UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








FORM 10-Q








(Mark One)


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





For the quarterly period ended December 31, 2010





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





For the transition period from _____________ to _____________




Commission file number:333-145659




Ecoblu Products, Inc.


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




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





909 West Vista Way


Vista, California 92083


(Address of principal executive offices)




(760) 732-5826


(Registrants telephone number, including area code)






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






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




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




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




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 December 31, 2010: 95,036,100 shares of common stock












1
 Table of Contents








Ecoblu Products, Inc.





Contents




PageNumberPART I
FINANCIAL INFORMATIONItem 1
Condensed Consolidated Financial Statements December 31, 2010Balance Sheets
3Statements of Operations
4Statement of Changes in Shareholders' Equity (Deficit)
5Statements of Cash Flows
7Notes to the Interim Financial Statements
9Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
25Item 3
Quantitative and Qualitative Disclosures About Market Risk
31Item 4
Controls and Procedures
31Part II
OTHER INFORMATIONItem 1
Legal Proceedings
32Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
32Item 3
Defaults Upon Senior Securities
33Item 4
[Removed and Reserved]
33Item 5
Other Information
33Item 6
Exhibits and Reports
36SIGNATURES
38





















2
 Table of Contents






Part I -FINANCIAL INFORMATION
 
 Item 1 - FinancialStatements






ECOBLU PRODUCTS, INC.(A DEVELOPMENT STAGE COMPANY)CONDENSED CONSOLIDATED BALANCE SHEETSDecember 31,


June 30,2010


2010(Unaudited)


(Derived fromaudited financialstatements)ASSETSCURRENT ASSETSCash

$
11,321


$
385,534Accounts receivable, net of allowance for doubtful accounts of $17,487 atDecember 31, 2010 and $4,487 at June 30, 2010


48,534



5,477Loan receivable - related party


-



23,500Other receivables


11,110



5,886Inventory


1,123,465



679,380Prepaid loan fees


57,637



176,607Other prepaid expenses


9,497



-Deposit


-



45,155Total current assets


1,261,564



1,321,539PROPERTY AND EQUIPMENT, net


399,751



429,912OTHER ASSETSEquipment deposits - related party


161,618



161,618Prepaid trademark costs


5,981



4,871Total other assets


167,599



166,489TOTAL ASSETS

$
1,828,914


$
1,917,940LIABILITIES AND STOCKHOLDERS' (DEFICIT)CURRENT LIABILITIESAccounts payable

$
263,566


$
200,900Payroll and taxes payable


263,350



106,580Advances from related party


171,500



-Other payables and accrued expenses


73,537



15,864Convertible notes payable, including accrued interest and net of discount


925,518



341,681Loans payable - related party


406,050



-Loans payable - other


857,578



44,500Derivative and warrant liabilities


1,748,119



1,656,217Total current liabilities


4,709,218



2,365,742LONG TERM LIABILITIESConvertible notes payable, including accrued interest and net of discount


-



407,779Total long term liabilities


-



407,779TOTAL LIABILITIES


4,709,218



2,773,521STOCKHOLDERS' (DEFICIT)Common stock, $0.001 par value, 100,000,000 shares authorized,95,036,100 shares issued and outstanding at December 31, 2010and 75,594,333 shares issued and outstanding at June 30, 2010


95,036



75,594Additional paid-in capital


4,379,290



3,368,972Common stock subscription receivable


(20,000
)


(20,000
)Deficit accumulated during the development stage


(7,334,630
)


(4,280,147
)Total stockholders' (deficit)


(2,880,304
)


(855,581
)TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)

$
1,828,914


$
1,917,940












3
 Table of Contents





ECOBLU PRODUCTS, INC.(A DEVELOPMENT STAGE COMPANY)CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSPeriod ofThree months


Three months


Six months


Six months


InceptionEnded


Ended


Ended


Ended


(May 20, 2009)December 31,


December 31,


December 31,


December 31,


December 31,2010


2009


2010


2009


2010(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)REVENUEProduct sales

$
368,482


$
-


$
722,599


$
-


$
908,760License sales


-



-



-



-



28,600Equipment and other sales


-



-



3,000



-



12,738Total revenue


368,482



-



725,599



-



950,098COST OF SALES


(309,707
)


-



(636,624
)


-



(866,518
)GROSS PROFIT


58,775



-



88,975



-



83,580OPERATING EXPENSESResearch and development


35,193



5,975



44,964



5,975



91,198Marketing


9,455



17,873



11,435



17,873



69,590Compensation


197,787



32,462



351,372



32,462



621,420Rent


91,434



62,417



233,890



124,345



663,109Professional fees


164,758



52,130



311,482



52,130



839,567Consulting


21,910



62,700



51,611



49,500



2,055,115Other general and administrative expenses


154,641



30,909



240,269



30,909



422,128Total operating expenses


675,178



264,466



1,245,023



313,194



4,762,127LOSS FROM OPERATIONS


(616,403
)


(264,466
)


(1,156,048
)


(313,194
)


(4,678,547
)OTHER INCOME (EXPENSES)Gain on settlement of lease


-



-



-



-



21,270Gain (loss) on settlement of debt


160



-



12,706



-



(86,311
)Loss on modification of debt


(44,516
)


-



(421,600
)


-



(421,600
)Change in fair value of derivative liability


(638,231
)


-



155,463



-



104,246Interest expense


(904,679
)


(1,035
)


(1,645,004
)


(1,035
)


(2,181,748
)Total other income (expenses)


(1,587,266
)


(1,035
)


(1,898,435
)


(1,035
)


(2,564,143
)LOSS BEFORE PROVISION FORINCOME TAXES


(2,203,669
)


(265,501
)


(3,054,483
)


(314,229
)


(7,242,690
)PROVISION FOR INCOME TAXES


-



-



-



-



-NET LOSS

$
(2,203,669
)

$
(265,501
)

$
(3,054,483
)

$
(314,229
)

$
(7,242,690
)NET LOSS PER COMMON SHARE -BASIC AND DILUTED


(0.03
)


(0.00
)


(0.04
)


(0.00
)WEIGHTED AVERAGE NUMBER OFCOMMON SHARES OUTSTANDING


85,938,406



68,502,724



81,113,370



67,320,334
 
 
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4
 Table of Contents




ECOBLU PRODUCTS, INC.(A DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)PERIOD OF INCEPTION (MAY 20, 2009) TO DECEMBER 31, 2010 (Unaudited)Deficit

Accumulated


CommonAdditional


During the


StockShare


Common Stock


Paid-in


Development


OtherDate

Price


Shares


Amount


Capital


Stage


Consideration


TotalsBALANCE, May 20, 2009 (Inception)





-


$
-


$
-

$



$
-


$
-Recapitalization to effect reverse merger with Ecoblu Products Inc. (Formerly N8 Concepts, Inc.)






64,940,000



64,940



-



(91,940
)


-



(27,000
)Issuance of common stock for cash
6/30/09

$
0.17



60,000



60



9,940



-



-



10,000Contributed legal services







-



-



3,200



-



-



3,200Net loss for period







-



-



-



(23,200
)


-



(23,200
)BALANCE, June 30, 2009







65,000,000



65,000



13,140



(115,140
)


