UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




FORM 10-Q




(Mark One)


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




For the quarterly period ended December 31, 2012





o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
  For the transition period from _____________ to _____________
  Commission file number:000-53875
  Eco Building Products, Inc.
 (Exact name of small business issuer as specified in its charter)


Colorado
20-8677788(State or other jurisdiction of

incorporation or organization)
(IRS Employer

Identification No.)




909 West Vista Way


Vista, California 92083


(Address of principal executive offices)





(760) 732-5826


(Registrants telephone number, including area code)






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






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




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




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




o Large accelerated filer       o Accelerated filer       o Non-accelerated filer       x Smaller reporting company




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes    x No




The number of shares outstanding of each of the issuer's classes of common equity as of February 19, 2013: 383,944,985 shares of common stock.














Eco Building Products, Inc.
   Contents


PageNumberPART I
FINANCIAL INFORMATION
1Item 1
Unaudited Condensed Consolidated Financial Statements December 31, 2012
1Condensed Consolidated Balance Sheet
1Condensed Consolidated Statement of Operations
2Condensed Consolidated Statement of Cash Flows
3Notes to the Interim Financial Statements
4Item 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
15Item 3
Quantitative and Qualitative Disclosures About Market Risk
19Item 4
Controls and Procedures
19PART II
OTHER INFORMATION
20Item 1
Legal Proceedings
20Item 6
Exhibits and Reports
20SIGNATURES
22


















ii






PART I -FINANCIAL INFORMATION
  Item 1 - Financial Statements




ECO BUILDING PRODUCTS, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)December 31


June 302012


2012ASSETSCURRENT ASSETSCash

$
100,049


$
111,251Accounts receivable, net of allowance for doubtful accounts of $10,099 atDecember 31, 2012 and June 30, 2012


766,675



666,223Inventories


1,077,205



922,646Prepaid loan facility fee - related party, current portion


1,008,383



1,008,383Prepaid expenses


191,860



7,297Deposits


-



7,100Other current assets


19,100



-Total current assets


3,163,272



2,722,900PROPERTY AND EQUIPMENT, net


1,145,842



1,207,035OTHER ASSETSNotes receivable - related party - long-term portion


135,063



-Intangible assets


14,616



16,325Prepaid loan facility fee - related party


574,670



1,078,861Equipment deposits - related party


-



-Total other assets


724,349



1,095,186TOTAL ASSETS

$
5,033,463


$
5,025,121LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable

$
567,260


$
426,179Payroll and taxes payable


2,084,431



1,594,848Advances from related party


-



-Other payables and accrued expenses


335,770



336,287Deferred revenue


-



33,640Current maturities of notes payable


2,196,537



8,670Line of credit payable - related party


1,666,667



1,666,667Loans payable - related party


543,976



201,480Loans payable - other


144,500



44,500Total current liabilities


7,539,141



4,312,271LONG TERM LIABILITIESLine of credit payable - related party


3,333,333



3,333,333Notes payable, less current maturities


12,121



17,295Total long term liabilities


3,345,454



3,350,628TOTAL LIABILITIES


10,884,595



7,662,899STOCKHOLDERS' EQUITYCommon stock, $0.001 par value, 500,000,000 shares authorized,351,648,553 and 290,961,669 shares issued and outstanding at December 31, 2012and June 30, 2012


275,849



216,162Subscription receivable


25,000



-Additional paid-in capital


21,810,744



18,578,613Accumulated deficit


(27,962,725
)


(21,432,553
)Total stockholders' equity


(5,851,132
)


(2,637,778
)TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
5,033,463


$
5,025,121





See accompanying notes to condensed consolidated financial statements


1






ECO BUILDINGPRODUCTS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)3-month ended


3-month ended


6-month ended


6-month endedDecember 31


December 31


December 31


December 312012


2011


2012


2011REVENUEProduct sale

$
1,362,733


$
996,845


$
2,423,159


$
1,687,524License saleEquipment and other sales

$
-






$
-


$
-TOTAL REVENUE

$
1,362,733


$
996,845


$
2,423,159


$
1,687,524COST OF SALES


1,225,303



907,371



2,036,985



1,530,975GROSS PROFIT


137,430



89,474



386,174



156,549OPERATING EXPENSESResearch and development


36,801



37,585



132,018



56,206Marketing


197,506



44,079



289,974



74,032Goodwill/Donation


9,233



13,730



18,558



13,730Compensation and related expenses


635,078



649,145



1,309,839



1,255,599Rent - facilities


207,858



96,037



418,478



174,992Professional fees


608,866



226,784



1,086,759



519,974Consulting


99,700



32,461



131,323



111,017Other general and administrative expenses


899,475



619,840



1,629,189



953,636Total operating expenses


2,694,517



1,719,661



5,016,138



3,159,186LOSS FROM OPERATIONS


(2,557,087
)


(1,630,187
)


(4,629,964
)


(3,002,637
)OTHER INCOME (EXPENSE)Interest income


-



16,834



-



20,199Interest expense


(367,474
)


(38,810
)


(682,940
)


(258,974
)Gain (loss) on settlement of lease






-







-Gain (loss) on settlement of debt


-



-



-



-Loss on modification of debt


(777,766
)


(75,000
)


(1,226,203
)


(75,000
)Change in fair value of derivative liability


-



-



-



-Other Income


1,381







8,935



--Total other income (expense)


(1,143,859
)


(96,976
)


(1,900,208
)


(313,775
)LOSS BEFORE PROVISION FOR INCOME TAXES


(3,700,946
)


(1,727,162
)


(6,530,172
)


(3,316,411
)-



-



-



-NET LOSS

$
(3,700,946
)

$
(1,727,162
)

$
(6,530,172
)

$
(3,316,411
)NET LOSS PER COMMON SHARE - BASIC


(0.01
)


(0.01
)


(0.02
)


(0.01
)WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING


314,214,007



178,432,839



305,629,429



179,068,887





See accompanying notes to condensed consolidated financial statements


2







ECO BUILDING PRODUCTS, INC.CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS(UNAUDITED)6-month ended


6-month endedDecember 31


December 312012


2011Cash flows from operating activitiesNet Loss

$
(6,530,172
)

$
(3,316,411
)Adjustments to reconcile net income to net cash usedby operating activities:Interest on amortization of loan fees






-Loss on modification of debt by issuance of common stock


1,312,173



75,000(Gain) loss on settlement of debt


-Interest on amortization of debt discountAmortization of loan fees


504,191



982,931Interest on repricing of warrantChange in fair value of derivative liabilityCommon stock issuance for services


