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 September 30, 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)
 
 (909) 519-5470
 (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. xYes 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  oNo
  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    oAccelerated 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).
 oYes xNo
  The number of shares outstanding of each of the issuer's classes of common equity as of September 30, 2010:
 78,169,501 shares of common stock
   
 
 
 
 Ecoblu Products, Inc.
 
 Contents
   PageNumberPART I
FINANCIAL INFORMATIONItem 1
Condensed Consolidated Financial Statements September 30, 2010Balance Sheet
3Statement of Operations
4Statement of Changes in Shareholders' Equity (Deficit)
5Statement of Cash Flows
7Notes to the Interim Financial Statements
8Item 2
Management's Discussion and Analysis of Financial Condition  and Results of Operations
22Item 3
Quantitative and Qualitative Disclosures About Market Risk
27Item 4
Controls and Procedures
27Part II
OTHER INFORMATIONItem 1
Legal Proceedings
28Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
28Item 3
Defaults Upon Senior Securities
29Item 4
[Removed and Reserved]
29Item 5
Other Information
29Item 6
Exhibits and Reports
29SIGNATURES
30
   Part I                 FINANCIAL INFORMATION
 
  Item 1 - Condensed Consolidated Financial Statements September 30, 2010
  Ecoblu Products, Inc.
 (A Development Stage Company
 Condensed Consolidated Balance Sheets
  September 30,


June 30,2010


2009(Unaudited)


Derived from Audited Financial StatementsAssetsCurrent assets:Cash

$
15,362


$
385,534Accounts receivable, net of allowance for doubtful accounts of $4,487


22,861



5,477Loan receivable - related party


10,627



23,500Other receivables


1,200



5,886Inventory


692,663



679,380Prepaid loan fees


116,529



176,607Deposit


-



45,155Total current assets


859,242



1,321,539Property and equipment, net


411,715



429,912Other assets:Equipment deposits - related party


161,618



161,618Prepaid trademark costs


4,871



4,871Total other assets


166,489



166,489Total assets

$
1,437,446


$
1,917,940Liabilities and Stockholders' (Deficit)Current liabilities:Accounts payable

$
218,961


$
200,900Payroll and taxes payable


170,753



106,580Advances from related party


139,000



-Other payables and accrued expenses


41,073



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


870,881



341,681Loan payable - other


44,500



44,500Derivative and warrant liabilities


1,109,888



1,656,217Total current liabilities


939,585



16,200Long term liabilitiesConvertible note payable – including accrued interest and net of discount


11,134



407,779Total long term liabilities


331,336



-Total liabilities


2,595,056



2,365,742Stockholders' (Deficit):Common stock, $.001 par value; 100,000,000 shares authorized;Issued and outstanding:78,169,501 shares at September 30, 2010,and 75,594,333 shares at June 30, 2010


78,170



75,594Additional paid-in capital


3,914,047



3,368,972Common stock subscription receivable


(20,000
)


(20,000
)Common stock issued for prepaid expense


(10,000
)


-Deficit accumulated during development stage


(5,130,961
)


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


(1,168,744
)


(855,581
)Total liabilities and stockholders’ (deficit)

$
1,437,446


$
1,917,940
   The accompanying notes are an integral part of these financial statements
 3
  Ecoblu Products, Inc.
 (A Development Stage Company)
 Condensed Consolidated Statements of Operations
  Period ofThree Months


Three Months


InceptionEnded


Ended


(May 20, 2009)September 30,


September 30,


to September 30,2010


2009


2010(Unaudited)


(Unaudited)


(Unaudited)RevenueProduct sales

$
354,117


$
-


$
540,278License sales


-



-



28,600Equipment and other sales


3,000



-



12,738Total revenue


357,117



-



581,616Cost of sales


(326,917
)


-



(556,811
)Gross profit


30,200



-



24,805Operating expenses:Research and development


9,771



-



56,005Marketing


1,980



-



60,135Compensation


153,585



-



423,633Rent


142,456



57,622



571,675Professional fees


146,724



-



220,562Consulting


29,701



13,200



2,033,205Other general and administrative expenses


85,628



35



267,487Total operating expenses


569,845



70,857



4,086,949Loss from operations


(539,645
)


(70,857
)


(4,062,144
)Other income (expenses):Gain on settlement of lease


-



-



21,270Gain (loss) on settlement of debt


12,546



-



(86,471
)Loss on modification of debt


(377,084
)


-



(377,084
)Change in fair value of derivative liability


793,694



-



742,477Interest expense


(740,325
)


-



(1,277,069
)Total other income (expenses)


(311,169
)


-



(976,877
)Net income (loss) before income taxes


(850,814
)


(70,857
)


(5,039,021
)Provision for income taxes


-



-



-Net income (loss)

$
(850,814
)

$
(70,857
)

$
(5,039,021
)Basic and diluted net income (loss) per share

$
(0.00
)

$
(0.00
)Weighted average shares outstanding


76,288,335



66,137,944
   The accompanying notes are an integral part of these financial statements
 4
  Ecoblu Products, Inc.
 (A Development Stage Company)
 Consolidated Statement of Changes in Shareholders' Equity (Deficit)
 Period of Inception (May 20, 2009) to September 30, 2010 (Unaudited)
  DeficitAccumulated


CommonPrice








Additional


During


StockPer


Common Stock


Paid-In


Development


OtherShare


Shares


Amount


Capital


Stage


Consideration


TotalsBALANCE, May 20, 2009





-


$
-


$
-


$
-


$
-


$
-(Inception)Recapitalization to effect reversemerger with Ecoblu Products, Inc.(formerly N8 Concepts, Inc.)





