Attached files
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Ecology
Coatings, Inc.
We have
audited the accompanying consolidated balance sheets of Ecology Coatings, Inc.
and Subsidiary (the “Company”) as of September 30, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity (deficit)
and cash flows for the years 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
audits.
We
conducted our audits 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 consolidated 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
audits provide 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 Ecology Coatings, Inc. and
Subsidiary as of September 30, 2008 and 2007, and the results of their
operations and their cash flows for the years 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 9 to
the consolidated financial statements, the Company’s recurring losses, negative
cash flows from operations and net capital deficiency raise substantial doubt
about its ability to continue as a going concern. Management’s plans
as to these matters are also discussed in Note 9. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ UHY
LLP
Southfield,
Michigan
December
19, 2008
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ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
|
Consolidated
Balance Sheets
|
||
|
ASSETS
|
||
|
September
30, 2008
|
September
30, 2007
|
|
|
Current
Assets
|
||
|
Cash
and cash equivalents
|
$974,276
|
$808,163
|
|
Miscellaneous
receivable
|
-
|
1,118
|
|
Prepaid
expenses
|
25,206
|
70,888
|
|
Total
Current Assets
|
999,482
|
880,169
|
|
Property
and Equipment
|
||
|
Computer
equipment
|
22,933
|
11,285
|
|
Furniture
and fixtures
|
18,833
|
1,565
|
|
Test
equipment
|
7,313
|
7,313
|
|
Signs
|
213
|
213
|
|
Software
|
1,332
|
1,332
|
|
Video
|
48,177
|
-
|
|
Total
fixed assets
|
98,801
|
21,708
|
|
Less:
Accumulated depreciation
|
(22,634)
|
(3,794)
|
|
Property
and Equipment, net
|
76,167
|
17,914
|
|
Other
|
||
|
Patents-net
|
421,214
|
302,575
|
|
Trademarks-net
|
5,029
|
3,465
|
|
Total
Other Assets
|
426,243
|
306,040
|
|
Total
Assets
|
$1,501,892
|
$1,204,123
|
See the
accompanying notes to the audited consolidated financial
statements.
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
|
Consolidated
Balance Sheets
|
||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||
|
September
30, 2008
|
September
30, 2007
|
|
|
Current
Liabilities
|
||
|
Accounts
payable
|
$1,359,328
|
$429,790
|
|
Credit
card payable
|
92,305
|
14,772
|
|
Deferred
revenue
|
-
|
24,884
|
|
Accrued
liabilities
|
12,033
|
-
|
|
Payroll
taxes payable
|
-
|
1,459
|
|
Accrued
wages
|
-
|
12,500
|
|
Franchise
tax payable
|
800
|
800
|
|
Interest
payable
|
133,332
|
15,851
|
|
Convertible
notes payable
|
894,104
|
170,280
|
|
Notes
payable - related party
|
243,500
|
243,500
|
|
Preferred
dividends payable
|
6,300
|
-
|
|
Total
Current Liabilities
|
2,741,702
|
913,836
|
|
Total
Liabilities
|
2,741,702
|
913,836
|
|
Commitments
and Contingencies (Note 5)
|
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Stockholders'
Equity (Deficit)
|
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|
Preferred
Stock - 10,000,000 $.001 par value shares
|
||
|
authorized;
2,010 and 0 shares issued and outstanding
|
||
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as
of September 30, 2008 and September 30, 2007, respectively
|
2
|
-
|
|
Common
Stock - 90,000,000 $.001 par value shares
|
||
|
authorized;
32,210,684 and 32,150,684
|
||
|
outstanding
as of September 30, 2008 and
|
||
|
September
30, 2007, respectively
|
32,234
|
32,174
|
|
Additional
paid in capital
|
13,637,160
|
6,165,282
|
|
Accumulated
Deficit
|
(14,909,206)
|
(5,907,169)
|
|
Total
Stockholders' Equity (Deficit)
|
(1,239,810)
|
290,287
|
|
Total
Liabilities and Stockholders'
|
||
|
Equity
(Deficit)
|
$1,501,892
|
$1,204,123
|
See the
accompanying notes to the audited consolidated financial
statements.
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
|
Consolidated
Statements of Operations
|
||
|
For
the Year Ended
|
For
the Year Ended
|
|
|
September
30, 2008
|
September
30, 2007
|
|
|
Revenues
|
$25,092
|
$41,668
|
|
Salaries
and fringe benefits
|
2,006,776
|
1,409,840
|
|
Professional
fees
|
2,735,360
|
2,583,927
|
|
Other
general and administrative costs
|
637,668
|
463,199
|
|
Operating
Loss
|
(5,354,712)
|
(4,415,298)
|
|
Other
Income (Expenses)
|
||
|
Interest
income
|
5,784
|
20,940
|
|
Interest
expense
|
(1,421,394)
|
(256,512)
|
|
Total
Other (Expenses), net
|
(1,415,610)
|
(235,572)
|
|
Net
Loss
|
$(6,770,322)
|
$(4,650,870)
|
|
Basic
and diluted net loss per share
|
$(0.21)
|
$(0.16)
|
|
Basic
and diluted weighted average of
|
||
|
common
shares outstanding
|
32,189,864
|
29,178,144
|
See the
accompanying notes to the audited consolidated financial
statements.
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||||||||||||
|
Statement
of Changes in Shareholders’ Equity (Deficit) for the Years Ended
September 30, 2008 and 2007
|
||||||||||||
|
Additional
|
Total
|
|||||||||||
|
Paid
In
|
Accumulated
|
Stockholders'
|
||||||||||
|
Common
Stock
|
Preferred
Stock
|
Capital
|
Deficit
|
Equity
|
||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
(Deficit)
|
||||||||
|
Balance
at September 30, 2006
|
28,200,000
|
$142,000
|
-
|
$-
|
$
-
|
$(1,256,299)
|
$(1,114,299)
|
|||||
|
Beneficial
conversion feature on convertible debt
|
-
|
-
|
-
|
-
|
116,819
|
-
|
116,819
|
|||||
|
Stock
option expense
|
-
|
-
|
-
|
-
|
1,288,670
|
-
|
1,288,670
|
|||||
|
Warrants
issued with debt
|
-
|
-
|
-
|
-
|
4,497
|
-
|
4,497
|
|||||
|
Issuance
of stock, net of issuance costs of $10,789
|
3,950,684
|
4,645,470
|
-
|
-
|
-
|
-
|
4,645,470
|
|||||
|
Creation
of par value stock
|
-
|
(4,755,296)
|
-
|
-
|
4,755,296
|
-
|
-
|
|||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(4,650,870)
|
(4,650,870)
|
|||||
|
Balance
at September 30, 2007
|
32,150,684
|
$32,174
|
-
|
$-
|
$6,165,282
|
$(5,907,169)
|
$290,287
|
|||||
|
Issuance
of stock for debt extension
|
60,000
|
60
|
-
|
-
|
161,940
|
-
|
162,000
|
|||||
|
Issuance
of warrants for debt extension
|
-
|
-
|
-
|
-
|
26,343
|
-
|
26,343
|
|||||
|
Issuance
of preferred stock
|
-
|
2,010
|
2
|
1,500,585
|
-
|
1,500,585
|
||||||
|
Beneficial
conversion feature on preferred stock
|
-
|
-
|
-
|
-
|
2,225,415
|
(2,225,415)
|
-
|
|||||
|
Warrants
issued with preferred stock
|
-
|
-
|
-
|
-
|
509,415
|
-
|
509,415
|
|||||
|
Beneficial
conversion feature on convertible debt
|
-
|
-
|
-
|
-
|
358,654
|
-
|
358,654
|
|||||
|
Stock
option expense
|
-
|
-
|
-
|
-
|
1,847,639
|
-
|
1,847,639
|
|||||
|
Warrants
issued with convertible debt
|
-
|
-
|
-
|
-
|
841,887
|
-
|
841,887
|
|||||
|
Preferred
dividends
|
-
|
-
|
-
|
-
|
-
|
(6,300)
|
(6,300)
|
|||||
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
(6,770,322)
|
(6,770,322)
|
|||||
|
Balance
at September 30, 2008
|
32,210,684
|
$32,234
|
2,010
|
$2
|
$13,637,160
|
$(14,909,206)
|
$(1,239,810)
|
|||||
See the
accompanying notes to the audited consolidated financial
statements.
