PINX:ECOB Eco Building Products Inc Annual Report 10-K Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2012                                

o    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 of incorporation)
(IRS Employer Identification #)
 
909 West Vista Way
Vista, CA 92083
Address of Principal Executive Offices
 
Registrants telephone number, including area code (760) 732-5826
 
Securities registered under Section 12(b) of the Exchange Act:     None
 
Securities registered under Section 12(g) of the Exchange Act:     Common Stock, par value $.001 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).     o YES    x NO
 
Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or section 15(d) of the Act.     o YES    x NO
 
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 issuer 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 (Section 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the Definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in 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 aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2012, was $14,945,168 based on 114,962,832.00 shares at $0.13 per share.
 
The number of shares outstanding of the Registrant's common stock as of October 12, 2012 was 311,422,033.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
Table of Contents
 

 
 
 
 
 
 
 
 
 

 

 
 
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.  As detailed herein, for the fiscal year ended June 30, 2012, the Company experienced revenues of $3,723,374.
 
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 quarter ended September 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, 2011, the wholly owned subsidiary has had little operating activity.

On May 31, 2011, the Company formed E Build & Truss, Inc. (“E Build”) in the State of California. E Build was formed for the purpose of operating the Company’s Framing Labor and Truss manufacturing activities. This wholly-owned subsidiary commenced operations during the three months ended December 31, 2011.

In December 2011, the Company formed Seattle Coffee Exchange (“Seattle”) in the State of California.  Seattle is a coffee shop which is located in the 1st floor of the Company’s corporate headquarters in Vista, CA.  This wholly-owned subsidiary has not started its operations as of June 30, 2012.

As of June 30, 2012, the Company owns 100% of E Build, Red Shield and Seattle.
 
Going Concern –

The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. To date the Company has generated minimal operating revenues, losses from operations, significant cash used in operating activities, and is dependent upon its ability to obtain future financing and successful operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

During the year ended June 30, 2011, the Company entered into an investment agreement and a revolving credit and warrant purchase agreement with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL. Under investment agreement, the Company received $5,000,000 in exchange for issuing 81,000,000 shares of its common stock. Subsequently, upon the effective date of the revolving credit and warrant purchase agreement the Company has the ability to borrow up to an additional $5,000,000.  Besides the $3,000,000 was borrowed in July, 2011 the remaining $2,000,000 was borrowed between October
 
 
 
 
and November 2011. With the infusion of the initial $5,000,000 under the investment agreement and up to an additional $5,000,000 under the revolving credit and warrant purchase agreement, management believes it the funding provides sufficient capital to continue operating the Company and allow it to become profitable, however; no assurances can be made that current or anticipated future sources of funds will enable the Company to finance future periods’ operations. As of June 30, 2012, the Company had cash on hand of $111,251 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 October and December, 2011 and the Company paid $46,000 interest and accrued $181,217 interest as of June 30, 2012.  Since the Company had borrowed the entire $5,000,000 line of credit during the second quarter of December 31, 2011, which made no available credit under this agreement during this period.  Subsequently, the Company was assigned a $100 million standby letter of credit from the Bank of China to support current debt and any additional debt the company may acquire subject to conditions and limitations see Subsequent Events herein.
 
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.
 
Business
 
Products
 
Eco Building Products, Inc., or "ECOB", has developed a line of eco-friendly protective wood coatings that extend the life of framing lumber and other wood used in the construction of single-family homes, multi-story buildings as well as The Eco Shelter™ which serves as cost-effective housing for the world.
 
Eco Building Products wood coatings are topically applied to lumber protecting it from mold, mildew, fungus, decay, wood rot, and Formosan termites. Eco’s newest product, Eco Red Shield™ also serves as a fire inhibitor protecting lumber from fire, slowing ignition time and reducing the amount of smoke produced.
 
The ECOB system of coatings is eco-friendly and remains chemically stable over time. The coatings emit virtually zero volatile organic compounds (VOCs), do not leech heavy metals or toxins into groundwater, and do not allow for 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 insect damage preserving our forests.
 
The Eco Building Products line includes dimensional lumber, wall and floor panels, I-joists, GluLam Beams, LVL beams, truss lumber and trim. These products can be coated at our production facilities and at the mill or distributor with our proprietary formula and coating machines.
 
By supporting and providing value added lumber materials direct from our facilities or the distributors and manufacturer, ECOB can create a compelling value package. This package is offered to builders, and provides the protection of ECOB coatings at a price that compares favorably to raw, untreated wood.
 
 
 
 
Eco Red Shield™
 
Our proprietary eco-friendly formula controls moisture and protects lumber from mold, mildew, fungus, decay, rot, termites (and other wood boring insects including Formosan termites), while simultaneously serving as a fire inhibitor.
 
Eco Clear Shield™
 
Our proprietary eco-friendly formula was designed specifically for staining - it controls moisture and protects lumber from mold, mildew, fungus, decay, rot, termites while simultaneously serving as a fire inhibitor. (fire protection optional)
 
Eco Blue Shield™
 
Our proprietary eco-friendly formula controls moisture and protects lumber from mold, mildew, fungus, decay, rot, termites (and other wood boring insects including Formosan termites)
 
Eco Red Shield™ Smart ComponentsÒ.
 
These revolutionary wall systems are built in a quality controlled factory setting and ready to ship anywhere in the world - these pre-engineered seismic wall systems are a breakthrough in engineering standards eliminating the need for sheer paneling and can be applied right out of the box. Smart Components is a registered product of Trussed Inc.
 
Eco Shelter™
 
Our pre-engineered and pre-packaged kit comes pre-cut and ready to assemble with hammer and nails – the simple design makes it ideal for rapid response relief housing, events, offices, meeting halls, storage sheds, medical clinics and more. Available in a variety of sizes and floor plans.
 
 
 
 
Eco Cabinets
 
Using the finest hardwoods and expert craftsmanship, Eco has delivered high-quality, cost-effective cabinet solutions for kitchen, bath, garage and office space. All Eco cabinets are manufactured by hand in a quality controlled environment with minimal effect on the environment.
 
 
Smart Components® Seismic Walls
 
Smart Components® made with Eco Red Shield™ Protected Lumber provide builders in seismic hot spots like California, Mexico and Japan a cost-effective and lifesaving product that has been deemed safer (and more sustainable) than concrete.
 
 
Eco LVL Beam
 
Eco LVL Beams are stronger and lighter than traditional solid lumber beams and are protected against fire, mold and termites. The Eco LVL Beam psi is 24% higher than conventional glue-laminates. Eco Red Shield™ also controls moisture in the wood and prevents de-lam and swelling due to rain or excess moisture.
 
 
Eco I Joist
 
The I beam joist iseco-friendly solution to large structural beams. The science is in the design and construction. Lighter and easier to work with, it also gets protection of Eco Red Shield from mold, mildew, fungus, decay, rot, termites.
 
 
 
 
 
Eco Corbels
 
Exterior details built with raw lumber are subjected to termites and fungus. Whereas Eco Red Shield™ exterior details are protected and ready for paint. All standard and custom exterior corbels can be coated with Eco Red Shield™ - which eliminates the need for primer and protects the wood against wood rot, termites and fire.
 
 
Eco Trim
 
Laminated Eco Trim is protected on all six sides and available in any protective coatings providing a nearly impenetrable barrier against moisture, mold and insects. It also offers an ultra-smooth surface for painting and a clean, finished look that builders and homeowners desire.
 
 
Eco LVL Studs
 
The sustainable alternative to traditional studs but with added protection of Eco Red Shield™ on all six sides of the board as well as solids that are locked into the lumber to control moisture and protect against fire, mold and termites.
 
 
Calvert Curved Beams
 
In new clear Eco Red Shield™ clear protection – designed specifically for staining and to highlight the wood's natural beauty and character.
 
 
 
 
Eco Home
 
It is our vision to provide well-made long-lasting homes to all those who need one at a fair price. Eco Home addresses this need by creating simple, cost-effective floor plans that are pre-engineered and constructed in a quality controlled environment to be assembled on-site by local labor. The key to our process is speed in construction.  Our design methodologies significantly reduce construction time allowing emerging countries to meet housing demands over the traditionally employed methods. These homes can be constructed quickly and safely and provide American ingenuity at its finest.
 
Markets
 
Eco Building Products are marketed through comprehensive labor and materials packages to residential builders and retailers as well as distributed internationally for offshore housing projects. Eco Red Shield™ can be applied to all wood substrates on the entire structure prior to construction preserving the wood’s structural qualities, while only adding an estimated 10% to the cost of building materials.
 
In addition to providing dimensional lumber and Engineered Wood Products coated with Eco Red Shield™, Eco Building has undertaken a number of projects that employ this coating, including Eco Shelters and Eco Home developments for use in regions overcoming natural disasters or to meet the demand for sustainable housing in many emerging countries around the world.
 
Historically, 90% of Canada’s lumber exports were shipped to the U.S. However, the downturn of the housing market has significantly impacted U.S. demand for Canadian wood, with less than 70% of lumber exports being shipped to the U.S. in late 2010. In 2010, the export market for softwood logs and lumber shipped from North America to China exceeded $1.6 billion, up 457% from $350 million in 2008. Lumber exports from the U.S. to China have risen from 256,000 cubic meters in 2007 (less than 1% of the region’s total log production) to roughly 2.4 million cubic meters in 2010 (7% of total log production) (Source: Wood Resources International LLC).
 
In early 2011, Canada’s softwood lumber exports to China exceeded the U.S. for the first time. In May 2011, British Columbia’s exported $122 million of softwood lumber versus the U.S., which shipped $119 million (Source: British Columbia’s Ministry of Jobs, Tourism, and Innovation, July 17, 2011). In fact, Canada’s lumber exports to China have increased 700% since 2008 (Source: Business Insider Inc. [www.businessinsider.com], February 22, 2011).
 
The North American export market was also aided in 2007 when Russia—one of China’s largest timber sources—increased tariffs on wood exports (Source: The Wall Street Journal, February 8, 2011). Global demand for North American lumber has further increased after an 8.9 magnitude earthquake and devastating tsunami caused significant structural damage to northern Japan in March 2011 (Source: Forest Business Network, August 15, 2011).
 
The company has invested significant amount of resources continually improving the Eco Red Shield product line with R&D and technical market acceptance. Through the use of independent wood scientists employed by the company we have successfully lobbied with the International Code Commission (ICC) to create an acceptance criteria (AC) defining a market space in the building codes for a topical borate treatment for wood members. On June 20th, 2011 the ICC adopted by unanimous vote a new Acceptance Criteria for Liquid Borate Fungal Decay and Termite-resistant Treatment Applied to Wood Members, AC433-0611-R1. This acceptance criteria was subsequently updated in June of 2012 to include structural wood fiber testing and was adopted into the 2012 Uniform Building Code (UBC).  Eco Red Shield successfully achieved building code acceptance as deemed by the International Code Commission (ICC-ES) meeting the requirements as set forth by AC433, resulting in the issuance of an Engineering Services Report ESR-3255 on July 2nd, 2012. The recently received evaluation report (ESR-3255) from ICC Evaluation Service (ICC-ES), provided evidence that Eco Red Shield protection against Wood Ingesting Organisms including Formosan Termites and Wood-Rot Decay now meets building code requirements. Additionally the product provides value added protection from Mold and Fire Inhibition. Building officials, architects, contractors, specifiers, designers and others utilize ICC-ES Evaluation Reports to provide a basis for using or approving Eco Red Shield coated lumber products in construction projects under the “AC433” Acceptance Criteria.
 
 
 
 
The creation of a building code (AC433) and the subsequent ESR-3255, addresses a key element (Termite Protection – Wood Rot/Decay) in the wood protection offered by Eco Building products and has started to open up significant market opportunities.  Eco Red Shield lumber products now meet industry standard Use Categories UC1, UC2 and UC3 as defined by the AWPA guidelines for usage of treated lumber. These use categories define the product use for above ground, attached to concrete not exposed to constant wetting which the most common use is for sill plates and exterior decking. The Company has engaged Timer Products Inspection (TPI) as the third party factory Quality Control auditing company.  Eco Red Shield is now successfully qualified to produce code approved lumber products in eight locations across the country. Having the ability to stamp/label the lumber with the equivalence to traditionally marketed pressure treated lumber has now opened up enormous opportunities in the supply chain, and not limited to, Big Box Retailers, national homebuilding supply companies, wholesalers and manufacturers. The pressure-treatment industry generates roughly $4 billion annually (Source: CBS News, February 11, 2009). Approximately 65% of the treated wood components sold annually fall into the UC1, UC2 and UC3 use categories opening up significant opportunities for Eco Red Shield products as a direct substitute or competitive product.  Having achieved an ESR designation as defined by the ICC-ES process will be recognized by every building official across the United States as well as over 220 countries worldwide. (Source: www.iccsafe.org)
 
ECOB treated wood products are available across the nation. Although, single family housing starts have dropped to just above 400,000 units for 2011, Source: NAHB/Wells Fargo Housing Market Index. U.S. Census Bureau.  The company has been successful with production home builders encouraging the utilization of ECOB lumber products. This past year has seen a rebound in the housing market and more significant in the multi-family, multi-story building projects. Marketing of Eco Red Shield through the value added package of E Build & Truss division has increased.  We have experienced greater numbers of houses being released on our current contracts and have completed/secured several multi-family, multi-story projects in the Southern California market. The Company has been successful in securing orders for Eco Red Shield protected lumber and truss package, with a premium, from the production builders based upon the merits of the Eco Red Shield protection and not having to provide the labor component.
 