64,940,000



64,940



-



(91,940
)


-



(27,000
)June 30, 2009Issuance of common stock for cash

$
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



65,000



13,140



(115,140
)


-



(37,000
)Issuance of common stock for cash:10/1/2009


0.16



1,125,000



1,125



173,875



-



-



175,00010/1/2009


0.1



1,137,944



1,138



112,656



-



-



113,79411/4/2009


0.05



20,000



20



4,980



-



-



5,00011/4/2009


0.15



340,000



340



49,660



-



-



50,00011/4/2009


0.25



518,000



518



128,982



-



-



129,50011/4/2009


0.33



20,000



20



6,480



-



-



6,50011/4/2009


0.5



380,000



380



179,620



-



-



180,00012/16/2009


0.16



31,250



31



4,969



-



-



5,0003,572,194



3,572



661,222



-



-



664,794Issuance of common stock forsettlement of debt:1/20/2010


0.67



150,000



150



100,350



-



-



100,5002/1/2010


0.53



23,334



23



12,344



-



-



12,3672/10/2010


0.45



12,560



13



5,639



-



-



5,6523/2/2010


0.37



160,000



160



59,040



-



-



59,2003/9/2010


0.36



240,000



240



86,160



-



-



86,4003/29/2010


0.38



59,888



60



22,697



-



-



22,7575/17/2010


0.25



78,024



78



19,428



-



-



19,506723,806



724



305,658



-



-



306,382Issuance of common stock forconsulting and advisory services:11/4/2009


0.25



360,000



360



89,640



-



-



90,00011/4/2009


0.5



175,000



175



87,325



-



-



87,5002/10/2010


0.45



95,000



95



42,655



-



-



42,7503/1/2010


0.36



120,000



120



43,080



-



-



43,2003/5/2010


0.38



3,300,000



3,300



1,250,700



-



-



1,254,0003/8/2010


0.43



100,000



100



42,900



-



-



43,0003/9/2010


0.36



100,000



100



35,900



-



-



36,0005/28/2010


0.34



200,000



200



67,800



-



-



68,0006/15/2010


0.3



1,033,333



1,033



308,967



-



-



3,100,0005,483,333



5,483



1,968,967



-



-



1,974,450Issuance of common stock forlegal services:3/5/2010


0.38



250,000



250



94,750



-



-



95,0003/9/2010


0.36



40,000



40



14,360



-



-



14,4005/11/2010


0.28



80,000



80



22,320



-



-



22,400370,000



370



131,430



-



-



131,800Issuance of common stock forprepaid loan fee:3/26/2010


0.36



100,000



100



35,900



-



-



36,0005/3/2010


0.36



100,000



100



35,900



-



-



36,400200,000



200



71,800



-



-



72,000
  The accompanying notes are an integral part of these financial statements
 5
  Ecoblu Products, Inc.
 (A Development Stage Company)
 Consolidated Statement of Changes in Shareholders' Equity (Deficit)
 Period of Inception (May 20, 2009) to September 30, 2010 (Unaudited)
  DeficitAccumulated


Common


TotalPrice








Additional


During


Stock


Stockholders’Per


Common Stock


Paid-In


Development


Other


EquityShare


Shares


Amount


Capital


Stage


Consideration


(Deficit)Issuance of common stock for rent:3/5/2010

$
0.38



250,000


$
250


$
94,750


$
-


$
-


$
95,000Issuance of common stock for note:10/1/2009


0.16



125,000



125



19,875



-



(1)(20,000
)


-Redemption andcancellation 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
)

$
(858,581
)Issuance of common stock forconversion of debt:9/10/2010


0.17



333,333



333



56,333



-



-



56,6669/14/2010


0.14



384,615



385



53,462



-



-



53,8479/21/2010


0.12



909,090



909



108,182



-



-



109,0911,627,038



1,627



217,977



-



-



219,604Issuance of common stock forsettlement of debt:7/13/2010


0.24



44,000



44



10,515



-



-



10,5598/16/2010


0.2



78,024



79



15,526



-



-



15,605122,024



123



26,041



-



-



26,164Issuance of common stock forconsulting and advisory services:7/13/2010


0.24



16,000



16



3,824



-



-



3,8408/16/2010


0.2



100,000



100



19,900



-



(2)(10,000
)


10,0008/31/2010


0.16



74,000



74



11,766



-



-



11,840190,000



190



35,490



-



-



25,680Issuance of common stock forlegal services:8/16/2010


0.2



186,106



186



37,036



-



-



37,2228/31/2010


0.16



50,000



50



7,950



-



-



8,00236,106



236



44,986



-



-



45,222Issuance of common stock forlease settlement:


