2011
 
             
REVENUE
           
Product sale
  $ 1,060,426     $ 690,679  
License sale
               
Equipment and other sales
  $ -          
                 
TOTAL REVENUE
  $ 1,060,426     $ 690,679  
                 
COST OF SALES
    811,682       623,604  
                 
GROSS PROFIT
    248,744       67,075  
                 
OPERATING EXPENSES
               
Research and development
    95,217       18,621  
Marketing
    92,468       29,953  
Goodwill/Donation
    9,325       -  
Compensation and related expenses
    674,761       606,454  
Rent - facilities
    210,620       78,955  
Professional fees
    477,893       293,190  
Consulting
    381,623       78,556  
Other general and administrative expenses
    474,714       333,795  
                 
Total operating expenses
    2,416,621       1,439,524  
                 
LOSS FROM OPERATIONS
    (2,167,877 )     (1,372,449 )
                 
OTHER INCOME (EXPENSE)
               
Interest income
    -       3,365  
Interest expense
    (337,270 )     (220,165 )
Gain (loss) on settlement of lease
            -  
Gain (loss) on settlement of debt
    -       -  
Loss on modification of debt
    (448,437 )     -  
Change in fair value of derivative liability
    -       -  
Other Income
    7,554       -  
                 
Total other income (expense)
    (778,153 )     (216,800 )
                 
LOSS BEFORE PROVISION FOR INCOME TAXES
    (2,946,030 )     (1,589,249 )
                 
      -       -  
                 
NET LOSS
  $ (2,946,030 )   $ (1,589,249 )
                 
NET LOSS PER COMMON SHARE - BASIC
    (0.01 )     (0.01 )
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    298,641,804       178,286,100  
 
 
 
See accompanying notes to condensed consolidated financial statements
 
 
4

 
 
 
 ECO BUILDING PRODUCTS, INC.
 
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
(UNAUDITED)
 
             
   
3-month ended
   
3-month ended
 
   
September 30
   
September 30
 
Cash flows from operating activities
 
2012
   
2011
 
             
Net Loss
  $ (2,946,030 )   $ (1,589,249 )
Adjustments to reconcile net income to net cash used by operating activities:
 
Interest o amortization of loan fees
            181,617  
Loss on modification of debt by issuance of common stock
    448,436          
(Gain) loss on settlement of debt
    -          
Interest on amortization of debt discount
               
Amortization of loan fees
    252,096          
Interest on repricing of warrant
               
Change in fair value of derivative liability
               
Common stock issuance for services
    896,560          
Common stock issuance for payment of rent and lease settlement
         
Stock Based Compensation
    14,190       14,190  
Depreciation and amortization expense
    41,464       43,666  
Bad debt expense
            -  
Changes in operating assets and liabilities:
               
(Increase) in accounts receivable
    (503,114 )     (74,437 )
(Increase) in other receivable
            -  
(Increase) in inventory
    (167,341 )     (448,743 )
(Increase) in prepaid expenses & other current assets
    (9,609 )     13,611  
Decrease (Increase) in deposits
            -  
Increase in accounts payable
    22,232       76,253  
Increase in Payroll and taxable payable
            71,738  
Increase in rent payable
            -  
Increase in other payable and accrued expenses
    229,456       (28,562 )
Increase in deferred rent expense
               
(Decrease) in other payables and accrued expenses
            (10,000 )
Increase in accrued interest added to principle
    72,022       38,548  
Net cash used by operating activities
    (1,649,638 )     (1,711,368 )
                 
Cash flows from investing activities
               
Purchase of property and equipment
    (21,523 )     (29,473 )
Purchase of software licenses
    -       (25,000 )
Payments for equipment deposits - related party
    -       (11,964 )
Payments for prepaid trademark costs
    -       -  
Net cash provided (used) by investing activities
    (21,523 )     (66,437 )
                 
Cash flows from financing activities
               
Proceeds from related party line of credit advances
    -       3,000,000  
Proceeds from debt issuance
    1,327,849       -  
Proceeds from related party advances and notes
    235,455       -  
Repayments of debt issuances
    -       -  
Repayments of related party advances and notes
    -       (1,272,491 )
Net cash provided by financing activities
    1,563,304       1,727,509  
                 
Net change in cash and cash equivalent
    (107,857 )     (50,296 )
                 
Cash and cash equivalent at the beginning of year
    111,251       81,648  
                 
Cash and cash equivalent at the end of year
  $ 3,394     $ 31,352  
                 
Supplemental disclosures of cash flow Information:
               
Cash Paid for Interest
  $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:
         
Forgiven Note Payable in connection with the transfer of common stock
  $ -     $ 72,791  
Issuance of warrant in connection with the loan fee of line of credit
  $ -     $ -  
 
 
 
See accompanying notes to condensed consolidated financial statements
 
 
 
5

 
 
 
Eco Building Products, Inc.

 
 
NONCASH INVESTING AND FINANCING ACTIVITIES
                 
 
Three Months Ended September 30, 2011
       
                 
 
On February 14, 2011, the Company entered into a revolving line of credit and warrant purchase agreement with MRL. This agreement
 
did not go into effect until it is ratified by the shareholders of MRL, on July 26, 2011. Pursuant to the terms of this agreement, MRL
 
extended a $5,000,000 revolving loan facility in advances of $500,000, each, from time to time. On July 26, 2011, the Company drew
 
down $3,000,000 on the revolving line of credit. In consideration of the revolving line of credit and warrant purchase agreement, the
 
Company issued MRL 5-year warrants for 50,000,000 common shares at an exercise price of $0.10 per share. The warrants were
 
valued at $3,025,148 on July 26, 2011 and expire on July 26, 2016. The valuation of these warrants was determined using a
 
multi-nominal lattice model using an exercise period of 5 years and projected volatility of 163%. The following assumptions
 
were incorporated into the model: (a) Due to the large number of warrants issued in the money, the dilutive impact of the transaction
 
was modeled; (b) MRL would exercise the warrants as they become exercisable based on volume limitations. Volume limitations
 
were based on 100% of the last 12 months average volume, increasing 1% monthly; (c) MRL would exercise the warrant at maturity
 
if the stock price was above 10 times the exercise price; and (d) Registration of the underlying shares would be effective 180 days
 
following their issuance. The Company has recorded the $3,025,148 value as a prepaid loan fee and is amortizing the value of the
 
warrants to interest expense over the 3 year availability period of the revolving line of credit. A total of $181,617 of interest expense
 
was recognized for the amortization of these warrants during the three months ended September 30, 2011.
                 