-



(37,000
)Issuance of common stock for cash
10/1/09

$
0.16



1,125,000



1,125



173,875



-



-



175,000Issuance of common stock for cash
10/1/09

$
0.10



1,137,944



1,138



112,656



-



-



113,794Issuance of common stock for cash
11/4/09

$
0.05



20,000



20



4,980



-



-



5,000Issuance of common stock for cash
11/4/09

$
0.15



340,000



340



49,660



-



-



50,000Issuance of common stock for cash
11/4/09

$
0.25



518,000



518



128,982



-



-



129,500Issuance of common stock for cash
11/4/09

$
0.33



20,000



20



6,480



-



-



6,500Issuance of common stock for cash
11/4/09

$
0.50



380,000



380



179,620



-



-



180,000Issuance of common stock for cash
12/16/09

$
0.16



31,250



31



4,969



-



-



5,0003,572,194



3,572



661,222



-



-



664,794Issuance of common stock for settlement of debt
1/20/10

$
0.67



150,000



150



100,350



-



-



100,500Issuance of common stock for settlement of debt
2/1/10

$
0.53



23,334



23



12,344



-



-



12,367Issuance of common stock for settlement of debt
2/10/10

$
0.45



12,560



13



5,639



-



-



5,652Issuance of common stock for settlement of debt
3/2/10

$
0.37



160,000



160



59,040



-



-



59,200Issuance of common stock for settlement of debt
3/9/10

$
0.36



240,000



240



86,160



-



-



86,400Issuance of common stock for settlement of debt
3/29/10

$
0.38



59,888



60



22,697



-



-



22,757Issuance of common stock for settlement of debt
5/17/10

$
0.25



78,024



78



19,428



-



-



19,506723,806



724



305,658



-



-



306,382Issuance of common stock for consulting and advisory services
11/4/09

$
0.25



360,000



360



89,640



-



-



90,000Issuance of common stock for consulting and advisory services
11/4/09

$
0.50



175,000



175



87,325



-



-



87,500Issuance of common stock for consulting and advisory services
2/10/10

$
0.45



95,000



95



42,655



-



-



42,750Issuance of common stock for consulting and advisory services
3/1/10

$
0.36



120,000



120



43,080



-



-



43,200Issuance of common stock for consulting and advisory services
3/5/10

$
0.38



3,300,000



3,300



1,250,700



-



-



1,254,000Issuance of common stock for consulting and advisory services
3/8/10

$
0.43



100,000



100



42,900



-



-



43,000Issuance of common stock for consulting and advisory services
3/9/10

$
0.36



100,000



100



35,900



-



-



36,000Issuance of common stock for consulting and advisory services
5/28/10

$
0.34



200,000



200



67,800



-



-



68,000Issuance of common stock for consulting and advisory services
6/15/10

$
0.30



1,033,333



1,033



308,967



-



-



310,0005,483,333



5,483



1,968,967



-



-



1,974,450Issuance of common stock for legal services
3/5/10

$
0.38



250,000



250



94,750



-



-



95,000Issuance of common stock for legal services
3/9/10

$
0.36



40,000



40



14,360



-



-



14,400Issuance of common stock for legal services
5/11/10

$
0.28



80,000



80



22,320



-



-



22,400370,000



370



131,430



-



-



131,800Issuance of common stock for prepaid loan fee
3/26/10

$
0.36



100,000



100



35,900



-



-



36,000Issuance of common stock for prepaid loan fee
5/3/10

$
0.36



100,000



100



35,900



-



-



36,000200,000



200



71,800



-



-



72,000Issuance of common stock for rent
3/5/10

$
0.38



250,000



250



94,750



-



-



95,000Issuance of common stock for note
10/1/09

$
0.16



125,000



125



19,875



-
(1)


(20,000
)


-Redemption and cancellation of common stock







(130,000
)


(130
)


(4,870
)


-



-



(5,000
)Beneficial conversion feature on debt







-



-



107,000



-



-



107,000Net loss for period







-



-



-



(4,165,007
)


-



(4,165,007
)BALANCE, June 30, 2010







75,594,333


$
75,594


$
3,368,972


$
(4,280,147
)

$
(20,000
)

$
(855,581
)
 
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.




5
 Table of Contents






Issuance of common stock for conversion of debt
9/10/10

$
0.17



333,333



333



56,333



-



-



56,666Issuance of common stock for conversion of debt
9/14/10

$
0.14



384,615



385



53,462



-



-



53,847Issuance of common stock for conversion of debt
9/21/10

$
0.12



909,090



909



108,182



-



-



109,091Issuance of common stock for conversion of debt
10/4/10

$
0.08



625,000



625



26,055



-



-



26,680Issuance of common stock for conversion of debt
10/5/10

$
0.14



625,000



625



26,058



-



-



26,683Issuance of common stock for conversion of debt
10/8/10

$
0.11



1,250,000



1,250



52,136



-



-



53,386Issuance of common stock for conversion of debt
10/22/10

$
0.07



1,818,181



1,818



51,642



-



-



53,460Issuance of common stock for conversion of debt
10/28/10

$
0.07



1,666,666



1,667



51,819



-



-



53,486Issuance of common stock for conversion of debt
11/16/10

$
0.04



1,492,537



1,493



25,281



-



-



26,774Issuance of common stock for conversion of debt
11/29/10

$
0.04



2,000,000



2,000



24,792



-



-



26,792Issuance of common stock for conversion of debt
12/3/10

$
0.05



2,500,000



2,500



35,015



-



-



37,515Issuance of common stock for conversion of debt
12/10/10

$
0.05



2,500,000



2,500



51,103



-



-



53,603Issuance of common stock for conversion of debt
12/23/10

$
0.07



980,392



980



26,633



-



-



27,613Issuance of common stock for conversion of debt
12/29/10

$
0.07



1,058,823



1,058



73,059



-



-



74,11718,143,637



18,143



661,570



-



-



679,713Issuance of common stock for settlement of debt
7/13/10

$
0.24



60,000



60



14,339



-



-



14,399Issuance of common stock for settlement of debt
8/16/10

$
0.20



78,024



79



15,526



-



-



15,605138,024



139



29,865



-



-



30,004Issuance of common stock for consulting and advisory services
8/16/10

$
0.20



100,000



100



19,900



-
(2)


(10,000
)


10,000Issuance of common stock for consulting and advisory services
8/31/10

$
0.16



74,000



74



11,766



-



-



11,840Issuance of common stock for consulting and advisory services
12/28/10

$
0.07



100,000



100



6,900



-



-



7,000274,000



274



38,566



-



(10,000
)


28,840Issuance of common stock for legal services
8/16/10

$
0.20



186,106



186



37,036



-



-



37,222Issuance of common stock for legal services
8/31/10

$
0.16



50,000



50



7,950



-



-



8,000Issuance of common stock for legal services
12/21/10

$
0.06



250,000



250



14,750



-



-



15,000486,106



486



59,736



-



-



60,222Issuance of common stock for settlement lease
8/16/10

$
0.20



400,000



400



79,600



-



-



80,000Repricing of warrants







-



-



140,981



-



-



140,981Expensing of prepaid consulting

andadvisory services



-



-



-



-



10,000



10,000Net loss for period







-



-



-



(3,054,483
)


-



(3,054,483
)BALANCE, December 31, 2010







95,036,100


$
95,036


$
4,379,290


$
(7,334,630
)

$
(20,000
)

$
(2,880,304
)
  (1)
Common stock subscription receivable(2)
Common stock issued for prepaid expense


6
 Table of Contents






ECOBLU PRODUCTS, INC.(A DEVELOPMENT STAGE COMPANY)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSPeriod ofSix months


Six months


InceptionEnded


Ended


(May 20, 2009)December 31,


December 31,


to December 31,2010


2009


2010(Unaudited)


(Unaudited)


(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(3,054,483
)

$
(314,229
)

$
(7,242,690
)Adjustment to reconcile net loss to net cashused in operating activities:Gain on settlement of lease


-



-



(21,270
)Loss on modification of debt


421,600



-



421,600(Gain) loss on settlement of debt


(12,706
)


-



86,311Interest on amortization of debt discount


887,282



878



1,317,699Interest on amortization of loan fees


118,969



-



180,363Interest on repricing of warrants


140,981



-



140,981Change in fair value of derivative liability


(155,463
)


-



(104,246
)Common stock issued for services


98,927



32,000



2,205,177Common stock issued for payment of rent and lease settlement


80,000



-



175,000Contributed legal services


-



-



3,200Depreciation expense


36,396



-



80,109Bad debt expense


13,000



-



17,487Changes in operating assets and liabilities:(Increase) in accounts receivable


(56,057
)


-



(63,521
)(Increase) in other receivables


(5,224
)


-



(11,110
)(Increase) in inventory


(444,084
)


-



(1,146,789
)(Increase) in prepaid expenses


(9,497
)


(47,688
)


(9,497
)Decrease (increase) in deposits


45,155



(20,642
)


(25,000
)Increase in accounts payable


105,511



97,138



496,777Increase in rent payable


-



114,900



143,316Increase in other payables and accrued expenses


214,443



33,500



336,884Increase in deferred rent expense


-



-



19,445Increase in accrued interest added to principal


173,753



157



187,797Net cash used in operating activities


(1,401,497
)


(103,986
)


(2,811,977
)CASH FLOWS FROM INVESTING ACTIVITIES:Payments for loans receivable - related party


-



-



(23,500
)Purchases of property and equipment


(6,234
)


(368,687
)


(522,119
)Payments for equipment deposits - related party


-



(339,119
)


(161,618
)Payments for leasehold improvements


-



(31,899
)


(63,406
)Payments for prepaid trademark costs


(1,110
)


-



(5,981
)Net cash used in investing activities


(7,344
)


(739,705
)


(776,624
)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sale of common stock


-



728,500



674,794Proceeds from debt issuances


770,500



127,000



2,802,000Proceeds from related party advances and notes


884,974



-



896,174Payments for redemption of common stock


-



-



(5,000
)Repayments of debt issuances


(336,922
)


-



(411,922
)Repayments of related party advances and notes


(283,924
)


(11,200
)


(295,124
)Payments of loan fees


-



-



(61,000
)Net cash provided by financing activities


1,034,628



844,300



3,599,922NET (DECREASE) INCREASE IN CASH ANDCASH EQUIVALENTS


(374,213
)


609



11,321CASH AND CASH EQUIVALENTS - beginning of period


385,534



-



-CASH AND CASH EQUIVALENTS - end of period

$
11,321


$
609


$
11,321
 
 
 
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.