0.2



400,000



400



79,600



-



-



80,000Re-pricing of warrants






-



-



140,981



-



-



140,981Net loss for period






-



-



-



(850,814
)


-



(850,814
)BALANCE - September 30, 2010






78,169,501


$
78,170


$
3,914,047


$
(5,130,961
)

$
(30,000
)

$
(1,168,744
)
  (1) Common stock subscription receivable
 (2) Common stock issued for prepaid expense
 The accompanying notes are an integral part of these financial statements
 6
  Ecoblu Products, Inc.
 (A Development Stage Company)
 Condensed Consolidated Statements of Cash Flows (Unaudited)
  Period ofThree Months


Three Months


InceptionEnded


Ended


(May 20, 2009)September 30,


September 30,


to September 30,2010


2009


2010(Unaudited)


(Unaudited)


(Unaudited)Cash flows from operating activities:Net loss

$
(850,814
)

$
(70,857
)

$
(5,039,021
)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Gain on settlement of lease


-



-



(21,270
)Loss on modification of debt


377,084



-



377,084Gain on settlement of debt


(12,546
)


-



86,471Interest on amortization of debt discount


474,174



-



904,591Interest on amortization of loan fees


60,077



-



121,471Interest on repricing of warrants


140,981



-



140,981Change in fair value of derivative liability


(793,694
)


-



(742,477
)Common stock issued for services


70,767



-



2,177,017Common stock issued for payment of rent and lease settlement


80,000



-



175,000Contributed legal services


-



3,200



3,200Depreciation expense


18,198



-



61,911Bad debt expense


-



-



4,487Change in operating assets and liabilities:(Increase) in accounts receivable


(17,384
)


-



(24,848
)(Increase) decrease in other receivables


4,686



-



(1,200
)(Increase) in inventory


(13,282
)


-



(715,987
)(Increase) in prepaid expenses


-



(21,200
)


-Decrease in deposit


45,155



-



-(Increase) in security deposits


-



(15,000
)


(25,000
)Increase in accounts payable


56,905



40,40



448,171Increase in rent payable


-



-



143,316Increase in other payables and accrued expenses


89,381



31,235



211,822Increase in deferred rent expense


-



22,222



19,445Increase in accrued interest added to principal


65,903



-



79,137Net cash used in operating activities


(205,219
)


(10,000
)


(1,615,609
)Cash flows from investing activities:Proceeds from repayment of loans receivable - related party


85,974



-



85,974Payments for loans receivable - related party


(73,100
)


-



(96,600
)Purchases of property and equipment


-



-



(515,885
)Payments for equipment deposits - related party


-



-



(339,118
)Refunds of equipment deposits - related party


-



-



177,500Payments for leasehold improvements


-



-



(63,406
)Payments for prepaid trademark costs


-



-



(4,871
)Net cash provided by (used in) investing activities


12,874



-



(756,406
)Cash flows from financing activities:Proceeds from sale of common stock


-



10,000



674,794Proceeds from debt issuances


-



-



2,031,500Advances from related party


139,000



-



150,200Payments for redemption of common stock


-



-



(5,000
)Repayments of debt issuances


(316,827
)


-



(391,827
)Repayments of related party advances


-



-



(11,200
)Payment of loan fees


-



-



(61,000
)Net cash provided by (used in) financing activities


(177,827
)


10,000



2,387,467Net increase (decrease) in cash and cash equivalents


(370,172
)


-



15,362Beginning balance – cash and cash equivalents


385,534



-



-Ending balance – cash and cash equivalents

$
15,362


$
-


$
15,362Supplemental information:Interest expense paid

$
56,969


$
-


$
87,858Income taxes paid

$
-


$
-


$
-
  The accompanying notes are an integral part of these financial statements
 7
  
 Ecoblu Products, Inc.
 Notes To Condensed Consolidated Financial Statements
 September 30, 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 September 30, 2010, the Company has recorded revenues totaling $581,616.  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 September 30, 2010, and the results of its operations and cash flows for the three months ended September 30, 2010 and 2009, and from its inception (May 20, 2009) through September 30, 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.
   8
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 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.
  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 are stated at lower of first-in-first out (FIFO) cost or market.
  Property and Equipment
  Property and equipment are stated at cost.  Major renewals and improvements with costs exceeding $500 are charged to the asset accounts while replacements, 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.  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 September 30, 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).
   9
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 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 September 30, 2010 that have been excluded from the computation of diluted net loss per share included convertible debt of $1,630,309 convertible into 8,417,257 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 income 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 three months ended September 30, 2010.  Sales to this customer represented approximately 59% of the Company’s total revenues for the current three month period.
   10
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 
 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 income.
  The Company classifies costs associated with shipping product to customers as part of selling expense as reflected in the statement of income.
  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 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 the financial position, results of operations or cash flows of the Company.
  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 the financial position, results of operations or cash flows of the Company.
  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 the financial position, results of operations or cash flows of the Company.
  3. Inventory
  As of September 30, 2010, inventories consist of the following:
  Chemicals
$180,452Lumber
512,211$692,663
 
 The above inventories were purchased from a related party (See Note 7).
 The Company is reliant on a single vendor for purchases of its chemical inventory.
 