Recently the Company has engaged with QAI Laboratories, a similar consumer rating and product monitoring agency as Underwriters Laboratories (UL), to certify the coating process and provide a listing for the fire efficacy of Eco Red Shield treated lumber products.  On September 4th, 2012 the Company successfully 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 one-hour rated, flammability performance on Douglas Fir solid sawn lumber, making Eco Red Shield protected lumber equivalent to the traditionally accepted fire retardant treated wood (FRTW) for interior use. Achieving the QAI listing for Flame spread properties renders Eco Red Shield protection applied to solid sawn lumber the first topical wood treatment of its kind for interior Class “A” flammability, Wood Ingesting Organisms including Formosan Termites and WoodRot Decay to meet building code requirements. Building officials, architects, contractors, specifiers, designers and others utilize QAI listings and product labeling to provide a basis for using or approving Eco Red Shield coated lumber products in construction projects under the International Building Code. The Company will continue to qualify other species and panel products for similar ratings. The Company has also submitted Eco Red Shield for an approval in Hawaii and the City of Los Angeles to achieve the issuance of an LA Research Report.
 
ECOB now believes that it has the first ever certified topical wood treatment in the industry for all the attributes of protection.  To date the industry never had available a product like Eco Red Shield providing an approved treatment that combines ,wood-rot decay, Formosan termite protection and Class A structural fire ratings with the value added benefits of mold inhibition. The topical application provides for a lower cost manufacturing process than traditional pressure methods allowing the company to maintain greater margins offering a superior product for similar or lower costs than traditional market competition. This has created great opportunities for the Company to offer a superior product to retailers at a lower cost allowing the retailers to achieve greater margins for similar/equivalent shelf space.

The Company is now in the process to cross over the chasm into the main stream market with Eco Red Shield treated lumber products. Albeit we are receiving demand from many sectors of the market we are cautiously approaching the supply chain to make sure we are able to maintain margins, provide a competitively priced product and blend into the supply chain the most cost effective way.  The Company will have to create or form alliances with existing manufacturers, wholesalers and or distribution companies in order achieve this goal.  Management wants to be sure to make the proper decisions and create the right partnerships as they are hard to unwind later. The Company continues to bid and negotiate the supply of housing in the emerging economies around the world.  We continue to actively pursue this business with the expectations to bring Eco Red Shield treated lumber products to the world as a Technically Advanced Building Material.
 
 

 
The Company has faced many challenges over the past year. Management feels confident with all of the product certification achievements coupled with an improving housing market in the USA and the industry acceptance of Eco Red Shield as a viable competitive product we will start to earn a percentage of the total wood production as a function of our sales model.  We continue to face financial challenges in the up-coming year however market acceptance of our product will create the sales revenue to allow the Company the ability to experience continued growth.
 
Competitive Advantages
 
ECOB products have a distinct advantage over non-treated lumber products in that it resists mold, rot, decay, termites and fire. Beyond those clear advantages, ECO products have environmental implications as well.

GREENGUARD Children & Schoolssm certified.
 
Termite infestation, mold and wood rot:
 
New trees must be sacrificed to save/remediate existing structures
 
Fumigation is the only recourse for termites; the process is dirty and toxic to the atmosphere
 
Mold has the potential to cause serious health problems and contribute to unhealthy interior air environments

Approved topical application methods provides for a lower cost than traditionally treated lumber products.

Eco Red Shield is now an approved product for Wood-Rot Decay, Formosan Termites and Class “A” fire protection never before combined in a single approved application.  Additionally Eco Red Shield provides mold protection.

Eco Red Shield is approved to be applied to the entire super structure of a home, traditional pressure treatments cannot be used in vertical load bearing applications or on engineered wood products.

Affordable fire protection for wood framed buildings everyone can afford. 
 
Reduce the risk of losing homes and commercial properties to fire; and
 
Protect life and property
 
Coating technology:
 
Prior industry methods of incising or pressure treatment modify structural values; and
 
Lower cost application technology provides for lower cost end use product
 
It is our belief, based upon our experience in the eco-friendly construction industry, that the use of ECOB products will increase the sustainability of our forest by creating a life-long wood product that will reduce consumption.
 
According to a recent report authored by Dr. Vernard R. Lewis, a cooperative extension specialist in insect biology for UC Berkeley, costs to control and repair drywood termite damage are rising in California, with current estimates exceeding $300 million annually (Source: Assessment of Devices and Techniques for Improving Inspection and Evaluation of Treatments for Inaccessible Drywood Termite Infestations - Executive Summary 2010). Dr. Lewis estimates that subterranean termites consume at least one billion board feet of lumber each year in California alone, which is equivalent to wooden wall one foot thick by 17 foot tall spanning from Oregon, through California, to the Mexican border.
 
 
 

Competition
 
We believe that our coatings and coated wood products are positioned to capture significant market share in the coated and treated wood market. This is a mature market with large established biocide and chemical manufacturers, functionally equivalent technologies and fierce competition. However, we appear to have a unique product with a combination mold, rot, decay, termite and fire inhibitor coating that meets HUD standards for above ground structural and sheathing wood components.
 
It is likely that competitors will field their own offerings, and a few already exist in partial or equivalent form, such as FrameGuard offered by Arch Chemical and Nature Wood offered by Osmose, Inc. However, these are chemical companies that sell to independent wood treaters and lumberyards. They cannot provide an integrated construction package as described herein and therefore provide value pricing to the builder. We believe that for the foreseeable future, the integrated construction value package approach will be an ECOB competitive advantage.
 
From time to time, we will be involved in intense competition with other business entities, many of which will have a competitive edge over us by virtue of their stronger financial resources and prior experience in business. There is no assurance that we will be successful in obtaining suitable investment, financing or purchase contracts for our products.
 
Employees
 
As of June 30, 2012, ECO had 45 full time and 2 part time employees consisting of   Mr. Conboy, who is also a Director, Mr. Vuozzo, our Chief Technical Officer and Director, 5 administrative, 2 engineering, 3 marketing, 33 production and production support personnel. We anticipate that we will hire additional key staff as operations develop in areas of Chief Operating Officer, Vice President Sales and Marketing; research and development, administration and accounting, business development, operations , and sales and marketing.
 
We expect to continue to use contract labor, management consultants, attorneys, accountants, engineers, and other professionals as necessary to support our management and administrative requirements.  The need for employees and their availability will be addressed on a continuing basis.

On September 10, 2012, the Company awarded a Supply Contract for Eco Red Shield Coated Lumber, Trusses and EWP for Construction of 77 units Apartment Complex Located in Marina Del Rey, California. TriCal Construction, Inc., the developer of the project, choose Eco Red Shieldtm coated lumber products based upon the merits of the lumber protection from mold, wood-rot, termites and fire properties. ECOB successfully quoted Eco Red Shield coated lumber at a competitive price versus value proposition without having to perform the framing labor services.
 
Construction of the Hampton Inn hotel in Mission Valley
 
On August 21, 2012, the Company awarded the lumber and labor framing contract to build the Hampton Inn hotel located in Mission Valley. This five story project consists of 182 units, incorporating Eco Red Shield™ protection, located in Mission Valley, "Hotel Circle" San Diego, California.
 
AF21 Product, Purchase, Sales, Distribution & Service Agreement
 
On January 18, 2011, the Company entered into an AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Newstar Holding Pte Ltd, a Singapore Corporation, and Randall Hart, an Indonesian National, the inventors and owners of technical data and intellectual property for a protective coating in order to obtain an exclusive supply of the product, together with certain distribution, marketing and sales rights. The product is a non-toxic non-corrosive fire inhibitor. Pursuant to the Agreement, the Company guaranteed it will purchase a minimum of 650 totes, each tote consisting of 245-gallons of product, in the first two-year period. The Company is required to increase the minimum quantities in the third year to 842 totes.   In the fourth year the Company is required to increase the minimum quantities to 1,264 totes. This fire inhibitor is a component of our Red Shield branded products which is an additional benefit to the basic Blue Shield branded products and can be added to our Clear shield products. Loss of this component would impact sales of Red Shield branded products until a suitable replacement could be secured or developed internally.
 
 
 

Product Sales
 
The Company had product sales revenue of $821,209, $491,623 and $463,418 to three customers, representing 22%, 13% and 12% of total sales for year ended June 30, 2012, respectively. No long term fixed contracts control any future sales to these customers; each project is bid and granted individually.
 
Governmental Regulation
 
It is impossible to predict all future government regulation, if any, to which we may be subject until it has been in production for a period of time. The use of assets and/or conduct of business that we are pursuing will be subject to environmental, public health and safety, land use, trade EPA and other governmental regulations, as well as state and/or local taxation. In acquiring and/or developing businesses in the wood treatment industry, management will endeavor to ascertain, to the extent possible due to its current limited resources, the effects of such government regulation on our prospective business. In certain circumstances, however, such as the acquisition of an interest in a new or start-up business activity, it may not be possible to predict with any degree of accuracy the impact of all potential government regulation. The inability to ascertain the complete effect of government regulation on current or future business activity makes our business a higher risk.
 
Properties
 
We maintain our official US address of record at 909 West Vista Way, Vista, CA 92083. We do not own any properties and at this time have no agreements to acquire any properties.
 
Real Estate Lease – Vista, California
In June 2009, the Company entered into an agreement to lease warehouse and office facilities for three years. Facilities include a 3,500 square foot building with a detached 1,200 square foot warehouse. 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%
 
Effective January 1, 2011, the Company entered into a one-year sublease with a related party for 460 square feet in this Vista facility at $900 per month.
 
Real Estate Lease – Colton, California

In January 2010, the Company entered into a lease of a manufacturing facility in Colton, California for nine months.  This lease was renewed effective November 1, 2010 for one year at a rate of $17,391 per month.  These facilities were previously leased and utilized by a company controlled by the Company’s President and majority shareholder.
 
Legal Proceedings

On August 23, 2010, the Company filed a legal action in The Superior Court San Diego, County of San Diego, Case # 37-2010-00058482-CU-MC-NC, against Bluwood USA, Inc., for failure of perform pursuant to the Purchase, Distribution and Services Agreement in the delivery of chemical product and protection of sales territory. A variety of defendants have been added to the case and a variety of claims apply. The case is presently in the discovery phase. The Company is making numerous claims and the Defendants are countering with others centering on a variety of legal claims like breach of contract, fraud, lack of performance, and others.  This case has been sent to arbitration and a portion of the case has been stayed in court. The Company is seeking relief in the amount of approximately $20,000,000 and other relief.  The arbitration panel has been selected and approved.
 
 
 
 
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.