897,372



-Common stock issuance for payment of rent and lease settlement



-Stock Based Compensation


-



-Depreciation and amortization expense


84,425



75,463Bad debt expense






-Changes in operating assets and liabilities:(Increase) in accounts receivable


(100,452
)


(417,333
)(Increase) in other receivable






-(Increase) in inventory


(154,559
)


(717,783
)(Increase) in prepaid expenses & other current assets


153,437



25,105Decrease (Increase) in deposits






-Increase in accounts payable


141,081



(20,631
)Increase in Payroll and taxables payable






-Increase in rent payable






-Increase in other payable and accrued expenses


540,644



337,178Increase in deferred rent expense(Decrease) in other payables and accrued expenses






-Increase in accrued interest added to principle


187,811



24,118Net cash used by operating activities


(2,964,050
)


(2,952,363
)Cash flows from investing activitiesPurchase of property and equipment


(21,523
)


(244,376
)Purchase of software licenses


-



(25,000
)Payments for equipment deposits - related party


-



(43,134
)Payments for prepaid trademark costs






-Net cash provided (used) by investing activities


(21,523
)


(312,510
)Cash flows from financing activitiesProceeds from related party line of credit advances


-



5,000,000243,000Proceeds from debt issuance


2,423,939



-Proceeds from related party advances and notes


307,432



26,270Repayments of debt issuances


-



-Repayments of related party advances and notes


-



(1,770,246
)Net cash provided by financing activities


2,974,371



3,256,024Net change in cash and cash equivalent


(11,202
)


(8,849
)Cash and cash equivalent at the beginning of year


111,251



81,648Cash and cash equivalent at the end of year

$
100,049


$
72,799Supplemental disclosures of cash flow Information:Cash Paid for Interest

$
310,751


$
46,000Supplemental disclosure of non-cash investing and financing activities:Issuance of common stock in connection with the convertible notes payable

$
224,523


$
-






See accompanying notes to condensed consolidated financial statements




3






ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
   1. Organization and Basis of Presentation


Organization
 Eco Building Products, Inc. (the “Company”) was incorporated in the state of Colorado under the name N8 Concepts, Inc. on March 27, 2007.
  On October 19, 2009, the Company merged with Ecoblu Products, Inc., a Nevada Corporation (“ECOBLU”). For financial reporting purposes, the acquisition was treated as a reverse acquisition whereby ECOBLU’s operations continue to be reported as if it had actually been the acquirer. Assets and liabilities continue to be reported at the acquiree’s historical cost because before the reverse acquisition; the Company had nominal assets, liabilities and operations, and accordingly, the fair value of the assets approximated their carrying value and no goodwill was recorded.
  ECOBLU was organized May 20, 2009 in Nevada as a wholesale distributor and manufacturer of proprietary wood products coated with an eco-friendly chemistry that is designed to protect against mold, rot, decay, termites and fire. The Company has also developed an affiliate coating program that allows lumber companies to coat commodity lumber at their facilities contingent upon their stocking the Company’s inventory and supporting the Company’s products.
  Through December 2010, the Company was deemed to be in the development stage, as defined in Accounting Codification Standard (“ACS”) topic 915 Development Stage Entities. During year ended June 30, 2011, management determined that the Company exited the development stage. Thus, the Company is no longer required to report its stock issuances from inception, nor include inception-to-date information in its statements of operations and cash flows.
  On April 8, 2011, the Company formed Red Shield Lumber, Inc. (“Red Shield”) in British Columbia, Canada. Red Shield was formed for the purpose of opening a plant in Canada utilizing the Company’s red coating process for sale and distribution.  As of December 31, 2012 the wholly owned subsidiary has had little operating activity.
  On May 31, 2011, the Company formed E Build & Truss, Inc. (E Build) on May 31, 2011 in the State of California. E Build was formed for the purpose of operating the Company’s Truss manufacturing activities. This wholly-owned subsidiary commenced operations during the 3 months ended December 31, 2011.
  Liquidity and Going Concern
 During the six months ended December 31, 2012, and the year ended June 30, 2012, the Company incurred net losses of $6,530,172 and $11,166,386, respectively.  As of December 31, 2012, the Company has an accumulated deficit of $27,962,725.  The Company's cash balance at December 31, 2012 was $100,049.  At December 31, 2012, the Company's balance sheet at December 31, 2012 has a current ratio (current assets divided by current liabilities) of 0.46 to 1.0, and a working capital deficit of $5,901,239 (current assets less current liabilities).  These circumstances raise concern about the Company's ability to continue as a going concern.
  In the last couple years the Company has taken actions to reduce its expense and to align its cost structure with economic conditions. The Company has the ability to further reduce expenses if necessary.
  During the year ended June 30, 2011, the Company entered into an investment agreement and a revolving credit and warrant purchase agreement with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL. Under investment agreement, the Company received $5,000,000 in exchange for issuing 81,000,000 shares of its common stock. Subsequently, upon the effective date of the revolving credit and warrant purchase agreement the Company has the ability to borrow up to an additional $5,000,000. Besides the $3,000,000 was borrowed in July, 2011 the remaining $2,000,000 was borrowed between October and November 2011. With the infusion of the initial $5,000,000 under the investment agreement and up to an additional $5,000,000 under the revolving credit and warrant purchase agreement, management believes it the funding provides
 
 
 4
 
  ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
 
 
 sufficient capital to continue operating the Company and allow it to become profitable, however; no assurances can be made that current or anticipated future sources of funds will enable the Company to finance future periods’ operations. As of  December 31, 2012, the Company had cash on hand of $100,049 and $5,000,000 of capital available to them under the MRL line of credit, of which the entire $5,000,000 was borrowed during July and December, 2011 and the Company paid $310,751interest and accrued $104,277 interest as of December 31, 2012. Since the Company had borrowed the entire $5,000,000 line of credit during the first and second quarters of December 31, 2011, which made no available credit under this agreement during this period.
  If current and projected revenue growth does not meet Management estimates, the Management may continue to choose to raise additional capital through debt and/or equity transactions, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation. Currently, the Company does not have any commitments or assurances for additional capital, nor can the Company provide assurance that such financing will be available to it on favorable terms, or at all. If, after utilizing the existing sources of capital available to the Company, further capital needs are identified and the Company is not successful in obtaining the financing, it may be forced to curtail its existing or planned future operations. With the recent technical achievements and certifications earned towards the use of Eco Red Shield the Company is experiencing increased demand for the product. The Company has significant inventories on hand and anticipates it will generate profits and cash flow from turns of sales and or contracts already on the books. The Company has already taken steps to reduce expenses. The Company has increased the sales price of the Eco Red Shield coatings as applied to finished good lumber sales. The Company feels that it now has gained good traction in the market place with our technology therefore can command a higher premium which will equate to greater margins and increased cash flows. Orders continue to increase as demand and market acceptance for Eco Red Shield increases. Nevertheless the Company experiences cash flow difficulties and there is no assurance of when it may be profitable.
  The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.  These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the Company's inability to continue as a going concern.
  Basis of Presentation
 The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of December 31, 2012, and the results of its operations and cash flows for the three months ended December 31, 2012 and 2011. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission (the “Commission”). The Company believes that the disclosures in the unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. The operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. For further information, refer to the financial statements and notes included in the Company’s Form 10-K for the year ended June 30, 2012.
   2. Summary of Significant Accounting Policies
  There have been no changes in the Company's significant accounting policies for the three months ended December 31, 2012 as compared to those disclosed in the Company's Annual Report on Form 10-K for the year ended June 30, 2012.
    5
   ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
   Recent Accounting Pronouncements
 Comprehensive income.In June 2011, the FASB issued guidance which requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. This requirement should be applied retrospectively and is effective for the Company in its first quarter of fiscal year 2013. The adoption of this standard had no effect on the Company's condensed consolidated statements of operations.
   3. Inventories
 