 
In September 2011, the Company purchased a vehicle for $32,095 via an installment sale with an auto dealership. Pursuant to the
 
installment sale agreement, the Company made a down payment of $5,000 and financed the remaining $27,095 over a five year period
 
at an interest rate of 9.99%.
         

 
 
 
 

 

 
 

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
6

 
 
 
Eco Building Products, Inc.

 
 
1.   Organization and Basis of Presentation
 
Organization
Eco Building Products, Inc. (the “Company”) was incorporated in the state of Colorado under the name N8 Concepts, Inc. on March 27, 2007.

On October 19, 2009, the Company merged with Ecoblu Products, Inc., a Nevada Corporation (“ECOBLU”). For financial reporting purposes, the acquisition was treated as a reverse acquisition whereby ECOBLU’s operations continue to be reported as if it had actually been the acquirer. 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, and accordingly, the fair value of the assets approximated their carrying value and no goodwill was recorded.

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. During year ended June 30, 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.

On April 8, 2011, the Company formed Red Shield Lumber, Inc. (“Red Shield”) in British Columbia, Canada. Red Shield was formed for the purpose of opening a plant in Canada utilizing the Company’s red coating process for sale and distribution.  As of September 30, 2011, the wholly owned subsidiary has had little operating activity.

On May 31, 2011, the Company formed E Build & Truss, Inc. (E Build) on May 31, 2011 in the State of California. E Build was formed for the purpose of operating the Company’s Truss manufacturing activities. This wholly-owned subsidiary commenced operations during the 3 months ended September 30, 2011.

Going Concern
The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. To date the Company has generated minimal operating revenues, losses from operations, significant cash used in operating activities and 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.

During the year ended June 30, 2011, the Company entered into an investment agreement and a revolving credit and warrant purchase agreement with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL. Under investment agreement, the Company received $5,000,000 in exchange for issuing 81,000,000 shares of its common stock. Subsequently, upon the effective date of the revolving credit and warrant purchase agreement the Company has the ability to borrow up to an additional $5,000,000. Besides the $3,000,000 was borrowed in July, 2011 the remaining $2,000,000 was borrowed between October and November 2011. With the infusion of the initial $5,000,000 under the investment agreement and up to an additional $5,000,000 under the revolving credit and warrant purchase agreement, management believes it the funding provides sufficient capital to continue operating the Company and allow it to become profitable, however; no assurances can be made that current or anticipated future sources of funds will enable the Company to finance future periods’ operations. As of  September 30, 2012, the Company had cash on hand of $3,393.  Since the Company had borrowed the entire $5,000,000 line of credit during the first and second quarters of December 31, 2011, which made no available credit under this agreement during this period. Subsequently, the Company was
 
 
 
7

 
 
 
Eco Building Products, Inc.

 
 
assigned a $100 million standby letter of credit from the Bank of China to support current debt and any additional debt the company may acquire subject to conditions and limitations.  On September 20, 2012, Eco has sent a proposal to MRL and related others to give up the rights and interests in Eco and no longer can claim they own securities in Eco in order to exchange for Eco supplying the concurrent promise to pay the sum of $10,500,000 by June 13, 2014.
 
If current and projected revenue growth does not meet Management estimates, the Management may continue to choose to raise additional capital through debt and/or equity transactions, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation. Currently, the Company does not have any commitments or assurances for additional capital, nor can the Company provide assurance that such financing will be available to it on favorable terms, or at all. If, after utilizing the existing sources of capital available to the Company, further capital needs are identified and the Company is not successful in obtaining the financing, it may be forced to curtail its existing or planned future operations. With the recent technical achievements and certifications earned towards the use of Eco Red Shield the Company is experiencing increased demand for the product. The Company has significant inventories on hand and anticipates it will generate profits and cash flow from turns of sales and or contracts already on the books. The Company has already taken steps to reduce expenses. The Company has increased the sales price of the Eco Red Shield coatings as applied to finished good lumber sales. The Company feels that it now has gained good traction in the market place with our technology therefore can command a higher premium which will equate to greater margins and increased cash flows. Orders continue to increase as demand and market acceptance for Eco Red Shield increases. Nevertheless the Company experiences cash flow difficulties and there is no assurance of when it may be profitable.
 
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 September 30, 2012, and the results of its operations and cash flows for the three months ended September 30, 2012 and 2011. 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, 2012.
 
 
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 subsidiaries, Ecoblu Products, Inc. of Nevada, E Build & Truss, Inc. and Red Shield Lumber, Inc. 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 $5,000,000 Loan Facility (see Note 5).
 
The Company discounts sales with extended terms where no interest is charged to their respective present value pursuant to ASC Topic 310-10-30-3 “Receivables.”
 
Allowance for Doubtful Accounts
An allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical write-off percentages, information collected from individual customers related to past transaction history, credit-worthiness, changes in payments terms and current economic industry trends. Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. To date write-offs and allowances have been insignificant.
 
 
 
8

 
 
 
Eco Building Products, Inc.

 
 
Inventories
Inventories primarily consist of chemicals and lumber and are stated at average cost basis.   Net realizable value is the respective inventory’s estimated selling price reduced by the cost of completion and disposal. As of September 30, 2012, 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 seven (7) years. Leasehold improvements are depreciated over their useful life or the term of the related lease, whichever is shorter. Depreciation expense is not recorded on idle property and equipment until such time as it is placed into service.

Long-Lived Assets
The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value.

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 related party equipment purchases.

Stock-Based Compensation
The Company accounts for stock-based compensation under ACS Topic 505-50 “Equity-Based Payments to Non-Employees.” This standard defines a fair value based method of accounting for stock-based compensation. In accordance with ACS Topic 505-50, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using 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.  Potential common shares at September 30, 2011 that have been excluded from the computation of diluted net loss per share included warrants exercisable into 50,250,000 shares of common stock and options exercisable into 1,200,000 shares of common stock.
 