Manhattan Resources Limited

On February 14, 2011, Eco Building Products, Inc., formerly EcoBlu Products Inc. (“Eco”) entered into an investment agreement (the “Investment Agreement”) with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL (the “Investment Agreement”). On February 14, 2011, Eco also entered into a revolving credit and warrant purchase agreement (the “Credit and Warrant Agreement”) with MRL. Agreements, securities, and obligations also were confirmed with SLM Holding PTE, Ltd. (SLM) a wholly owned subsidiary of MRL, and Swanny Sujanty, an individual, including transfer of 9,500,000 shares of restricted stock from Steve Conboy, the CEO of Eco, to Swanny Sujanty. Copies of these above agreements (the "Past Agreements") and their terms were disclosed under the Eco Form 8-K filling on February 16, 2011. Herein "MRL" includes MRL, LTK, SLM, and Swanny Sujanty, considered affiliates to MRL by Eco. At various points, the past year, Eco, offered MRL for MRL and affiliates, an arrangement whereby all their interests in Eco and all obligations of Eco to any of them would be exchanged for a promise to make a future buyout payment. On July 9, 2012 lawyers for Eco advised Eco that the aspect of the Offer, below, and the communication that an agreement was reached is legal grounds, subject to potential judicial determination, supporting Eco's conclusion that MRL has agreed to Eco's offer including selling all interests back to Eco for promise of a future payment, as stated below. If judicial action was taken, Eco may or may not be successful. Previously, on June 13, 2012, Eco was advised that MRL had accepted Eco's Offer.
The Offer was as follows:

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

On or about September 7, 2012, a law firm claiming to represent MRL supplied a letter to Eco. On September 19, 2012 Eco obtained the advice of litigation counsel which, after review and consultation,
concluded to the effect that the letter is material, notwithstanding current or recently past communications impacting upon the veracity of the contents of the letter, or the intention of the letter. The contents of the letter include statements advising Eco that Eco is in breach of the Revolving Credit and Warrant Purchase Agreement referenced above ("Revolving Agreement"), and the Investment Agreement dated February 14, 2011 referenced above. It is not clear if that law firm (the firm that sent the letter) also represents the other parties noted in the agreements other than MRL. The letter claims the transactions, previously reported, by Eco relating to the Purchase Agreement and granting of a security interest, August 13, 2012, per the previously filed Form 8K of Eco August 22, 2012, was a breach of various provisions of the agreements relating to MRL, they (MRL) will enforce their rights, and reserve rights, and that an Event of Default has happened under Section 6(a) of Revolving Agreement, in that Eco failed to pay the $5,000,000 allegedly due. The same claims of default as to interest, and that they do not agree that MRL agreed to forebear from individually enforcing rights or remedies. Eco takes the position that an agreement, altering the rights of MRL and related others, was previously offered and accepted and that it means that MRL and noted affiliates surrendered to Eco rights and interests in Eco and no longer can claim they own securities in Eco, and this was in exchange for Eco supplying the concurrent promise to pay the sum of $10,500,000 by June 13, 2014; that the securities held by MRL and affiliates are or should be deemed cancelled or retired; and that Eco is willing to negotiate and entertain, though not obligated, repaying the sum with interest, as well as any "amendment" or terms for orderly procedures of the parties. This would mean that Eco also believes the Past Agreements no longer apply. Eco is now seeking the advice of counsel and has believes that MRL is open to settle and resolve the differences and demands of MRL communicated to Eco and while it plans to vigorously defend and protect its interests, it also continues to express the interest to reach an amicable resolution with MRL. No assurance can be given that Eco will be successful in the resolution, if possible, of such claims.
 
 
 
 
 
 
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is quoted on the over-the-counter Electronic Bulletin Board under the symbol ECOB. The table below sets forth the high and low closing price per share of our common stock for each quarter of our last two years.  These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
 
Fiscal Quarter Ended
 
High
   
Low
 
June 30, 2012
 
$
0.14
   
$
0.07
 
March 31, 2012
 
$
0.15
   
$
0.07
 
December 31, 2011
 
$
0.19
   
$
0.11
 
September 30, 2011
 
$
0.31
   
$
0.16
 
June 30, 2011
 
$
0.30
   
$
0.08
 
March 31, 2011 
 
$
0.10
   
$
0.06
 
December 31, 2010
 
$
0.14
   
$
0.03
 
September 30, 2010
 
$
0.26
   
$
0.09
 
June 30, 2010
 
$
0.40
   
$
0.23
 
 
At June 30, 2012, there were approximately 140 holders of record of our Common Stock. There are 50,250,000 warrants outstanding to purchase shares of our Common Stock subject to conditions and limitations.
 
Equity Compensation Plan Information
 
The Eco Building Products, Inc. 2012 Employee and Consultant Stock Plan was adopted by majority vote of the Board of Directors on June 14, 2012.  The plan authorizes 10, 000,000 shares to be issued under the plan. As of June 30, 2012 a total of 7,000,000 shares remain available for issuance under the plan.
 
We have no other equity compensation plan at this time.
 
Dividend Policy
 
Since inception, no dividends have been paid on our common stock.  The Company does not anticipate paying any cash dividends on its common stock in the next 12 month period. The payment of any dividends is at the discretion of the Board of Directors.

Recent Sales of Unregistered Securities
 
Warrants

There is no warrant and stock issued during the year of FYE 12.

On April 28, 2011, the Company issued warrants pursuant to a consulting agreement to purchase 250,000 shares of the Company common of stock of which 100,000 shares have a purchase price per share of $0.15, 100,000 shares have a purchase price per share of $0.25, and 50,000 shares have a purchase price per share of $0.35. The warrants were valued at $14,925. 
 
On February 14, 2011, the Company also 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 facility (the “Loan Facility”) in advances of $500,000, each, from time to time.  On July 26, 2011, the Company borrowed $3.0 million on the Loan Facility.  In consideration of the 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 the multi-nomial lattice model using an exercise period of 5 years, risk free rate of 1.51%, volatility of 163%, and an exercise price of the warrant is $0.1 per share.
 
All sales were issued as exempted transactions under Section 4(2) of the Securities Act of 1933. They 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 are restricted pursuant to Rule 144.
 
Private Placement of Debenture and Shares
 
On August 13, 2012, Eco entered into a Securities Purchase Agreement (the "Purchase Agreement") wherein the Company agreed to privately issue and sell (the "Offering") and the purchaser identified on the signature page to the Purchase Agreement (the "Purchaser") agreed to purchase (i) $1 million, in the aggregate, of Original Issue Discount Senior Secured Convertible Debentures due on November 13 ,2012 (the "Debentures") and (ii) an aggregate of 3,500,000 shares (the "Shares") of the Company's common stock, par value $0.001 per share (the "Common Stock").
 
The Company sold to the Purchaser the Debenture having a principal amount of $1,080,000. At any time after the Original Issue Date until the Debenture is no longer outstanding, the Debenture shall be convertible, in whole or in part, into shares of Common Stock at the option of holder, subject to certain conversion limitations set forth in the Debenture, at a conversion price equal to the lesser of (i) $0.08, subject to adjustment thereunder, and (ii) 80% of the average of the lowest 3 closing prices during the 3 trading days immediately prior to any such date of conversion.
 
Upon any Event of Default, the outstanding principal amount of the Debenture, plus liquidated damages, interest and other amounts owing in respect thereof through the date of acceleration, shall become, at holder's election, immediately due and payable in cash. Commencing after the occurrence of any Event of Default, the interest rate on the Debenture shall accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted under applicable law. To secure the Company's obligations under the Debenture, the Company granted a security interest in substantially all of its property to secure the prompt payment, performance and discharge in full of all of the Company's obligations under the Debenture in accordance with that certain security agreement between the Company and the Purchaser, dated as of August 13, 2012 (the "Security Agreement"). Furthermore, the Company's subsidiaries entered into a subsidiary guarantee, dated as of August 13, 2012 (the "Subsidiary Guarantee"), to guarantee the prompt and complete payment and performance when due of all of the obligations pursuant to the Debenture and transaction documents.
 
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 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.
 
 
 
 
Financial Condition and Results of Operations
 
Results of Operations for the Year end June 30, 2012 as Compared to the Year ended June 30, 2011

During 2011, we adopted our wood coating chemistry process Eco Red Shield. This change had a significant impact on our gross profit projections as discussed below.
 
Revenues and Cost of Sales - For the year ended June 30, 2012 we had total revenues of $3,723,374 from product and equipment sales, as compared to $1,338,962 in revenues from product sales for the previous year  Our cost of sales for the year ended June 30, 2012 was $4,104,860 and $1,588,430, respectively. Our gross loss (cost of sales in excess of sales) for the year ended June 30, 2012 of $381,486 was caused by writing off all of the obsolete and slow moving inventories which have accumulated for periods of time.
 
Operating Expenses - For the year ended June 30, 2012, our total operating expenses were $9,198,760 as compared to $3,757,545 for the year ended June 30, 2011. Included in our operating expenses for the year ended June 30, 2012 was compensation costs of $4,461,765 of which $744,033 was accrued and not paid.  Moreover, $2,119,935 of the $4,461,765 compensation cost was related to 74,800,000 shares of our common stock issued to the Company’s employees and officers during the year.  Other significant operating costs we incurred during the year ended June 30, 2012 included research and development of $221,187, marketing of $119,724, rent of $647,775, other general and administrative costs of $1,388,864 and professional fees of $2,105,651 which included stock based compensation of $1,483,009. The $1,483,009 was the value assigned to the issuance of 14,496,397 shares of our common stock to the attorney for legal services.

Our operating expenses for the year ended June 30, 2011 of $3,757,545 included consulting expense of $356,034, legal and professional fees of $863,390, rent of $353,585, compensation of $1,189,775, marketing of $212,608, research and development of $113,733 and other general and administrative expenses of $668,420.  Consulting expense of $356,034, which included $142,000 in stock based compensation, which was the value assigned to 1,716,010, shares of our common stock issued to third party consultants during the year.

Other Income (Expenses) - For the year ended June 30, 2012 we had other expenses that included a ($420,002) loss on the modification of debt, and interest expense of ($1,183,885). This is compared to the year ended June 30, 2011, in which our other income (expenses) included $333 interest income, gain of $310,900 from settlement of debt, loss of $(421,600) from modification of debt, change in the fair value of our derivative liabilities of 121,590 , and interest expense of $1,990,230.  The interest expense for the year ended June 30, 2012 included $940,662 amortization of loan fees related to the Company issued 50,000,000 warrants in exchange for the payment of the $ 3.0 million prepaid loan fees in connection with the MRL $5 million line of credit.
 
Liquidity and Capital Resources

On June 30, 2012, we had $111,251 in cash on hand.  During the year ended June 30, 2012, net cash used in our operating activities amounted to $ 4,357,925. Net cash used during the same period for our investing activities totaled $ 462,926. During the same year, we received proceeds resulting in net cash from financing activities of $ 4,850,454 of which $5,000,000 was received through drawdowns on the revolving facility (the “Loan Facility”); $889,500 was received through the issuance of common stock and $1,039,046 was used to reduce debt owed to related parties.
 
During the year ended June 30, 2011, net cash used in our operating activities was amounted to $4,793,258. Net cash used during the same period for our investing activities totaled $266,725. During the same year, we received proceeds resulting in net cash from financing activities of $4,756,097 of which $5,000,000 was received through the issuance of 81,000,000 shares of our common stock, $200,000 was received through loans from unrelated third parties and $1,596,118 was received through loans from related parties  Of the $6,796,118 received during the year, $704,772 was used to reduce our debt obligations to third parties, $1,335,239 was used to reduce debt owed to related parties, and $10 was used to acquire 27,037,500 warrants from a related parties which were subsequently cancelled.
 
 
 
On July 11, 2012, the Company received one hundred million ($100,000,000.00) dollar standby letter of credit assigned from InsurFinancial Holdings Plc issued by Bank of China to support the major expansion in the Company's core business.   This facility credit support will last for four years and will not expire until December 4th, 2016. It supports us in negotiations with others that in the event we are unable to meet liabilities to creditors that are due and can't be paid, then we can seek to draw down on the credit support (subject to conditions and limitations).
 
Additionally, the agreement grants an option that allows InsurFinancial Holdings, Plc to convert their fee into an equity investment of up to five million ($5,000.000.00) dollars each year for the next four years. The option calls for the share price of the additional equity investment to be calculated at 120% of the three month trailing average of ECOB's stock. The Company now has the availability of credit which should enhance credit support for the future liabilities incurred in the rapid expansion of the demand for its products.
 
During the year ended June 30, 2011, the Company entered into an investment agreement and a revolving credit and warrant purchase agreement with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL. Under investment agreement, the Company received $5,000,000 in exchange for issuing 81,000,000 shares of its common stock. Subsequently, upon the effective date of the revolving credit and warrant purchase agreement the Company has the ability to borrow up to an additional $5,000,000.  Besides the $3,000,000 was borrowed in July, 2011 the remaining $2,000,000 was borrowed between October and November 2011. With the infusion of the initial $5,000,000 under the investment agreement and up to an additional $5,000,000 under the revolving credit and warrant purchase agreement, management believes it the funding provides sufficient capital to continue operating the Company and allow it to become profitable, however; no assurances can be made that current or anticipated future sources of funds will enable the Company to finance future periods’ operations. As of October 12, 2012 the Company had cash on hand of $72,799 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 October and December, 2011 and the Company has stopped paying interests recently due to the Company position, contradicted by MRL, that termination of agreement applies and that MRL is no longer the major investor of the Company.  Since the Company had borrowed the entire $5,000,000 line of credit during the three months ended December 31, 2011, which made no available credit under this agreement at this period.
 
Critical Accounting Policies
 
Long-Lived Assets
The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value.
 
Issuances Involving Non-cash Consideration
All issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount equaling the market value of the shares issued on the date the shares were issued for such services.
 
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.
 
 
 
 
Convertible Debentures
If the conversions feature of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method. If a BCF is convertible into a variable number of shares it is accounted for as a derivative liability.
 
Derivative Financial Instruments
Derivative financial instruments, as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.
 
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.
 