 As of December 31, 2012, inventories consisted of the following:
 
 Chemicals

$
228,263Truss Plate


31,507Lumber


817,435$
1,077,205
 
 In addition, inventory is considered finished goods as the Company sells and markets the chemical and treated lumber.  All of the Company’s inventories are pledged as collateral for the Company’s $5,000,000 Loan Facility (see Note 6).
   4. Prepaid Loan Facility Fee
  As discussed in Note 6, as consideration for a $5,000,000 Loan Facility, the Company issued MRL a 5-year warrant to subscribe for 50,000,000 common shares at an exercise price of $0.10 per share (the “Warrant”). The warrants were valued at $3,025,148 on July 26, 2011 and expire on July 26, 2016. The valuation of these warrants was determined using a Proprietary Multinomial Lattice Model option pricing model taking into account the following variables such as using an exercise period of 5 years, risk free rate of 1.51%, volatility of 166.52%, and a trading price of the underlying shares of $0.26. The Company has recorded the $3,025,148 value of the warrants as a prepaid loan fee and is amortizing the balance to interest expense over the 3-year availability period of the Loan Facility.  A total of $252,096 of interest expense was recognized on the amortization of the prepaid loan fees during the three months ended December 31, 2012.
   5. Property and Equipment
  Property and equipment as of December 31, 2012 consisted of the following:
 
 Machinery and equipment (useful life of five to seven years)

$
1,143,873Furniture (useful life of five years)


20,408Computer equipment and software (useful life of three years)


83,999Displays (useful life of three years)


59,475Vehicles (useful life of five years)


44,095Leasehold improvements (useful life of three years)


183,3631,535,213Less accumulated depreciation


(389,371
)$
1,145,842
   6
   ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
 
 The Company had a deposit for machinery and equipment in the amount of $259,315 as of December 31, 2012.  Depreciation charged to operations for the three months ended December 31, 2012 and 2011 amounted to $40,610 and $31,671, respectively.  All of the Company’s property and equipment are pledged as collateral for the Company’s $5,000,000 Loan Facility (see Note 6).
   6. Notes Payable
  Loan Facility and Credit and Warrant Agreement with MRL
 On February 14, 2011, the Company entered into a revolving credit and warrant purchase agreement (the “Credit and Warrant Agreement”) with MRL. The Credit and Warrant Agreement did not go into effect until it is ratified by the shareholders of MRL, on July 26, 2011.
  Pursuant to the terms of the Credit and Warrant Agreement, MRL extended a $5,000,000 revolving loan facility (the “Loan Facility”). Interest accrues on the unpaid principal amount of each advance at a rate of 6% per annum. Under the terms of the Loan Facility the Company is allowed to borrow in $500,000 increments for a period of three years and is due with accrued interest at 6% per annum three months from the date of borrowing but not later than the expiration date of the agreement of February 14, 2014. So long as no events of defaults exist any loan may be rolled with another loan upon approval by the lender. The available credit under the loan facility can be reduced by the like amount of cash received through the exercise of warrants noted below. The Loan Facility is secured by substantially all the assets of the Company.
  As of December 31, 2012, the Company drew down $5,000,000 on the Loan Facility and the short term portion and the long term portion were $1,666,667 and $3,333,333, respectively. As of December 31, 2012, the Company paid a total of $310,751 towards the interest and accrued $104,277 interest expense on the $5,000,000 loan facility from MRL for the three months ended December 31, 2012.
  Convertible Notes - $1,080,000  Financing
 On August 20, 2012, the Company entered into a definitive agreement with accredited investors to borrow a $1,080,000 in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due in November 13, 2012 with a 10% per annum interest rate.  The gross proceeds of the loan was $1,080,000 with $80,000 prepaid origination loan fee and $30,000 towards legal expenses.  Moreover, on August 20, 2012, the Company issued 3.5 million common stocks of $0.01 per share valued in the amount of $350,000 as prepaid loan origination fee to the note holder.  For the three months and six months ended, the amortization of prepaid origination fee was $215,000 and $430,000.  For the three and six months ended December 31, 2012, the Company accrued $22,065 and $44,130 interest on the $1.08 million senior convertible notes.  In accordance with ASC 470-20,Debt with conversions and other options, the proceeds from the note holder were allocated based on the relative fair value of the note without the warrant issued in conjunction with the note and of the warrant itself at the time of issuance. The beneficial conversion feature or BCF is immaterial and management decided not to record BCF on its financial for the six months ended December 31, 2012.
  On November 16, 2012, the note holder sold the $1.08 million senior convertible note to Redwood Management for $1.25 million at a rate of 10% per annum due in February 13, 2013.  The gross proceeds of the loan was $1.25 million with $250,000 prepaid origination fee.  As $80,000 prepaid origination loan fee has been capture in the previous $1.08 million notes, the remaining $170,000 prepaid loan origination will be due in February 16, 2013.   For the three months and six months ended, the amortization of prepaid origination fee was $36,170.  For the three and six months ended December 31, 2012, the Company accrued $65,860 interest on the $1,250,000 senior convertible notes.  In accordance with ASC 470-20,Debt with conversions and other options, the proceeds from the note holder were allocated based on the relative fair value of the note without the warrant issued in conjunction with the note and of the warrant itself at the time of issuance. The beneficial conversion feature or BCF is immaterial and management decided not to record BCF on its financial for the six months ended December 31, 2012.
   7
 ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
   Convertible Notes - $320,000 Financing
 On September 26, 2012, the Company entered into a definitive agreement with accredited investors to borrow a $320,000  in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due on June 1, 2013.  The original loan was $320,000 with $20,000 prepaid loan origination fee needs to be paid by June 1, 2013.  For the three months and six months ended, the amortization of prepaid origination fee was $10,000 and $20,000.  For the three and six months ended December 31, 2012, the Company accrued $643 and $2,675 interest on the $320,000 senior convertible notes.  In accordance with ASC 470-20,Debt with conversions and other options, the proceeds from the note holder were allocated based on the relative fair value of the note without the warrant issued in conjunction with the note and of the warrant itself at the time of issuance. The beneficial conversion feature or BCF is immaterial and management decided not to record BCF on its financial for the six months ended December 31, 2012.
 