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
|
Consolidated
Statements of Cash Flows
|
||
|
For
the Year
|
For
the Year
|
|
|
Ended
|
Ended
|
|
|
September
30, 2008
|
September
30, 2007
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||
|
Net loss
|
$(6,770,322)
|
$(4,650,870)
|
|
Adjustments
to reconcile net loss
|
||
|
to
net cash (used in) operating activities:
|
||
|
Depreciation
and amortization
|
37,486
|
12,757
|
|
Option
expense
|
1,847,639
|
1,288,670
|
|
Interest
paid through conversion to stock
|
-
|
137,391
|
|
Beneficial
conversion expense
|
374,476
|
116,819
|
|
Issuance
of stock for debt extension
|
162,000
|
412,500
|
|
Warrants
|
868,231
|
4,497
|
|
Changes
in Asset and Liabilities
|
||
|
Miscellaneous
receivable
|
1,118
|
(1,118)
|
|
Prepaid
expenses
|
45,683
|
(39,531)
|
|
Accounts
payable
|
929,539
|
144,122
|
|
Accrued
payroll taxes and wages
|
(13,960)
|
(28,428)
|
|
Accrued
liabilities
|
12,033
|
-
|
|
Credit
card payable
|
77,533
|
14,772
|
|
Interest
payable
|
117,481
|
(62,893)
|
|
Deferred
revenue
|
(24,884)
|
(41,668)
|
|
Net
Cash Used in Operating Activities
|
(2,335,947)
|
(2,692,980)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||
|
Purchase
of fixed assets
|
(77,094)
|
(12,050)
|
|
Purchase
of intangibles
|
(138,848)
|
(85,514)
|
|
Net
Cash Used in Investing Activities
|
(215,942)
|
(97,564)
|
|
Repayment
of notes payable - related parties
|
-
|
(53,530)
|
|
Repayment
of notes payable
|
(591,998)
|
(67,642)
|
|
Proceeds
from notes payable and warrants
|
1,300,000
|
500,000
|
|
Issuance
of preferred stock
|
2,010,000
|
-
|
|
Issuance
of common stock
|
-
|
2,483,500
|
|
Net
Cash Provided by Financing Activities
|
2,718,002
|
2,862,328
|
|
Net
Increase in Cash and Cash Equivalents
|
166,113
|
71,784
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING
|
||
|
OF
PERIOD
|
808,163
|
736,379
|
|
CASH
AND CASH EQUIVALENTS AT END
|
||
|
OF
PERIOD
|
$974,276
|
$808,163
|
See the
accompanying notes to the audited consolidated financial
statements.
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
|
Consolidated
Statements of Cash Flows
|
||
|
For
the Year
|
For
the Year
|
|
|
Ended
|
Ended
|
|
|
September
30, 2008
|
September
30, 2007
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
|
||
|
INFORMATION
|
||
|
Interest
paid
|
$79,284
|
$114,253
|
|
Income
taxes paid
|
-
|
-
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH
|
||
|
FINANCING
ACTIVITIES
|
||
|
Conversion
of notes and interest for common stock
|
$-
|
$1,749,470
|
|
Issuance
of common stock for services
|
$-
|
$412,500
|
|
Issuance
of common stock for debt extension
|
$162,000
|
$-
|
See the
accompanying notes to the audited consolidated financial
statements.
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Summary of Significant Accounting Policies, Nature of Operations and Use of
Estimates
Description of
the Company. The terms “we”, “us”, “Ecology”, and “the
Company” refer to Ecology Coatings, Inc. We were originally incorporated in
Nevada on February 6, 2002 as OCIS Corp. (“OCIS”). OCIS completed a merger
with Ecology Coatings, Inc. a California corporation (“Ecology-CA”) on
July 26, 2007 (the “Merger”). In the Merger, OCIS changed its name from
OCIS Corporation to Ecology Coatings, Inc. We develop nanotechnology-enabled,
ultra-violet curable coatings that are designed to drive efficiencies and clean
processes in manufacturing. We create proprietary coatings with unique
performance and environmental attributes by leveraging our platform of
integrated nano-material technologies that reduce overall energy consumption and
offer a marked decrease in drying time. Ecology’s market consists electronics,
automotive and trucking, paper products and original equipment manufacturers
(“OEMs”).
Principles of
Consolidation. The consolidated financial statements include
all of our accounts and the accounts of our wholly owned subsidiary Ecology-CA.
All significant intercompany transactions have been eliminated in
consolidation.
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 affect the
amounts of 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.
Cash and Cash
Equivalents. We consider all highly liquid investments with
original maturities of three months or less to be cash and cash
equivalents.
Revenue
Recognition. Revenues from licensing contracts are recorded
ratably over the life of the contract. Contingency earnings such as royalty fees
are recorded when the amount can reasonably be determined and collection is
likely.
Loss Per
Share. Basic loss per share is computed by dividing the net
loss by the weighted average number of shares of common stock outstanding during
the period. Diluted loss per share is computed by dividing the net loss by the
weighted average number of shares of common stock and potentially dilutive
securities outstanding during the period. Potentially dilutive shares consist of
the incremental common shares issuable upon the exercise of stock options and
warrants and the conversion of convertible debt and convertible preferred stock.
Potentially dilutive shares are excluded from the weighted average number of
shares if their effect is anti-dilutive. We had a net loss for all periods
presented herein; therefore, none of the stock options and/or warrants
outstanding or stock associated with the convertible debt or with the
convertible preferred shares during each of the periods presented were included
in the computation of diluted loss per share as they were anti-dilutive. As of
September 30, 2008 and 2007, there were 12,031,220 and 3,792,080
potentially dilutive securities outstanding.
Income Taxes and
Deferred Income Taxes. We use the asset and liability approach
for financial accounting and reporting for income taxes. Deferred income taxes
are provided for temporary differences in the bases of assets and liabilities as
reported for financial statement purposes and income tax purposes and for the
future use of net operating losses. We have recorded a valuation allowance
against the net deferred income tax asset. The valuation allowance reduces
deferred income tax assets to an amount that represents management’s best
estimate of the amount of such deferred income tax assets that more likely than
not will be realized. We cannot be assured of future income to realize the net
deferred income tax asset; therefore, no deferred income tax asset has been
recorded in the accompanying consolidated financial statements.
Property and
Equipment. Property and equipment is stated at cost less
accumulated depreciation. Depreciation is recorded using the straight-line
method over the following useful lives:
|
Computer
equipment
|
3-10
years
|
|||
|
Furniture
and fixtures
|
3-7
years
|
|||
|
Test
equipment
|
5-7
years
|
|||
|
Software
Computer
|
3
years
|
|||
|
Marketing
and Promotional Video
|
3
years
|
|||
Repairs
and maintenance costs are charged to operations as incurred. Betterments or
renewals are capitalized as incurred.