Warranty Costs
The Company provides a ten-year warranty on its products. The Company accrues for the estimated warranty costs at the time when revenue is recognized. The warranty accruals are regularly monitored by management based upon historical experience and any specifically identified failures. While the Company engages in extensive product quality assessment, actual product failure rates, material usage or service delivery.
 
Going Concern
The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. To date the Company has generated minimal operating revenues, losses from operations, significant cash used in operating activities, and is dependent upon its ability to obtain future financing and successful 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.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements or financing activities with special purpose entities.
 
 
 
 
 
 
 
 
 
 
 
ECO Building Products, Inc.
 
 
Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

To the Board of Directors and
Stockholders of Eco Building Products, Inc. (formerly EcoBlu Products, Inc.)  and subsidiaries
 
We have audited the accompanying consolidated balance sheet of Eco Building Products, Inc. and subsidiaries (collectively the “Company”) as of June 30, 2012, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. The consolidated financial statements of the Company as of June 30, 2011 were audited by other auditors whose report dated September 28, 2011, expressed an unqualified opinion on those consolidated financial statements. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eco Building Products, Inc. and subsidiaries as of June 30, 2012, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 of the consolidated financial statements, the Company has generated minimal operating revenues, losses from operations, significant cash used in operating activities and its viability is dependent upon its ability to obtain future financing and successful operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans with respect to these matters are also discussed in Note 2.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ Sam Kan & Company
 
Alameda, California
October 12, 2012
 


 
 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and
Stockholders of Eco Building Products, Inc. (formerly EcoBlu Products, Inc.)  and subsidiaries
 
We have audited the accompanying consolidated balance sheet of Eco Building Products, Inc. and subsidiaries (collectively the “Company”) as of June 30, 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eco Building Products, Inc. and subsidiaries as of June 30, 2011, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 of the consolidated financial statements, the Company has generated minimal operating revenues, losses from operations, significant cash used in operating activities and its viability is dependent upon its ability to obtain future financing and successful operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans with respect to these matters are also discussed in Note 2.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ dbbmckennon
 
dbbmckennon
Newport Beach, California
September 28, 2011
 



 
 
ECO BUILDING PRODUCTS, INC.
 
CONSOLIDATED BALANCE SHEETS
 
             
   
June 30
   
June 30
 
   
2012
   
2011
 
             
 ASSETS
           
CURRENT ASSETS
           
Cash
  $ 111,251     $ 81,648  
Accounts receivable, net of allowance for doubtful accounts of $18,727
               
and $0 at June 30, 2012 and June 30, 2011
    666,223       369,840  
Inventories
    922,646       1,542,378  
Prepaid loan facility fee - related party, current portion
    1,008,383          
Prepaid expenses
    7,297       85,967  
Deposits
    7,100          
Other current assets
    -          
Total current assets
    2,722,900       2,079,833  
                 
PROPERTY AND EQUIPMENT, net
    1,207,035       743,523  
                 
OTHER ASSETS
               
Accounts receivable - long-term portion
    -       81,648  
Intangible assets
    16,325       -  
Prepaid loan facility fee - related party
    1,078,861       -  
Equipment deposits - related party
    -       188,447  
Total other assets
    1,095,186       270,095  
                 
 TOTAL ASSETS
  $ 5,025,121     $ 3,093,451  
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
CURRENT LIABILITIES
               
    Accounts payable
  $ 426,179     $ 440,471  
    Payroll and taxes payable
    1,594,848       728,751  
    Advances from related party
    -       63,163  
    Other payables and accrued expenses
    336,287       58,484  
    Deferred revenue
    33,640       20,500  
    Current maturities of notes payable
    8,670       -  
    Line of credit payable - related party
    1,666,667       1,029,111  
    Loans payable - related party
    201,480       174,217  
    Loans payable - other
    44,500       44,500  
 Total current liabilities
    4,312,271       2,559,197  
                 
LONG TERM LIABILITIES
               
Line of credit payable - related party
    3,333,333       -  
Notes payable, less current maturities
    17,295       -  
Total long term liabilities
    3,350,628       -  
                 
TOTAL LIABILITIES
    7,662,899       2,559,197  
                 
STOCKHOLDERS' EQUITY (DEFICIT)
               
Common stock, $0.001 par value, 500,000,000 shares authorized,
               
290,961,669 shares issued and outstanding at June 30, 2012
               
and 178,286,100 shares issued and outstanding at June 30, 2011
    216,162       178,286  
    Additional paid-in capital
    18,578,613       10,622,135  
    Accumulated deficit
    (21,432,553 )     (10,266,167 )
Total stockholders' equity (deficit)
    (2,637,778 )     534,254  
 
               
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 5,025,121     $ 3,093,451  
 
 
The accompanying notes are an integral part of these consolidated financial statements

 
 
ECO BUILDING PRODUCTS, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
             
   
Year ended
   
Year ended
 
   
June 30
   
June 30
 
   
2012
   
2011
 
             
REVENUE
           
Product sale, net
  $ 3,723,374     $ 1,338,962  
                 
TOTAL REVENUE
    3,723,374       1,338,962  
                 
COST OF SALES
    4,104,860       1,588,430  
                 
GROSS LOSS
    (381,486 )     (249,468 )
                 
OPERATING EXPENSES
               
Research and development
    221,187       113,733  
Marketing
    119,724       212,608  
Goodwill/Donation
    51,777       -  
Compensation and related expenses
    4,461,765       1,189,775  
Rent - facilities
    647,775       353,585  
Professional fees
    2,105,651       863,390  
Consulting
    202,017       356,034  
Other general and administrative expenses
    1,388,864       668,420  
        Total operating expenses     9,198,760       3,757,545  
                 
LOSS FROM OPERATIONS
    (9,580,246 )     (4,007,013 )
                 
OTHER INCOME (EXPENSE)
               
Interest income
    -       333  
Interest expense
    (424,840 )     (1,990,230 )
Gain (loss) on settlement of debt
    -       310,900  
Other (Expense)
    (3,500 )     -  
Other Income
    21,247       -  
Loss on modification of debt
    (420,002 )     (421,600 )
Change in fair value of derivative liability
    -       121,590  
        Total other income (expense)     (827,095 )     (1,979,007 )
                 
LOSS BEFORE PROVISION FOR INCOME TAXES
    (11,166,386 )     (5,986,020 )
                 
PROVISION FOR INCOME TAXES     -       -  
                 
NET LOSS
  $ (11,166,386 )   $ (5,986,020 )
                 
NET LOSS PER COMMON SHARE - BASIC
  $ (0.06 )   $ (0.05 )
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    188,505,763       118,896,970  
 
 
The accompanying notes are an integral part of consolidated financial statements.
 
 
 
ECO BUILDING PRODUCTS, INC.
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)  
PERIOD OF JULY 1, 2010 TO JUNE 30, 2012
 
                                     
               
Additional
   
Common
             
   
Common Stock
   
Paid-in
   
Stock
   
Accumulated
       
   
Shares
   
Amount
   
Capital
   
Receivable
   
Deficit
   
Totals
 
BALANCE, July 1, 2010
    75,594,333     $ 75,594     $ 3,368,972       (20,000 )   $ (4,280,147 )   $ (855,581 )
Issuance of common stock for cash
    81,000,000       81,000       4,919,000       -       -       5,000,000  
Issuance of common stock for settlement of debt
    18,681,661       18,682       771,036       -       -       789,718  
Issuance of common stock for professional services
    2,510,106       2,510       236,551       -       -       239,061  
Issuance of common stocks for consulting services
    500,000       500       34,500       -       -       35,000  
Stock based compensation from option grants
    -       -       14,190       -       -       14,190  
Compensation recognized on warrant grant
    -       -       14,925       -       -       14,925  
Repricing of warrant grant
    -       -       140,981       -       -       140,981  
Reclassification of derivative liability
    -       -       1,534,627       -       -       1,534,627  
Discount amortization on related party convertible debt
    -       -       (392,647 )     -       -       (392,647 )
Cancelation of subscription receivable
    -       -       (20,000 )     20,000       -       -  
Net loss
    -       -       -       -       (5,986,020 )     (5,986,020 )
BALANCE, June 30, 2011
    178,286,100       178,286       10,622,135       -       (10,266,167 )     534,254  
                                                 
Issuance of common stock for cash
    16,500,000       16,500       873,000       -       -       889,500  
Issuance of common stock for settlement of debt
    6,879,172       6,880       413,122       -       -       420,002  
Issuance of common stock for legal services
    14,496,397       14,496       1,468,513       -       -       1,483,009  
Issuance of warrants for prepaid loan fee
    -       -       3,025,148       -       -       3,025,148  
Issuance of common stock for officers' compensation
    62,000,000       -       1,799,935       -       -       1,799,935  
Issurance of common stock for employees
    12,800,000       -       320,000       -       -       320,000  
    Compensation recognized on options grant     -       -       56,760       -       -       56,760  
Net loss
    -       -       -       -       (11,166,386 )     (11,166,386 )
BALANCE, June 30, 2012
    290,961,669     $ 216,162     $ 18,578,613     $ -     $ (21,432,553 )   $ (2,637,778 )
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
ECO BUILDING PRODUCTS, INC.
 
CONSOLIDATED STATEMENT OF CASH FLOWS
 
             
   
Year Ended June 30,
 
   
2012
   
2011
 
             
Cash flows from operating activities
           
Net loss
  $ (11,166,386 )   $ (5,986,020 )
Adjustments to reconcile net loss to net cash used by operating activities:
         
Loss on modification of debt by issuance of common stock
    420,002       421,600  
(Gain) on settlement of debt
    -       (310,900 )
Interest on amortization of debt discount
    -       888,946  
Amortization of loan fees
    940,662       176,606  
Interest on repricing of warrant
    -       140,981  
Change in fair value of derivative liability
    -       (121,590 )
Charge off of trademark costs
    -       4,871  
Common stock issuance for services
    3,602,944       273,927  
Common stock issuance for payment of rent and lease settlement
    -       80,000  
Compensation recognized on option grants
    56,760       14,190  
Depreciation and amortization expense
    171,536       76,285  
Reserve for obsolesence inventory
    674,348       -  
Bad debt expense
    18,727       6,305  
Changes in operating assets and liabilities:
               
(Increase) in accounts receivable
    (233,462 )     (447,430 )
(Increase) in customer deposit
    -       20,500  
(Increase) decrease in other receivable
    -       1,000  
(Increase) decrease in inventory
    (54,616 )     (862,998 )
(Increase) decrease in prepaid expenses & other current assets
    71,570       (48,540 )
Decrease in deposits
    -       45,155  
Increase in accounts payable
    (14,292 )     160,748  
(Increase) in prepaid expenses & other non current assets
    (2,758 )     -  
Increase in other payable and accrued expenses
    975,823       664,790  
Increase in accrued interest added to principle
    181,217       8,316  
Net cash used by operating activities
    (4,357,925 )     (4,793,258 )
                 
Cash flows from investing activities
               
Purchase of property and equipment
    (609,290 )     (204,330 )
Purchase of software licenses
    (25,000 )     -  
Purchase of intangible assets
    (17,083 )     -  
Payments for equipment deposits - related party
    188,447       (26,830 )
Payment for leasehold improvements
    -       (35,565 )
Net cash used by investing activities
    (462,926 )     (266,725 )
                 
Cash flows from financing activities
               
Proceeds from related party line of credit advances
    5,000,000       -  
Proceeds from debt issuance
    -       200,000  
Proceeds from issuance of common stocks
    889,500       5,000,000  
Proceeds from related party advances and notes
    -       1,596,118  
Repayments of debt issuances
    -       (704,772 )
Repayments of related party advances and notes
    (1,039,046 )     (1,335,239 )
Payment to related party for cancellation of warrant
    -       (10 )
Net cash provided by financing activities
    4,850,454       4,756,097  
                 
Net change in cash and cash equivalent
    29,603       (303,886 )
                 
Cash and cash equivalent at the beginning of year
    81,648       385,534  
                 
Cash and cash equivalent at the end of year
  $ 111,251     $ 81,648  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 46,000     $ 745,377  
Cash paid for taxes
  $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:
         
Issuance of warrant in connection with the loan fee of line of credit
  $ 3,025,148     $ -  
 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
 
NONCASH INVESTING AND FINANCING ACTIVITIES
 
Year Ended June 30, 2012
 
During the year ended June 30, 2012, the Company issued 14,496,397 shares of its common stock for legal services valued at $1,483,009 (See Note 11).
 
During the year ended June 30, 2012, the Company issued 62,000,000 and 12,800,000 shares of its common stock to officers and employees, respectively, for employees compensation valued at $2,176,695 (See Note 11).
 