 In October 2012, the Company issued 1,607,764 common stocks at $0.06 conversion price to converted $140,592 notes payable and as of December 31, 2012, the outstanding notes payable was $179,408.
 Convertible Notes - $55,000 Financing
 On July 13, 2012, the Company entered into a definitive agreement with accredited investors to borrow a $55,000  in gross proceeds before $5,000 prepaid loan origination fee through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due March 1, 2013 with a 10% per annum interest rate.  For the three and six months ended December 31, 2012, the Company accrued $1,162 and $3,343 interest on the $55,000 senior convertible notes.  In accordance with ASC 470-20,Debt with conversions and other options, the proceeds from the note holder were allocated based on the relative fair value of the note without the warrant issued in conjunction with the note and of the warrant itself at the time of issuance. The beneficial conversion feature or BCF is immaterial and management decided not to record BCF on its financial for the six months ended December 31, 2012.
  In October 2012, the Company issued 643,106 common stocks at $0.06 conversion price to converted $42,000 notes payable and as of December 31, 2012, the outstanding notes payable was $13,000.
  Convertible Notes - $100,000 Financing
 On June 11, 2012, the Company entered into a definitive agreement with accredited investors to borrow $100,000 in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due June 11, 2013 with 4% per annum interest rate.  For the three and six months ended December 31, 2012, the Company accrued $537 and $1,545 interest on the $100,000 senior convertible notes.
  The Notes bear interest at an annual rate of 4% payable.  At the Company's option, the interest can be paid in either cash or, subject to the satisfaction of certain customary conditions, registered shares of the Company’s common stock.  The effective conversion price for a payment in shares is determined from a computation based on 85% of the volume weighted average price of the Company’s common stock for each of the twenty (20) consecutive Trading Days immediately preceding the applicable installment date.
  In December 2012, the Company issued 1,246,758 common stocks at $0.02 conversion price to converted $25,000 notes payable and as of December 31, 2012, the outstanding notes payable was $75,000.  Due to the timing difference, the stock conversion did not record on the shareholders report until January 2013, the Company recorded the $25,000 as subscription receivable under Equity of the Consolidated Balance Sheet as of December 31, 2012.
  In accordance with ASC 470-20,Debt with conversions and other options, the proceeds from the note holder were allocated based on the relative fair value of the note without the warrant issued in conjunction with the note and of the warrant itself at the time of issuance. The beneficial conversion feature or BCF is immaterial and management decided not to record BCF on its financial for the six months ended December 31, 2012.
   8
   ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
   Loan Payable – Related Party
 At December 31, 2012,the Company had a non interest bearing note payable due to its Chief Executive Officer who is also a Director and significant shareholder with a balance of$543,976.
  Loan Payable - Other
 At December 31, 2012, the Company has a $144,500 liability for advances from a third party.  As of the date these financial statements were issued, no terms for repayment have been agreed to between the Company and this third party.
  The Company entered in an auto loan agreement on November 7, 2011 to purchase a Ford 150 pickup truck.  The principal amount of the loan is $21,886 and the interest rate 9.99%.  The loan will be matured on October 7, 2015.  The Company is currently paying $675 auto payment per month.
  The following table summarizes the notes payable for the period ended December 31, 2012.
 
 As of December 31, 2012Description

Short term


Long termAuto notes payable

$
8,278


$
12,121MRL line of credit


1,666,667



3,333,333Loan payable related party


543,976



-Loan payable other


144,500



-Convertible notes


2,196,537Total notes payable

$
4,559,958


$
3,345,454
 Moreover the following table summarizes the future minimum payment for 5-year commitments of the notes payable:
 Principal6/30/2013

$
3,464,208,6/30/2014


4,422,6406/30/2015


7,5856/30/2016


2,7016/30/2017


-Thereafter


-Total

$
7,897,134
 Employment Agreement – President and Chief Executive Officer
 Effective April 1, 2011, the Company entered into an employment agreement with its President and Chief Executive Officer for a term of two years. Key provisions of the agreement include:
 (a)
Annual salary of $300,000(b)
Cash bonus of $300,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $34,000,000, subject to certain limitations.
 (c)
Additional cash bonus of $300,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $92,000,000, subject to certain limitations. In the event that gross sales for the prior fiscal year are with 35% of the $92,000,000 target, the target shall be adjusted up so that a minimum sales increase must be achieved for the bonus to vest.   9
   ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
   (d)
Option grants to purchase 800,000 shares of the company’s common stock at an exercise price of $0.10 per share, expiring April 1, 2016 (five-year life). Such options will vest over a two-year period. These options were valued at $75,680, as determined using the Black-Scholes option-pricing model using a risk free rate of 2.24%, volatility of 169.83% and a trading price of the underlying shares of $0.10.(e)
Severance pay is due the President upon separating from service, with or without cause, equaling his then current monthly salary multiplied by the number of full years that the President has been employed with the Company prior to separation.
 
 Accrued compensation due the President at December 31, 2012 totaled $445,513.  Severance pay accrued and charged to operations during the three months ended December 31, 2012 totaled $0.  Compensation charged to operations during the three months ended December 31, 2012  totaled $75,000.
  During the three months ended December 31, 2012, the Company did not make any repayments of accrued compensation to the President and Chief Executive Officer.
  Employment Agreement – Chief Technical Officer and Director
 Effective April 1, 2011, the Company entered into an employment agreement with its Chief Technical Officer and Director for a term of two years. Key provisions of the agreement includes:
 (a)
Annual salary of $250,000(b)
Cash bonus of $250,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $34,000,000, subject to certain limitations.
 (c)
Additional cash bonus of $250,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $92,000,000, subject to certain limitations. In the event that gross sales for the prior fiscal year are with 35% of the $92,000,000 target, the target shall be adjusted up so that a minimum sales increase must be achieved for the bonus to vest.(d)
Option grants to purchase 400,000 shares of the company’s common stock at an exercise price of $0.10 per share, expiring April 1, 2016 (five-year life). Such options will vest over a two-year period. These options were valued at $37,840, as determined using the Black-Scholes option-pricing model using a risk free rate of 2.24%, volatility of 169.83% and a trading price of the underlying shares of $0.10.
 (e)
Severance pay is due the CTO upon separating from service, with or without cause, equaling his then current monthly salary multiplied by the number of full years that the President has been employed with the Company prior to separation.
 