 
 
9

 
 
 
Eco Building Products, Inc.

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

Credit Risk
At times, the Company maintains cash balances at a financial institution in excess of the $250,000 FDIC insurance limit.

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

Convertible Debentures
If the conversion 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.

Derivative Financial Instruments
Derivative financial instruments, as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

The Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued financial instruments including senior convertible notes payable and freestanding stock purchase warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, in certain instances, these instruments are required to be carried as derivative liabilities, at fair value, in the Company’s financial statements.

The Company estimates the fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objectively measuring fair values. In selecting the appropriate technique, consideration is given to, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company's operating results will reflect the volatility in these estimate and assumption changes.

Revenue Recognition and Concentration Risk
The Company records revenue when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the prices for the services performed and the collectability of those amounts.
 
 
 
10

 
 
 
Eco Building Products, Inc.

 
 
The Company generally recognizes revenue from product sales, including equipment, at the time product is shipped and title passes to the customer assuming all the other revenue recognition criteria stated above are satisfied. Revenues earned on non-refundable licensing fees are generally recognized when the licensing fees are delivered assuming all the other revenue recognition criteria stated above are satisfied. Sales are recorded net of any applicable sales tax.

The Company had product sales revenue of $298,666, $240,271, and $102,778 to three customers, representing approximately 28%, 23% and 10% of total sales for the three months ended September 30, 2012, respectively.

The Company had product sales revenue of $152,109, $104,900 and $97,472 to three customers, representing approximately 22%, 15% and 14% of total sales for the three months ended September 30, 2011, respectively.

Cost of Revenues
Costs of revenues include costs related to revenue recognized; such costs represent materials, labor, depreciation and amortization, equipment rental, supplies, utilities, repair and maintenance.

General and Administrative Expenses
General and administrative expenses include management and administrative personnel costs; corporate office costs; accounting fees, legal expense, information systems expense, and product marketing and sales expense.

Research and Development Expenses
Research and development expenses consist of expenses related to its wood coating process.

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.

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 May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820) – Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. The ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2011 and should be applied prospectively. The Company adopted this standard effective July 1, 2012.

In September 2011, FASB issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350).” Under the amendments in ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9. Under the amendments in this Update, an entity has the option to bypass the
 
 
 
11

 
 
 
Eco Building Products, Inc.

 
 
qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a
date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued. Management does not expect the provisions of ASU 2011-08 to have a material effect on the Company’s financial position, results of operations or cash flows.
 
 
3.   Inventories

As of September 30, 2012, inventories consisted of the following:

Chemicals
 
$
255,852
 
Lumber
   
834,135
 
   
$
   1,089,987
 

In addition, inventory is considered finished goods as the Company sells and markets the chemical and treated and untreated lumber.  All of the Company’s inventories are pledged as collateral for the Company’s $5,000,000 Loan Facility (see Note 5).
 
 
4.   Prepaid Loan Facility Fee

As discussed in Note 5, In September 2011, the Company issued 50,000,000 warrants in exchange for the payment of the $3.0 million prepaid loan fees in connection with the MRL $5 million line of credit.  The $3,025,000 total prepaid loan fees were amortized using the straight line method over the three year terms of the underlying notes.  Amortization charged to interest expense for the years ended September 30, 2012 and September 30, 2011 totaled $1,192,758 and $181,617 respectively.  As of September 30, 2012, the current and non-current prepaid loan facility fee was $1,008,383 and $826,765 respectively.


5.   Notes Payable

Loan Facility and Credit and Warrant Agreement with MRL
On February 14, 2011, the Company entered into a revolving credit and warrant purchase agreement (the “Credit and Warrant Agreement”) with MRL. The Credit and Warrant Agreement did not go into effect until it is ratified by the shareholders of MRL, on July 26, 2011.

Pursuant to the terms of the Credit and Warrant Agreement, MRL extended a $5,000,000 revolving loan facility (the “Loan Facility”). Interest accrues on the unpaid principal amount of each advance at a rate of 6% per annum. Under the terms of the Loan Facility the Company is allowed to borrow in $500,000 increments for a period of three years and is due with accrued interest at 6% per annum three months from the date of borrowing but not later than the expiration date of the agreement of February 14, 2014. So long as no events of defaults exist any loan may be rolled with another loan upon approval by the lender. The available credit under the loan facility can be reduced by the like amount of cash received through the exercise of warrants noted below. The Loan Facility is secured by substantially all the assets of the Company.

As of September 30, 2012, the Company drew down $5,000,000 on the Loan Facility and the short term portion and the long term portion were $1,666,667 and $3,333,333, respectively. As of September 30, 2012, the Company did not pay any interest and accrued $72,022 interest expense on the $5,000,000 loan facility from MRL for the three months ended September 30, 2012.

Convertible Notes - $1,080,000  Financing
On August 13, 2012, the Company entered into a definitive agreement with accredited investors to borrow a $1,080,000 in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due on November 13, 2012 with a 8% per annum interest rate.  After deducting all administrative and legal expenses, the proceed of the convertible note was$970,000 for the period ended September 30, 2012.
 
 
 
12

 
 
 
Eco Building Products, Inc.

 
 
Convertible Notes - $220,000 Financing
On September 1, 2012, the Company entered into a definitive agreement with accredited investors to borrow a $220,000  in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due in December 31, 2012.  The original loan was $200,000 with $20,000 interest needs to be due on March 1, 2013.
 
Convertible Notes - $55,000 Financing
During the three months ended September 30, 2012, the Company entered into a definitive agreement with accredited investors to borrow a $55,000  in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due in June 1st , 2013 with a 10% per annum interest rate.
 
Convertible Notes - $55,000 Financing
During the three months ended September 30, 2012, the Company entered into another definitive agreement with accredited investors to borrow a $55,000  in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due in June 1st , 2013 with a 10% per annum interest rate.
 