From December 2011 to February 2012, the Company issued 6,879,172 shares of its common stock at $420, 002 in exchange for the debt settlement with the third party lender (See Note 11).
 
In September 2011, the Company issued warrants to its major shareholder in exchange for the $3,025,148 prepaid loan fee for the $5 million line of credit from the major shareholder (See Note 11).
 
Year Ended June 30, 2011
 
During the year ended June 30, 2011, the Company was a party to an agreement whereby certain increments of a $127,000 convertible note payable was assigned by the original investor to a third party.  The assignment agreement included modifications to the debt increments and embedded conversion features that were more favorable to the lender, resulting in a $161,667 loss on debt modification that was charged to operations.  During the year ended June 30, 2011, a total of $132,054 of debt increments were assigned to this third party and converted into 2,685,861 shares of the Company's common stock at prices ranging from $0.07 to $0.17 per share.
 
During the year ended June 30, 2011, a total of $132,054 of debt increments were assigned to this third party and converted.
 
During the year ended June 30, 2011, the Company was a party to an agreement whereby a $360,000 convertible note was assigned in full to the same third party as the note increments described above.  The assignment agreement included modifications to the debt and its embedded conversion feature that were more favorable to the lender, resulting in a $259,933 loss on debt modification that was charged to operations.  Pursuant to this debt modification, the Company recognized a derivative liability with an initial value of $247,364 due to a change in the exercise price of the embedded conversion feature from fixed to variable.  As of the year ended June 30, 2011, debt totaling $385,991 was converted into 15,457,776 shares of the Company's common stock at prices ranging from $0.04 to $0.14 per share (See Note 6).
 
During the year ended June 30, 2011, the Company issued 400,000 common shares as additional consideration for the cancellation of the Company's lease on its Texas facilities.  These shares were valued at $80,000 (See Note 11).
 
During the year ended June 30, 2011, the Company issued 1,774,000 shares of its common stock for consulting and advisory services valued at $153,840.  Also during the year, the Company issued 500,000 shares for sales commissions valued at $35,000 (See Note 11).
 
During the year ended June 30, 2011, the Company issued 736,106 shares of its common stock for legal services valued at $85,221 (See Note 11).  debt due professionals and consultants. The Company valued the shares at $30,005 and recognized a net gain on the cancellation of  indebtedness of $12,706 (See Note 11).
 
During the year ended June 30, 2011, the Company had recognized derivative and warrant liabilities as a result of committed and  outstanding common shares in excess of the number of shares authorized (See Note 9).  In January 2011, pursuant  to a state-approved increase to the Company's authorized capital, derivative and warrant liabilities totaling $1,534,627 for the former excess shares were reclassified to additional paid-in capital.
 
 
 
 
 
 
During the year ended June 30, 2011, the Company agreed to reduce the exercise price of 3,750,000 of its warrants from $0.40 per share to $0.20 per share.  A total of $140,981 was charged to interest expense for the re-pricing of these warrants (See Note 11).
 
In December 2010, SLM Holding PTE, Ltd. (SLM), a wholly owned subsidiary of MRL and related party, purchased convertible notes issued  by the Company from a group of third party investors and a placement agent for the aggregate sum of $1,000,000 (see Note 6).  In January 2011, SLM agreed to terminate 27,037,500 Series A through G warrants and beneficial conversion features related to these acquired notes for nominal consideration of $10.  The beneficial conversion features formerly comprised all rights granted to the note holders to convert debt to 4,012,500 shares of the Company's common stock.
 
In April 2011, options to purchase a total of 1,200,000 were granted to two officers of the Company pursuant to their employment agreements. The exercise price is $0.10 per share and the options expire in April 2016. The Company valued the 1,200,000 options at $113.520, which  are being charged to operations over the two year vesting period.
 
In June 2011, the Company entered into a consulting agreement with an unrelated third party. Under the terms the agreement, the Company  paid $30,000 and issued warrants to purchase 250,000 shares of the Company's common stock that were valued at $14,925. In addition, an additional $22,500 is due under the agreement. The cost including the value of the warrants totaling $67,425 charged to prepaid expense and is being amortized over the term of the agreement.
 
During the year ended June 30, 2011, the Company issued 138,024 shares of its common stock in exchange for the cancellation of debt due professionals and consultants. The Company valued the shares at $30,005 and recognized a net gain on the cancellation of indebtedness of $12,706 (See Note 11).
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
25

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
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 June 30, 2012, the wholly owned subsidiary is fully operated.

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. As of June 30, 2012, the Company has purchased equipment through this wholly owned subsidiary.

In December 2011, the Company formed Seattle Coffee Exchange (“Seattle”) in the State of California.  Seattle is a coffee shop which is located in the 1st floor of the Company’s corporate headquarters in Vista, CA.  This wholly-owned subsidiary has not started its operations as of June 30, 2012.

As of June 30, 2012, the Company owns 100% of E Build, Red Shield and Seattle

Going Concern
The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. To date the Company has generated minimal operating revenues, losses from operations, significant cash used in operating activities and its viability is dependent upon its ability to obtain future financing and the success of its future operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.
 
These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or liabilities that might be necessary should the Company be unable to continue as a going concern.
 
 
 
26

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011


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.  As of December 31, 2011, the Company has already borrowed the entire $5 million line of credit from MRL.   
 
In order to continue to gain market shares in the lumber industry, on July 11, 2012, the company received one hundred million ($100,000,000.00) dollar standby letter of credit from InsurFinancial Holdings Plc backed by Bank of China to support the major expansion in the Company's core business.   This facility credit support will last for four years and will not expire until December 4th, 2016.
 
Additionally, the agreement grants an option that allows InsurFinancial Holdings, Plc to convert their fee into an equity investment of up to five million ($5,000.000.00) dollars each year for the next four years. The option calls for the share price of the additional equity investment to be calculated at 120% of the three month trailing average of ECOB's stock. The Company now has the availability of credit which should enhance credit support for the future liabilities incurred in the rapid expansion of the demand for its products.
 
The Company has faced many challenges over the past year. Management feels confident with all of the product certification achievements coupled with an improving housing market in the USA and the industry acceptance of Eco Red Shield as a viable competitive product we will start to earn a percentage of the total wood production as a function of our sales model.  We continue to face financial challenges in the up-coming year however market acceptance of our product will create the sales revenue to allow the Company the ability to experience continued growth.


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, E Build & Truss, Inc. and Red Shield Lumber, Inc.  Intercompany transactions and balances have been eliminated in consolidation.

Accounts Receivable
Accounts receivable are reported at the customers’ outstanding balances less any allowance for doubtful accounts.  Interest is not accrued on overdue accounts receivable.

The Company discounts sales with extended terms where no interest is charged to their respective present value pursuant to ASC Topic 310-10-30-3 “Receivables”.

Allowance for Doubtful Accounts
An allowance for doubtful accounts on accounts receivable is charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover any probable losses.  Management determines the adequacy of the allowance based on historical write-off percentages, information collected from individual customers related to past transaction history, credit-worthiness, changes in payments terms and current economic industry trends.  Accounts receivable are charged off against the allowance when collectability is determined to be permanently impaired. The allowance for doubtful account was $18,727 and $0, respectively, as of June 30, 2012 and June 30, 2011.

Inventories
Inventories primarily consist of chemicals, labor and lumber and are stated at lower of first-in-first out (FIFO) cost or market (net realizable value).  Net realizable value is the respective inventory’s estimated selling price reduced by the cost of completion and disposal.  The Company also evaluates its inventories in an ongoing basis based on the demand of its inventories.  If the Company deemed that the inventories do not have demand, the Company
 
 
 
27

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
reserves those slow moving inventories as obsolescence inventories.  As of June 30, 2012, the Company wrote off $659,781 as obsolescence inventory and recorded under “cost of sales” under the Consolidated Statements of Operations.  The gross profit before the inventory obsolescence write off of $659,781 would have been $278,295.

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

Long-Lived Assets
The Company accounts for its long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate.  The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition.  If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value.  At June 30, 2012, 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 “Equity-Based Payments to Non-Employees”. This standard defines a fair value based method of accounting for stock-based compensation. In accordance with ACS Topic 505-50, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using the Black-Scholes option-pricing model, whereby compensation cost is the excess of the fair value of the award as determined by the pricing model at the grant date or other measurement date over the amount that must be paid to acquire the stock. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period.
 
Loss Per Share
The Company reports earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." A 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. A 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 June 30, 2011 that have been excluded from the computation of diluted net loss per share included convertible debt of 1,029,111 convertible into 10,501,134 shares of common stock, warrants exercisable into 250,000 shares of common stock and options exercisable into 1,200,000 shares of common stock. 
 
 
 
 
 
28

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
Cash and Cash Equivalents
For purpose of the statements of cash flows, the Company considers cash and cash equivalents to include all stable, highly liquid investments with maturities of three months or less.
 
Credit Risk
At times, the Company maintains cash balances at a financial institution in excess of the $250,000 FDIC insurance limit.
 
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affects the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
Convertible Debentures
If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”).  A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.  If a BCF is convertible into a variable number of shares it is accounted for as a derivative liability.
 
Derivative Financial Instruments
Derivative financial instruments, as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

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

The Company estimates the fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objectively measuring fair values. In selecting the appropriate technique, consideration is given to, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company's operating results will reflect the volatility in these estimate and assumption changes.
 
 
 
 
29

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
Revenue Recognition and Concentration Risk
The Company records revenue when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the prices for the services performed and the collectability of those amounts.
 
The Company generally recognizes revenue from product sales, including equipment, at the time product is shipped and title passes to the customer assuming all the other revenue recognition criteria stated above are satisfied. Revenues earned on non-refundable licensing fees are generally recognized when the licensing fees are delivered assuming all the other revenue recognition criteria stated above are satisfied. Sales are recorded net of any applicable sales tax.
 
The Company had product sales revenue of $463,374, $821,277 and $491,691 to three major customers representing 12%, 22% and 13% of total sales for year ended June 30, 2012, respectively.
 
The Company had product sales revenue of $415,345, $204,322 and $169,783 to three major customers representing 31%, 15% and 13% of total sales for year ended June 30, 2011, respectively.
 
Cost of Revenues
Costs of revenues include costs related to revenue recognized; such costs represent materials, labor, depreciation and amortization, equipment rental, supplies, utilities, repair and maintenance.
 
General and Administrative Expenses
General and administrative expenses include management and administrative personnel costs; corporate office costs; accounting fees, legal expense, information systems expense, and product marketing and sales expense.
 
Research and Development Expenses
Research and development expenses consist of expenses related to its wood coating process. It is charged to operations when incurred. We incurred $221,187 and $113,733 for the years ended June 30, 2012 and 2011, respectively.
 
Deferred revenue
The Company recorded deferred revenue for products or services that have been paid by the customers but the products have not been shipped or services have not been provided to the customers.  The Company recorded $33,640 and $20,500 on deferred revenue for the fiscal year ended June 30, 2012 and June 30, 2011, respectively.

Advertising Cost
Advertising costs are charged to operations when incurred.  During in the years ended June 30, 2012 and 2011 the Company incurred $119,724 and $212,608 respectively in advertising and promotion costs.

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

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

 
 
 
30

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
Litigation and Settlement Costs
Legal costs are expensed as incurred. We are involved in disputes, litigation and other legal actions in the ordinary course of business. We continually evaluate uncertainties associated with litigation and record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the loss or range of loss can be reasonably estimated. In the event of settlement discussions, this generally occurs when an agreement in principle has been reached by both parties that include substantive terms, conditions and amounts. If a settlement has more than one element, we account for the agreement as a multiple element arrangement and allocate the consideration to the identifiable elements based on relative fair value. Past multiple element settlement agreements have included the licensing of intellectual property for future use and payments related to alleged prior infringement.

Recent Accounting Pronouncements

In June 2011 the Financial Accounting Standards Board, or FASB, issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We adopted the provisions of this guidance effective July 1, 2012, as reflected in the unaudited condensed consolidated statements of comprehensive income herein.


3.  Balance Sheet Components

Inventories
 
Inventories consisted of the following:
 
   
For the year ended
 
   
June 30,
 
   
2012
   
2011
 
Chemicals
 
$
264,510
   
$
328,640
 
Lumber
   
658,136
     
1,213,738
 
Total
 
$
922,646
   
$
1,542,378
 
 
All of the Company’s inventories are pledged as collateral for the Company’s $1,500,000 Senior Secured Notes (see Note 6). In addition, inventory is considered finished goods as the Company sells and markets the chemical and treated and untreated lumber.
 
Accrued Liabilities
 
As of June 30, 2012, the Company owed $850,815 in past due payroll taxes and accrued penalties. The Company has not yet to file the necessary payroll tax reports with the impacted taxing authorities. These amounts are recorded within payroll and taxes payable on the accompanying condensed consolidated balance sheet. Also at June 30, 2012, the Company owed $121,948 in past due sales tax in which it has filed the appropriate reports and is making periodic payments.
 