 Accrued compensation due the Chief Technical Officer at December 31, 2012 totaled $330,976.  Severance pay accrued and charged to operations during the three months ended December 31, 2012 totaled $0.  The Company made repayments of accrued compensation totaling $27,692 to the Chief Technical Officer during the three months ended December 31, 2012.
 
 8. Fair Value of Assets and Liabilities
 
 The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
  Line of Credit Payable – Related Party.The Company assessed that the fair value of this liability to approximate its carrying value based on the effective yields of similar obligations.
  Notes Payable.The Company assessed that the fair value of this liability to approximate its carrying value based on the effective yields of similar obligations.
  Loans Payable - Other. The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.  The methodology described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. If readily determined market values became available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be
 
 
 10
 
  ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
 
 
 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.
  Assets and Liabilities Measured at Fair Value on a Recurring Basis
 The following table presents the fair value of financial instruments that are measured and recognized on a non-recurring basis classified under the appropriate level of the valuation hierarchy described above, as of December 31, 2012:
  December 31, 2012Fair value measured usingLevel 1


Level 2


Level 3

Total BalanceAssetCash

$
100,491







$
100,491Total assets measured at fair value


100,491








100,491LiabilitiesLine of credit - related party





$
5,000,000




$
5,000,000Notes payable





$
1,958,658




$
1,958,658Loan payable - related party and other





$
688,476




$
688,476Total liabilities measured at fair value

$
-


$
7,647,134




$
7,647,134
 
 
 9. Stockholders' Deficit
  Investment Agreement with MRL
 On February 14, 2011, the Company entered into an investment agreement (the “Investment Agreement”) with MRL and LTK, a controlling shareholder of MRL (the “Investment Agreement”).
  On February 16, 2011, pursuant to the terms of the Investment Agreement, LTK subscribed for 81,000,000 shares in the Company, representing approximately 21.77 percent of the Company’s resulting total issued and outstanding common equity, for an aggregate consideration of $5,000,000. The agreement called for LTK to sell the Shares to MRL, for the same consideration, subject to approval from shareholders of MRL, which occurred on July 26, 2011.
  On February 14, 2011, the Company also entered into a revolving credit and warrant purchase agreement with MRL. The Credit and Warrant Agreement did not go into effect until it was ratified by the shareholders of MRL, which occurred on July 26, 2011. See Notes 4 and 6 for material terms of the Credit and Warrant Agreement.
  In the event MRL fully exercises the Warrant which was granted upon MRL shareholder approval of the Credit and Warrant Agreement on July 26, 2011, MRL would acquire an aggregate of 131,000,000 Shares representing approximately 30.62 percent of the resulting total issued and outstanding common equity of the Company, for an aggregate consideration of $10,000,000.
   11
   ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
  
 Options
 In April 2011, the Company granted options to its President to purchase 800,000 shares of its common stock and options to its Chief Technical Officer to purchase 400,000 shares of its common stock. The 1,200,000 options have an exercise price of $0.10 per share and expire in five years. The options were valued at $113,520 using the Black-Scholes Option Model with a risk-free interest rate of 2.24%, volatility of 169.83%, and trading price of $0.10 per share. The $113,520 is being charged to operations over their two year vesting period. Compensation charged to operations for the three months ended December 31, 2012 on these options amounted to $14,190. As of December 31, 2012, a total of 450,000 of the 1,200,000 options were vested.
  Common Stocks
 During the three months ended December 31, 2012, the Company issued a total of 40,326,520 shares of its common stock, of which 14,250,000 were issued to compensate outside law firms, calculated for accounting at a stock closing price at the end of each trading date, being compensation for legal services, for a total exercise of $690,000 as a legal expense for legal services and 5,999,269 shares of its common stock in the amount of $369,221 to pay interest on the outstanding notes payable, of which 4,412,517 shares in the amount of $264,751 were issued to Manhattan Resources Limited was paid towards the accrued interest.
 