Convertible Notes - $55,000 Financing
On September 1, 2012, the Company entered into a definitive agreement with accredited investors to borrow a $55,000  in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due on March 1, 2013 with a 10% per annum interest rate.

Convertible Notes - $100,000 Financing
On June 11, 2012, the Company entered into a definitive agreement with accredited investors to borrow $100,000 in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due June 11, 2013.
 
The Notes bear interest at an annual rate of 4% payable.  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 $0.70 at any time which upon full conversion of the Notes would have resulted in the issuance of 1,388,889 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.
 
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from ICG, Inc. were allocated based on the relative fair value of the note without the warrant issued in conjunction with the note and of the warrant itself at the time of issuance. We recorded the relative fair value of the warrant issued to ICG Inc. in the amount of $84,795 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note.  Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental intrinsic value benefit of $0, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note.  We recorded interest expenses in the amounts of $12,603 for the three months ended September 30, 2012 and 2011, respectively, in connection with the Senior Note.

Loan Payable – Related Party
At September 30, 2012, the Company had a non interest bearing note payable due to its Chief Executive Officer who is also a Director and significant shareholder with a balance of $336,935.
 
 
 
13

 
 
 
Eco Building Products, Inc.

 
 
Loan Payable - Other
At September 30, 2012, the Company has a $144,500 liability for advances from a third party.  As of the date these financial statements were issued, no terms for repayment have been agreed to between the Company and this third party.

The Company entered in an auto loan agreement on November 7, 2011 to lease a Ford 150 pickup truck.  The principal amount of the loan is $21,886 and the interest rate 9.99%.  The loan will be matured on October 7, 2015.  The Company is currently paying $690 auto payment per month.

The following table summarizes the notes payable for the period ended September 30, 2012.

   
As of September 30, 2012
 
Description
 
Short term
   
Long term
 
Auto notes payable
 
$
8,278
   
$
13,608
 
MRL line of credit
   
1,666,667
     
3,333,333
 
Loan payable related party
   
336,935
     
-
 
Loan payable other
   
144,500
     
-
 
Financing with warrant issuance
   
15,206
     
-
 
 Convertible notes
   
1,325,000 
       -  
Total notes payable
 
$
3,496,586
   
$
3,346,941
 
 
Moreover the following table summarizes the future minimum payment for 5-year commitments of the notes payable:
 
   
Principal
 
6/30/2013
 
$
2,938,271
 
6/30/2014
   
3,894,970
 
6/30/2015
   
7,585
 
6/30/2016
   
2,701
 
6/30/2017
   
-
 
Thereafter
   
-
 
Total
 
$
6,843,527
 
 
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 include:
 
(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.
 
(e)
Severance pay is due the President upon separating from service, with or without cause, equaling his then current monthly salary multiplied by the number of full years that the President has been employed with the Company prior to separation.

Accrued compensation due the President at September 30, 2012 totaled $370,513.  Severance pay accrued and charged to operations during the three months ended September 30, 2012 totaled $15,025.  Compensation charged to operations during the three months ended September 30, 2012 on the granted options for both officers totaled $14,190.
 

 
 
14

 
 
 
Eco Building Products, Inc.

 
 
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
 
 
(a)
Annual salary of $250,000
 
(b)
Cash bonus of $250,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $34,000,000, subject to certain limitations.
 
(c)
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.
 
(d)
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.
 
(e)
Severance pay is due the President upon separating from service, with or without cause, equaling his then current monthly salary multiplied by the number of full years that the President has been employed with the Company prior to separation.

Accrued compensation due the Chief Technical Officer at September 30, 2012 totaled $296,169.  Severance pay accrued and charged to operations during the three months ended September 30, 2012 totaled $30,049.  The Company made repayments of accrued compensation totaling $32,300 to the Chief Technical Officer during the three months ended September 30, 2012.


6.   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.
 
 
 
15

 
 
 
Eco Building Products, Inc.

 
 
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. Derivative instruments include the derivative liabilities as Level 2. Derivative instruments are valued using standard calculations/models that are primarily based on observable inputs, including volatilities and interest rates. Therefore, derivative instruments are included in Level 2

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.

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.

Line of Credit 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.

Notes Payable. 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 - 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 September 30, 2012:

Liabilities measured at fair value at September 30, 2012:
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                                 
Line of credit payable – related party
 
$
--
   
$
6,532,641
   
$
--
   
$
6,532,641
 
                                 
Notes payable
 
$
--
   
$
21,886
   
$
--
   
$
21,886
 

Loans payable – other
 
$
--
   
$
144,500
   
$
--
   
$
144,500
 


7.   Stockholders' Deficit

Investment Agreement with MRL
On February 14, 2011, the Company entered into an investment agreement (the “Investment Agreement”) with MRL and LTK, a controlling shareholder of MRL (the “Investment Agreement”).
 
 
 
16

 
 
 
Eco Building Products, Inc.


On February 16, 2011, pursuant to the terms of the Investment Agreement, LTK subscribed for 81,000,000 shares in the Company, representing approximately 26 percent of the Company’s resulting total issued and outstanding common equity, for an aggregate consideration of $5,000,000. The agreement called for LTK to sell the Sale Shares to MRL, for the same consideration, subject to approval from shareholders of MRL, which occurred on July 26, 2011.

On February 14, 2011, the Company also entered into a revolving credit and warrant purchase agreement with MRL. The Credit and Warrant Agreement did not go into effect until it was ratified by the shareholders of MRL, which occurred on July 26, 2011. See Notes 4 and 5 for material terms of the Credit and Warrant Agreement.

In the event MRL fully exercises the Warrant which was granted upon MRL shareholder approval of the Credit and Warrant Agreement on July 26, 2011, MRL would acquire an aggregate of 131,000,000 Shares representing approximately 42 percent of the resulting total issued and outstanding common equity of the Company, for an aggregate consideration of $10,000,000.