 
 
 
31

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
4.  Prepaid Loan Fees
 
In March 2010, the Company received $1,500,000 from Iroquois Master Fund, Ltd through the issuance of senior convertible notes and warrants (See Note 6). In connection with this financing, the Company incurred loan fees totaling $202,000 of which $105,000 was due to the Placement Agent and evidenced by a convertible promissory note.  The Company also issued 100,000 shares of its common stock to the Placement Agent as partial consideration for its services. The common shares were valued at their respective market value on date the loan closed of $36,000 and were included in loan fees. The remaining fees of $61,000 were paid from the proceeds received.
 
In May 2010, the Company issued additional common shares to the placement agent and other parties valued at $36,000 in connection with the above financing.
 
In September 2011, the Company issued 50,000,000 warrants in exchange for the payment of the $3.0 million prepaid loan fees in connection with the MRL $5 million line of credit.  The $3,025,000 total prepaid loan fees were amortized using the straight line method over the three year terms of the underlying notes.  Amortization charged to interest expense for the years ended June 30, 2012 and June 30, 2011 totaled $940,662 and $176,606, respectively.  As of June 30, 2012, the current and non-current prepaid loan facility fee was $1,008,383 and $1,078,861, respectively.


5.  Property and Equipment

Property and equipment consisted of the following:
 
   
For the year ended
 
   
June 30,
 
   
2012
   
2011
 
Machinery and equipment (useful life of five to seven years)
  $ 908,778     $ 629,721  
Vehicles (useful life is three  years)
    65,991       33,896  
Furniture (useful life of five years)
    18,223       18,223  
Software license
    25,000          
Computer equipment and software (useful life of three years)
    88,054       74,582  
Leasehold improvements (useful life of three years)
    408,289       98,971  
      1,514,335       855,393  
Less accumulated depreciation
    (307,300 )     (111,870 )
    $ 1,207,035     $ 743,523  
  
Depreciation charged to operations for the year ended June 30, 2012 and 2011 amounted to $170,778 and $76,285, respectively.  All of the Company’s property and equipment are pledged as collateral for the Company’s $1,500,000 Senior Secured Notes (see Note 6).
 
 
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.
 
 
 
32

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 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 June 30, 2012, the Company drew down $5,000,000 on the Loan Facility and the short term portion and the long term portion were $1,666,667 and $3,333,333, respectively.  The Company paid $46,000 interest and accrued $181,217 interest during the fiscal year ended June 30, 2012.

Convertible Notes - $100,000 Financing
On June 11, 2012, the Company entered into a definitive agreement with accredited investors to borrow $100,000 in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due June 11, 2013.
 
The Notes bear interest at an annual rate of 4% payable.  At the Company's option, the interest can be paid in either cash or, subject to the satisfaction of certain customary conditions, registered shares of the Company’s common stock.  The effective conversion price for a payment in shares is determined from a computation based on 85% of the volume weighted average price of the Company’s common stock for each of the twenty (20) consecutive Trading Days immediately preceding the applicable installment date.  
 
Pursuant to the original terms, the holders were able convert the Notes into shares of common stock at a conversion price of $0.70 at any time which upon full conversion of the Notes would have resulted in the issuance of 1,388,889 shares of common stock.   In connection with the issuance of the original Notes, the Company issued seven different series of warrants to the investors to purchase a total of 26,250,000 shares of its common stock at exercise prices ranging from $0.40 per share to $0.60 per share. The majority of the warrants expire five years from their respective date of issuance.  The warrants allowed for cashless exercise.
 
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the Senior Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance.  As of June 30, 2012 the Company recorded the relative fair values of the warrants issued to ICG USA in connection with the Senior Note in the amount of $97,397 as a debt discount upon each issuance, and expensed each debt discount as interest expense upon issuance.  Additionally, as a result of issuing the warrants with the convertible promissory notes, a beneficial conversion option was recorded as a debt discount on each note reflecting the incremental intrinsic value benefit totaling $97,397, at the time of each issuance provided to JTR in connection with the Senior Note up to an including June 30, 2012. The debt discount for each issuance under the Senior Note is expensed as interest expense upon issuance. We recorded interest expenses in the amounts of $2,603 and $0 for the three months ended June 30, 2012 and 2011, respectively, in connection with the Senior Note.

Loan payable – related party
At June 30, 2012, the Company had a non interest bearing note payable due to its Chief Executive Officer who is also a Director and significant shareholder with a balance of $201,480.

Loans Payable - Other
The Company received $44,500 in advances from the same party that originally held the $360,000 note payable described above.  As of the date these financial statements were issued, no terms for repayment have been agreed to between the Company and this third party and the payment is paid on demand.


 
33

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
The Company entered in an auto loan agreement on November 7, 2011 to lease a Ford 150 pickup truck.  The principal amount of the loan is $27,095 and the interest rate 9.99%.  The loan will be matured on October 7, 2015.  The Company is currently paying $690 auto payment per month.
 
The following table summarizes the notes payable for the fiscal year ended June 30, 2012.

   
As of June 30, 2012
 
Description
 
Short term
   
Long term
 
Auto notes payable
  $ 6,067     $ 17,295  
MRL line of credit
    1,666,667       3,333,333  
Loan payable related party
    201,480       -  
Loan payable other
    44,500       -  
Financing with warrant issuance
    2,603       -  
                 
Total notes payable
  $ 1,921,317     $ 3,350,628  

Moreover the following table summarizes the future minimum payment for 5-year commitments of the notes payable:
 
   
Principal
 
6/30/2013
  $ 1,921,317  
6/30/2014
    3,340,342  
6/30/2015
    7,585  
6/30/2016
    2,701  
6/30/2017
    -  
Thereafter
    -  
Total
  $ 5,271,945  
 
Notes payable as of June 30, 2011
 
Convertible Notes - $1,500,000 Financing
 
On March 26, 2010, the Company entered into a definitive agreement with accredited investors to borrow $1,500,000 in gross proceeds before fees and expenses through the issuance of Senior Secured Convertible Notes (the “Notes”) originally due March 26, 2011.
 
 
 
34

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
The Notes bear interest at an annual rate of 8% payable quarterly.  At the Company's option, the interest can be paid in either cash or, subject to the satisfaction of certain customary conditions, registered shares of the Company’s common stock.  The effective conversion price for a payment in shares is determined from a computation based on 85% of the volume weighted average price of the Company’s common stock for each of the twenty (20) consecutive Trading Days immediately preceding the applicable installment date.  
 
Pursuant to the original terms, the holders were able convert the Notes into shares of common stock at a conversion price of $0.40 at any time which upon full conversion of the Notes would have resulted in the issuance of 3,750,000 shares of common stock. 
 
In connection with the issuance of the original Notes, the Company issued seven different series of warrants to the investors to purchase a total of 26,250,000 shares of its common stock at exercise prices ranging from $0.40 per share to $0.60 per share. The majority of the warrants expire five years from their respective date of issuance.  The warrants allowed for cashless exercise.
 
Beginning June 26, 2010, the Notes amortize in ten monthly installments.  The amortization payments can be made in, at the Company’s option, either cash or, subject to the satisfaction of certain customary conditions, registered shares of common stock.  The first installment payment of $75,000 was made in June 2010.  Two installment payments of $158,413 each were made in August 2010. Another installment payment of $336,494 was made in October 2010, which included the September and October installments of $158,413 each, plus penalties and interest associated with the late payment and registration delay (as described below).    
 
In August 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 was to use its reasonable best efforts to cause the registration statement to be declared effective within 90 days of the Closing Date (120 days in the event the SEC reviews the registration statement).  If the registration statement was not declared effective within the 120 days, the Company was obligated to pay the investors “Registration Delay Payments” equal 1% of 67% of each investor’s original principal amount as stated in such investor’s Note. The registration delay payment obligation accrued at a rate of $10,050 in each thirty-day period that the registration statement remained not effective commencing on August 23, 2010.  Interest would accrue on any unpaid Registration Delay Payment at a rate of 1.5% per month.  Pursuant to the Exchange Agreement described in the next paragraph, the Registration Delay Payment obligation has been extinguished.
 
Pursuant to ASC Topic 470-20, “Debt with Conversion and Other Options,” the convertible notes were recorded net of discounts that include the relative fair value of the warrants and the Notes’ beneficial conversion features totaling $1,500,000.  The discounts were amortized and charged to operations over the life of the debt.  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.
 
The $1,500,000 discount was originally offset to liabilities pursuant to ASC Topic 815-40-25,”Contracts in Entity’s Own Equity.” On the date the proceeds were received, the number of the Company’s authorized but unissued common shares were insufficient to meet all of the Company’s commitments for share issuances under the terms of its convertible notes, options and warrant agreements, thereby requiring liability accounting.  As discussed in Note 8, on the valuation date of January 11, 2011, the former derivative liability was reclassified to additional paid-in capital due to the Company’s effective increase in its authorized shares and elimination of the warrants and conversion feature of the New Notes.  
 
 
 
35

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
On October 27, 2010, the Company entered into a separate Exchange Agreement with each of the investors whereby in exchange for each investor’s Note it issued to each investor a Senior Secured Convertible Note (each a “New Note” and collectively, the “New Notes”) which were convertible into shares of the Company’s common stock.  Pursuant to the terms of each Exchange Agreement, the Company was also no longer obligated to register the shares of common stock issuable upon conversion of the New Notes or upon exercise of the warrants.  In addition, the related Registration Delay Payment obligation described in the above paragraph has been extinguished by this Exchange Agreement.
 
Effective November 10, 2010, the Company filed a request with the SEC to withdraw the registration statement.
 
The aggregate original principal amount of all New Notes on the October 27, 2010 debt exchange date was $1,287,834.  Pursuant to the terms thereof, each of the New Notes amortizes in six equal installments (November 24, 2010, December 23, 2010, January 24, 2011, February 22, 2011, March 22, 2011, and March 26, 2011). The Company may pay each monthly installment amount due under each of the New Notes, at its option, in cash or, subject to the satisfaction of customary equity conditions, in shares of the Company’s common stock.  If the Company elected to make payment in shares of its common stock, the number of shares issued by the Company would be determined by dividing the installment amount being converted by the lowest of (a) the conversion price then in effect, (b) 70% of the average of the three (3) lowest closing bid prices of our common stock during the 20 consecutive trading day period immediately preceding the applicable installment date and (c) 70% of the closing bid price of our common stock on the trading day immediately preceding the applicable installment date. The New Notes continued to be secured by all of the assets of the Company.
 
As discussed below, the New Notes were purchased by a related party in December 2010 and the related warrants and conversion features were cancelled.  The related party also purchased the note due a private placement agent as discussed below. The combined balance of the New Notes at June 30, 2011 was $1,029,111. The principal balance and accrued interest was fully paid on July 26, 2011.
 
Amortization of the discounts charged to operations for the year ended June 30, 2011 amounted to $745,701. Discount amortization after the New Notes were purchased by the related party of $366,950 was charged to equity. Interest charged to operations on the principal balance of the notes (including penalties and interest associated with the late payment and registration delay) for the year ended June 30, 2011 totaled $480,977.
 
Placement Agent Loan Fees
 
In addition, the Company engaged a placement agent with respect to the Notes.  Accordingly, as consideration for the placement agent’s services, the placement agent received compensation equal to 7% of the aggregate amount raised in the form of the Notes in the aggregate amount of $105,000 with a voluntary conversion price of $0.40 which was convertible into 262,500 shares of common stock and also include seven different series of warrants to purchase a total of 787,500 shares of its common stock at exercise prices ranging from $0.40 per share to $0.60 per share.  The convertible notes were recorded net of discounts that include the relative fair value of the warrants and the Notes’ beneficial conversion features totaling $105,000.  The discounts are amortized and charged to operations over the life of the debt using the effective interest method.  The initial value of the warrants of $68,535 was calculated using the Black-Scholes Option Model with a risk free interest rate ranging from 1.04% to 2.59%, volatility of 108.37%, and trading price of $0.36 per share.  The beneficial conversion feature of $36,465 was calculated pursuant to ASC Topic 470-20 using a trading price of $0.36 per share and an effective conversion price $0.1389 per share.  
 
In March 2010, the placement agent was also issued 100,000 shares of the Company’s common stock valued at $36,000.  The placement agent was also entitled to compensation equal to 7% for any gross proceeds the Company receives from the exercise of any of the Warrants.
 
In May 2010, the Company issued additional common shares to the placement agent and other parties valued at $36,000 in connection with the same financing.
 
 
 
36

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
Interest charged to operations on the principal balance of this note through October 27, 2010 totaled $2,149.  Effective with the October 27, 2010 Exchange Agreement described above, the balance of this note was reclassified and combined with the balances of the other convertible notes from the original $1,500,000 financing.
 