 Debt conversion
 During the three months ended December 31, 2012, the Company issued 20,077,251 shares of its common stock to the third party lender with a conversion price of $0.05 per share to settle the debt that has been outstanding in prior years. The Company recorded $777,766 loss on modification of debt under other expense in the Condensed Consolidated Statements of Operations.  Moreover, in November 2012, Alpha Capital sold its notes payable in the amount of $1.25 million which included $1 million outstanding loan and $250,000 prepaid loan fee to Redwood Management.  The $250,000 prepaid loan fee will be amortized in one year and will be ended in October 2013.  Redwood Management replaced Alpha Capital as one of the investors by note assignment during December, 2012.
   10. Commitments and Contingencies
  Purchase, Distribution & Services Agreement #1
 On July 26, 2009, the Company entered into an AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Megola, Inc., the owner of technical data and intellectual property for a protective coating in order to obtain an exclusive supply of the product, together with certain distribution, marketing and sales rights. The product is a non-toxic non-corrosive fire inhibitor. Pursuant to the Agreement, the Company guaranteed it will purchase a minimum of four hundred fifty five (455) two hundred and forty five (245) gallon totes of product in the first twelve month period. The Company was required to increase the minimum quantities in the second year, to 842 totes and in the third year to 1,263 totes.
  The current agreement expired on November 11, 2010. In December 2010, the Company purchased 37,500 gallons of AF21 at a total price of $303,750. This inventory was used as partial security for the Company’s $570,500 short-term borrowing from Manhattan Resources Limited (see Note 6). As of the date of these financial statements, the Company has no obligation to purchase additional inventory from Megola, Inc.
  Purchase, Distribution & Services Agreement #2
 On January 18, 2011, the Company entered into an AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Newstar Holding Pte Ltd, a Singapore Corporation, and Randall Hart, an Indonesian National, the inventors and owners of technical data and intellectual property for a protective coating in order to obtain an exclusive supply of the product, together with certain distribution, marketing and sales rights. In addition, a significant shareholder of Newstar Holding Pte Ltd is also a significant shareholder of MRL. The product is a non-toxic non-corrosive fire inhibitor. Pursuant to the Agreement, the Company guaranteed it will purchase a minimum of six hundred fifty (650) XXX gallon totes of product in the first two-year period at a cost of $XX.XX per gallon, making the total purchase commitment $1,815,450 for the first two years. The Company is required to increase the minimum quantities in the third year to 842 totes at $XX.XX per gallon, making the total purchase commitment $2,351,706 for year three. In the fourth year the Company is required to increase the minimum quantities to 1,264 totes at $XX.XX per gallon, making the total purchase commitment $3,530,352 for year four. There are no penalty clauses other than cancellation of the agreement if the minimum purchase commitments are not met. If the agreement were to be cancelled it would have a significant impact on the Company's operations until a replacement product could be arranged.
   12
   ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
   Vehicle Lease – Ford Credit
 In September 2011, the Company entered into a two year automobile lease with scheduled payments of $390 per month.
  Legal Proceedings
 On August 23, 2010, EcoBlu Products Inc., now known as Eco Building Products, Inc. filed a legal action against Bluwood USA and Adolph Morando in the Superior Court of California, San Diego County, for breach of a Purchase, Distribution and Services Agreement, dated August 24, 2009.
  On November 28, 2010, Bluwood USA filed a demand for arbitration with the American Arbitration Association asserting claims against Eco for breach of the same Purchase, Distribution and Services Agreement.
  On January 5, 2011, Eco filed an amended complaint in the California Superior Court action naming as additional defendants, Edgefield Lumber Co., Mason McGowin, Bluwood International Corp. and Robert Seaman.
  On July 1, 2011, the California Superior Court action was stayed by Order of the Court and arbitration before the American Arbitration was compelled. On September 12, 2011, Eco filed claims in arbitration against Bluwood USA, Edgefield Lumber Co. and Mason McGowin.
  On or about February 18, 2013, the litigation between Eco, Bluwood USA, Edgefield Lumber Co. and Mason McGowin was resolved in a manner acceptable to each party and the California Superior Court action and the Arbitration proceedings were dismissed.
  The resolution shall not have any material effect on the Company's financial positions. Any and all business relationships and issues which may have existed between the parties prior to this resolution have been terminated. Each party has put the disputes behind it and will concentrate on developing its respective businesses.
  On or about September 7, 2012, Manhattan Resources Limited (“MRL”) sent correspondence to the Company in which MRL advises that the Company is in default of the Revolving Credit and Warrant Purchase Agreement and the Investment Agreement (the “Agreements”) between the parties, dated February 14, 2011.  MRL alleges that the Company defaulted on the Agreements through a transaction with a third party involving the sale of securities, issuance of debentures, and grating of security interests, dated August 13, 2012.  MRL further alleges that the Company has defaulted on the Agreements in failing to pay $5,000,000.00 and accrued interest due thereunder.
  The Company and MRL continue to work together to resolve the issues raised in MRL’s September 7, 2012 correspondence.  No assurance is given that the Company will successfully resolve the issues raised by MRL, and further, if the issues raised by MRL are litigated the Company may or may not be successful in defending against the claims.
     13
   ECO BUILDING PRODUCTS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2012
 (Unaudited)
 
 
 12. Subsequent Events
  On January 14, 2013, 2.5 million of non-restricted common stocks in the amount of $0.02/share equivalent to $50,000 were issued to an accredited investor for Debt Conversion from a vendor per Assignment and Assumption Agreement between Vendor (Assignor) and Investor (Assignee).  The Company agreed to pay 12% interest on $50,000 and the loan will be matured on January 14, 2013.  On January 28, 2013, Certificate to be originally issued free trading on 2.5 million of common stocks was issued.
  On January 29, 2013, Redwood Management LLC converted $200,000 principal amount to 14,814,814 amounts of common stocks at 0.135 conversion price.  The balance of principal after conversion is $880,000.   On January 30, 2013, Redwood Management LLC converted $64,750 principal amount to 4,796,296 amounts of common stocks at 0.135 conversion price.  The balance of principal after conversion is $815,250.
  The Company issued shares of common stocks to different recipients.  On January 1, 2013, 1,000,000 shares of restricted common stock were issued to Royal Hudson, LLC with no cost /share for binding MOU between parties. On January 14, 2013, 1,000,000 shares of restricted common stocks with no cost were issued to Peter Kuhn for binding MOU between parties.   2,000,000 shares of restricted common stocks with $0.03/share were issued to Arthur Douglas for five months service based on existing contract.  On January 15, 2013, 3,000,000 restricted common stocks with no cost were issued to Tonaquint, Inc these shares to be held in an escrow account to comply with a default provision in the original loan agreement between the parties.
  On February 6, 2013, Eco issued 2,000,000 shares of non-restricted stocks with $0.05/share for investment agreement dated and funded on July 9, 2012.




14






Eco Building Products, Inc.




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




The following management's discussion and analysis should be read in connection with the information presented in our unaudited condensed consolidated financial statements and related notes for the three months ended December 31, 2012 included in this report and our audited consolidated financial statements and related notes for the year ended June 30, 2012 included in our Annual Report on Form 10-K filed on October 15, 2012 with the Securities and Exchange Commission.





Forward-Looking Statements





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





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





Overview


Eco Building Products, Inc., or "ECOB", has developed a line of eco-friendly protective wood coatings that extend the life of framing lumber and other wood used in the construction of single-family homes, multi-story buildings as well as The Eco ShelterTM which serves as cost-effective housing for the world.
 
 Eco Building Products wood coatings are topically applied to lumber protecting the wood surface from mold, mildew, fungus, decay, wood rot, termites and Formosan termites. Eco’s newest product, Eco Red ShieldTM also serves as a fire inhibitor, now meeting class A – one hour ratings on structural lumber (Doug Fir), protecting lumber from fire, slowing ignition time and reducing the amount of smoke produced.
 
 The ECOB system of coatings is eco-friendly and remains chemically stable over time. The coatings emit virtually zero volatile organic compounds (VOCs), do not leech heavy metals or toxins into groundwater, and inhibit the growth and propagation of various molds that have the potential to contaminate occupant indoor air quality. More importantly, ECOB coatings prevent the degradation of structural lumber that potentially requires existing homes to be periodically rebuilt due to rot and/or wood ingesting insects/termite damage preserving our forests.
 
 The following milestones contribute to the viability and acceptance of the Company’s flag ship product Eco Red Shield;
 
 On July 2nd 2012 the Company was granted an Engineering Services Report (ESR 3255) from the International Code Commission (ICC-ES) providing evidence that Eco Red Shield meets building code requirements for wood ingesting orginisms including Formosan termites and Wood-Rot Decay. This new certification renders Eco Red Shield equivalent to traditional pressure treated lumber typically used for sill plates, mounting against concrete, in above ground applications.
 