7
 Table of Contents






ECOBLU PRODUCTS, INC.(A DEVELOPMENT STAGE COMPANY)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSPeriod ofSix months


Six months


InceptionEnded


Ended


(May 20, 2009)December 31,

December 31,

to December 31,2010


2009


2010(Unaudited)


(Unaudited)


(Unaudited)SUPPLEMENTAL DISCLOSURES OF CASH FLOWINFORMATION:Interest paid

$
324,019


$
-


$
354,908Income taxes paid

$
-


$
-


$
-
  NONCASH INVESTING AND FINANCING ACTIVITIESSix Months Ended December 31, 2010During the six months ended December 31, 2010, the Company was a party to an agreement whereby certain increments of a$127,000 convertible note payable were assigned by the original investor to a third party.  The assignment agreement included modificationsto the debt increments and embedded conversion features that were more favorable to the lender, resulting in a $161,667 loss on debtmodification that was charged to operations.  During the current six month period, a total of $132,054 of debt increments wereassigned to this third party and converted into 2,685,861 shares of the Company's common stock at prices ranging from $0.07to $0.17 per share (See Note 6).During the six months ended December 31, 2010, the Company was a party to an agreement whereby a $360,000 convertible notewas assigned in full to the same third party as the note increments described above.  The assignment agreement included modificationsto the debt and its embedded conversion feature that were more favorable to the lender, resulting in a $259,933 loss on debtmodification that was charged to operations.  Pursuant to this debt modification, the Company recognized a derivative liability with an initialvalue of $247,364 due to a change in the exercise price of the embedded conversion feature from fixed to variable.  During the currentsix month period, debt totaling $385,991 was converted into 15,457,776 shares of the Company's common stock at prices rangingfrom $0.04 to $0.14 per share (See Note 6).During the six months ended December 31, 2010, the Company issued 400,000 common shares as additional consideration for thecancellation of the Company's lease on its Texas facilities.  These shares were valued at $80,000.During the six months ended December 31, 2010, the Company issued 274,000 shares of its common stock for consulting and advisoryservices valued at $38,840.During the six months ended December 31, 2010, the Company issued 486,106 shares of its common stock for legal services valuedat $60,221.During six months ended December 31, 2010, the Company issued 138,024 shares of its common stock in exchange for the cancellationof debt due professionals and consultants. The Company valued the shares at $30,005 and recognized a net gain on the cancellation ofindebtedness of $12,706.At December 31, 2010, the Company had recognized derivative and warrant liabilities with a fair value totaling $1,748,119.  Theseliabilities are the result of a variable exercise price on its $360,000 convertible note payable (see above) and committed and outstandingcommon shares in excess of the number of shares authorized (See Notes 8 and 9).During the six months ended December 31, 2010, the Company agreed to reduce the exercise price of 3,750,000 of its warrants from $0.40per share to $0.20 per share.  A total of $140,981 was charged to interest expense for the re-pricing of these warrants (See Note 10).Six Months Ended December 31, 2009During the six months ended December 31, 2009, the Company recognized additional paid-in capital for legal services contributedby a related party that were valued at $3,200.
 
 
 
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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Ecoblu Products, Inc.




Notes To Condensed Consolidated Financial Statements


December 31, 2010


(Unaudited)








1.  Organization and Basis of Presentation




Organization


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





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





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





The Company is in the development stage, as defined in Accounting Codification Standard (“ACS”) topic 915-10, formerly Statement of Financial Accounting Standards No. 7, Accounting and Reporting by Development Stage Enterprises.  From inception through December 31, 2010, the Company has recorded revenues totaling $950,098.  The Company will continue to report as a development stage company until significant revenues are produced.





Going Concern


The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company is a development stage company presently generating minimal operating revenues and its viability is dependent upon its ability to obtain future financing and the success of its future operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.





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





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





Basis of Presentation


The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of December 31, 2010, and the results of its operations and cash flows for the six months ended December 31, 2010 and 2009, and from its inception (May 20, 2009) through December 31, 2010. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission (the “Commission”). The Company believes that the disclosures in the unaudited condensed consolidated financial statements are adequate to make the information presented not misleading.  The operating results of the Company on a quarterly basis may not be indicative of operating results for the full year.  For further information, refer to the financial statements and notes included in the Company’s Form 10-K for the year ended June 30, 2010.






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Ecoblu Products, Inc.




Notes To Condensed Consolidated Financial Statements


December 31, 2010


(Unaudited)








2.  Summary of Significant Accounting Policies





Principles of Consolidation


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





Accounts Receivable


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





Allowance for Doubtful Accounts


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





Inventories


Inventories primarily consist of chemicals and lumber and are stated at lower of first-in-first out (FIFO) cost or market (net realizable value).  Net realizable value is the estimated selling price in the ordinary course of business.  As of December 31, 2010, there were no write-downs of inventory to net realizable value.





Property and Equipment


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





Long-Lived Assets


The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate.  The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition.  If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value.  At December 31, 2010, the Company determined that none of its long-term assets were impaired.





Issuances Involving Non-cash Consideration


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





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Ecoblu Products, Inc.




Notes To Condensed Consolidated Financial Statements


December 31, 2010


(Unaudited)








Stock Based Compensation


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





Loss Per Share


The Company reports earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed conversion of warrants and debt to purchase common shares would have an anti-dilutive effect.  Potential common shares at December 31, 2010 that have been excluded from the computation of diluted net loss per share included convertible debt of $1,319,820 convertible into 4,012,500 shares of common stock and warrants exercisable into 27,037,500 shares of common stock.





Cash and Cash Equivalents


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





Use of Estimates


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





Convertible Debentures


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





Revenue Recognition and Concentration Risk


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


The Company had product sales revenue of $209,078 to a single customer for the six months ended December 31, 2010.  Sales to this customer represented approximately 29% of the Company’s total revenues for the current six month period.  The Company had product sales revenue of $204,322 to another customer for same period, which totaled approximately 28% of the Company’s total revenues.





Shipping and Handling Costs


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






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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)
 Income Taxes


The Company accounts for its income taxes under the provisions of ASC Topic 740 ”Income Taxes” (formerly Statement of Financial Accounting Standards 109). 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 January 2011, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2011-01 (ASU 2011-01), Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.The amendments in this Update apply to all public-entity creditors that modify financing receivables within the scope of the disclosure requirements about troubled debt restructurings in Update 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.  The Company does not expect the provisions of ASU 2011-01 to have a material effect on its financial position, results of operations or cash flows.




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




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




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


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








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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)





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





3.  Inventories





As of December 31, 2010, inventories consist of the following:





Chemicals

$
578,304Lumber


545,161$
1,123,465





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




4.  Prepaid Loan Fees





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





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





The $238,000 total prepaid loan fees are being amortized over the one year term of the underlying notes.  Amortization charged to interest expense for the three months and six months ended December 31, 2010 totaled $58,892 and $118,969, respectively.  The balance of prepaid loan fees totaled $57,637 at December 31, 2010.