We review
long lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets.
Patents. It
is our policy to capitalize costs associated with securing a patent. Costs
consist of legal and filing fees. Once a patent is issued, it will be amortized
on a straight-line basis over its estimated useful life. Six patents were issued
as of September 30, 2008 and are being amortized over 8 years.
Stock-Based
Compensation. Our stock option plans are subject to the
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
Share-Based Payment.
Under the provisions of SFAS No. 123(R), employee and director
stock-based compensation expense is measured utilizing the fair-value
method.
We
account for stock options granted to non-employees under SFAS No. 123(R) using
EITF 96-18, requiring the measurement and recognition of stock-based
compensation to consultants under the fair-value method with stock-based
compensation expense being charged to earnings on the earlier of the date
services are performed or a performance commitment exists.
Expense
Categories. Salaries and Fringe Benefits of $2,006,776 and
$1,409,840 for the years ended September 30, 2008 and 2007, respectively,
include wages paid to and insurance benefits for our officers and employees as
well as stock based compensation expense for those individuals. Professional
fees of $2,735,360 and $2,583,927 for the years ended September 30, 2008 and
2007, respectively, include amounts paid to attorneys, accountants, and
consultants, as well as the stock based compensation expense for those
services.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS 141(R)) and No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160).
SFAS 141(R) will significantly change how business acquisitions are accounted
for and will impact financial statements both on the acquisition date and in
subsequent periods. SFAS 160 will change the accounting and reporting for
minority interests, which will be re-characterized as non-controlling interests
and classified as a component of equity. SFAS 141(R) and SFAS 160 are effective
for both public and private companies for fiscal years beginning on or after
December 15, 2008 (October 1, 2009 for Ecology). Early adoption is
prohibited for both standards. SFAS 141(R) will be applied prospectively. SFAS
160 requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other requirements of SFAS 160
shall be applied prospectively. The adoption of SFAS 160 would have no impact on
our financial position or results of operations for the year ended September 30,
2008
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133”. This statement changes the disclosure requirements for derivative
instruments and hedging activities. SFAS 161 will become effective for us
beginning in the three months ending March 31, 2009. The adoption of this
pronouncement would have had no impact on our results or financial position as
of September 30, 2008.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are
presented
in conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). SFAS 162 will not have an impact on our financial
statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 163 will not have an impact on our
financial statements.
Note 2 — Concentrations
For the
years ended September 30, 2008 and 2007, we had one customer representing 100%
of revenues. As of September 30, 2008 and 2007, there were no amounts due from
this customer.
We
occasionally maintain bank account balances in excess of the federally insurable
amount of $100,000. The Company had cash deposits in excess of this limit on
September 30, 2008 and 2007 of $874,276 and $708,163, respectively.
Note
3 — Related Party Transactions
We have
borrowed funds for our operations from certain major stockholders, directors and
officers as disclosed below:
We have
an unsecured note payable due to a principal shareholder and former director
that bears interest at 4% per annum with principal and interest due on
December 31, 2008. As of September 30, 2008 and September 30, 2007,
the note had an outstanding balance of $110,500. The accrued interest on the
note was $8,407 and $3,836 as of September 30, 2008 and September 30, 2007,
respectively. The note carries certain conversion rights that allow the holder
to convert all or part of the outstanding balance into shares of our common
stock.
We have
an unsecured note payable due to a principal shareholder and former director
that bears interest at 4% per annum with principal and interest due on
December 31, 2008. As of September 30, 2008 and September 30, 2007,
the note had an outstanding balance of $133,000. The accrued interest on the
note was $10,125 and $4,617 as of September 30, 2008 and September 30,
2007, respectively. The note carries certain conversion rights that allow the
holder to convert all or part of the outstanding balance into shares of our
common stock.
We had an
unsecured note payable due to a majority shareholder, officer and director that
bore interest at 4% per annum with principal and interest due on
December 31, 2008. As of September 30, 2008 and September 30, 2007,
the note had an outstanding balance of $0. The unpaid accrued interest on the
note was $2,584 as of September 30, 2008 and September 30, 2007. The note
carries certain conversion rights which allow the holder to convert all or part
of the outstanding balance into shares of the our common stock..
Future
maturities of related party long-term debt as of September 30, 2008 are as
follows:
|
Year Ending September 30,
|
||||
|
2009
|
$
|
243,500
|
||
We have a
payable to a related party totaling $63,775 and $49,191 as of September 30, 2008
and September 39, 2007, respectively, included in accounts payable on the
consolidated balance sheets.
We also
paid consulting fees for contracted administrative support to a related party
company totaling $8,244 for the year ended September 30, 2007.
Note
4 — Notes Payable
We have
the following convertible notes:
|
September
30, 2008
|
September
30, 2007
|
|||||||
|
Convertible
note payable, 20% per annum interest rate, principal and interest payment
due December 31, 2007; unsecured, accrued interest of $130
outstanding at September 30, 2007, convertible at holder’s option
into common shares of the Company. Conversion price is $1.60 per share.
This note is stated net of an unamortized discount of $2,400 at September
30, 2007.
|
$-
|
708
|
||||||
|
Convertible
subordinated note payable, 7.5% per annum interest rate. Principal and
interest payment due December 31, 2007; unsecured, convertible at
holder’s option into common shares of the Company at a price per share of
$2.00. Accrued interest of $415 is outstanding as of September 30,
2007.
|
-
|
26,461
|
||||||
|
Convertible
note payable, 15% per annum interest rate, principal and interest payment
was due May 31, 2008; unsecured, convertible at holder’s option into
common shares of the Company at $1.60 per share. Accrued interest of
$15,367 and $4,268 was outstanding as of September 30, 2008 and
September 30, 2007, respectively. This note is stated net of
unamortized discount of $0 and $13,422 as of September 30, 2008 and
September 30, 2007, respectively. The holder made demand
upon the Company for repayment of this note on August 18, 2008. See Note
10-Subsequent Evens for further discussion.
|
94,104
|
145,873
|
||||||
|
Convertible
subordinated note payable, 25% per annum, unsecured, principal and
interest was due June 30, 2008; the Company extended the maturity for
30 days, to July 30, 2008 in exchange for warrants to purchase 15,000
shares of the Company’s common stock at $1.75 per share. Additionally, the
Company granted the note holder warrants to purchase 12,500 shares of the
Company’s common stock at $1.75 per share. All outstanding principal and
interest is convertible, at the note holder’s option, into the Company’s
common shares at the lower of the closing price of the shares on the last
trading date prior to conversion or at the average share price at which
the Company sells its debt or equity securities in its next public
offering or other private offering made pursuant to Section 4(2) of
the Securities Act of 1933, as amended. Demand for repayment was made on
September 8, 2008. See Note 10-Subsequent Events for further discussion.
Accrued interest of $7,329 was outstanding as of September 30, 2008. This
note is stated net of unamortized discount of $0 as of September 30,
2008.
|
$
|
50,000
|
$
|
—
|
||||
|
Convertible
subordinated note payable, 25% per annum, unsecured, principal and
interest was due June 30, 2008; the Company extended the maturity for
30 days, to July 30, 2008 in exchange for warrants to purchase 15,000
shares of the Company’s common stock at $1.75 per share. Additionally, the
Company granted the note holder warrants to purchase 125,000 shares of the
Company’s common stock at $1.75 per share. All outstanding principal and
interest is convertible, at the note holder’s option, into the Company’s
common shares at the lower of the closing price of the shares on the last
trading date prior to conversion or at the average share price at which
the Company sells its debt or equity securities in its next public
offering or other private offering made pursuant to Section 4(2) of
the Securities Act of 1933, as amended. Demand for repayment was made on
September 5, 2008. See Note 10-Subsequent Events for further discussion.