 11
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 
 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 ended September 30, 2010 totaled $60,077. The balance of prepaid loan fees totaled $116,529 at September 30, 2010.
  5. Property and Equipment
  Property and equipment as of September 30, 2010 consists of the following:
  Useful Life(years)Machinery and equipment
7
$                378,500Furniture
5
18,223Computer equipment
3
3,685Research and development equipment
5
1,684Leasehold improvements
3
63,405465,497Less accumulated depreciation

(53,782)$                411,715
  Depreciation charged to operations for the three months ended September 30, 2010 amounted to $18,198.
 There was no depreciation expense for the three months ended September 30, 2009.
  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 September 30, 2010, the Company has not yet met the customary conditions and thus is currently 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.
   12
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 
 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 three months ended September 30, 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 remains 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 common stock issuable upon conversion of the New Notes or upon exercise of the warrants (see Note 13 – Subsequent Events).  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 (see Note 13 – Subsequent Events).
  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 three months ended September 30, 2010 amounted to $376,567.
  Interest charged to operations on the principal balance of the notes for the three months ended September 30, 2010 totaled $56,969. The balance of the notes at September 30, 2010, net of discounts totaling $737,641, was $429,167.
  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.
   13
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 
 Placement Agent Loan Fees
  In addition, the Company engaged a placement agent with respect to the Notes.  Accordingly, as consideration for the placement agent’s services, the placement agent received compensation equal to 7% of the aggregate amount raised in the form of the Notes in the aggregate amount of $105,000 with a voluntary conversion price of $0.40 which 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 three months ended September 30, 2010 amounted to $26,360.
  The majority of the warrants expire five years from their respective date of issuance.  The warrants allow for cashless exercise.
  In March 2010, the placement agent was also issued 100,000 shares of the Company’s common stock valued at $36,000.  The placement agent 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 the notes for the three months ended September 30, 2010 totaled $2,149. The balance of the notes at September 30, 2010, net of discounts totaling $51,634, was $57,731.
  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 three months ended September 30, 2010, the Company was a party to an agreement to whereby certain increments of a $127,000 convertible note payable were assigned by the original investor to a third party.  The assignment agreement included modifications to the debt increments and embedded conversion features that were more favorable to the borrower, resulting in a $117,151 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 three month period, a total of $100,000 (plus accrued interest) of debt increments were assigned to this third party and converted into 1,627,038 shares of the Company's common stock at prices ranging from $0.12 to $0.17 per share.  There were no unconverted assigned increments at September 30, 2010.
  For the three months ended September 30, 2010, interest totaling $1,416 was accrued and charged to operations. During the same period, discount amortization charged to operations totaled $71,247.  The net note balance at September 30, 2010 is $11,134, which consists of the remaining note principal and accrued interest totaling $29,269 less unamortized discounts totaling $18,135.
   14
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
  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 three months ended September 30, 2010 totaled $4,560.  The balance of the note at September 30, 2010 was $383,983.
  During the three months ended September 30, 2010, the Company was a party to an agreement to whereby a $360,000 convertible note was assigned in full to the same third party as the note increments described above.  The assignment agreement included modifications to the debt and its embedded conversion feature that were more favorable to the borrower, 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).
 
 Summary of Convertible Note Balances
  The balance of the convertible note as of September 30, 2010 is as follows:
  Principal balance and accrued interest
$
1,689,426Less discount

(807,411)882,015Less current balances of convertible notes

(870,881)Long-term convertible notes
$
11,134
 
 Loans Payable - Other
  As of September 30, 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.
  7. Related Party Transactions
  As of September 30, 2010, approximately 81% of the Company’s Property and Equipment has been purchased from two related entities that are controlled by the Company’s President, who is also a majority shareholder.
  During the year ended June 30, 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 three month periods ended September 30, 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 three months ended September 30, 2010, the Company received advances totaling $139,000 from a Company officer who is also a significant shareholder.  Such advances bear no interest and are repayable on or before March 15, 2011.
  These related party transactions are not considered to have occurred at arm’s length.
   15
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 
 8. Derivative and Warrant Liabilities
  At September 30, 2010 (“the valuation date”), the Company decreased its derivative and warrant liabilities and made a correlating credit to operations in the amount of $793,694 pursuant to ASC 815-40-19 “Contracts in Entity's Own Equity,” as the Company had 4,266,478 common shares issuable at a variable price on its $360,000 convertible note payable.  Additionally, 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 13,624,258. The total liabilities of $1,109,888 at the valuation date are the maximum amount the Company believes it would be liable for if it were required to meet all its variable-share and committed share obligations. The liabilities consist of three components.
  The first component is valuing the common shares issuable that are connected with the variable-share convertible debt obligations.  The 4,266,478 shares are valued at the valuation date at $85,330 based upon the difference between the trading price of the Company’s common stock of $0.11 per share and the effective conversion price of $0.09. This component is classified as a current liability, as the debt is immediately convertible.
  The second 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 $0.0765 per share. The fair value of the Series A and E Warrants of $590,963 was calculated using the Black-Scholes Option Model with a risk free interest rate of 1.27%, volatility of 127.65%, exercise price of $0.40 per share, and trading price of $0.11 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 5,899,258 using the fair value of Series B and F warrants at the valuation date of $0.0735 per share. The fair value of the Series B and F Warrants of $433,595 was calculated using the Black-Scholes Option Model with a risk free interest rate of 1.27%, volatility of 127.83%, exercise price of $0.50 per share, and trading price of $0.11 per share.  This component is classified as a current liability, due to the underlying warrants being immediately exercisable.
  The second and third components of the liability will cease to exist once the Company increases the number of its authorized shares to meet all of its committed share obligations.  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.  On November 22, 2010 the Company submitted amended articles of incorporation to the State of Colorado stating the same.  The amended articles are currently awaiting the State’s approval.
  