Options
In April 2011, the Company granted options to its President to purchase 800,000 shares of its common stock and options to its Chief Technical Officer to purchase 400,000 shares of its common stock. The 1,200,000 options have an exercise price of $0.10 per share and expire in five years. The options were valued at $113,520 using the Black-Scholes Option Model with a risk-free interest rate of 2.24%, volatility of 169.83%, and trading price of $0.10 per share. The $113,520 is being charged to operations over their two year vesting period. Compensation charged to operations for the three months ended September 30, 2012 on these options amounted to $14,190. As of September 30, 2012, a total of 450,000 of the 1,200,000 options were vested.

Common Stocks
During the three months ended September 30, 2012, the Company issued 6,650,000 shares of its common stock, under options, to compensate outside law firms, calculated for accounting at a stock closing price at the end of each trading date, being compensation for legal services, for a total exercise of $435,500 as a legal expense for legal services.  In addition, the Company issued 5,900,000 shares of its common stock to compensate consulting firms for consulting services, for a total exercise of $461,000 for consulting services.  Moreover, the Company issued 6,810,364 shares of its common stock to the third party lender with a conversion price of $0.055771 per share to settle the debt that has been outstanding in prior years. The Company recorded $448,43 6 loss on modification of debt under other expense in the Condensed Consolidated Statements of Operations.

8.   Commitments and Contingencies

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 was to purchase minimum product. The initial term of the agreement was two years.

With regard to the above agreement, the Company learned, among other things, in fiscal 2010 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 and the Company immediately terminated the agreement with cause and all such issues including developments are part of an ongoing litigation and arbitration, see Legal Proceedings below.

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 5). As of the date of these financial statements, the Company has no obligation to purchase additional inventory from Megola, Inc.
 
 
 
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Eco Building Products, 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. In addition, a significant shareholder of Newstar Holding Pte Ltd is also a significant shareholder of MRL. 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) XXX gallon totes of product in the first two-year period at a cost of $XX.XX 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 $XX.XX 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 $XX.XX per gallon, making the total purchase commitment $3,530,352 for year four. There are no penalty clauses other than cancellation of the agreement if the minimum purchase commitments are not met. If the agreement were to be cancelled it would have a significant impact on the Company's operations until a replacement product could be arranged.

Vehicle Lease – Ford Credit
In September 2011, the Company entered into a two year automobile lease with scheduled payments of $390 per month.

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

Moreover, on or about September 7, 2012, a law firm claiming to represent MRL supplied a letter to Eco. On September 19, 2012 Eco obtained the advice of litigation counsel which, after review and consultation, concluded to the effect that the letter is material, notwithstanding current or recently past communications impacting upon the veracity of the contents of the letter, or the intention of the letter. The contents of the letter include statements advising Eco that Eco is in breach of the Revolving Credit and Warrant Purchase Agreement referenced above ("Revolving Agreement"), and the Investment Agreement dated February 14, 2011 referenced above. It is not clear if that law firm (the firm that sent the letter) also represents the other parties noted in the agreements other than MRL. The letter claims the transactions, previously reported, by Eco relating to the Purchase Agreement and granting of a security interest, August 13, 2012, per the previously filed Form 8K of Eco August 22, 2012, was a breach of various provisions of the agreements relating to MRL, they (MRL) will enforce their rights, and reserve rights, and that an Event of Default has happened under Section 6(a) of Revolving Agreement, in that Eco failed to pay the $5,000,000 allegedly due.  The same claims of default as to interest, and that they do not agree that MRL agreed to forebear from individually enforcing rights or remedies.
 
Manhattan Resources Limited

On February 14, 2011, Eco Building Products, Inc., formerly EcoBlu Products Inc. (“Eco”) 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”). On February 14, 2011, Eco also entered into a revolving credit and warrant purchase agreement (the “Credit and Warrant Agreement”) with MRL. Agreements, securities, and obligations also were confirmed with SLM Holding PTE, Ltd. (SLM) a wholly owned subsidiary of MRL, and Swanny Sujanty, an individual, including transfer of 9,500,000 shares of restricted stock from Steve Conboy, the CEO of Eco, to Swanny Sujanty. Copies of these above agreements (the "Past Agreements") and their terms were disclosed under the Eco Form 8-K filling on February 16, 2011. Herein "MRL" includes MRL, LTK, SLM, and Swanny Sujanty, considered affiliates to MRL by Eco. At various points, the past year, Eco, offered MRL for MRL and affiliates, an arrangement whereby all their interests in Eco and all obligations of Eco to any of them would be exchanged for a promise to make a future
 
 
 
18

 
 
 
Eco Building Products, Inc.

 
 
buyout payment. On July 9, 2012 lawyers for Eco advised Eco that the aspect of the Offer, below, and the communication that an agreement was reached is legal grounds, subject to potential judicial determination, supporting Eco's conclusion that MRL has agreed to Eco's offer including selling all interests back to Eco for promise of a future payment, as stated below. If judicial action was taken, Eco may or may not be successful. Previously, on June 13, 2012, Eco was advised that MRL had accepted Eco's Offer.
 
The Offer was as follows:

1.   MRL surrenders all rights and interests in Eco. This includes all securities.
2.   Eco agrees to repay or pay MRL the sum of $10,000,000 USD on or before 24 months from acceptance, or June 13, 2014. (Recently determined to be an additional $500,000 USD representing interest, total $10,500,000.)
3.   The only obligation that survives the settlement or agreement is the obligation of Eco to pay the sum stated. Based on the Offer and the communicated acceptance, Eco proceeded to prepare and provide a document to memorialize the agreement but was informed by MRL that it was not accepted. Various communications followed.