Accrued interest of $73,288 was outstanding as of September 30, 2008. This
note is stated net of unamortized discount of $0 as of September 30,
2008.
|
$
|
500,000
|
$
|
-
|
||||
|
Convertible
subordinated note payable, 25% per annum, unsecured, principal and
interest was due July 18, 2008. Additionally, the Company issued a warrant
to purchase 100,000 shares of the Company’s common stock at a price equal
to $.75 per share (the “Warrant”). The Warrant is exercisable immediately
and carries a ten (10) year term. The Holder may convert all or part
of the then-outstanding Note balance into shares at $.50 per share. If
applicable, the Company has agreed to include the Conversion Shares in its
first registration statement filed with the Securities and Exchange
Commission. Demand for repayment was made on August 27, 2008. Accrued
interest of $10,685 was outstanding as of September 30, 2008. This note is
stated net of unamortized discount of $0 as of September 30,
2008.
|
150,000
|
$
|
-
|
|||||
|
Convertible
subordinated note payable, 25% per annum, unsecured, principal and
interest was due August 10, 2008. Additionally, the Company issued a
warrant to purchase 100,000 shares of the Company’s common stock at a
price equal to $.50 per share (the “Warrant”). The Warrant is exercisable
immediately and carries a ten (10) year term. The Holder may convert
all or part of the then-outstanding Note balance into shares at $.50 per
share. If applicable, the Company has agreed to include the Conversion
Shares in its first registration statement filed with the Securities and
Exchange Commission. Demand for repayment was made on August 27, 2008.
Accrued interest of $5,548 was outstanding as of September 30, 2008. This
note is stated net of unamortized discount of $0 as of September 30,
2008.
|
100,000
|
$
|
173,042
|
|||||
|
$894,104
|
$173,042
|
|||||||
Future
maturities of the notes payable as of September 30, 2008 are as
follows:
|
Year Ending
|
||||
|
2009
|
$
|
894,104
|
||
The above
notes payable have conversion rights and detachable warrants. These Notes may be
converted for the principal balance and any unpaid accrued interest to Common
Stock. In accordance with guidance issued by the FASB and the Emerging Issue
Task Force (“EITF”) regarding the Accounting for Convertible Securities with a
Beneficial Conversion Feature (EITF No. 98-5), the Company recognized an
embedded beneficial conversion feature present in these Notes. The Company
allocated the proceeds based on the fair value of $1,767,881to the warrants. The
warrants are exercisable through March 31, 2018 and the fair value was
amortized to interest expense over the term of the Notes.
Note
5 — Commitments and Contingencies
Consulting
Agreements. On July 15, 2006, we entered into an
agreement that provides for six months of international business development
consulting services. We agreed to pay the consultant $15,000 per month payable
in cash and an additional $15,000 per month payable in shares of our common
stock at a
share
price of $2.00. We further agreed to pay the consultant a fee of 2% of any
royalties that we receive pursuant to royalty agreements that are a direct
result of the consultant’s material efforts under the consulting agreement. In
addition, we agreed to pay the consultant a fee of 2% of any net sales that we
receive pursuant to joint venture agreements that are a direct result of the
consultant’s material efforts under the consulting agreement. We will pay the
fees to the consultant for the term of any royalty or joint venture agreements
for a period of time not to exceed a period of 48 months. The agreement was
extended for six month increments in January 2007, July 2007, and January
2008.
On
February 1, 2007, we amended an agreement with a consultant. The consultant
provides various business and financial consulting services, including but not
limited to assistance with raising capital. The original agreement was dated
June 1, 2006 and called for $12,500 to be paid to the consultant in
18 monthly payments commencing February 1, 2007. The amendment called
for additional monthly payments of $9,250 on February 1, 2007, $9,375 on
March 1, 2007, and $9,000 per month from April 1, 2007 and continuing
through September 1, 2007. This agreement was further amended on
December 28, 2007 to extend the agreement until November 1, 2010. The
effective date of the agreement was November 1, 2007. Additionally, the
agreement calls for monthly payments of $16,000. Finally, the agreement calls
for an option grant of 100,000 shares at an exercise price of $3.05 per share.
25,000 options will vest on June 28, 2008, 25,000 options will vest on
December 28, 2008, 25,000 options will vest on June 28, 2009, and
25,000 options will vest on December 28, 2009. All of the options expire on
December 27, 2017. This agreement was terminated on July 31, 2008. See the
caption Contingencies under this Note for further discussion.
On
May 1, 2007, we entered into an agreement with a consultant to provide
information system consulting services. The agreement calls for six monthly
payments of $5,000 plus reimbursement for any out of pocket costs. Additionally,
options to purchase 1,000 shares of common stock at $2.00 per share were issued
to the consultant, with additional options to purchase 500 shares upon the
achievement of certain performance measures. The options are restricted for 12
months and expire 10 years from date of issuance. On October 8, 2007,
we extended the contract with the consultant for six months, and, on May 8,
2008, extended the contract for an additional six months. The expiration date is
now November 8, 2008 and provides for monthly payments of $5,000. This agreement
was terminated on July 31, 2008. See the caption Contingencies under this Note
for further discussion.
On
June 1, 2007, we entered into a consulting agreement with an individual who
serves as the chairman of Ecology’s business advisory board. The agreement
expires June 1, 2009. Ecology will pay the consultant $11,000 per month.
Additionally, Ecology granted the consultant 200,000 options to purchase shares
of our common stock for $2.00 per share. Of these options, 50,000 options vest
on December 1, 2007, 50,000 options vest on June 1, 2008, 50,000
options vest on December 1, 2008, and the remaining 50,000 options vest on
June 1, 2009. Additionally, we will reimburse the consultant for all
reasonable expenses incurred by the consultant in the conduct of Ecology
business.
On
July 26, 2007, we entered into a consulting agreement with a company owned
by two former officers and directors of OCIS Corporation. The terms of the
agreement call for the transfer of the $100,000 standstill deposit paid to OCIS
as a part of a total payment of $200,000. The balance will be paid in equal
installments on the first day of each succeeding calendar month until paid in
full. The agreement calls for the principals to provide services for
18 months in the area of investor relations programs and initiatives;
facilitate conferences between Ecology and members of the business and financial
community; review and analyze the public securities market for our securities;
and introduce Ecology to broker-dealers and institutions, as
appropriate.
On
December 13, 2007, we entered into an agreement with a consultant to
provide investor relations services. The agreement expires on December 13,
2008. The consultant will bill against a non-refundable monthly retainer of
$5,000. The consultant charges on an hourly basis ranging from $35 to $225 per
hour. The term of the contract is 12 months.
On
April 2, 2008, we entered into a letter agreement with an individual to
become chairman our Scientific Advisory Board. The letter agreement provides
that we will grant the individual options to purchase 100,000 shares of our
common stock. Each option is exercisable at a price equal to the
final
closing
price as quoted on the Over The Counter Bulletin Board on April 3, 2008.
The options vest as follows: 25,000 immediately upon grant; 25,000 on
October 3, 2008; 25,000 on April 3, 2009, and the remaining 25,000 on
October 3, 2009. The options will all expire on April 3,
2018.