5.  Property and Equipment





Property and equipment as of December 31, 2010 consists of the following:





Machinery and equipment (useful life of 7 years)

$
383,200Furniture (useful life of 5 years)


18,223Computer equipment (useful life of 3 years)


3,685Research & development equipment (useful life of 5 years)


3,218Leasehold improvements (useful life of 3 years)


63,405471,731Less accumulated depreciation


(71,980
)$
399,751








Depreciation charged to operations for the three months and six months ended December 31, 2010 amounted to $18,198 and $36,396, respectively.  There was no depreciation expense for the three months or six months ended December 31, 2009. All of the Company’s property and equipment are pledged as collateral for the Company’s $1,500,000 Senior Secured Convertible Notes (see Note 6).






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Ecoblu Products, Inc.




Notes To Condensed Consolidated Financial Statements


December 31, 2010


(Unaudited)








6.  Notes Payable





Convertible Notes - $1,500,000 Financing


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




The Notes bear interest at an annual rate of 8% payable quarterly.  At the Company's option, the interest can be paid in either cash or, subject to the satisfaction of certain customary conditions, registered shares of the Company’s common stock.  The effective conversion price for a payment in shares is determined from a computation based on 85% of the volume weighted average price of the Company’s common stock for each of the twenty (20) consecutive Trading Days immediately preceding the applicable installment date.  At December 31, 2010, the Company had not yet met the customary conditions and thus was precluded from paying the interest installments in shares.




The holders, however, may convert the Notes into shares of common stock at a conversion price of $0.40 at any time which upon full conversion of the Notes would result in the issuance of 3,750,000 shares of common stock.  Beginning June 26, 2010, the Notes amortize in ten monthly installments.  The amortization payments can be made in, at the Company’s option, either cash or, subject to the satisfaction of certain customary conditions, registered shares of common stock.  The first installment payment of $75,000 was made in June 2010.  Two installment payments of $158,413 each were made in August 2010. Another installment payment of $336,494 was made in October 2010, which included the September and October installments of $158,413 each, plus penalties and interest associated with the late payment and registration delay (as described below).





In connection with the issuance of the 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 allow for cashless exercise.





During the six months ended December 31, 2010, the Company agreed to reduce the exercise price of 3,750,000 of these warrants from $0.40 per share to $0.20 per share.  A total of $140,981 was charged to interest expense for the re-pricing of these warrants.





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




On October 27, 2010, the Company entered into a separate Exchange Agreement with each of the investors whereby in exchange for each investor’s Note it issued to each investor a Senior Secured Convertible Note (each a “New Note” and collectively, the “New Notes”) which is convertible into shares of the Company’s common stock.  Pursuant to the terms of each Exchange Agreement, the Company is also no longer obligated to register the shares of








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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)
 common stock issuable upon conversion of the New Notes or upon exercise of the warrants.  In addition, the related Registration Delay Payment obligation described in the above paragraph has been extinguished by this Exchange Agreement.
  Effective November 10, 2010, the Company filed a request with the SEC to withdraw the registration statement.





The aggregate original principal amount of all New Notes is $1,287,834.  Pursuant to the terms thereof, each of the New Notes amortizes in six equal installments (November 24, 2010, December 23, 2010, January 24, 2011, February 22, 2011, March 22, 2011, and March 26, 2011). The Company may pay each monthly installment amount due under each of the New Notes, at its option, in cash or, subject to the satisfaction of customary equity conditions, in shares of the Company’s common stock.  If the Company elects to make payment in shares of its common stock, the number of shares issued by the Company will be determined by dividing the installment amount being converted by the lowest of (a) the conversion price then in effect, (b) 70% of the average of the 3 lowest closing bid prices of our common stock during the 20 consecutive trading day period immediately preceding the applicable installment date and (c) 70% of the closing bid price of our common stock on the trading day immediately preceding the applicable installment date. The New Notes continue to be secured by all of the assets of the Company.  The balance of the new notes at December 31, 2010, including accrued interest, is $1,319,820.





Pursuant to ASC Topic 470-20, “Debt with Conversion and Other Options,” the convertible notes were recorded net of discounts that include the relative fair value of the warrants and the Notes’ beneficial conversion features totaling $1,500,000.  The discounts are amortized and charged to operations over the life of the debt using the effective interest method.  The initial value of the warrants of $1,221,600 was calculated using the Black-Scholes Option Model with a risk free interest rate ranging from 1.04% to 2.59%, volatility of 108.37%, and trading price of $0.36 per share.  The beneficial conversion feature of $278,400 was calculated pursuant to ASC Topic 470-20 using a trading price of $0.36 per share and an effective conversion price $0.0742 per share. Amortization of the discounts charged to operations for the six months ended December 31, 2010 amounted to $745,702.





Interest charged to operations on the principal balance of the notes (including penalties and interest associated with the late payment and registration delay) for the six months ended December 31, 2010 totaled $437,108. The balance of the notes at December 31, 2010, net of discounts totaling $394,303, was $925,517.





The $1,500,000 discount was offset to liabilities pursuant to ASC Topic 815-40-25,”Contracts in Entity’s Own Equity.” On the date the proceeds were received, the number of the Company’s authorized but unissued common shares were insufficient to meet all of the Company’s commitments for share issuances under the terms of its convertible notes, options and warrant agreements, thereby requiring liability accounting.





Placement Agent Loan Fees


In addition, the Company engaged a placement agent with respect to the Notes.  Accordingly, as consideration for the placement agent’s services, the placement agent received compensation equal to 7% of the aggregate amount raised in the form of the Notes in the aggregate amount of $105,000 with a voluntary conversion price of $0.40 which can be converted into 262,500 shares of common stock and also include seven different series of warrants to purchase a total of 787,500 shares of its common stock at exercise prices ranging from $0.40 per share to $0.60 per share.  The convertible notes were recorded net of discounts that include the relative fair value of the warrants and the Notes’ beneficial conversion features totaling $105,000.  The discounts are amortized and charged to operations over the life of the debt using the effective interest method.  The initial value of the warrants of $68,535 was calculated using the Black-Scholes Option Model with a risk free interest rate ranging from 1.04% to 2.59%, volatility of 108.37%, and trading price of $0.36 per share.  The beneficial conversion feature of $36,465 was calculated pursuant to ASC Topic 470-20 using a trading price of $0.36 per share and an effective conversion price $0.1389 per share.  Amortization of the discount charged to operations for the six months ended December 31, 2010 amounted to $52,199.





The majority of the warrants expire five years from their respective date of issuance.  The warrants allow for cashless exercise.






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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)
 In March 2010, the placement agent was also issued 100,000 shares of the Company’s common stock valued at $36,000.  The placement agent is also entitled to compensation equal to 7% for any gross proceeds the Company receives from the exercise of any of the Warrants.





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





Interest charged to operations on the principal balance of this note for the six months ended December 31, 2010 totaled $2,149.  Effective with the October 27, 2010 Exchange Agreement described above, the balance of this note was reclassified and combined with the balances of the other convertible notes from the original $1,500,000 financing.





The $105,000 discount was offset to liabilities pursuant to ASC Topic 815-40-25,”Contracts in Entity’s Own Equity.” On the date the proceeds were received, the number of the Company’s authorized but unissued common shares were insufficient to meet all of the Company’s commitments for share issuances under the terms of its convertible notes, options and warrant agreements, thereby requiring liability accounting.





Convertible Note - $127,000 Financing


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





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





During the six months ended December 31, 2010, the Company was a party to an agreement to whereby increments of the $127,000 convertible note payable were assigned by the original investor to a third party.  The assignment agreement included modifications to the debt increments and embedded conversion features that were more favorable to the lender, resulting in a $161,667 loss on debt modification that was charged to operations.  Such modifications included an increase in the interest rate to 12%, a shortening of the increments’ maturities to March 10, 2011, and a change in the conversion price to 50% of the lowest trading price for 5 trading days prior to conversion.  During the current six month period, a total of $132,054 of debt increments (inclusive of accrued interest) were assigned to this third party and converted into 2,685,861 shares of the Company's common stock at prices ranging from $0.07 to $0.17 per share.  At December 31, 2010, the entire note balance was converted to common stock.





For the six months ended December 31, 2010, interest totaling $1,748 was accrued and charged to operations. During the same period, discount amortization charged to operations totaled $89,382.  The net note balance at December 31, 2010 is $0.