The $105,000 discount was offset to liabilities pursuant to ASC Topic 815-40-25,”Contracts in Entity’s Own Equity.” On the date the proceeds were received, the number of the Company’s authorized but unissued common shares were insufficient to meet all of the Company’s commitments for share issuances under the terms of its convertible notes, options and warrant agreements, thereby requiring liability accounting. As discussed in Note 8, on the valuation date of January 11, 2011, the former derivative liability was reclassified to additional paid-in capital due to the Company’s effective increase in its authorized shares and elimination of the conversion feature of the New Notes.
 
As discussed below, the note was purchased by a related party in December 2010 and the related warrants and conversion features were cancelled in January 2011. Amortization of the discounts charged to operations for the year ended June 30, 2011 amounted to $52,308. Discount amortization after the note was purchased by the related party of $25,687 was charged to equity. 
 
Purchase of Convertible Notes by Related Party
 
In December 2010, SLM Holding PTE, Ltd. (“SLM”), a wholly owned subsidiary of Manhattan Resources Limited (“MRL”) and related party, purchased the New Notes and the Placement Agent notes as discussed above.  On January 12, 2011, SLM agreed to terminate 27,037,500 Series A through G warrants and conversion features related to these acquired notes for nominal consideration of $10.  The conversion features formerly comprised all rights granted to the note holders to convert debt to 4,012,500 shares of the Company's common stock.  The termination of the warrants and conversion features was deemed a substantial modification of terms and accounted for as an extinguishment of debt pursuant to ASC Topic 470-50 “Modifications and Extinguishments.”  The unamortized discount from the warrants and beneficial conversion features totaled $392,647 on January 12, 2011, and this amount was written off to additional paid-in capital since the transaction was consummated with a related party. In addition, the payment terms of note were modified requiring that the balance of the note to be paid down to $1.0 million in February 2011 with the remainder of the note incurring monthly interest at 8% per annum with the principal balance due when $5.0 credit facility is authorized, see Note 10. As indicated above the balance due the related party at June 30, 2011 including accrued interest was $1,029,111.  The balance due plus accrued interest was fully paid on July 26, 2011 through proceeds received from the credit facility.
 
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 was to mature on December 22, 2012, when the outstanding principal and accrued interest becomes fully due and payable. Prior to maturity, the holder has the right to convert the balance owed into 600,000 shares of the Company’s common stock.
 
Pursuant to ASC Topic 470-20, “Debt with Conversion and Other Options,” the convertible note was recorded net of a discount that includes a beneficial conversion feature (“BCF”) amounting to $107,000. The discount was amortized and charged to operations over the life of the debt using the effective interest method.  The initial value of the BCF of $107,000 was calculated as the difference between the market value of the 600,000 potential conversion shares at December 22, 2009 (600,000 shares multiplied by the stock price of $0.39 per share, or $234,000), less the effective cost of the conversion at such date (the note  balance, or $127,000).
 
During the year ended June 30, 2011, the Company was a party to an agreement whereby increments of the $127,000 convertible note payable were assigned by the original investor to a third party.  The assignment agreement included modifications to the debt increments and embedded conversion features that were more favorable to the lender, resulting in a $161,667 loss on debt modification that was charged to operations.  Such modifications included an increase in the interest rate to 12%, a shortening of the increments’ maturities to March 10, 2011, and a change in the conversion price to 50% of the lowest trading price for 5 trading days prior to conversion.  During the year, a total of $132,054 of debt increments (inclusive of accrued interest) were assigned to this third party and converted into 2,685,861 shares of the Company's common stock at prices ranging from $0.07 to $0.17 per share.  By June 30, 2011, the entire note balance was converted to common stock.
 
 
 
37

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
For the year ended June 30, 2011, interest totaling $1,748 was accrued and charged to operations. During the same period, discount amortization charged to operations totaled $89,381.  
 
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 was to note mature on February 11, 2013, when the outstanding principal and accrued interest becomes 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.
 
During the year ended June 30, 2011, the Company was a party to an agreement whereby a $360,000 convertible note was assigned in full to the same third party as the note increments described above.  The assignment agreement included modifications to the debt and its embedded conversion feature that were more favorable to the lender, resulting in a $259,933 loss on debt modification that was charged to operations.  Such modifications included an increase in the interest rate to 12%, a shortening of the maturity to March 10, 2011, and a change in the conversion price to 50% of the lowest trading price for 5 trading days prior to conversion.  Pursuant to this debt modification, the Company recognized a derivative liability with an initial value of $247,364 due to a change in the exercise price of the embedded conversion feature from fixed to variable (See Note 9).
 
During the year ended June 30, 2011, debt totaling $385,991 was converted into 15,457,776 shares of the Company’s common stock at prices ranging from $0.04 to $0.14 per share. Interest charged to operations on the principal balance of the notes for the year ended June 30, 2011 totaled $6,568.  The balance of the note at June 30, 2011 was $0, due to the conversions of the entire note balance to common stock as described above.
 
Loans Payable - Other
 
The Company received $44,500 in advances from the same party that originally held the $360,000 note payable described above.  As of the date these financial statements were issued, no terms for repayment have been agreed to between the Company and this third party.
 
In December 2010, the Company had received $200,000 in advances from an unrelated third party. In March 2011, the Company negotiated terms with this party to repay a total of $300,000, and has imputed interest on the balance due based on these negotiated terms.  The $300,000 was fully paid by June 30, 2011 of which $100,000 was charged to operations as interest expense.
 
During the year ended June 30, 2011, the Company received a $570,500 short-term loan from MRL, partially secured by inventory purchased from Megola, Inc., valued at $303,750. The remainder of the loan was used to purchase inventory valued at $266,750. This loan was repaid in full in February 2011 in the amount of $739,200.  Interest charged to operations on the principal balance of the notes for the year ended June 30, 2011 totaled $168,700. The Company has entered into a separate $5,000,000 revolving credit and warrant purchase with Manhattan Resources Limited, effective February 14, 2011.
 
 
7. Letter of Credit

In order to continue to gain market shares in the lumber industry, on July 11, 2012, the company received one hundred million ($100,000,000.00) dollar standby letter of credit from InsurFinancial Holdings Plc backed by Bank of China to support the major expansion in the Company's core business. This facility credit support will last for four years and will not expire until December 4th, 2016.

Additionally, the agreement grants an option that allows InsurFinancial Holdings, Plc to convert their fee into an equity investment of up to five million ($5,000.000.00) dollars each year for the next four years. The option calls for the share price of the additional equity investment to be calculated at 120% of the three month trailing average of ECOB's stock. The Company now has the availability of credit which should enhance credit support for the future liabilities incurred in the rapid expansion of the demand for its products.
 
 
 
38

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
8.  Related Party Transactions
 
At June 30, 2012, the Company had a non interest bearing note payable due to its Chief Executive Officer who is also a Director and significant shareholder with a balance of $201,480.
 
At June 30, 2011, the Company had a note payable due to its Chief Executive Officer who is also a Director and significant shareholder with a balance of $174,217.
 
The Company had advances payable of $0 and $63,163, to the Chief Technical Officer who is also a director and significant shareholder as of June 30, 2012 and June 30, 2011, respectively.  During the year ended June 30, 2011, the Company received advances totaling $171,500 from this officer and has repaid $108,337 during the same period.  Such advances bear no interest and are due on demand. 
 
As of June 30, 2012 and 2011, a total of $363,500 (or approximately 77%) of the Company’s Property and Equipment has been purchased from two related entities that are controlled by the Company’s President, who is also a majority shareholder. The Property and Equipment, which was purchased in fiscal 2010, was recorded based on the carryover basis which also represented the purchase price.
 
During the years ended June 30, 2012 and 2011, the Company made inventory purchases totaling $0 and $7,478, respectively, from companies controlled by the Company’s President. The 2010 inventory purchases were recorded based on the carryover basis which also represented the purchase price.
 
During the years ended June 30, 2012 and 2011, the Company recorded revenues of $0 and $38,527, respectively, through sales of their lumber products to an entity owned by the Company’s Chief Executive Officer. The Company maintains that the sales were at current pricing. As of June 30, 2012 and 2011, $0 and $6,421, respectively, is due from this entity and recorded in accounts receivable on the accompanying financial statements.
 
See Notes 6, 11 for transactions with MRL, a significant shareholder.

Employment Agreement – President and Chief Executive Officer
Effective April 1, 2011, the Company entered into an employment agreement with its President and Chief Executive Officer for a term of two years.  Key provisions of the agreement includes
 
 
(a)
Annual salary of $300,000
 
 
(b)
Cash bonus of $300,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $34,000,000, subject to certain limitations.
 
 
(c)
Additional cash bonus of $300,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $92,000,000, subject to certain limitations.  In the event that gross sales for the prior fiscal year are with 35% of the $92,000,000 target, the target shall be adjusted up so that a minimum sales increase must be achieved for the bonus to vest.
 
 
(d)
Option grants to purchase 800,000 shares of the company’s common stock at an exercise price of $0.10 per share, expiring April 1, 2016 (five-year life).  Such options will vest over a two-year period.  These options were valued at $75,680, as determined using the Black-Scholes option-pricing model using a risk free rate of 2.24%, volatility of 169.83% and a trading price of the underlying shares of $0.10.
 
 
(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 June 30, 2012 totaled $295,513. Compensation charged to operations during the year ended June 30, 2012 on the option granted totaled $37,840.
 
 
39

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
Accrued compensation due the president at June 30, 2011 totaled $196,153. Severance pay accrued and charged to operations during the year ended June 30, 2011 totaled $16,027.  Compensation charged to operations during the year ended June 30, 2011 on the option granted totaled $9,460.
 
Employment Agreement –Chief Technical Officer and Director
Effective April 1, 2011, the Company entered into an employment agreement with its Chief Technical Officer and Director for a term of two years.  Key provisions of the agreement includes
 
 
(a)
Annual salary of $250,000
 
 
(b)
Cash bonus of $250,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $34,000,000, subject to certain limitations.
 
 
(c)
Additional cash bonus of $250,000 in the event that gross sales for the fiscal year ending June 30, 2012 exceed $92,000,000, subject to certain limitations.  In the event that gross sales for the prior fiscal year are with 35% of the $92,000,000 target, the target shall be adjusted up so that a minimum sales increase must be achieved for the bonus to vest.
 
 
(d)
Option grants to purchase 400,000 shares of the company’s common stock at an exercise price of $0.10 per share, expiring April 1, 2016 (five-year life).  Such options will vest over a two-year period.  These options were valued at $37,840, as determined using the Black-Scholes option-pricing model using a risk free rate of 2.24%, volatility of 169.83% and a trading price of the underlying shares of $0.10.
 
 
(e)
Severance pay is due the President upon separating from service, with or without cause, equaling his then current monthly salary multiplied by the number of full years that the President has been employed with the Company prior to separation.
 
Accrued compensation due the Chief Technical Officer and Director at June 30, 2012 totaled $265,975. Compensation charged to operations during the year ended June 30, 2012 on the option granted totaled $18,920.
 
Accrued compensation due the Chief Technical Officer and Director at June 30, 2011 totaled $158,638. Severance pay accrued and charged to operations during the year ended June 30, 2011 totaled $13,356.  Compensation charged to operations during the year ended June 30, 2011 on the option granted totaled $4,730.
 
 
9.  Derivative and Warrant Liabilities

During the year ended June 30, 2011, the Company decreased its derivative and warrant liabilities and made a correlating credit to operations in the amount of 121,590 pursuant to ASC 815-40-19 “Contracts in Entity's Own Equity,” as the number of Company’s potential common shares plus the number of actual common shares outstanding (“Committed Shares”) at the valuation date exceeded the number of common shares the Company had authorized to issue. The shortage in the number of committed shares over the number of authorized but unissued shares at the final valuation date of January 11, 2011 totaled 26,086,100. The total liabilities of $1,534,627 at the valuation date are the maximum amount management believes it would have been liable for if the Company were required to meet all its committed share obligations.
 
On the valuation date of January 11, 2011, the $1,534,627 former derivative liability was reclassified to additional paid-in capital due to the Company’s (a) increase in the number of its authorized shares to meet all of its committed share obligations, (b) reporting of such action to its shareholders and the Securities and Exchange Commission (the SEC) via an effective information statement, and (c) submission of amended articles of incorporation and receipt of approval from the State of Colorado (d) elimination of the warrants and conversion feature of the notes due to the assignment of the note to MRL.  
 