On
April 10, 2008, we entered into an agreement with a consultant to assist us
in securing equity and/or debt financing. The agreement called for payment of
$5,000 at inception and an additional payment of $5,000 on May 1, 2008. The
agreement was terminable upon notice of either party and was terminated on May
31, 2008.
On
September 17, 2008, we entered into an agreement with an entity controlled by an
investor in and a director of Ecology Coatings, Inc. This agreement is for
business and marketing consulting services. This agreement expires on September
17, 2010 and calls for monthly payments of $20,000, commissions on licensing
revenues equal to 15% of said revenues, commissions on product sales equal to 3%
of said sales, and a grant of options to purchase 531,000 shares of our common
stock for $1.05 per share. 177,000 of the options become exercisable on March
17, 2009, 177,000 of the options become exercisable on September 17, 2009, and
177,000 of the options become exercisable on March 17, 2010. The options expire
on December 31, 2020.
On
September 17, 2008, we entered into an agreement with our Chairman of the Board
of Directors under which the Chairman will provide advice and consultation to us
regarding strategic planning, business and financial matters, and revenue
generation. The agreement expires on September 17, 2011 and calls for monthly
payments of $16,000, commissions on licensing revenues equal to 15% of said
revenues, commissions on product sales equal to 3% of said sales, $1,000 per
month to pay for office rent reimbursement, expenses associated with the
consultant’s participation in certain conferences, information technology
expenses incurred by the consultant in the performance of duties relating to the
Company, and certain legal fees incurred by the consultant during his tenure as
our Chief Executive Officer.
On
September 17, 2008 we entered into an agreement with a shareholder under which
that shareholder will act as a consultant to us. Under this agreement, the
shareholder will provide business development services for which he will receive
commissions on licensing revenues equal to 15% of said revenues and commissions
on product sales equal to 3% of said sales and reimbursement for information
technology expenses incurred by the consultant in the performance of duties
relating to the Company. This agreement expires on September 17,
2011.
Employment
Agreements. On October 30, 2006, we entered into an
employment agreement with an officer that expires on October 30, 2008.
Pursuant to the agreement, the officer is paid an annual base salary of
$160,000. We also granted the officer 321,217 options to purchase its common
stock at $2.00 per share. Twenty-five percent (25%) of the options vested on
November 1, 2007 and the remaining seventy-five percent (75%) will vest on
November 1, 2008. The options expire on November 1, 2016.
On
November 1, 2006, we entered into an employment agreement with an officer
that expires on November 1, 2008. Pursuant to the agreement, the officer
was paid an annual base salary of $100,000. We also granted the officer 150,000
options to acquire its common stock at $2.00 per share. The options will all
vest on November 1, 2008. The options expire on November 1, 2016. On
July 1, 2007, we amended this employment agreement. The amended agreement
will expire on November 1, 2009, and calls for an annual salary $140,000, a
one time bonus of $12,500 and the grant of 87,500 options to purchase our common
stock at $2.00 per share. Upon grant, 25,000 of the options vested, 37,500
options will vest on July 1, 2008, and 25,000 options will vest on
July 1, 2009. All of the options expire on July 1, 2017. This employee
resigned effective July 31, 2008.
On
January 1, 2007, we entered into an employment agreement with an officer
that expires on January 1, 2012. Upon expiration, the agreement calls for
automatic one-year renewals until terminated by either party with thirty days
written notice. Pursuant to the agreement, the officer will be paid an annual
base salary of $180,000 in 2007; an annual base salary of $200,000 for the years
2008 through 2011; and an annual base salary of $220,000 for 2012. In addition,
450,000 options were granted to the officer to acquire our common stock at $2.00
per share. 150,000 options will vest on January 1, 2010, 150,000 options
will vest on January 1, 2011 and the remaining 150,000 options will vest
January 1, 2012. The options expire on January 1, 2022.
On
February 1, 2007, we entered into an employment agreement with an officer
that expired on February 1, 2008. Pursuant to the agreement, the officer
was paid an annual base salary of $120,000 and was granted 25,000 options to
acquire our common stock at $2.00 per share. All of the options vested on
February 1, 2008. The options expire on February 1, 2017. On
February 1, 2008, we entered into a new agreement with this officer. This
new agreement expires on February 1, 2010 and calls for an annual salary of
$140,000. Further, the officer was granted 50,000 options to purchase shares of
our common stock at $3.00 per share. 25,000 options vest on February 1,
2009 and the remaining 25,000 options vest on February 1, 2010. This
agreement was modified effective October 1, 2008. Under the modified agreement,
the employee receives an annual base salary of $70,000, subject to increase to
$140,000 upon the achievement by the Company of revenues of at least $100,000.
Additionally, we granted the employee options to purchase 10,000 shares of our
common stock at $1.05 per share. The options become exercisable on September 17,
2009 and expire on September 17, 2018.
On
May 21, 2007, we entered into an employment agreement with an officer that
expires on May 21, 2009. Pursuant to the agreement, the officer will be
paid an annual base salary of $160,000 and was granted 300,000 options to
acquire our common stock at $2.00 per share. 75,000 of the options vested on
May 21, 2008, and 225,000 of the options will vest on May 21, 2009.
The options expire on May 21, 2017. On October 1, 2007, the Company
modified the employment agreement to increase the salary from $160,000 to
$210,000.
On
December 28, 2007, we entered into an employment agreement with our
Chairman of the Board of Directors and Chief Executive Officer. Under this
agreement, he will continue to be paid at a rate of $320,000 per year through
August 8, 2010. This agreement was terminated by consent of both parties on
September 17, 2008. See also Consulting Agreements under this Note
5.
On August
11, 2008, we employed, on an at-will basis, an individual to serve as Vice
President and General Counsel. The letter documenting the employment calls for a
probationary period of 90 days and stipulates a salary of $150,000 per
year.
On
September 15, 2008, we employed, on an at-will basis, an individual to serve as
Chief Executive Officer. The letter documenting the employment calls for a
probationary period of 90 days and stipulates a salary of $200,000 per year.
Additionally, we issued options to the individual to purchase 330,000 shares of
our common stock at $1.05 per share. 110.000 of the options become exercisable
on March 15, 2010, 110,000 of the options become exercisable on September 15,
2010, and 110,000 of the options become exercisable on March 15, 2011. The
options expire on September 15, 2018.
Contingencies. On
September 11, 2008, we filed a lawsuit against a consultant in the Circuit Court
of Oakland County, Michigan for violation of fiduciary duties. See Note 10 –
Subsequent Events for further discussion.
A lawsuit
was filed against us on September 16, 2008 in the Circuit Court of Oakland
County, Michigan for breach of contract by a consultant previously contracted by
the Company to provide information technology services. The suit seeks damages
in excess of $42,335 plus court costs and attorney fees. See Note 10 –
Subsequent Events for further discussion. Our financial statements
reflect an accrual for the amount of the damages.
Lease
Commitments.
|
a.
|
On
August 1, 2005, we leased our office facilities in Akron, Ohio for a
rent of $1,800 per month. The lease expired July 1, 2006 and was
renewed under the same terms through August 31, 2007. The Company now
leases that property on a month-to-month basis for the same rent. Rent
expense for the years ended September 30, 2008 and 2007 was $21,600 and
$21,600, respectively.
|
||
|
b.
|
On
September 1, 2006, we leased our office space in Bloomfield Hills,
Michigan for monthly rent of $1,800. A new lease was executed on
April 1, 2007 with monthly payments of $3,200. The lease is on a
month-to-month basis until terminated by tenant or landlord upon
60 days notice. The monthly lease amount was reduced to $2,400 on
September 1, 2007. We vacated this space on August 31, 2008 and have
no further obligation under the lease. Rent expense for the years ended
September 30, 2008 and 2007 was $26,400 and $28,850,
respectively
|
||
|
c.
|
On
September 1, 2008, we executed a lease for our office space in Auburn
Hills, Michigan. The lease calls for average monthly rent of $2,997 and
expires on September 30, 2010. The landlord is a company owned by a
shareholder and director of Ecology.
|
||
|
d.
|
On
January 9, 2006, we leased computer equipment with 24 monthly
payments of $147.