Convertible Note - $360,000 Financing


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






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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)
 During the six months ended December 31, 2010, the Company was a party to an agreement to whereby a $360,000 convertible note was assigned in full to the same party as the note increments described above.  The assignment agreement included modifications to the debt and its embedded conversion feature that were more favorable to the lender, resulting in a $259,933 loss on debt modification that was charged to operations.  Such modifications included an increase in the interest rate to 12%, a shortening of the maturity to March 10, 2011, and a change in the conversion price to 50% of the lowest trading price for 5 trading days prior to conversion.  Pursuant to this debt modification, the Company recognized a derivative liability with an initial value of $247,364 due to a change in the exercise price of the embedded conversion feature from fixed to variable (See Note 8).





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





Summary of Convertible Note Balances





The total balance of the convertible notes payable as of December 31, 2010 is as follows:





Principal balance and accrued interest

$
1,319,820Less unamortized discount


(394,302
)Current convertible notes payable

$
925,518





Loans Payable - Other


As of December 31, 2010, the Company had received $44,500 in advances from the same party that originally held the $360,000 note payable described above.  As of the date these financial statements were issued, no terms for repayment have been agreed to between the Company and this third party.





As of December 31, 2010, the Company had received $200,000 in advances from an unrelated third party. The Company is currently negotiating terms of repayment with this party, and has accrued interest at 14.4% on the balance due based on these negotiations.  The balance of this loan payable at December 31, 2010, including accrued interest, is $205,880.  As of the date these financial statements were issued, no final terms for repayment have been agreed to between the Company and this third party.





As of December 31, 2010, the Company had received a $570,500 short-term loan from Manhattan Resources Limited, partially secured by inventory purchased from Megola, Inc. (see Note 12), valued at $303,750.  Repayment of this loan was due January 31, 2011 in the amount of $739,200.  The balance of this loan payable at December 31, 2010, including accrued interest, is $607,198.  The Company has entered into a separate $5,000,000 revolving credit and warrant purchase with Manhattan Resources Limited, effective February 14, 2011 (see Note 13).





7.  Related Party Transactions




At December 31, 2010, the Company had a note payable due to its President with a balance of $406,050, including accrued interest. This note is due on demand and accrues interest at 9% per annum.  Any unpaid principal after the date that demand is made accrues interest at 18% per annum.  A total of $7,620 of interest was accrued on this note during the six months ended December 31, 2010 and was charged to operations.  During the same six month period, borrowings on this note totaled $713,474 and principal repayments totaled $283,294.





At December 31, 2010, the Company had $63,462 payable to its President and $75,000 payable to its General Manager for deferred compensation liabilities.  These amounts are included in payroll and taxes payable in the accompanying balance sheet.





At December 31, 2010, the Company owed $62,375 to its former Chief Financial Officer, and this amount is included in accounts payable in the accompanying balance sheet.





As of December 31, 2010, a total of $363,500 (or approximately 77%) of the Company’s Property and Equipment has been purchased from two related entities that are controlled by the Company’s President, who is also a majority shareholder. The Company made no related party Property and Equipment purchases during the six month periods ended December 31, 2010 and 2009.






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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)
 During the quarter ended March 31, 2010, the Company made inventory purchases totaling $400,886 from a company controlled by the Company’s President.  The Company made no related party inventory purchases during the six month periods ended December 31, 2010 and 2009.





In January 2010, the Company entered into a lease of a manufacturing facility in Colton, California for 9 months.  These facilities were previously leased and utilized by a company controlled by the Company’s President and majority shareholder.





During the six months ended December 31, 2010, the Company received advances totaling $171,500 from a Company officer who is also a significant shareholder.  Such advances bear no interest and are repayable on or before March 15, 2011.





During the six months ended December 31, 2010, the Company’s sales revenue included $35,105 from a related entity that is controlled by the Company’s President, who is also a majority shareholder.





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




8.  Derivative and Warrant Liabilities




At December 31, 2010 (“the valuation date”), the Company decreased its derivative and warrant liabilities and made a correlating credit to operations in the amount of $155,463 for the six months then ended pursuant to ASC 815-40-19 “Contracts in Entity's Own Equity,” as the number of Company’s potential common shares plus the number of actual common shares outstanding (“Committed Shares”) at the valuation date exceeded the number of unissued common shares the Company currently has authorized to issue. The shortage in the number of committed shares over the number of authorized but unissued shares at the valuation date totaled 26,086,100. The total liabilities of $1,748,119 at the valuation date are the maximum amount the Company believes it would be liable for if it were required to meet all its committed share obligations. The liabilities consist of four components.





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





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





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





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







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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)
 The liability will cease to exist once the Company (a) increases the number of its authorized shares to meet all of its committed share obligations, (b) such action is reported to its shareholders and the Securities and Exchange Commission (the SEC) via an effective information statement, and (c) submits its amended articles of incorporation and receives approval from the State of Colorado.  On September 9, 2010, the Company’s Board of Directors approved a resolution to increase the number of authorized shares from 100,000,000 to 500,000,000.  In October 2010 the Company filed a Schedule 14C Information Statement with the SEC stating the same, which was declared effective by the Commission in November 2010.   The Company submitted the necessary amended articles of incorporation to the State of Colorado in December 2010, which were approved by Colorado in January 2011.





9.  Fair Value of Assets and Liabilities





Determination of Fair Value


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





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





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





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





Level 2.     Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.





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





Application of Valuation Hierarchy


A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodology used to measure fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.





Advances from Related Party.     The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.






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Ecoblu Products, Inc.




Notes To Condensed Consolidated Financial Statements


December 31, 2010


(Unaudited)








Convertible 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 - Related Party.     The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.





Loans Payable - Other.     The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.





Derivative and Warrant Liabilities.    The Company assessed that the fair value of these liabilities approximate their carrying value since the carrying value is determined from the trading price of the Company’s common shares.





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 December 31, 2010:





Liabilities measured at fair value at

December 31, 2010:

Level 1


Level 2


Level 3


TotalNonrecurring:Advances from related party

$
--


$
171,500


$
--


$
171,500Convertible notes payable

$
--


$
925,518


$
--


$
925,518Loans payable – related party

$
--


$
406,050


$
--


$
406,050Loans payable - other

$
--


$
857,578


$
--


$
857,578Derivative and warrant liabilities

$
--


$
--


$
1,748,119


$
1,748,119





A reconciliation of derivative and warrant liabilities is as follows:





Balance - June 30, 2010

$
1,656,217Initial value of variable conversion feature on $360,000 note


247,365Less: change in fair value of derivativeliabilities credited to operations


(155,463)Balance - December 31, 2010

$
1,748,119







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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)
 10.  Stockholders' Deficit





Common Stock Issuances


During the six months ended December 31, 2010, the Company issued a total of 19,441,767 shares of its common stock of which 2,685,861 shares were issued for debt conversions of increments totaling $132,054 on the Company’s $127,000 note payable, which included related losses on debt modification totaling $161,667.  During the same six month period, another 15,457,776 shares were issued for debt conversions totaling $385,991 on the Company’s $360,000 note payable.  In addition, 400,000 shares valued at $80,000 were issued as additional consideration for the cancellation of the Company’s lease on its Texas facilities, 274,000 shares valued at $38,840 were issued for consulting and advisory services, 486,106 shares valued at $60,221 were issued for legal services, and 138,024 shares were issued to various consultants and advisors in connection with the cancellation of $42,711 of debt due them. The 138,024 common shares were valued at $30,005 resulting in a net gain from the cancellation of indebtedness of $12,706 that was credited to operations.




Warrants





The following is a schedule of warrants outstanding as of December 31, 2010:





Warrants Outstanding


Weighted Average Exercise Price

Weighted Average Remaining Life

Aggregate Intrinsic ValueBalance, June 30, 2010


27,037,500


$
0.49

4.24 Years

$
-Warrants granted


-


$
-

-

$
-Warrants expired


-


$
-

-

$
-Balance, December 31, 2010


27,037,500


$
0.46

3.74 Years

$
-





During the six months ended December 31, 2010, the Company agreed to reduce the exercise price of 3,750,000 of its warrants from $0.40 per share to $0.20 per share.  A total of $140,981 was charged to interest expense for the re-pricing of these warrants.


All the warrants are available for exercise at December 31, 2010.





11.  Income Taxes





As of December 31, 2010, for income tax purposes the Company has an unused net operating loss carryforward of approximately $2,614,000, which may provide future federal tax benefits of approximately $889,000, and which expires in various years through 2029.





An allowance of $889,000 has been provided at December 31, 2010 to reduce the tax benefits accrued by the Company for these operating losses to zero as it cannot be determined when, or if, the tax benefits derived from these losses will materialize.