 On September 4th, 2012 the Company achieved QAI Laboratories (QAI) listing B1053-1, providing evidence that Eco Red Shield’s fire protection qualities now meets building code requirements for Class “A” structural performance on all dimensional Douglas Fir lumber, making Eco Red Shield protected lumber equivalent to the traditionally accepted fire retardant treated wood (FRTW) for interior use.
 
 On October 29th ,2012 Eco Red Shield has been approved for use in Hawaii by the Department of Planning and Permitting Building Division, City and County of Honolulu. The basis of approval for use is in conjunction with the ICC-ES Engineering Services Report (ESR-3255) currently in effect. Hawaii approval MM2012-0060 will remain in effect for three years and subject to standard building department regulations.
 
 The Eco Building Products line includes dimensional lumber, wall and floor panels, I-joists, GluLam Beams, LVL beams, truss lumber and trim. These products can be coated at our production facilities and at the mill or distributor with our proprietary formula and coating machines. Additionally the company has six authorized affiliates producing Eco Red Shield coated products. The Company sells concentrated coating materials to the affiliate network creating additional revenue streams.
   15
 
  Eco Building Products, Inc.
 
 
 By supporting and providing value added lumber materials direct from our facilities and/or our affiliates, ECOB can create a compelling value package. Eco Red Shield has obtained industry certifications never before combined into a single product. The overall treatment methodology is cost effective making Eco Red Shield a low cost alternative with greater value.





Critical Accounting Policies





Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to revenue recognition, stock-based compensation, inventories, income taxes, warranty obligations and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions.  Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates.





We believe the following critical accounting policies reflect our more significant judgments used in the preparation of our consolidated financial statements.





Lines of Credit with Detachable Warrants


Warrants issued to obtain a line of credit are recorded at fair value at contract inception.  When warrants are issued to obtain a line of credit rather than in connection with the issuance, the warrants are accounted for as equity, at the measurement date in accordance with ASC 505-50-25 “Equity-Based Payments to Non-Employees”. The issuance of these warrants is equivalent to the payment of a loan commitment or access fee, and, therefore, the offset is recorded akin to debt issuance costs. The deferred fee is amortized on a straight-line basis over the stated term of the line of credit





Issuances Involving Non-cash Consideration


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





Stock Based Compensation


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





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





Revenue Recognition and Concentration Risk


We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) – Accounting Standards Codification (“ASC”) 605-10-S25 Revenue Recognition – Overall – Recognition. ASC 605-10-S25 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is








16







Eco Building Products, Inc.








reasonably assured. Determination of criteria (3) and (4) are based on management's judgment regarding the fixed nature of the fee charged for products delivered and the collectability of those fees. The application of these criteria has resulted in our generally recognizing revenue upon shipment (when title passes) to customers. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely impacted.




All items sold, we sell to end users, job sites and distributors are sold as is.  We offer a replacement warranty for items that are deemed not acceptable at the time of delivery.  We will offer the customer a maximum of a 30 day period of time to request a replacement item period. Any items that a customer wants to return for credit we charge a 25% restocking fee as this is stated in every quotation.




These arrangements do not include any special payment terms (our normal payment terms are 30-45 days for our distributors), price protection or exchange rights. Returns are limited to our standard product warranty. Certain of our distributors have contracts that include limited inventory rotation rights that permit the return of a small percentage of the previous six months' purchases.




Warranty Reserves.  We offer customer a 10 year replacement warranty against Mold, wood-Rot and Termite damage for the value added portion of company’s service such as the coating applied to the raw lumber.  This warranty is backed by an 11 million dollar product liability policy in which the company maintains a deductible policy on it.  As of current, the company has not yet experienced any warranty claim against this stated warranty policy.




Inventory Valuation. We currently value our inventory at the average cost.  We write down inventory for obsolescence or lack of demand, based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. On the contrary, if market conditions are more favorable, we may be able to sell inventory that was previously reserved.





Going Concern





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




Financial Condition and Results of Operations





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





Results of Operations for the Three Months Ended December 31, 2012 as Compared to the Three Months Ended December 31, 2011





Revenues and Cost of Sales - For the three months ended December 31, 2012 we had total revenues of $1,362,733 from product sales, as compared to $996,845 in revenues from product and equipment sales for three month period ended December 31, 2011.  Our cost of sales and gross profit for the three months ended December 31, 2012 was $1,225,303 and$137,430, respectively. This is compared to our cost of sales and gross profit for the three months ended December 31, 2011 of $907,371 and $89,474, respectively. Sales margins have improved however gross sales have not yet developed to sufficient levels to improve efficiencies




Operating Expenses - For the three months ended December 31, 2012, our total operating expenses were $2,694,517 as compared to $1,719,661 for the three month period ended December 31, 2011. Included in our operating expenses for the three months ended December 31, 2012 were compensation and related costs of $635,078. Professional fees included in our operating expenses for the three months ended December 31,2012 amounted to $608,866.  Other








17







Eco Building Products, Inc.








significant operating costs we incurred during the three months ended December 31, 2012 included rent of $207,858, consulting fees of $99,700, marketing of $197,506, research and development of $36,801, and other general and administrative costs of $899,475 Our operating expenses for the three months ended December 31, 2011 consisted of $649,145 of compensation and related costs, $226,784 of professional fees, $96,037 of rent expense, $32,461 of consulting fees, $37,585 of research and development expense, $44,079 of marketing expense, and $619,840 of other general and administrative expenses.





Other Income and Expenses - For the three months ended December 31, 2012 we had other expenses that included interest expense of $367,474.  We incurred $777,766 for the loss on modification of our convertible notes payable as the Company issued 11.1 million shares for the three months ended December 31, 2012 in order to offset the loan that owed to the third party lender in prior years. This is compared to the three months ended December 31, 2011, in which our other income and expenses included interest income of $16,834 and interest expense of $38,810 and loss on modification of 75,000.





Liquidity and Capital Resources





On December 31, 2012, we had $100,049 cash on hand.  During the six months ended December 31, 2012, net cash used in our operating activities amounted to $2,964,050. Net cash used during the same period for our investing activities totaled $21,523 which was used for the purchase of property and equipment.  During the six month ended December 31, 2012, net cash provided by our financing activities totaled $2,974,371, of which $307,432 was received from related party advances and notes and $2,666,939 was received from debt issuance.  In January and February 2013, the note holders completed the six months holding periods and start the conversion of the note to common stock thereby terminating the requirement to collateralize the note (see "NOTE 12 - Subsequent event" for more information.