We
recognized expense of $588 and $1,764 for the years ended
September 30, 2008 and 2007, respectively, related to this
lease.
|
||
|
e.
|
On
April 17, 2006, we leased computer equipment with 36 monthly
payments of $75. We recognized expense of $901 for each of the
years ended September 30, 2008 and September 30, 2007 related to
this lease.
|
||
|
f.
|
On
June 17, 2007, we leased computer equipment with 36 monthly
payments of $42. We recognized expense of $504 and $126 for the years
ended September 30, 2008 and 2007, respectively, related to
this lease.
|
||
|
g.
|
On
July 17, 2007, we leased computer equipment with 36 monthly
payments of $44. We recognized expense of $528 and $88 for the
years ended September 30, 2008 and 2007, respectively, related to this
lease.
|
||
|
h.
|
On
September 22, 2008, we leased a multi-purpose copier with 36 monthly
payments of $526. The first payment was due November 3,
2008.
|
Minimum
future rental payments under the above operating leases as of September 30,
2008 are as follows:
|
Year
Ending September 30,
|
||||
|
2009
|
$
|
42,589
|
||
|
2010
|
44,364
|
|||
|
2011
|
6,312
|
|||
|
$
|
93,265
|
|||
Note
6 — Equity
Reverse
Merger. A reverse merger with OCIS Corporation was consummated
on July 26, 2007. The shareholders of Ecology acquired 95% of the voting stock
of OCIS. OCIS had no significant operating history. The purpose of the
acquisition was to provide Ecology with access to the public equity markets in
order to more rapidly expand its business operations. The consideration to the
shareholders of OCIS was approximately 5% of the stock, at closing, of the
successor company. The final purchase price was agreed to as it reflects the
value to Ecology of a more rapid access to the public equity markets than a more
traditional initial public offering.
Warrants. On
December 16, 2006, we issued warrants to purchase 500,000 shares of our
stock at $2.00 per share. The warrants were issued to the holder of the
$1,500,000 convertible note. The warrants vested on December 17, 2007. The
weighted average remaining life of the warrants is 8.5 years.
On
February 6, 2008, we issued warrants to purchase 262,500 shares of our
common stock at the lower of $2.00 per share or at the average price per share
at which the Company sells its debt or and/or equity in its next private or
public offering. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.5 years.
On
March 1, 2008, we issued warrants to purchase 137,500 shares of our common
stock at the lower of $2.00 per share or at the average price per share at which
the Company sells its debt or and/or equity in its next private or public
offering. The warrants vested upon issuance. The weighted average remaining life
of the warrants is 9.5 years.
On June
9, 2008, we issued warrants to purchase 210,000 shares of our common stock at
the lower of $2.00 per share or at the average price per share at which the
Company sells its debt or and/or equity in its next private or public offering.
The warrants vested upon issuance. The weighted average remaining life of the
warrants is 9.8 years.
On June
21, 2008, we issued warrants to purchase 100,000 shares of our common stock at
the $.75 per share. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.8 years.
On July
14, 2008, we issued warrants to purchase 100,000 shares of our common stock at
$.50 per share. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.8 years.
On July
14, 2008, we issued warrants to purchase 30,000 shares of our common stock at
$1.75 per share. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.8 years.
We issued
warrants as shown below to the holder of our convertible preferred
stock.
|
Strike
|
Date
|
Expiration
|
||||
|
Number
|
Price
|
Issued
|
Date
|
|||
|
100,000
|
$ 0.75
|
July
28, 2008
|
July
28, 2018
|
|||
|
5,000
|
$ 0.75
|
August
20, 2008
|
August
20, 2018
|
|||
|
25,000
|
$ 0.75
|
August
27, 2008
|
August
27, 2018
|
|||
|
500,000
|
$ 0.75
|
August
29, 2008
|
August
29, 2018
|
|||
|
375,000
|
$ 0.75
|
September
26, 2008
|
September
26, 2018
|
Shares. On
February 5, 2008, we entered into an agreement with a convertible note
holder. The amount owed the note holder, including principal and accrued
interest, totaled $142,415 and the note matured on December 31, 2007 (See
Note 4). The maturity date of the note was extended to May 31, 2008, with
interest continuing at 15% per annum. In consideration of this extension, we
issued 60,000 shares of our common stock to the note holder and granted the
holder certain priority payment rights.
On August
28, 2008, we entered into an agreement with an investor to issue up to
$5,000,000 in convertible preferred securities. The securities accrue cumulative
dividends at 5% per annum and the entire amount then outstanding is convertible
at the option of the investor into shares of our common stock at $.50 per share.
The preferred securities carry “as converted” voting rights. As of September 30,
2008, we had issued 2,010 of these convertible preferred shares. In the event
that we sell additional convertible preferred securities under this agreement,
we will issue attached warrants (500 warrants for each $1,000 convertible
preferred share sold). The warrants will be immediately exercisable, expire in
five years, and entitle the investor to purchase one share of our common stock
at $.75 per share for each warrant issued.
Note
7 — Stock Options
Stock Option
Plan. On May 9, 2007, we adopted a stock option plan and
reserved 4,500,000 shares for the issuance of stock options or for awards of
restricted stock. All prior grants of options were included under this plan. The
plan provides for incentive stock options, nonqualified stock options, rights to
restricted stock and stock appreciation rights. Eligible recipients are
employees, directors, and consultants. Only employees are eligible for incentive
stock options. The vesting terms are set by the Board of Directors. All options
expire 10 years after issuance.
The
Company granted non-statutory options as follows during the year ended September
30, 2008:
|
Weighted
|
||||||||||||||||
|
Weighted
|
Average
|
|||||||||||||||
|
Average
|
(Remaining)
|
|||||||||||||||
|
Exercise
Price
|
Number
of
|
Contractual
|
Aggregate
|
|||||||||||||
|
per
Share
|
Options
|
Term
|
Fair
Value
|
|||||||||||||
|
Outstanding
as of September 30, 2006
|
$
|
2.00
|
150,000
|
8.7
|
$
|
184
|
||||||||||
|
Granted
|
$
|
2.04
|
3,036,119
|
9.5
|
$
|
3,681,425
|
||||||||||
|
Exercised
|
---
|
---
|
---
|
---
|
||||||||||||
|
Forfeited
|
---
|
---
|
---
|
---
|
||||||||||||
|
Excersisable
|
$
|
2.00
|
375,800
|
9.8
|
$
|
552,540
|
||||||||||
|
Outstanding
as of September 30, 2007
|
$
|
2.03
|
3,186,119
|
9.5
|
$
|
3,681,609
|
||||||||||
|
Granted
|
$
|
1.49
|
1,456,000
|
10.3
|
$
|
1,329,891
|
||||||||||
|
Exercised
|
—
|
—
|
—
|
—
|
||||||||||||
|
Forfeited
|
—
|
—
|
—
|
—
|
||||||||||||
|
Outstanding
as of September 30, 2008
|
$
|
1.83
|
4,642,119
|
9.2
|
$
|
5,011,500
|
||||||||||
|
Exercisable
|
$
|
2.09
|
1,605,228
|
8.4
|
$
|
1,966,657
|
||||||||||
1,605,228
of the options were exercisable as of September 30, 2008. The options are
subject to various vesting periods between June 26, 2007 and
January 1, 2012. The options expire on various dates between June 1,
2016 and January 1, 2022. Additionally, the options had no intrinsic value
as of June 30, 2008. Intrinsic value arises when the exercise price is lower
than the trading price on the date of grant.