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




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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)
 12.  Commitments and Contingencies





Real Estate Lease – Vista, California


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





1.
Base rentals - $5,500 per month beginning October 1, 2009.2.
Base rentals increase to $6,000 monthly beginning October 1, 2010 and $6,500 monthly beginning October 1, 2011.


3.
Company is responsible to pay its proportionate share of property taxes, insurance and common area maintenance – estimated at $875 per month4.
Termination date – September 30, 2012.


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


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





Rent expense related to this lease was $40,856 for the three months ended December 31, 2010.





Real Estate Lease – Colton, California


In January 2010, the Company entered into a lease of a manufacturing facility in Colton, California for 9 months.  This lease was renewed effective November 1, 2010 for one year at a rate of $17,391 per month.  These facilities were previously leased and utilized by a company controlled by the Company’s President and majority shareholder (see Note 7).  Rent expense related to this lease was $93,034 for the six months ended December 31, 2010.





Total minimum future lease payments under the Company’s real estate leases as of December 31, 2010 are as follows:





December 31,2011

$
289,6922012


66,375Total minimum lease payments

$
356,067





Purchase, Distribution & Services Agreement #1


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





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






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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)
 The Company has not made all of its original purchase commitments in this agreement, due to non-performance by the seller and the existence toxins as described above.  Further, the Company has discontinued selling the product and is pursuing alternative solutions. Management believes that the issue has been isolated to the concentrate form and is not affecting the end user coated product.  The Company is currently in the discovery phase of determining the overall impact of this issue, but legal counsel has advised the Company that the seller is responsible for any liabilities generated from the use of the product.





Purchase, Distribution & Services Agreement #2


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





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





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.





13.  Subsequent Events





On September 9, 2010, the Company’s Board of Directors approved a resolution to increase the number of authorized shares from 100,000,000 to 500,000,000.   In October 2010 the Company filed a Schedule 14C Information Statement with the SEC stating the same, which was declared effective by the Commission in November 2010.   The Company submitted the necessary amended articles of incorporation to the State of Colorado in December 2010, and these were approved by Colorado in January 2011.





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











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Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 December 31, 2010
 (Unaudited)
 On February 14, 2011, the Company also entered into a revolving credit and warrant purchase agreement (the “Credit and Warrant Agreement”) with MRL.  A summary of the material terms of these two agreements are as follows:





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





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





In the event MRL purchases the Sale Shares from LTK and if they fully exercised the Warrant which would be granted upon final approval of the Credit and Warrant Agreement, both of which are subject to MRL shareholder approval, MRL would acquire an aggregate of 131,000,000 Shares representing approximately 54.5 percent of the resulting total issued and outstanding common equity of the Company, for an aggregate consideration of $10,000,000. As of the date of these financial statements no warrants have been issued to MRL due to the remaining approval requirements.





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




































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Ecoblu Products, Inc.











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




Forward-Looking Statements




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




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




Results of Operations for the Three-Months Ended December 31, 2010 as Compared to the Three-Months Ended December 31, 2009




Revenues and Cost of Sales - For the three-months ended December 31, 2010 we had total revenues of $368,482 from product sales, as compared to no revenues for the three-month period ended December 31, 2009.  Our cost of sales and gross profit for the three-months ended December 31, 2010 was $309,707 and 58,775, respectively, as compared to no cost of sales or gross profit three-month period ended December 31, 2009.  Sales have not yet developed to sufficient levels to improve efficiencies and margins.




Sales have been consistent with the prior three month period ended September 30, 2010 resulting in total sales for the six month period ended December 31, 2010 of $725,599 and gross profit of $88,975.




Operating Expenses - For the three-months ended December 31, 2010 our total operating expenses were $675,178, as compared to total operating expenses of $264,466 for the three-months ended December 31, 2009.  For the three-months ended December 31, 2010 our operating expenses consisted of $35,193 of research and development expense, $9,455 of marketing expense, $197,787 of compensation and related costs, $91,434 of rent expense, $164,758 of professional fees, $21,910 of consulting fees, and $ 154,641 of other general and administrative expenses.  This is compared to operating expenses for the three-months ended December 31, 2009 which consisted of $5,975 of research and development expense, $17,873 of marketing expense, $32,462 of compensation and related costs, $62,417 of rent expense, $52,130 of professional fees, $62,700 of consulting fees, and $30,909 of other general and administrative expenses.




The resulting increase in operating expenses over the prior period is primarily the result of increased operations from sales where in the prior comparative period no sales were generated.




Other Income (Expenses) - For the three-months ended December 31, 2010 we had other income (expenses) that included a $160 gain on the settlement of debt, a ($44,516) loss on the modification of debt, a ($638,231) loss from a change in the fair value of our derivative liabilities, and interest expense of ($904,679).  This is compared to the three-month period ended December 31, 2009, in which our other income (expenses) was ($1,035) from interest expense.




The resulting increase in other expenses over the prior periodis primarily the result of increased financing activities under less favorable terms as the prior comparative period.




Net Loss - As noted in our financial statements, we are a development stage enterprise and as such have not had significant operating revenues from the period of inception through December 31, 2010.  As such, our net loss for the three-months ended December 31, 2010 was $2,203,669 as compared to a $265,501 net loss for the three-months ended December 31, 2009.  Our net loss from the period of inception (May 20, 2009) to December 31, 2010 totaled $7,242,690.




The resulting increase of $1,586,231 in other expenses over the prior period is primarily the result of increased costs related to financing activities under less favorable terms as the prior comparative period. As a result of our recent financing from the sale of common equity for proceeds of $5,000,000 we expect these expenses will drop significantly in the next period due to the retirement of outstanding debt.




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Ecoblu Products, Inc.











Results of Operations for the Six -Months Ended December 31, 2010 as Compared to the Six -Months Ended December 31, 2009




We commenced our current operations during the quarter ended December 31, 2009.  As indicated above, we had no sales or related costs of sales during the quarter.  For the six-months ended December 31, 2010 we had total revenues of $725,599, cost of sales of $636,624, and gross profit of $88,975.




Operating Expenses - For the six -months ended December 31, 2010 our total operating expenses were $1,245,023, as compared to total operating expenses of $313,194 for the six-months ended December 31, 2009.  For the six-months ended December 31, 2010 our operating expenses consisted of $44,964 of research and development expense, $11,435 of marketing expense, $351,372 of compensation and related costs, $233,890 of rent expense, $311,482 of professional fees, $51,611 of consulting fees, and $240,269 of other general and administrative expenses.  This is compared to operating expenses for the six-months ended December 31, 2009 which consisted of $5,975 of research and development expense, $17,873 of marketing expense, $32,462 of compensation and related costs, $124,345 of rent expense, $52,130 of professional fees, $49,500 of consulting fees, and $30,909 of other general and administrative expenses.




Other Income (Expenses) - For the six -months ended December 31, 2010 we had other income (expenses) that included a $12,706 gain on the settlement of debt, a ($421,600) loss on the modification of debt, a $155,463 gain from a change in the fair value of our derivative liabilities, and interest expense of ($1,645,004).  This is compared to the six-month period ended December 31, 2009, in which our other income (expenses) was ($1,035) from interest expense.




Liquidity and Capital Resources




On December 31, 2010, we had $11,321 cash on hand.  Our operations used $1,401,497 of cash in the six-month period ended December 31, 2010. Cash $7,344 used in by investing activities during the same period consisted of purchases of property and equipment of $6,324 and payments for prepaid trademark costs of $1,110.  Cash of $1,034,628 was provided by financing activities during the same period, which consisted of proceeds from debt issuance of $770,500 and related party advances of $884,974, less repayments of related party advances of $283,924 and repayments of debt totaling $336,922.




On December 31, 2009, we had $609 cash on hand and had discontinued our former operations marketing our apparel lines.  Our operating activities used $103,986 and our investing activities used $739,705 of cash in the six-month period ended December 31, 2009.  During the same period, we received proceeds from financing activities of $844,300 primarily from the issuance of common stock and issuance of debt.




We have recently completed a significant financingthrough the sale of our common equity. This financing of $5,000,000 will be sufficient to retire our outstanding debt and satisfy our short term cash requirements.  Since inception, we have predominantly financed cash flow requirements through the issuance of common stock for cash.




We do not anticipate enough positive internal operating cash flow until such time as we can generate substantial revenues from business activities, which may take the next few years to realize.