 16
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 9. Fair Value of Assets and Liabilities
  Determination of Fair Value
  The Company’s financial instruments consist of convertible notes payable, loans payable and a derivative liability.  The Company believes all of the financial instruments’ recorded values approximate their fair values because of their nature and respective durations.
  The Company complies with the provisions of ASC No. 820-10 (ASC 820-10), “Fair Value Measurements and Disclosures.”  ASC 820-10 relates to financial assets and financial liabilities. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.
  ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions, about market participant assumptions, that are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820-10 are described below:
  Level 1.     Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
  Level 2.     Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
  Level 3.   Inputs that are both significant to the fair value measurement and unobservable. These inputs rely on management's own assumptions about the assumptions that market participants would use in pricing the asset or liability. The unobservable inputs are developed based on the best information available in the circumstances and may include the Company's own data.
  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.
  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 - 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 this liability approximates its carrying value since its carrying value is determined from the trading price of its common shares.
   17
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 
 The methodology described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. If readily determined market values became available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be adjusted, which could result in material differences from the recorded carrying amounts. The Company believes its method of determining fair value is appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.
  The following table presents the fair value of financial instruments that are measured and recognized on a non-recurring basis classified under the appropriate level of the valuation hierarchy described above, as of September 30, 2010:
   Liabilities measured at fair value at September 30, 2010:

Level 1


Level 2


Level 3


TotalNonrecurring:Convertible notes payable

$
-


$
870,881


$
-


$
870,881Loans payable - other

$
-


$
44,500


$
-


$
44,500Derivative liability

$
-


$
-


$
1,109,888


$
1,109,888
  A reconciliation of derivative and warrant liabilities is as follows:
  Balance - June 30, 2010
$
1,656,217Initial valued or variable conversion feature on $360,000 note

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

(793,694)Balance - September 30, 2010
$
1,109,888
  10. Stockholders' Deficit
  Common Stock Issuances
  During the three months ended September 30, 2010, the Company issued a total of 2,575,168 shares of its common stock of which 1,627,038 shares were issued for debt conversions of increments totaling $102,453 on the Company’s $127,000 note payable, which also included related losses on debt modification totaling $117,151.  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, 190,000 shares valued at $35,680 were issued for consulting and advisory services, 236,106 shares valued at $45,222 were issued for legal services, and 122,024 shares were issued to various consultants and advisors in connection with the cancellation of $38,710 of debt due them. The 122,024 common shares were valued at $26,164 resulting in a net gain from the cancellation of indebtedness of $12,546 that was credited to operations.
  Warrants
  The following is a schedule of warrants outstanding as of September 30, 2010:
   Weighted Average


Weighted Average


AggregateWarrants


Exercise


Remaining


IntrinsicOutstanding


Price


Life


ValueBalance, June 30, 2010


27,037,500


$
0.49


4.24 years



-Warrants granted


-


$
-



-



-Warrants expired


-


$
-



-



-Balance September 30, 2010


27,037,500


$
0.46


3.99 years


$
-
   18
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 
 During the three months ended September 30, 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 September 30, 2010.
  11. Income Taxes
  As of September 30, 2010, for income tax purposes the Company has an unused net operating loss carryforward of approximately $1,890,000, which may provide future federal tax benefits of approximately $643,000, and which expires in various years through 2029.
  An allowance of $643,000 has been provided at September 30, 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.
  12. Commitments and Contingencies
  Real Estate Lease – Vista, California
  In June 2009, the Company entered into an agreement to lease warehouse and office facilities for three years.  The details on the lease are as follows:
 
 1.
Base rentals - $5,500 per month beginning October 1, 2009.
 2.
Base rentals increase to $6,000 monthly beginning October 1, 2010 and $6,500 monthly beginning October 1, 2011.
 3.
Company is responsible to pay its proportionate share of property taxes, insurance and common area maintenance – estimated at $875 per month
 4.
Termination date – September 30, 2012.
 5.
Renewal Option – one option for an additional three year period.
 6.
Security Deposit - $5,500.
 7.
Rent for month six (March 2010) shall be discounted to by 50%
 8.
Rent for month twelve (March 2011) shall be discounted by 50%
 
 Rent expense related to this lease was $17,375 for the three months ended September 30, 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.  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 $45,081 for the three months ended September 30, 2010.
 