Our stock
option plans are subject to the provisions of Statement of Financial Accounting
Standards (“SFAS”) Number 123(R), Accounting for Stock-Based
Compensation. Under the provisions of SFAS Number 123(R), employee and
director stock-based compensation expense is measured utilizing the fair-value
method.
We
account for stock options granted to non-employees under SFAS Number 123(R)
using EITF 96-18 requiring the measurement and recognition of stock-based
compensation to consultants under the fair-value method with stock-based
compensation expense being charged to earnings on the earlier of the date
services are performed or a performance commitment exists.
On
September 15, 2008, the Board of Directors approved a change in exercise price
on option grants previously made to two officers. This change was effective for
options to purchase 375,000 shares of our common stock. The new exercise price
is $1.05 per share. The weighted average of the price of the options at original
issuance was $2.13. This change resulted in a total incremental compensation
increase of $240,641, combined, for the two officers.
In
calculating the compensation related to employee/consultants and directors stock
option grants, the fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model and the following weighted average
assumptions:
|
Dividend
|
None
|
|||
|
Expected
volatility
|
91.69%-101.73
|
%
|
||
|
Risk
free interest rate
|
1.50%-5.11
|
%
|
||
|
Expected
life
|
5.5
years
|
|||
The
expected volatility was derived utilizing the price history of another publicly
traded nanotechnology company. This company was selected due to the fact that it
is widely traded and is in the same equity sector as our Company.
The risk
free interest rate figures shown above contain the range of such figures used in
the Black-Scholes calculation. The specific rate used was dependent upon the
date of option grant.
Based
upon the above assumptions and the weighted average $1.83 exercise price, the
options outstanding at September 30, 2008 had a total unrecognized compensation
cost of $1,582,378 which will be recognized over the remaining weighted average
vesting period of .7 years. Options cost of $1,847,639 was recorded as an
expense for the year ended September 30, 2008 of which $623,518 was recorded as
compensation expense and $1,224,121 was recorded as consulting
expense.
The
Company has incurred losses since operations commenced in 1990. The
Company has a net operating loss carry forward for income tax purposes of
approximately $7,464,662. The total loss carry forward expiring on September 30,
2028 is $3,109,937, expiring on September 30, 2027 is $3,488,598, expiring on
September 30, 2026 is $427,056, expiring on September 30, 2025 is $203,978,
expiring on September 30, 2024 is $189,988, expiring on September 30, 2023 is $
25,364 and expiring on September 30, 2022 is $19,741. The Company
changed its year-end to September 30th from
February 28th
effective in fiscal 2006.
Deferred
income taxes arise from timing differences resulting from income and expense
items reported for financial accounting and tax purposes in different
periods.
The
principal sources of timing differences are different accrual versus cash
accounting methods used for financial accounting and tax purposes; the timing of
the utilization of the net operating losses, and different book versus tax
depreciation methods.
As of
September 30, 2008 and 2007, the deferred tax asset based on a 34% tax bracket
consists of the following:
|
2008
|
2007
|
||||
|
Assets:
|
|||||
|
Federal
loss carry forwards
|
$2,537,985
|
$1,481,936
|
|||
|
Cash
basis accounting differences
|
451,603
|
89,925
|
|||
|
Depreciation
timing differences
|
939
|
||||
|
Liability:
|
|||||
|
Depreciation
timing differences
|
(804)
|
-
|
|||
|
Deferred
tax asset
|
2,988,784
|
1,572,800
|
|||
|
Valuation allowance
|
(2,988,784)
|
(1,572,800)
|
|||
|
Net
deferred tax asset
|
$-
|
$-
|
|||
The tax
benefit from net operating losses and differences in timing differ from the
federal statutory rate primarily due to the $1,415,984 change in the deferred
tax asset valuation allowance from September 30, 2007.
Note
9 — Going Concern
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. For the years ended September 30, 2008
and 2007, we incurred net losses of ($6,770,322) and ($4,560,870),
respectively. As of September 30, 2008 and September 30, 2007, we had
stockholders’ deficit and equity of ($1,239,810) and $290,287,
respectively.
Our
continuation as a going concern is dependent upon our ability to generate
sufficient cash flow to meet our obligations on a timely basis, to obtain
additional financing or refinancing as may be required, to develop commercially
viable products and processes, and ultimately to establish profitable
operations. We have financed operations through operating revenues and,
primarily, through the issuance of equity securities and debt. Until we are able
to generate positive operating cash flows, additional funds will be required to
support operations. We believe that cash investments subject to a securities
purchase agreement with a investor will be sufficient to enable us to continue
as a going concern through the fiscal year ending September 30, 2009. This
securities purchase agreement does not legally bind the investor to make the
investments and there can be no assurances that the investments will continue.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to
continue as a going concern. Please see also Note 10 — Subsequent
Events.
Note
10 — Subsequent Events
On
November 6, 2008, we settled the lawsuit filed against us on September 16, 2008
by a consultant for breach of contract. We paid $26,500 in full settlement of
all claims. This amount was included in Accounts Payable at September 30,
2008.
On
November 11, 2008, we settled the lawsuit we filed against one of two
consultants on September 11, 2008 for breach of contract. Under the terms of the
settlement, we will pay the consultant $7,500 per month for twelve months under
a new consulting agreement and will pay $15,000 in 12 equal monthly payments of
$1,250 to the consultant’s attorney. Additionally, we will pay the
consultant a commission of 15% for licensing revenues and 3% for product sales
that the consultant generates for the Company.
On
November 11, 2008, we paid in full the principal and accrued interest on the
note payable shown in Note 4 with a September 30, 2008 principal balance of
$94,104. In addition, we issued warrants to the note holder for the purchase of
2,000,000 shares of our common stock at $.50 per share and reset the strike
price of warrants and options previously issued to the note holder to purchase
1,500,000 shares of our common stock at $2 per share. The new price is $.80 per
share.
On
November 13, 2008, we reached agreement with a convertible note holder. The note
holder made demand for payment on September 5, 2008. We made a payment of
$100,000 on October 6, 2008 on the outstanding principal and interest on that
date. On November 13, we made another payment of $100,000 against the
outstanding principal and interest on that date. Further, we agreed to make
additional payments on the remaining principal and interest. These payments will
be $100,000 for each month beginning in December of 2008 and continuing until
all principal and interest has been paid. This note payable is shown in Note 4
with a September 30, 3008 principal balance of $500,000.
On
November 14, 2008, we reached agreement with a convertible note holder. The note
holder made demand for payment on September 8, 2008. We made a payment of
$10,000 on October 8, 2008 on the outstanding principal and interest on that
date. On November 14, we made another payment of $10,000 against the outstanding
principal and interest on that date. Further, we agreed to make additional
payments on the remaining principal and interest. These payments will be $10,000
for each month beginning in December of 2008 and continuing until all principal
and interest has been paid. This note payable is shown in Note 4 with a
September 30, 3008 principal balance of $50,000.