On or about September 7, 2012, a law firm claiming to represent MRL supplied a letter to Eco. On September 19, 2012 Eco obtained the advice of litigation counsel which, after review and consultation, concluded to the effect that the letter is material, notwithstanding current or recently past communications impacting upon the veracity of the contents of the letter, or the intention of the letter. The contents of the letter include statements advising Eco that Eco is in breach of the Revolving Credit and Warrant Purchase Agreement referenced above ("Revolving Agreement"), and the Investment Agreement dated February 14, 2011 referenced above. It is not clear if that law firm (the firm that sent the letter) also represents the other parties noted in the agreements other than MRL. The letter claims the transactions, previously reported, by Eco relating to the Purchase Agreement and granting of a security interest, August 13, 2012, per the previously filed Form 8K of Eco August 22, 2012, was a breach of various provisions of the agreements relating to MRL, they (MRL) will enforce their rights, and reserve rights, and that an Event of Default has happened under Section 6(a) of Revolving Agreement, in that Eco failed to pay the $5,000,000 allegedly due. The same claims of default as to interest, and that they do not agree that MRL agreed to forebear from individually enforcing rights or remedies. Eco takes the position that an agreement, altering the rights of MRL and related others, was previously offered and accepted and that it means that MRL and noted affiliates surrendered to Eco rights and interests in Eco and no longer can claim they own securities in Eco, and this was in exchange for Eco supplying the concurrent promise to pay the sum of $10,500,000 by June 13, 2014; that the securities held by MRL and affiliates are or should be deemed cancelled or retired; and that Eco is willing to negotiate and entertain, though not obligated, repaying the sum with interest, as well as any "amendment" or terms for orderly procedures of the parties. This would mean that Eco also believes the Past Agreements no longer apply. Eco is now seeking the advice of counsel and has believes that MRL is open to settle and resolve the differences and demands of MRL communicated to Eco and while it plans to vigorously defend and protect its interests, it also continues to express the interest to reach an amicable resolution with MRL. No assurance can be given that Eco will be successful in the resolution, if possible, of such claims.

9.   Subsequent Events
 
On October 25, 2012, the Board of Directors of the Corporation determined it is in the best  interests of the Corporation  to issue 4,412,512 restricted common stock shares to Manhattan Resources Limited (MRL) in lieu of a cash interest payment as part of an offer or resolution it is seeking.
 
On October 25, 2012, the Board decided to present an offer to MRL  to pay, in 24 months or less, the $10,000,000 reflecting the  $5,000,000 worth of stocks and $5,000,000 outstanding line of credit  of MRL, or take steps with the goal of registering the stock of MRL, and also, as part of  a proposal to MRL,  pay interest on the $5,000,000 outstanding line of credit from MRL quarterly in payment of shares of common stock.
 
On October 19, 2012, the Company has not been successful to monetize or obtain a beneficial credit enhancement with vendors or customers or others, relating to the $100 million standby letter of credit (SBLC) with Bank of China or SBLC in several business transactions as it was intended to be useful for. The Company has not been successful utilizing the SBLC to secure credit or raise cash leaving us in a situation where we are unable to pay any fees relating to the SBLC and the Company has decided to proceed in a way to return the SBLC to the original assignor.





 
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following management's discussion and analysis should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three months ended September 30, 2012 included in this report and our audited consolidated financial statements and related notes for the year ended June 30, 2012 included in our Annual Report on Form 10-K filed on October 15, 2012 with the Securities and Exchange Commission.

Forward-Looking Statements

Certain statements concerning our plans and intentions included herein may constitute forward-looking statements. There are a number of factors that may affect our future results, including, but not limited to, (a) our ability to obtain additional funding for operations, (b) the continued availability of management to develop the business plan and (c) successful development and market acceptance of our products.

This annual report may contain both historical facts and forward-looking statements. Any forward-looking statements involve risks and uncertainties, including, but not limited to, those mentioned above. Moreover, future revenue and margin trends cannot be reliably predicted.

Overview
Eco Building Products, Inc., or "ECOB", has developed a line of eco-friendly protective wood coatings that extend the life of framing lumber and other wood used in the construction of single-family homes, multi-story buildings as well as The Eco Shelter™ which serves as cost-effective housing for the world.
 
Eco Building Products wood coatings are topically applied to lumber protecting it from mold, mildew, fungus, decay, wood rot, and Formosan termites. Eco’s newest product, Eco Red Shield™ also serves as a fire inhibitor protecting lumber from fire, slowing ignition time and reducing the amount of smoke produced.
 
The ECOB system of coatings is eco-friendly and remains chemically stable over time. The coatings emit virtually zero volatile organic compounds (VOCs), do not leech heavy metals or toxins into groundwater, inhibit the growth and propagation of various molds that have the potential to contaminate occupant indoor air quality. More importantly, ECOB coatings prevent the degradation of structural lumber that potentially requires existing homes to be periodically rebuilt due to rot and/or wood ingesting insects/termite damage preserving our forests.
 
The Eco Building Products line includes dimensional lumber, wall and floor panels, I-joists, GluLam Beams, LVL beams, truss lumber and trim. These products can be coated at our production facilities and at the mill or distributor with our proprietary formula and coating machines. Additionally the company has six authorized affiliates producing Eco Red Shield coated products. The Company sells concentrated coating materials to the affiliate network creating additional revenue streams.
 
By supporting and providing value added lumber materials direct from our facilities or the distributors and manufacturer, ECOB can create a compelling value package. This package is offered to builders, and provides the protection of ECOB coatings at a price that compares favorably to raw, untreated wood.
 
Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, inventories, income taxes, warranty obligations and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions.  Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates.
 
 
 
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We believe the following critical accounting policies reflect our more significant judgments used in the preparation of our consolidated financial statements.
 
Lines of Credit with Detachable Warrants
Warrants issued to obtain a line of credit are recorded at fair value at contract inception.  When warrants are issued to obtain a line of credit rather than in connection with the issuance, the warrants are accounted for as equity, at the measurement date in accordance with ASC 505-50-25 “Equity-Based Payments to Non-Employees”. The issuance of these warrants is equivalent to the payment of a loan commitment or access fee, and, therefore, the offset is recorded akin to debt issuance costs. The deferred fee is amortized on a straight-line basis over the stated term of the line of credit

Issuances Involving Non-cash Consideration
All issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount equaling the market value of the shares issued on the date the shares were issued for such services.

Stock Based Compensation
The Company accounts for stock options issued to employees and consultants under ASC 718 “Share-Based Payment”. Under ASC 718, share-based compensation cost to employees is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee's requisite vesting period.

The Company accounts for stock-based compensation to non-employees under ACS Topic 505-50 “Equity-Based Payments to Non-Employees.” This standard defines a fair value based method of accounting for stock-based compensation. In accordance with ACS Topic 505-50, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using a mulit-nominal lattice model or the Black-Scholes option-pricing model, whereby compensation cost is the excess of the fair value of the award as determined by the pricing model at the grant date or other measurement date over the amount that must be paid to acquire the stock. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period.