Over the next twelve months we believe that existing capital and funds from intended operations will be sufficient to sustain current operational levels but not planned development of intended operations. Consequently, we will be required to seek additional capital in the future to fund growth through additional equity or debt financing or credit facilities. No assurance can be made that such financing would be available, and if available it may take either the form of debt or equity. In either case, the financing could have a negative impact on our financial condition and our Stockholders.




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




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Ecoblu Products, Inc.











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




Plan of Operation




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




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




Over the next twelve months the Company intends to continue to expand marketing efforts to develop sales of products. Our recent financing activities have eliminated our debt and provided the operating capital needed to develop our sales of our products (see Item 5 titled “Other Information” of this Quarterly Report and the related exhibits for detailed information relating to the recent financing).




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
























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Ecoblu Products, Inc.
 
 
 
 Critical Accounting Policies





Principles of Consolidation


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





Accounts Receivable


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





Allowance for Doubtful Accounts


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





Inventories


Inventories primarily consist of chemicals and lumber and are stated at lower of first-in-first out (FIFO) cost or market (net realizable value).  Net realizable value is the estimated selling price in the ordinary course of business.  As of December 31, 2010, there were no write-downs of inventory to net realizable value.





Property and Equipment


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





Long-Lived Assets


The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate.  The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition.  If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value.  At December 31, 2010, the Company determined that none of its long-term assets were impaired.





Issuances Involving Non-cash Consideration


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







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Ecoblu Products, Inc.
 
 
 
 Stock Based Compensation


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





Loss Per Share


The Company reports earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed conversion of warrants and debt to purchase common shares would have an anti-dilutive effect.  Potential common shares at December 31, 2010 that have been excluded from the computation of diluted net loss per share included convertible debt of $1,319,820 convertible into 4,012,500 shares of common stock and warrants exercisable into 27,037,500 shares of common stock.





Cash and Cash Equivalents


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





Use of Estimates


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





Convertible Debentures


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





Revenue Recognition and Concentration Risk


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


The Company had product sales revenue of $209,078 to a single customer for the six months ended December 31, 2010.  Sales to this customer represented approximately 29% of the Company’s total revenues for the current six month period.  The Company had product sales revenue of $204,322 to another customer for same period, which totaled approximately 28% of the Company’s total revenues.





Shipping and Handling Costs


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






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Ecoblu Products, Inc.
 
 
 
 Income Taxes


The Company accounts for its income taxes under the provisions of ASC Topic 740 ”Income Taxes” (formerly Statement of Financial Accounting Standards 109). 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 January 2011, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2011-01 (ASU 2011-01), Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.The amendments in this Update apply to all public-entity creditors that modify financing receivables within the scope of the disclosure requirements about troubled debt restructurings in Update 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.  The Company does not expect the provisions of ASU 2011-01 to have a material effect on its financial position, results of operations or cash flows.





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





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





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







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





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





Going Concern


Our continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations. As shown in the accompanying financial statements, we have incurred a net loss of $7,242,690 for the period from inception (May 20, 2009) to December 31, 2010, and have generated total revenue since inception of $950,098. Our future is dependent upon our ability to obtain financing and to develop profitable operations. 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.




Off-Balance Sheet Arrangements


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





Item 3 - Quantitative andQualitative 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 - Controlsand Procedures




Evaluation of Disclosure Controls and Procedures


We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2010. This evaluation was carried out under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of December 31, 2010, our disclosure controls and procedures were effective.




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




Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.




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




Changes in Internal Controls


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






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Ecoblu Products, Inc.
 
 
 
 Part II - OTHERINFORMATION




Item 1 - LegalProceedings




EcoBlu v. Bluwood USA




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




From time to time the Company may be named in claims arising in the ordinary course of business. Currently, no legal proceedings or claims, other than those disclosed above, are pending against or involve the Company that, in the opinion of management, could reasonably be expected to have a material adverse effect on its business and financial condition.




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




On February 14, 2011, the Ecoblu Products Inc. (“Ecoblu”)  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. Pursuant to the terms of the Investment Agreement, LTK purchased 81,000,000 shares in Ecoblu representing approximately 45.5 percent of the resulting total issued and outstanding common equity of Ecoblu, for $5,000,000. Pursuant to the agreement LTK will sell the shares to MRL, for the same consideration, subject to approval from shareholders of MRL. The proceeds are to be used for retirement of debt and working capital. This transaction was previously disclosed in our current report on for Form 8K filed February 16, 2011.




All of the above sales were issued as exempted transactions under Section 4(2) of the Securities Act of 1933 and are subject to Rule 144 of the Securities Act of 1933. The recipient(s) of our securities took them for investment purposes without a view to distribution.  Furthermore, they had access to information concerning our Company and our business prospects; there was no general solicitation or advertising for the purchase of our securities; and the securities issued are restricted pursuant to Rule 144.












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Item 3 - Defaults UponSenior Securities




None, for the period ending December 31, 2010




Item 4- [Removedand Reserved]






Item 5 - Other Information




Ecoblu Products, Inc. includes the following disclosure previously filed on form 8-K on February 16, 2011 under Section 1 – Registrant’s Business and Operations, Item 1.01  Entry into a Material Definitive Agreement.




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




(i)        pursuant to the terms of the Investment Agreement, Dato’ Low Tuck Kwong will subscribe for 81,000,000 shares in Ecoblu (“Sale Shares”), representing approximately 45.5 percent of the resulting total issued and outstanding common equity of Ecoblu, for an aggregate consideration of $5,000,000. Dato’ Low Tuck Kwong will sell the Sale Shares to MRL, for the same consideration, subject to approval from shareholders of MRL; and




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




In the event MRL purchases the Sale Shares from LTK and if they fully exercised the Warrant which would be granted upon final approval of the Credit and Warrant Agreement, both of which are subject to MRL shareholder approval, MRL would acquire an aggregate of 131,000,000 Shares representing approximately 54.5 percent of the resulting total issued and outstanding common equity of Ecoblu, for an aggregate consideration of $10,000,000. As of the date of this report no warrants have been issued to MRL due to the remaining approval requirements.




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




The Company considered several factors related to both the initial sale of common equity and the entry into the Credit and Warrant Agreement with MRL which include but were limited to: our need for operating capital, the immediate need for capital to satisfy our liabilities, our limited opportunities for financing on terms favorable to the Company, our recent market price and volume for our equity, the potential availability of the revolving line of credit from MRL, the good faith actions of MRL and its affiliates related to advances interim loans to the Company, termination of warrants and other conversion rights and the potential for future support as a significant shareholder of substantial financial strength.




Investment Agreement Use of Proceeds:




Ecoblu will use all of the proceeds from the purchase of the Purchased Shares to (i) pay accrued interest on the 3/10 Notes; (ii) repay $380,000 previously advanced by Steven Conboy to the Company; (iii) discharge all working capital loans currently extended to the Company, including $739,200 owed to MRL; and (iv) provide working capital, including the purchase of lumber or chemicals or for investment in fixed assets, including the establishment of coating and/or storage facilities, provided that any single expenditure in excess of $250,000 shall be pursuant to the Company’s annual Board-approved business plan or otherwise pursuant to specific Board approval.




Warrants:




(i)        Exercise Price.  The exercise price of the Warrant is $0.10 per Share (the “Exercise Price”).




(ii)       Termination Date. The Warrant is exercisable for a period of five years from the date of issuance.







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Ecoblu Products, Inc.
 