 
 
40

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
The derivative liabilities were valued prior to extinguishment based on the following components:
 
The first component is valuing the shortage of common shares of 7,725,000 using the fair value of Series A and E warrants at the valuation date of $0.0644 per share. The fair value of the Series A and E Warrants of $497,490 was calculated using the Black-Scholes Option Model with a risk free interest rate of 1.98%, volatility of 161.45%, exercise price of $0.40 per share, and trading price of $0.08 per share.  
 
The second component is valuing the shortage of common shares of 7,725,000 using the fair value of Series B and F warrants at the valuation date of $0.0629 per share. The fair value of the Series B and F Warrants of $485,903 was calculated using the Black-Scholes Option Model with a risk free interest rate of 1.98%, volatility of 161.45%, exercise price of $0.50 per share, and trading price of $0.08 per share.  
 
The third component is valuing the shortage of common shares of 7,725,000 using the fair value of Series C and G warrants at the valuation date of $0.0617 per share. The fair value of the Series C and G Warrants of $476,633 was calculated using the Black-Scholes Option Model with a risk free interest rate of 1.98%, volatility of 161.45%, exercise price of $0.60 per share, and trading price of $0.08 per share.  
 
The fourth and final component is valuing the shortage of common shares of 3,161,100 using the fair value of Series D warrants at the valuation date of $0.0236 per share. The fair value of the Series D Warrants of $74,601 was calculated using the Black-Scholes Option Model with a risk free interest rate of 0.28%, volatility of 165.47%, exercise price of $0.20 per share, and trading price of $0.08 per share.  
 
 
10.  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.  Derivative instruments include the derivative liabilities as Level 2. Derivative instruments are valued using standard calculations/models that are primarily based on observable inputs, including volatilities and interest rates. Therefore, derivative instruments are included in Level 2.
 
 
 
41

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
Level 3.               Inputs that are both significant to the fair value measurement and unobservable. These inputs rely on management's own assumptions about the assumptions that market participants would use in pricing the asset or liability. The unobservable inputs are developed based on the best information available in the circumstances and may include the Company's own data.
 
Application of Valuation Hierarchy
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodology used to measure fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
 
Advances from Related Party.     The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.
 
Notes Payable – Related Party.   The Company assessed that the fair value of this liability to approximate its carrying value based on the effective yields of similar obligations.
 
Convertible Notes Payable.   The Company assessed that the fair value of this liability to approximate its carrying value based on the effective yields of similar obligations.
 
Loans Payable - Related Party.     The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.
 
Loans Payable - Other.     The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.
 
Derivative and Warrant Liabilities.    The Company assessed that the fair value of these liabilities approximate their carrying value since the carrying value is determined from the trading price of the Company’s common shares.
 
The methodology described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. If readily determined market values became available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be adjusted, which could result in material differences from the recorded carrying amounts. The Company believes its method of determining fair value is appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.
 
The following table presents the fair value of financial instruments that are measured and recognized on a non-recurring basis classified under the appropriate level of the valuation hierarchy described above, as of June 30, 2012 and 2011:
 
Liabilities measured at fair value at June 30, 2012:
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Advances from related party
 
$
--
   
$
--
   
$
--
   
$
--
 
                                 
Notes payable – related party
 
$
--
   
$
5,000,000
   
$
--
   
$
5,000,000
 
                                 
Loans payable – related party
 
$
--
   
$
201,480
   
$
--
   
$
201,480
 
 
Liabilities measured at fair value at June 30, 2011:
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Advances from related party
 
$
--
   
$
63,163
   
$
--
   
$
63,163
 
                                 
Notes payable – related party
 
$
--
   
$
1,029,111
   
$
--
   
$
1,029,111
 
                                 
Loans payable – related party
 
$
--
   
$
174,217
   
$
--
   
$
174,217
 
 
 
42

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
11.  Stockholders' Deficit
 
Common Stock Issuances
During the year ended June 30, 2012, the Company issued a total of 112,675,569  shares of its common stock of which 16,500,000 shares were issued for cash for $889,500, 6,879,172 shares were issued for debt conversions of increments totaling $420,002 the related to losses on debt modification.  Also 14,496,397 shares valued at $1,483,009 were issued for legal services, 74,800,000 shares valued at $2,176,695 were issued for employees compensation.
 
During the year ended June 30, 2011, the Company issued a total of 102,691,767 shares of its common stock of which 81,000,000 shares were issued for cash (as described below), 2,685,861 shares were issued for debt conversions of increments totaling $132,054 on the Company’s $127,000 note payable, which included related losses on debt modification totaling $161,667.  During the same period, another 15,457,776 shares were issued for debt conversions totaling $385,991 on the Company’s $360,000 note payable. The Company recognized a $161,667 loss on the cancelation of the $385,991 of indebtedness. In addition, 400,000 shares valued at $80,000 were issued as additional consideration for the cancellation of the Company’s lease on its Texas facilities, 1,774,000 shares valued at $153,840 were issued for consulting and advisory services, 500,000 shares valued at $35,000 were issued for sales commissions, 736,106 shares valued at $85,221 were issued for legal services, and 138,024 shares were issued to various consultants and advisors in connection with the cancellation of $42,711 of debt due them. The 138,024 common shares were valued at $30,005 resulting in a net gain from the cancellation of indebtedness of $12,706 that was credited to operations.
 
Investment Agreement with MRL
On February 14, 2011, the Company entered into an investment agreement (the “Investment Agreement”) with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL (the “Investment Agreement”).
 
On February 16, 2011, the Company received $5,000,000 from LTK pursuant to the Investment Agreement.

Pursuant to the terms of the Investment Agreement, LTK subscribed for 81,000,000 shares in the Company, representing approximately 45.5 percent of the Company’s resulting total issued and outstanding common equity, for an aggregate consideration of $5,000,000.  LTK will sell the Sale Shares to MRL, for the same consideration, subject to approval from shareholders of MRL.
 
On February 14, 2011, the Company also entered into a revolving credit and warrant purchase agreement (the “Credit and Warrant Agreement”) with MRL.  The Credit and Warrant Agreement does not go into effect until it is ratified by the shareholders of MRL, which occurred on July 26, 2011, see Note 13.

A summary of the material terms of these two agreements are as follows:

(i)      Pursuant to the terms of the Investment Agreement, LTK will subscribe for 81,000,000 shares in the Company (“Sale Shares”), representing approximately 45.5 percent of the Company’s resulting total issued and outstanding common shares, for an aggregate consideration of $5,000,000.  LTK will sell the Sale Shares to MRL, for the same consideration, subject to approval from shareholders of MRL.
 
(ii)     Pursuant to the terms of the Credit and Warrant Agreement, MRL will extend a $5,000,000 revolving facility (the “Loan Facility”). In consideration of the Loan Facility, the Company 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”).  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. The Loan Facility is secured by substantially all the assets of the Company.
 
 
 
43

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
In the event MRL purchases the Sale Shares from LTK and if they fully exercised the Warrant which would be granted upon final approval of the Credit and Warrant Agreement, both of which are subject to MRL shareholder approval, MRL would acquire an aggregate of 131,000,000 Shares representing approximately 54.5 percent of the resulting total issued and outstanding common equity of the Company, for an aggregate consideration of $10,000,000. As of the date of these financial statements, the Loan Facility is not yet effective, and no warrants have been issued to MRL due to the remaining approval requirements.
 
During the year ended June 30, 2012, the Company offered MRL, an arrangement for all their interests in Eco and all obligations of Eco to any of them would be exchanged for a promise to make a future buyout payment. On July 9, 2012 lawyers for Eco advised Eco that the aspect of the Offer, below,  and the communication that an agreement was reached is legal grounds, subject to potential judicial determination, supporting Eco's conclusion that MRL has agreed to Eco's offer including selling all interests back to Eco for promise of a future payment, as stated below. If judicial action was taken, Eco may or may not be successful.
 
Previously, on June 13, 2012, Eco was advised that MRL had accepted Eco's Offer.
 
The Offer was as follows:
 
1. MRL surrenders all rights and interests in Eco. This includes all securities.
 
2. Eco agrees to repay or pay MRL the sum of $10,000,000 USD on or before 24 months from acceptance, or June 13, 2014. (Recently determined to be an additional $500,000 USD, total $10,500,000.)
 
3. The only obligation that survives the settlement or agreement is the obligation of Eco to pay the sum stated.

Warrants
On April 28, 2011, the Company issued warrants pursuant to a consulting agreement to purchase 250,000 shares of the Company common of stock of which 100,000 shares have a purchase price per share of $0.15, 100,000 shares have a purchase price per share of $0.25, and 50,000 shares have a purchase price per share of $0.35. The warrants were valued at $14,925 using the Black-Scholes Option Model with a risk free interest of 0.61%, volatility of 171.46%, and trading price of $0.09 per share. The $14,925 is included in prepaid expense and is being amortized to operations over the two year term of the agreement.
 
In September 2011, the Company issued 50,000,000 warrants in exchange for the payment of the $3.0 million prepaid loan fees in connection with the MRL $5 million line of credit and the warrants are expired in 5 years.  The $3,025,000 total prepaid loan fees were amortized using the straight line method over the three year terms of the underlying notes.  For detail, please refer to Note 4, Prepaid loan fee.
 
During the year ended June 30, 2011, the Company agreed to reduce the exercise price of 3,750,000 of its warrants from $0.40 per share to $0.20 per share.  A total of $140,981 was charged to interest expense for the re-pricing of these warrants.
 
In December 2010, SLM Holding PTE, Ltd. (SLM), a wholly owned subsidiary of MRL and related party, purchased convertible notes issued by the Company from a group of third party investors and a placement agent for the aggregate sum of $1,000,000 (see Note 6).  In January 2011, SLM agreed to terminate 27,037,500 Series A through G warrants and conversion features related to these acquired notes for nominal consideration of $10.  The conversion features formerly comprised all rights granted to the note holders to convert debt to 4,012,500 shares of the Company's common stock.
 
 
 
44

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
   
Warrants
outstanding
   
Weighted average exercise price
   
Weighted average
remaining life
 
Aggregate intrinsic value
 
                                   
Balance, June 30, 2010
    27,037,500     $ 0.49       4.74  
 Years
  $ -  
                                   
Warrants granted
    250,000       0.23       2.00  
 Years
       
Warrants expired
                       
 
       
Warrants canceled
    (27,037,500 )     0.46       4.20    Years        
                                   
Balance, June 30, 2011
    250,000       0.23       1.83  
 Years
    -  
                                   
Warrants granted
    50,000,000       0.01       5.00  
 Years
       
Warrants expired
    -                            
Warrants canceled
    -                            
                                   
Balance, June 30, 2012
    50,250,000     $ 0.01       3.98  
 Years
  $ -  
 
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 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 operation for the years ended June 30, 2012 and June 30, 2011 on these options amounted to $56,760 and $14,190, respectively.
 
A schedule of compensation expense on the option grants for the next year is as follows:
 
June 30, 2013
 
$
42,570
 
 
The following is a schedule of options outstanding as of June 30, 2012:
 
   
Options Outstanding
   
Weighted Average Exercise Price
 
Weighted Average Remaining Life
 
Aggregate Intrinsic Value
 
                           
Balance, June 30, 2010
   
-
   
$
-
     
$
-
 
Options granted
   
1,200,000
     
0.10
 
5.00 Years
   
-
 
Options expired
   
                  -
     
               -
 
-
   
-
 
Options cancelled
   
-
   
 
-
     
 
-
 
Balance, June 30, 2011
   
1,200,000
   
 
0.10
 
4.75 Years
 
 
-
 
Options granted
                     
-
 
Options expired
   
                  -
     
               -
  -     -
 
Balance, June 30, 2012
   
1,200,000
   
$
0.10
 
3.75 Years
 
$
-
 

As of June 30, 2012, 600,000 of the 1,200,000 options were vested.
 
 
 
45

 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2012 and 2011

 
12. Income Taxes
 
Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
 
The effective tax rate on the net loss before income taxes differs from the U.S. statutory rate as follows:
 
   
June 30,
 
   
2012
   
2011
 
Current expense – Benefit
           
Federal
 
$
-
   
$
-
 
State
   
-
     
-
 
Total current expense (benefit)
   
-
     
-
 
                 
Deferred Benefit
               
Federal
 
$
-
   
$
-
 
State
   
-
     
-
 
Total deferred benefit
   
-
     
-
 
                 
U.S statutory rate
   
34.00
%
 
$
34.00
%
Permanent differences
   
43.00
%
   
22.00
%
Less valuation allowance and other
   
-48.3
%
   
-56.00
%
Effective tax rate
   
0.00
%
   
0.00
%
 
The significant components of deferred tax assets and liabilities are as follows:
 
    June 30,  
   
2012
   
2011
 
Deferred tax assets
           
Bad debt reserve
  $ 6,367     $ 1,526  
Stock based compensation
    1,244,299       809,260  
Net operating losses
    3,796,571       1,914,388