 Total minimum future lease payments under the Company’s real estate leases as of September 30, 2010 are as follows:
  September 30,
 2011                                                       $ 86,911
 2012                                                          78,000
 Total minimum lease payments         $64,911
 
 19
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 
 Purchase, Distribution & Services Agreement #1
  On August 24, 2009, the Company entered into a Purchase, Distribution & Services Agreement, (the “Agreement”) with the owner of technical data and intellectual property for a protective coating, in order to obtain an exclusive supply of the product, use of the technical data, intellectual property and other information relating to the product and use of the trademarks, together with certain distribution, marketing and sales rights.  Pursuant to the Agreement, the Company has guaranteed it will purchase a minimum of fifty (50) 275 gallon totes of product in the first twelve month period.  The Company is required to increase the minimum quantities by 25% in the second year, to 62.5 totes.  The initial term of the agreement is two years and will renew for additional one year terms without further action unless otherwise terminated.
  With regard to the above agreement, the Company has learned from third parties that the seller's formula contains a toxic and carcinogenic contaminant known as chlorothalonil.  After confronting the manufacturer, it was confirmed the toxin exists in the product. The Company’s management does not know how long the toxin has been in the solution. Testing and investigation is ongoing. The seller has indicated nothing as to removing the toxin and is continuing its own investigation of its liabilities.
  The Company has not made all of its original purchase commitments in this agreement, due to non-performance by the seller and the existence toxins as described above.  Further, the Company has 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.  On November 10, 2010 the parties signed a term sheet expressing their desire to negotiate a revised agreement.  The parties will continue to work under the terms of current agreement until a new agreement can executed, which is expected to occur in December 2010.  Until that time, both parties agree that neither will enter a new exclusive agreement with any other party.
  Legal Proceedings
  Subsequent to June 30, 2010, the Company filed a legal action against the company with which we have signed a Purchase, Distribution and Services Agreement, for lack of performance in the delivery of chemical product and protection of sales territory. An unfavorable outcome on this case could materially impact the sales territory and availability of the related chemical product.
  The Company is involved in a collection proceeding in Colorado for Express Employment vs. N8 Concepts, Inc. (the predecessor to EcoBlu Products, Inc.). This is related to alleged temporary labor provided to N8/EcoBlu that was not paid for. A judgment is estimated at approximately $40,000. It is at least reasonably possible that this estimate may materially change in the near term.
  The Company accrues the legal costs associated with loss contingencies as the associated legal services are rendered.
   20
 
  Ecoblu Products, Inc.
  Notes To Condensed Consolidated Financial Statements
 September 30, 2010
 (Unaudited)
 
 13. Subsequent Events
  From October 1, 2010 to November 20, 2010, the Company issued 7,477,384  shares of common stock.
  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 plans to submit the necessary amended articles of incorporation to the State of Colorado in December 2010.
  As discussed in Note 6, the Company failed to have its registration statement become effective by the “Effective Deadline” of August 22, 2010.  Pursuant to the terms of the Registration Rights Agreement, the Company was obligated to the investors to pay “Delayed Registration Payments” of $10,050 for each thirty day period after the Effective Deadline that the registration statement is not effective. In addition, any unpaid Delayed Registration Payment would accrue interest at a rate of 1.5% per month.  Effective November 10, 2010, the Company filed a request with the SEC to withdraw the registration statement.  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 common stock issuable upon conversion of the New Notes or upon exercise of the warrants.
  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 Company has elected to pay the November 24, 2010 installment amount in cash.  The New Notes continue to be secured by all of the assets of the Company.  The Exchange Agreements do not amend or modify any of the Warrants unless the Company fails to timely pay the entire November 24, 2010 installment amount.
  Subsequent to the three months ended September 30, 2010, the Company was a party to an agreement whereby certain increments of  a $360,000 convertible note payable were assigned by the original investor to a third party. As of the date of this report, a total of $225,000 of debt increments were assigned to this third party and converted into 7,477,384 shares of the Company's common stock.
   21
 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 September 30, 2010 as Compared to the Three-Months Ended September 30, 2009
  Revenues and Cost of Sales - For the three-months ended September 30, 2010 we had total revenues of $357,117 (consisting of $354,117 from product sales and $3,000 from equipment sales), as compared to no revenues for the three-month period ended September 30, 2009.  Our cost of sales and gross profit for the three-months ended September 30, 2010 was $326,917 and $30,200, respectively, as compared to no cost of sales or gross profit three-month period ended September 30, 2009.  Sales have not yet developed to sufficient levels to improve efficiencies and margins.
  Operating Expenses - For the three-months ended September 30, 2010 our total operating expenses were $569,845, as compared to total operating expenses of $70,857 for the three-months ended September 30, 2009.  For the three-months ended September 30, 2010 our operating expenses consisted of $9,771 of research and development expense, $1,980 of marketing expense, $153,585 of compensation and related costs, $142,456 of rent expense, $146,724 of professional fees, $29,701 of consulting fees, and $85,628 of other general and administrative expenses.  This is compared to operating expenses for the three-months ended September 30, 2009 which consisted of $57,622 of rent expense, $13,200 of consulting expense, and $35 of other general and administrative expenses.
  Other Income (Expenses) - For the three-months ended September 30, 2010 we had other income (expenses) that included a $12,546 gain on the settlement of debt from the payment of accounts payable through issuances of our common stock, a ($377,084) loss on the modification of two of our convertible notes payable, a $793,694 gain from a change in the fair value of our derivative liabilities, and interest expense of ($740,325).  This is compared to the three-month period ended September 30, 2009, in which our other income (expenses) were $0.
  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 September 30, 2010.  As such, our net loss for the three-months ended September 30, 2010 was $850,814 as compared to a $70,857 net loss for the three-months ended September 30, 2009.  Our net loss from the period of inception (May 20, 2009) to September 30, 2010 totaled $5,039,021.
  Liquidity and Capital Resources
  On September 30, 2010, we had $15,362 cash on hand.  Our operations used $205,219 of cash in the three-month period ended September 30, 2010. Cash of $12,874 was provided by investing activities during the same period, which consisted of payments of $73,100 for loans to a related party, and proceeds of $85,974 from repayments of such loans.  Cash of $177,827 was used by financing activities during the same period, which consisted of proceeds from related party advances of $139,000, less repayments of debt totaling $316,827.
  On September 30, 2009, we had $0 cash on hand. Our operations used $10,000 of cash in the three-month period ended September 30, 2009.  During the same period, we received proceeds of $10,000 from the issuance of common stock.
  We are unable to predict the duration, extent or trends related to the current credit and capital markets. We do expect to continue to experience difficulty financing our short term cash requirements as a result of these struggling markets and the U.S. Economy in general. Also, we may not be able to get terms favorable to the company or the existing shareholders if we are able to secure additional financing.
   22
 ECOBLU PRODUCTS, INC.
 