 
 
 (iii)      Exercise. The Warrant may be exercised in full or in part.
  (iv)      Payment Terms.  Payment of the Exercise Price shall be made by wire transfer to an account designated by Ecoblu in writing or by certified or official bank check payable to the order of Ecoblu. MRL may also pay the exercise price at their election by off-set against any outstanding balance due pursuant to the Loan Facility.
  (v)       Adjustments. The Exercise Price and the number of Shares issuable pursuant to the exercise of the Warrant is subject to certain adjustments which include, inter alia, the splitting, subdivision or combination of the Shares, or the declaration of dividend or making of a distribution.
  Loan Facility:
  (i)        Period: MRL shall make loans on a revolving basis from time to time from the “Effective Date”(which is contingent upon Shareholders’ approval and all other regulatory approvals being obtained by MRL) until three years from the Effective Date (the “Expiration Date”).
  (ii)       Amount: The loan shall be made in such aggregate amounts as Ecoblu may request with prior approval of its board of directors and be in multiples of $500,000, provided that the aggregate outstanding principal of all loans shall not at any time exceed $5,000,000 less the aggregate investment, if any, made by MRL pursuant to the exercise of the Warrant.
  (iii)      Repayment: Each loan shall be due and payable, together with accrued interest, three months from the date it is advanced but not later than the Expiration Date.
  (iv)      Interest: Payable on any unpaid principal amount of each loan from the date of such loan until paid in full at a rate per annum of 6 per cent. After maturity, and at any time an event of default exists, accrued interest on all loans shall be payable on demand.
  (v)       Use of Loan Proceeds: The loan proceeds are to be used solely for:
  (a)       Note Repayment; and
  (b)       Ecoblu’s working capital, including the purchase of lumber or chemicals or for investment in fixed assets, including the establishment of coating and/or storage facilities.
  Board of Directors of Ecoblu.
  On completion of the subscription of shares by LTK, the number of directors on the board of directors of Ecoblu (“Ecoblu Board”) will be increased from one to five members and LTK (or the MRL in the event they acquire the shares from LTK) will be permitted to propose for election two of the five directors, for purposes of filling the initial vacancies created by the increase in the size of the Ecoblu Board and subsequently for annual election by the shareholders of Ecoblu. No candidates have been proposed as of the date of this report.
  Material relationships between the related parties
  Dato’ Low Tuck Kwong (“LTK”)
  LTK is deemed to be a “controlling shareholder” of MRL, as he indirectly owns more than 15 per cent of the issued shares of MRL. LTK also owns a majority interest in Newstar Holdings Pte Ltd, a Company of which we recently agreed to purchase chemical components.
  Acquired Notes and Termination of Warrants and Conversion Rights Acquired
  In December 2010, SLM Holding PTE, Ltd. (SLM) a wholly owned subsidiary of MRL bought loan notes from a group of third party investors issued by Ecoblu (the “Notes”), for the aggregate sum of $1,000,000, in anticipation of the agreements discussed in this Item 1.01. The use of proceeds for the investment agreement provide that Ecoblu repay the principal owing on the Notes amounting to approximately $1,287,000 together with accrued interest (“Note Repayment”).


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In January 2011, SLM Holding PTE, Ltd. (SLM) a wholly owned subsidiary of MRL agreed to terminate various warrants it acquired from 3rd party holders for nominal consideration of $10. These comprise all right, title and interest in Series A through G Warrants issued March 26, 2010, for a total of 26,250,000 shares, and all rights granted to certain note holders to convert debt to 3,750,000 shares of the Company's common stock.





The referenced notes and warrants are those which were the subject of our disclosure filed on Form 8K on October 28, 2010 which we incorporate by reference in the entirety into this current report on Form 8K.




Promissory Note - Related Party (Conboy/Ecoblu)




On October 22, 2010, Ecoblu borrowed from its President Steve Conboy, the sum of $380,000.00 with interest from October 22, 2010 on the unpaid principal at 9% interest per annum.  The unpaid principal and accrued interest is payable in full on demand.  Unpaid principal after the demand for payment shall accrue interest at 18% per annum.




Proceeds from the note were used to make $336,494 in payments related to the notes acquired by MRL and a portion of the proceeds from the Investment Agreement as disclosed in this Item 1.01are to be used to repay this outstanding Note.




Promissory Note - Related Party (Conboy/LTK)




On October 21, 2010 our President Steve Conboy executed a promissory note whereby; Steve Conboy promised to pay to LTK, the sum of Three Hundred Eighty Thousand US dollars and no cents ($380,000.00).  The repayment of the Note (including principal and interest, if any) is due in full on or before February 21, 2011 and thereafter upon demand.




The terms provide that the Note will be settled in all by assignment of nine million five hundred thousand (9,500,000) Rule 144 restricted shares in EcoBlu Products, Inc. (OTCBB: ECOB) from Steve Conboy’s personal share holdings.  Each share valued at .04 cents.




Subsequently, LTK assigned the proceeds from this note to Swanny Sujanty, an individual. The note was paid in full and all obligations were satisfied on January 18th 2011 with the transfer of 9,500,000 shares of restricted stock from Steve Conboy to Swanny Sujanty.




Repayment of loans for Purchase of Supplies and Inventory




Ecoblu will use the Loan Facility to repay monies owed by Ecoblu to MRL amounting to approximately $739,000 used for the purchase of supplies and inventory.




The preceding paragraphs  contained in this Item 5 are qualified in their entirety by reference to the form of Investment Agreement, the form of Revolving Credit and Warrant Agreement and the form of Warrant Termination Agreement, incorporated by reference in Exhibit 10.5,  Exhibit 10.6 and Exhibit 10.7 to this Quarterly Report on Form 10Q.




About Manhattan Resources Limited, a Singapore Corporation




Manhattan Resources Limited, through its subsidiaries and joint ventures, provides logistics, production, and other support services to the coal mining and oil and gas industries in Indonesia. The company engages in the ship chartering and provision of freight services, primarily for coal carrying activities; and leasing of mining equipment and machinery. It also provides agency, handling, and consultancy services; and coal mining ancillary services. The company is based in Singapore.








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Item 6 - Exhibits and Reports




Exhibits




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




3.1
Articles of Incorporation, filed as exhibit 3.1.1 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.3.2
Bylaws, filed as exhibit 3.2 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.3.3
Amended  Articles of Incorporation ; filed as exhibit 3.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on October 22, 20094.1
Securities Purchase Agreement dated March 26, 2010; filed as exhibit 10.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.2
Form of Secured Convertible Note; filed as exhibit 10.2 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.3
Form of Security Agreement; filed as exhibit 10.3 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.4
Form of Registration Rights Agreement; filed as exhibit 10.4 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.5
Form of Series A Warrant ; filed as exhibit 10.5 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.6
Form of Series B Warrant ; filed as exhibit 10.6 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.7
Form of Series C Warrant ; filed as exhibit 10.7 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.8
Form of Series D Warrant ; filed as exhibit 10.8 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.9
Form of Series E Warrant ; filed as exhibit 10.9 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.10
Form of Series F Warrant ; filed as exhibit 10.10 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.11
Form of Series G Warrant ; filed as exhibit 10.11 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on March 29, 20104.12
Convertible Promissory Note, dated December 22, 2009; filed as exhibit 10.5 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 20104.13
Convertible Promissory Note, dated February 11, 2010; filed as exhibit 10.6 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 2010    36
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   Ecoblu Products, Inc.
   10.1
Agreement and Plan of Merger – between Ecoblu Products, Inc. (Colorado) and Ecoblu Products Inc. (Nevada), dated October 7, 2009. Additional Parties to the agreement are James H. Watson, Jr., Ken Relyea, Steve Conboy and Mark Vuozzo, as Individuals, filed as exhibit 10.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on October 22, 2009.10.2
AF21 Product, Purchase, Sales,  Distribution & Service Agreement, between Ecoblu Products, Inc. and Megola, Inc., dated November 11, 2009 filed as exhibit 10.2 with the registrant’s Quarterly Report on Form 10-Q; filed with the Securities and Exchange Commission on November 23, 2009.10.3
Purchase, Distribution & Service Agreement, between Ecoblu Products, Inc. Bluwood USA, Inc., dated August 24, 2009, filed as exhibit 10.3 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on October 22, 2009.10.4
Application System Purchase Agreement – between Ecoblu Products, Inc. and SC Bluwood Inc., dated September 28, 2009, filed as exhibit 10.4 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on October 22, 2009.10.5
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, 2011.10.6
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, 2011.10.7
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.








Ecoblu Products, Inc. includes herewith the following exhibits:




10.8
Hartindo AF21 Product, Purchase, Sales,  Distribution & Service Agreement, between Ecoblu Products, Inc. and Newstar Holdings Pte Ltd, dated January 18, 2011.31.1
Certification of Principal Executive Officer and Principal Financial Officer (Rule 13a-14(a)/15(d)-14(a))32.1
Certification of Principal Executive Officer and Principal Financial Officer (18 U.S.C. 1350)













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Ecoblu Products, Inc.








SIGNATURES




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




Ecoblu Products, Inc.Date: February 22, 2010
By:
/s/   Steve ConboySteve Conboy, PresidentPrincipal Executive OfficerPrincipal Financial Officer


































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