Revenue Recognition and Concentration Risk
We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) – Accounting Standards Codification (“ASC”) 605-10-S25 Revenue Recognition – Overall – Recognition. ASC 605-10-S25 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgment regarding the fixed nature of the fee charged for products delivered and the collectability of those fees. The application of these criteria has resulted in our generally recognizing revenue upon shipment (when title passes) to customers. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely impacted.

All items sold, we sell to end users, job sites and distributors and are sold as is.  We offer a replacement warranty for items that are deemed not acceptable at the time of delivery.  We will offer the customer a maximum of a 30 day period of time to request a replacement item period. Any items that a customer wants to return for credit we charge a 25% restocking fee as this is stated in every quotation.
 
These arrangements do not include any special payment terms (our normal payment terms are 30-45 days for our distributors), price protection or exchange rights. Returns are limited to our standard product warranty. Certain of our distributors have contracts that include limited inventory rotation rights that permit the return of a small percentage of the previous six months' purchases.

Warranty Reserves.  We offer customer a 10 year replacement warranty against Mold, wood-Rot and Termite damage for the value added portion of company’s service such as the coating applied to the raw lumber.  This warranty is backed by an 11 million dollar product liability policy and a 5 million dollar mold rider in which the company maintains a deductible policy on it.  As of current, the company has not yet experienced any warranty claim against this stated warranty policy. 
 
 
 
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Inventory Valuation. We currently value our inventory at the average cost.  We write down inventory for obsolescence or lack of demand, based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. On the contrary, if market conditions are more favorable, we may be able to sell inventory that was previously reserved.

Going Concern

Our continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations. Our future is dependent upon our ability to obtain financing and upon future profitable operations. Management plans to seek additional financing through the sale of its common stock through private placements. There is no assurance that our current operations will be profitable or we will raise sufficient funds to continue operating. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event we cannot continue in existence.


Financial Condition and Results of Operations
The table below sets forth the data from our Condensed Consolidated Statement of Operations as a percentage of revenue for the periods indicated:  

Results of Operations for the Three Months Ended September 30, 2012 as Compared to the Three Months Ended September 30, 2011

Revenues and Cost of Sales - For the three months ended September 30, 2012 we had total revenues of $1,060,426 from product sales, as compared to $690,679 in revenues from product and equipment sales for three month period ended September 30, 2011.  Our cost of sales and gross profit for the three months ended September 30, 2012 was $811,682 and$248,744, respectively. This is compared to our cost of sales and gross profit for the three months ended September 30, 2011 of $623,604 and $67,075, respectively. Sales margins have improved however gross sales have not yet developed to sufficient levels to improve efficiencies.

Operating Expenses - For the three months ended September 30, 2012, our total operating expenses were $2,416,621 as compared to $1,439,524 for the three month period ended September 30, 2011. Included in our operating expenses for the three months ended September 30, 2012 were compensation and related costs of $674,761. Professional fees included in our operating expenses for the three months ended September 30, 2012 amounted to $477,893.  Other significant operating costs we incurred during the three months ended September 30, 2012 included rent of $210,620, consulting fees of $381,623, marketing of $92,468, research and development of $95,217, and other general and administrative costs of $474,714. Our operating expenses for the three months ended September 30, 2011 consisted of $606,454 of compensation and related costs, $293,190 of professional fees, $78,955 of rent expense, $78,556 of consulting fees, $18,621 of research and development expense, $29,953 of marketing expense, and $333,795 of other general and administrative expenses.

Other Income and Expenses - For the three months ended September 30, 2012 we had other expenses that included interest expense of $337,270.  We incurred 448,437 for the loss on modification of five of our convertible notes payable as the Company issued 5 million shares for the three months ended September 30, 2012 in order to offset the loan that owed to the third party lender in prior years and expense of $7,554 change in FV of derivative liability.  This is compared to the three months ended September 30, 2011, in which our other income and expenses included interest income of $3,365 and interest expense of $220,165.

Liquidity and Capital Resources

On September 30, 2012, we had $3,394 cash on hand.  During the three months ended September 30, 2012, net cash used in our operating activities amounted to $1,649,638. Net cash used during the same period for our investing activities totaled $21,523 which was used for the purchase of property and equipment.  During the same three month period, net cash provided by our financing activities totaled $1,563,304, of which $235,455 was received from related party advances and notes and $1,327,849 was received from debt issuance.
 
 
 
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During the three months ended September 30, 2011, net cash used in our operating activities amounted to $1,711,368.  Cash of $66,437 was used by investing activities during the same period, which consisted of $29,473 of purchasing of property and equipment, $25,000 of purchasing of software license and $11,964 payments for equipment deposits – related party.  Cash of $1,727,509 was provided by financing activities during the same period, which consisted of $3,000,000 proceeds from related party line of credit advances, less repayment of related party advances and notes of $1,272,491.

During the year ended June 30, 2011, we entered into an investment agreement and a revolving line of credit and warrant purchase agreement with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL. Under the investment agreement, we received $5,000,000 in exchange for issuing 81,000,000 shares of its common stock. Effective July 26, 2011, we obtained the ability to borrow up to an additional $5,000,000 on the revolving credit and warrant purchase agreement, in exchange for the issuance of warrants to purchase 50,000,000 shares of our common stock at $0.10 per share to MRL as a loan facility fee.  Of this amount $3,000,000 was borrowed in July 2011 and $2,000,000 was borrowed subsequent to September 30, 2011.  As of the date of this filing we had cash on hand of $3,394.  Since the Company had borrowed the entire $5,000,000 line of credit during the three months ended December 31, 2011, which made no credit was available under this agreement at this period.  On October 25, 2012, we made a proposal to MRL and we have started to pay interest on the $5,000,000 line of credit to MRL quarterly.  For detail please refer to Note 9, Subsequent Events on the condensed consolidated footnote.