  A critical component of our operating plan impacting our continued existence is the ability to obtain additional capital through additional equity and/or debt financing. 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.
  Our near term cash requirements are anticipated to be offset through the receipt of funds from private placement offerings and loans obtained through private sources. Since inception, we have predominantly financed cash flow requirements through the issuance of common stock for cash.
  Over the next twelve months we believe that existing capital and funds from intended operations will not be sufficient to sustain operations and planned development of those 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 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.
  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 (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 September 30, 2010, there were no write-downs of inventory to net realizable value.
 
 
 23
 ECOBLU PRODUCTS, INC.
 
 
 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 September 30, 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).
 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 September 30, 2010 that have been excluded from the computation of diluted net loss per share included convertible debt of $1,630,309 convertible into 8,417,257 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.
   24
 ECOBLU PRODUCTS, INC.
 
 
 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 three months ended September 30, 2010.  Sales to this customer represented approximately 59% of the Company’s total revenues for the current three month period.
 
 Shipping and Handling Costs
 
 The Company classifies shipping and handling costs associated with the receipt of product as part of cost of sales as reflected in the statement of operations.
 
 The Company classifies costs associated with shipping product to customers as part of selling expense as reflected in the statement of operations.
 
 Income Taxes
 
 The Company accounts for its income taxes under the provisions of ASC Topic 740”Income Taxes” (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.
 
 Plan of Operation
  The Company originally intended to focus on developing a line of athletic and casual apparel and accessories. We were not able to secure any licensing relationships with any apparel or equipment companies. We have since identified an opportunity to enter the treated lumber products market.
   On October 19, 2009 we completed a merger transaction to acquire EcoBlu Products, Inc. (Nevada) which was formed on May 20, 2009 as a Nevada corporation. All operations of Ecoblu Products, Inc.(Nevada) have become the operations of Ecoblu Products, Inc.(Colorado) as of that date with Ecoblu Products, Inc.(Nevada) being the disappearing corporation pursuant to the Merger Agreement.
   EcoBlu Products, Inc. develops proprietary wood products coated with an eco-friendly chemistry that protects against mold, rot, decay, termites and value added fire. EcoBlu products utilizing BLUWOODTM technology is the ultimate in wood protection, preservation, and fire safety to building components constructed of wood; from I-joists, beams and paneling, to floors and ceilings.
   25
 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.
  EcoBlu Products, Inc. has developed an 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 EcoBlu EWP products.
  The Company has recently identified a contaminant known as chlorothalonil in the concentrated chemical provided by BluewoodUSA, Inc. (See “Legal Proceedings”).  The Company temporarily suspended all sales of this chemical to participants in the affiliate program. No measurable traces of the contaminant have been detected in samples of finished wood products.
  Material Contract and Agreements
  Purchase, Distribution & Services Agreement (Megola)
  On July 26, 2009,  we 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,  we guaranteed  we 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.  We are required to increase the minimum quantities in the second year, to 842 totes and in the third year to 1263 totes.
  This agreement was extended on November 10, 2010 and will operate under the existing terms until a new agreement can be executed tentatively by year end.
  Purchase, Distribution & Services Agreement (BluwoodUSA)
  On August 24, 2009, we entered into a Purchase, Distribution & Services Agreement, (the “Agreement”), with BluwoodUSA, Inc., the owner of technical data and intellectual property for protective coatings 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. The coatings provide protection against water, mold, rot, infestation and other damaging effects in wood products. Pursuant to the Agreement,  we guaranteed  we will purchase a minimum of fifty (50) two hundred and seventy five ( 275 ) gallon totes of product in the first twelve month period.  We are 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.
  The Company filed a legal action in San Diego Superior Court against  BluewoodUSA, for lack of performance in the delivery of chemical product and protection of sales territory. (See “Legal Proceedings”)
  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 $5,039,021 for the period from inception (May 20, 2009) to September 30, 2010, and have generated minimal revenue since inception. Our future is dependent upon our ability to obtain financing and upon future profitable operations. Management plans to seek additional financing through the sale of its common stock through private placements. There is no assurance that our current operations will be profitable or we will raise sufficient funds to continue operating. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event we cannot continue in existence.
  Off-Balance Sheet Arrangements
  We have no off-balance sheet arrangements or financing activities with special purpose entities.
   26
 ECOBLU PRODUCTS, INC.
 