During the six months ended December 31, 2011, net cash used in our operating activities amounted to $2,952,363.  Cash of $312,510 was used by investing activities during the same period, which consisted of $244,376 of purchasing of property and equipment, $25,000 of purchasing of software license and $43,134 payments for equipment deposits – related party.  Cash of $3,256,024 was provided by financing activities during the same period, which consisted of $5,026,270 proceeds from related party line of credit advances, less repayment of related party advances and notes of $1,770,246.





During the year ended June 30, 2011, we entered into an investment agreement and a revolving line of credit and warrant purchase agreement with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL. Under the investment agreement, we received $5,000,000 in exchange for issuing 81,000,000 shares of its common stock. Effective July 26, 2011, we obtained the ability to borrow up to an additional $5,000,000 on the revolving credit and warrant purchase agreement, in exchange for the issuance of warrants to purchase 50,000,000 shares of our common stock at $0.10 per share to MRL as a loan facility fee.  Of this amount $3,000,000 was borrowed in July 2011 and $2,000,000 was borrowed subsequent to November 30, 2011.  As of the date of this filing we had cash on hand of $100,049 and$5,000,000 of capital available to them under the MRL line of credit, of which the entire $5,000,000 was borrowed during July and December, 2011. Since the Company had borrowed the entire $5,000,000 line of credit during the three months ended December 31, 2011, as of the date of this filing, no capital was available.  On October 25, 2012, we made a proposal to MRL and we have started to pay interest on the $5,000,000 line of credit to MRL quarterly.


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





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






18






Eco Building Products, Inc.








Off Balance Sheet Arrangements





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




Item 3 - Quantitative and Qualitative Disclosures About Market Risk




We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.




Item 4 - Controls and Procedures




Evaluation of Disclosure Controls and Procedures


Based on that evaluation, our principal executive officer and our principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.




Changes in Internal Controls


There were no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.






























19







Eco Building Products, Inc.








PART II - OTHER INFORMATION




Item 1 - Legal Proceedings




On August 23, 2010, EcoBlu Products Inc., now known as Eco Building Products, Inc. filed a legal action against Bluwood USA and Adolph Morando in the Superior Court of California, San Diego County, for breach of a Purchase, Distribution and Services Agreement, dated August 24, 2009.




On November 28, 2010, Bluwood USA filed a demand for arbitration with the American Arbitration Association asserting claims against Eco for breach of the same Purchase, Distribution and Services Agreement.




On January 5, 2011, Eco filed an amended complaint in the California Superior Court action naming as additional defendants, Edgefield Lumber Co., Mason McGowin, Bluwood International Corp. and Robert Seaman.




On July 1, 2011, the California Superior Court action was stayed by Order of the Court and arbitration before the American Arbitration was compelled. On September 12, 2011, Eco filed claims in arbitration against Bluwood USA, Edgefield Lumber Co. and Mason McGowin.




On or about February 18, 2013, the litigation between Eco, Bluwood USA, Edgefield Lumber Co. and Mason McGowin was resolved in a manner acceptable to each party and the California Superior Court action and the Arbitration proceedings were dismissed.




The resolution shall not have any material effect on the Company's financial positions. Any and all business relationships and issues which may have existed between the parties prior to this resolution have been terminated. Each party has put the disputes behind it and will concentrate on developing its respective businesses.




On or about September 7, 2012, Manhattan Resources Limited (“MRL”) sent correspondence to the Company in which MRL advises that the Company is in default of the Revolving Credit and Warrant Purchase Agreement and the Investment Agreement (the “Agreements”) between the parties, dated February 14, 2011.  MRL alleges that the Company defaulted on the Agreements through a transaction with a third party involving the sale of securities, issuance of debentures, and grating of security interests, dated August 13, 2012.  MRL further alleges that the Company has defaulted on the Agreements in failing to pay $5,000,000.00 and accrued interest due thereunder.




The Company and MRL continue to work together to resolve the issues raised in MRL’s September 7, 2012 correspondence.  No assurance is given that the Company will successfully resolve the issues raised by MRL, and further, if the issues raised by MRL are litigated the Company may or may not be successful in defending against the claims.




Item 6 - Exhibitsand Reports




Exhibits




Eco Building Products, Inc. includes by reference the following exhibits:




3.1
Articles of Incorporation, filed as exhibit 3.1.1 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.3.2
Bylaws, filed as exhibit 3.2 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.3.3
Amended  Articles of Incorporation ; filed as exhibit 3.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on October 22, 20093.4
Amended  Articles of Incorporation ; filed as exhibit 3.3 with the registrant’s Annual Report on Form 10-K; filed with the Securities and Exchange Commission on September 28, 2011   20
   Eco Building Products, Inc.
   4.1
Convertible Promissory Note, dated December 22, 2009; filed as exhibit 10.5 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 20104.2
Convertible Promissory Note, dated February 11, 2010; filed as exhibit 10.6 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 201010.1
Investment Agreement – between Ecoblu Products, Inc.,  Manhattan Resources Limited and Dato’ Low Tuck Kwong , dated February 14, 2009, filed as exhibit 10.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on February 16, 2011.10.2
Revolving Credit and Warrant Agreement – between Ecoblu Products, Inc. and Manhattan Resources Limited, dated February 14, 2009, filed as exhibit 10.2 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on February 16, 2011.10.3
Warrant Termination Agreement – between Ecoblu Products, Inc. and SLM Holding PTE, Ltd., dated January 12, 2011; filed as exhibit 10.3 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on February 16, 2011.10.4
Hartindo AF21 Product, Purchase, Sales,  Distribution & Service Agreement, between Ecoblu Products, Inc. and Newstar Holdings Pte Ltd, dated January 18, 2011;filed as exhibit 10.8 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 2011.10.5
Employment Agreement – between Ecoblu Products, Inc. and Steve Conboy, Effective April 1, 2011.filed as exhibit 10.5 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on May 23, 2011.10.6
Employment Agreement – between Ecoblu Products, Inc. and Mark Vuozzo, Effective April 1, 2011filed as exhibit 10.6 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on May 23, 2011.21.1
Subsidiaries List filed as exhibit 21.1 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on November 15, 2011.





Eco Building Products, Inc. includes herewith the following exhibits:




31.1
Certification of Principal Executive Officer andPrincipal Financial Officer (Rule 13a-14(a)/15(d)-14(a))32.1
Certification of Principal Executive Officerand Principal Financial Officer (18 U.S.C. 1350)




















21






Eco Building 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.




Eco Building Products, Inc.Date: February 19, 2013
By:
/s/ Steve ConboySteve Conboy, PresidentPrincipal Executive OfficerPrincipal Financial Officer