If current and projected revenue growth does not meet management estimates and proceeds received from MRL are insufficient, we may choose to raise additional capital through debt and/or equity transactions, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation. Currently, we do not have any commitments or assurances for additional capital, other than MRL, nor can we provide assurance that such financing will be available to us on favorable terms, or at all. If, after utilizing the existing sources of capital available to us, further capital needs are identified and we are not successful in obtaining the financing, we may be forced to curtail our existing or planned future operations.

We may continue to incur operating losses over the next twelve months. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in our stage of development. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things, obtain a customer base, implement and successfully execute our business and marketing strategy, continue to develop and upgrade technology and products, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

Off Balance Sheet Arrangements

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



 
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Item 3 - Quantitative and Qualitative Disclosures About Market Risk
 
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
 
Item 4 - Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” pursuant to Exchange Act Rule 13a-15(e). Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations. Our internal controls framework is based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Based on that evaluation, our principal executive officer and our principal financial officer has concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are not effective in ensuring that information required to be disclosed in our Exchange Act reports is recorded, processed, and summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms to allow timely decisions regarding required disclosure.
 
During the period ended June 30, 2012 and continuing through the period ended September 30, 2012, we determined that because of the limited personnel, lack of segregation of duties and manual process related to the tracking and valuation of our inventory, management determined that a material weakness existed in the processes, procedures and controls related to the preparation of our financial statements.  This material weakness could result in the reporting of financial information and disclosures in future consolidated annual and interim financial statements that are not in accordance with generally accepted accounting principles.
 
The Company expects to take the following steps to remedy these weaknesses:

 
1.
Implement a new Enterprise Resource Planning system in which will improve the segregation of duties issues and automate the tracking of costs related to inventory
 
2.
Controller to implemented procedures to improve the transaction processing, reconciliation and reporting process of inventory.
 
3.
Formal reviews by Management of the inventory outputs as generated by the Controller.
 
The Company expects to remediate these weaknesses prior to the completion of the quarter ended December 31, 2012.
 
 
 
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Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - OTHER INFORMATION
 
Item 1     Legal Proceedings
 
The Company (sometimes herein "Eco" or "ECOB")  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 accrues the legal costs associated with loss contingencies as the associated legal services are rendered. As previously reported, the matter has been referred to arbitration and the Company relies upon the advice of litigation counsel as the legal matter continues or resolution or a proceeding.
 
Ecob is now seeking the advice of counsel and has believes that MRL is open to settle and resolve the differences and demands of MRL communicated to Ecob and while it plans to vigorously defend and protect its interests, it also continues to express the interest to reach an amicable resolution with MRL. No assurance can be given that Ecob will be successful in the resolution, if possible, of such claims.
 

Item 2     Unregistered Sales of Equity Securities and Use of Proceeds
 
None.

Item 3     Defaults Upon Senior Securities
 
On or about September 7, 2012, a law firm claiming to represent Manhattan Resources Limited, or MRL, supplied a letter to Ecob. On September 19, 2012 Ecob obtained the advice of litigation counsel which, after review and consultation, concluded to the effect that the letter is material, notwithstanding current or recently past communications impacting upon the veracity of the contents of the letter, or the intention of the letter. The contents of the letter include statements advising Ecob that Ecob is in breach of the Revolving Credit and Warrant Purchase Agreement referenced above ("Revolving Agreement"), and the Investment Agreement dated February 14, 2011 referenced above. It is not clear if that law firm (the firm that sent the letter) also represents the other parties noted in the agreements other than MRL. The letter claims the transactions, previously reported, by Ecob relating to the Purchase Agreement and granting of a security interest, August 13, 2012, per the previously filed Form 8K of Ecob August 22, 2012, was a breach of various provisions of the agreements relating to MRL, they (MRL) will enforce their rights, and reserve rights, and that an Event of Default has happened under Section 6(a) of Revolving Agreement, in that Eco failed to pay the $5,000,000 allegedly due.  The same claims of default as to interest, and that they do not agree that MRL agreed to forebear from individually enforcing rights or remedies.
 
Ecob takes the position that an agreement, altering the rights of MRL and related others, was previously offered and accepted and that it means that MRL and noted affiliates surrendered to Ecob rights and interests in Ecob and no longer can claim they own securities in Ecob, and this was in exchange for Ecob supplying the concurrent promise to pay the sum of $10,500,000 by June 13, 2014; that the securities held by MRL and affiliates are or should be deemed cancelled or retired; and that Ecob is willing to negotiate and entertain, though not obligated, repaying the sum with interest, as well as any "amendment" or terms for orderly procedures of the parties. This would mean that Ecob also believes the Past Agreements no longer apply.
 
Ecob is now seeking the advice of counsel and has believes that MRL is open to settle and resolve the differences and demands of MRL communicated to Ecob and while it plans to vigorously defend and protect its interests, it also continues to express the interest to reach an amicable resolution with MRL. No assurance can be given that Ecob will be successful in the resolution, if possible, of such claims.
 
As of September 5th 2012 a total of $ 5,264,751.00 was owed to MRL and this would include a total of $ 264,751.00 in accrued interest assuming that interest is due.
 

 
 
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Item 6     Exhibits and Reports
 
Exhibits
 
Eco Building 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
3.4
Amended  Articles of Incorporation ; filed as exhibit 3.3 with the registrant’s Annual Report on Form 10-K; filed with the Securities and Exchange Commission on September 28, 2011
4.1
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
4.2
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.
10.5
Employment Agreement – between Ecoblu Products, Inc. and Steve Conboy, Effective April 1, 2011. filed as exhibit 10.5 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on May 23, 2011.
10.6
Employment Agreement – between Ecoblu Products, Inc. and Mark Vuozzo, Effective April 1, 2011 filed as exhibit 10.6 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on May 23, 2011.
21.1
Subsidiaries List filed as exhibit 21.1 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on November 15, 2011.
 
Eco Building Products, Inc. includes herewith the following exhibits:
 
 


 
 
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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.
 
  Eco Building Products, Inc.  
       
Date: November 26 , 2012
By:
/s/ Steve Conboy  
    Steve Conboy, President  
    Principal Executive Officer  
    Principal Financial Officer  







 
 
 
 

 




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