 
 Item 3 -                Quantitative and Qualitative Disclosures About Market Risk
  We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
  Item 4 -                Controls and Procedures
  Evaluation of Disclosure Controls and Procedures
  We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 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 September 30, 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 significant change in our internal controls over financial reporting or in other factors that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
  
 27
 ECOBLU PRODUCTS, INC.
  
 Part II                      OTHER INFORMATION
  Item 1                      Legal Proceedings
  EcoBlu v. Bluewood USA
  On August 23, 2010, the Company filed a legal action in San Diego Superior Court against the company with which we have signed a Purchase, Distribution and Services Agreement, for lack of performance in the delivery of chemical product and protection of sales territory. One named individual in the suit has filed a motion to dismiss based on lack of personal jurisdiction.
  The Company has recently learned from third parties that the Bluwood USA formula may contain a contaminant known as chlorothalonil. The contaminant is measurable in the concentrated Bluwood USA product. Our management does not know how long the contaminant has been in the solution. Testing and investigation is ongoing. Bluwood USA is continuing its own investigation. No measurable traces of the contaminant have been detected in samples of finished wood products.
  The Company has temporarily discontinued selling the concentrated product to coaters under its affiliate program. Our agreement provides that Bluwood USA is responsible for any liabilities generated from the use of the product. Therefore, in the event we incur any liability related to this contaminant we will amend our complaint to include such additional claims.
  Express Employment v. N8 Concepts
  The Company has discovered a collection proceeding in Colorado for Express Employment vs. N8 Concepts, Inc.  (the predecessor to EcoBlu Products, Inc.). The claim is related to alleged temporary labor provided to N8/EcoBlu that was not paid.  We contacted the claimant upon discovery of this suit and have not received any documentation from the claimant as of the date of this report. We believe the claim is for approximately $40,000.
  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
  During the three months ended September 30, 2010, the Company issued 400,000 common shares as additional consideration for the cancellation of the Company's loss on its Texas facilities. These shares were valued at $80,000.
  During the three months ended September 30, 2010, the company issued 100,000 shares of its common stock for consulting and advisory services valued at $20,000.
  During the three months ended September 30, 2010, the company issued 78,024 shares of its common stock in exchange for the cancellation of debt due a consultant. The Company valued the shares at $15,605.
  During the three months ended September 30, 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. During the current three month period, a total of $102,453 of debt increments were assigned to this third party and converted into 1,627,038 shares of the Company's common stock at prices ranging from $0.12 to $0.17 per share.
 
 Subsequent to the three months ended September 30, 2010, the Company was a party to an agreement whereby certain increments of  a $360,000 convertible note payable were assigned by the original investor to a third party. As of the date of this report, a total of $225,000 of debt increments were assigned to this third party and converted into 7,477,384 shares of the Company's common stock.
  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.
  28
 ECOBLU PRODUCTS, INC.
 
 Item 3                      Defaults Upon Senior Securities
  None, for the period ending September 30, 2010
  Item 4                      [Removed and Reserved]
  
  Item 5                      Other Information
  None, for the period ending September 30, 2010
  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 onAugust 23, 2007.
  3.2
Bylaws, filed as exhibit 3.2 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.
 
 3.3
Amended  Articles of Incorporation ; filed as exhibit 3.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on October 22, 2009
  4.1
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, 2010
  4.2
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, 2010
  4.3
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, 2010
  4.4
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, 2010
  4.5
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, 2010
  4.6
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, 2010
  4.7
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, 2010
  4.8
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, 2010
  4.9
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, 2010
  4.10
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, 2010
  4.11
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, 2010
  4.12
Convertible Promissory Note, dated December 22, 2009; filed as exhibit 10.5 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 2010
  4.13
Convertible Promissory Note, dated February 11, 2010; filed as exhibit 10.6 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 2010
  10.1
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, (the “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, (the “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.
  Ecoblu Products, Inc. includes herewith the following exhibits:
  31.1         Certification of Principal Executive Officer (Rule 13a-14(a)/15(d)-14(a))
  31.2         Certification of Principal Financial Officer (Rule 13a-14(a)/15(d)-14(a))
  32.1         Certification of Principal Executive Officer (18 U.S.C. 1350)
  32.2         Certification of Principal Financial Officer (18 U.S.C. 1350)
  
 29
 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: November 22, 2010                                                By:    /s/Steve Conboy
 Steve Conboy, President
 Principal Executive Officer
 
 
 Date: November 22, 2010                                                By:    /s/Rodney H. McKinley
 Rodney H. McKinley, CFO
 Principal Financial Officer