On
December 2, 2008, our Board of Directors authorized the addition of 1,000,000
shares of our common stock to the 2007 Plan.
On
December 3, 2008, we terminated the employment agreement with our Chief
Financial Officer. The Chief Financial Officer continues to be employed by the
Company in that capacity as an at-will employee.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
Ecology
Coatings, Inc.
We have
audited the accompanying consolidated balance sheets of Ecology Coatings, Inc.
and Subsidiary (the “Company”) as of September 30, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity (deficit)
and cash flows for the years 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
audits.
We
conducted our audits 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 consolidated 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
audits provide 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 Ecology Coatings, Inc. and
Subsidiary as of September 30, 2008 and 2007, and the results of their
operations and their cash flows for the years 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 9 to
the consolidated financial statements, the Company’s recurring losses, negative
cash flows from operations and net capital deficiency raise substantial doubt
about its ability to continue as a going concern. Management’s plans
as to these matters are also discussed in Note 9. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ UHY
LLP
Southfield,
Michigan
December
19, 2008
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
|
Consolidated
Balance Sheets
|
||
|
ASSETS
|
||
|
September
30, 2008
|
September
30, 2007
|
|
|
Current
Assets
|
||
|
Cash
and cash equivalents
|
$974,276
|
$808,163
|
|
Miscellaneous
receivable
|
-
|
1,118
|
|
Prepaid
expenses
|
25,206
|
70,888
|
|
Total
Current Assets
|
999,482
|
880,169
|
|
Property
and Equipment
|
||
|
Computer
equipment
|
22,933
|
11,285
|
|
Furniture
and fixtures
|
18,833
|
1,565
|
|
Test
equipment
|
7,313
|
7,313
|
|
Signs
|
213
|
213
|
|
Software
|
1,332
|
1,332
|
|
Video
|
48,177
|
-
|
|
Total
fixed assets
|
98,801
|
21,708
|
|
Less:
Accumulated depreciation
|
(22,634)
|
(3,794)
|
|
Property
and Equipment, net
|
76,167
|
17,914
|
|
Other
|
||
|
Patents-net
|
421,214
|
302,575
|
|
Trademarks-net
|
5,029
|
3,465
|
|
Total
Other Assets
|
426,243
|
306,040
|
|
Total
Assets
|
$1,501,892
|
$1,204,123
|
See the
accompanying notes to the audited consolidated financial
statements.
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
|
Consolidated
Balance Sheets
|
||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||
|
September
30, 2008
|
September
30, 2007
|
|
|
Current
Liabilities
|
||
|
Accounts
payable
|
$1,359,328
|
$429,790
|
|
Credit
card payable
|
92,305
|
14,772
|
|
Deferred
revenue
|
-
|
24,884
|
|
Accrued
liabilities
|
12,033
|
-
|
|
Payroll
taxes payable
|
-
|
1,459
|
|
Accrued
wages
|
-
|
12,500
|
|
Franchise
tax payable
|
800
|
800
|
|
Interest
payable
|
133,332
|
15,851
|
|
Convertible
notes payable
|
894,104
|
170,280
|
|
Notes
payable - related party
|
243,500
|
243,500
|
|
Preferred
dividends payable
|
6,300
|
-
|
|
Total
Current Liabilities
|
2,741,702
|
913,836
|
|
Total
Liabilities
|
2,741,702
|
913,836
|
|
Commitments
and Contingencies (Note 5)
|
||
|
Stockholders'
Equity (Deficit)
|
||
|
Preferred
Stock - 10,000,000 $.001 par value shares
|
||
|
authorized;
2,010 and 0 shares issued and outstanding
|
||
|
as
of September 30, 2008 and September 30, 2007, respectively
|
2
|
-
|
|
Common
Stock - 90,000,000 $.001 par value shares
|
||
|
authorized;
32,210,684 and 32,150,684
|
||
|
outstanding
as of September 30, 2008 and
|
||
|
September
30, 2007, respectively
|
32,234
|
32,174
|
|
Additional
paid in capital
|
13,637,160
|
6,165,282
|
|
Accumulated
Deficit
|
(14,909,206)
|
(5,907,169)
|
|
Total
Stockholders' Equity (Deficit)
|
(1,239,810)
|
290,287
|
|
Total
Liabilities and Stockholders'
|
||
|
Equity
(Deficit)
|
$1,501,892
|
$1,204,123
|
See the
accompanying notes to the audited consolidated financial
statements.
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
|
Consolidated
Statements of Operations
|
||
|
For
the Year Ended
|
For
the Year Ended
|
|
|
September
30, 2008
|
September
30, 2007
|
|
|
Revenues
|
$25,092
|
$41,668
|
|
Salaries
and fringe benefits
|
2,006,776
|
1,409,840
|
|
Professional
fees
|
2,735,360
|
2,583,927
|
|
Other
general and administrative costs
|
637,668
|
463,199
|
|
Operating
Loss
|
(5,354,712)
|
(4,415,298)
|
|
Other
Income (Expenses)
|
||
|
Interest
income
|
5,784
|
20,940
|
|
Interest
expense
|
(1,421,394)
|
(256,512)
|
|
Total
Other (Expenses), net
|
(1,415,610)
|
(235,572)
|
|
Net
Loss
|
$(6,770,322)
|
$(4,650,870)
|
|
Basic
and diluted net loss per share
|
$(0.21)
|
$(0.16)
|
|
Basic
and diluted weighted average of
|
||
|
common
shares outstanding
|
32,189,864
|
29,178,144
|
See the
accompanying notes to the audited consolidated financial
statements.
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||||||||||||
|
Statement
of Changes in Shareholders’ Equity (Deficit) for the Years Ended
September 30, 2008 and 2007
|
||||||||||||
|
Additional
|
Total
|
|||||||||||
|
Paid
In
|
Accumulated
|
Stockholders'
|
||||||||||
|
Common
Stock
|
Preferred
Stock
|
Capital
|
Deficit
|
Equity
|
||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
(Deficit)
|
||||||||
|
Balance
at September 30, 2006
|
28,200,000
|
$142,000
|
-
|
$-
|
$
-
|
$(1,256,299)
|
$(1,114,299)
|
|||||
|
Beneficial
conversion feature on convertible debt
|
-
|
-
|
-
|
-
|
116,819
|
-
|
116,819
|
|||||
|
Stock
option expense
|
-
|
-
|
-
|
-
|
1,288,670
|
-
|
1,288,670
|
|||||
|
Warrants
issued with debt
|
-
|
-
|
-
|
-
|
4,497
|
-
|
4,497
|
|||||
|
Issuance
of stock, net of issuance costs of $10,789
|
3,950,684
|
4,645,470
|
-
|
-
|
-
|
-
|
4,645,470
|
|||||
|
Creation
of par value stock
|
-
|
(4,755,296)
|
-
|
-
|
4,755,296
|
-
|
-
|
|||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(4,650,870)
|
(4,650,870)
|
|||||
|
Balance
at September 30, 2007
|
32,150,684
|
$32,174
|
-
|
$-
|
$6,165,282
|
$(5,907,169)
|
$290,287
|
|||||
|
Issuance
of stock for debt extension
|
60,000
|
60
|
-
|
-
|
161,940
|
-
|
162,000
|
|||||
|
Issuance
of warrants for debt extension
|
-
|
-
|
-
|
-
|
26,343
|
-
|
26,343
|
|||||
|
Issuance
of preferred stock
|
-
|
2,010
|
2
|
1,500,585
|
-
|
1,500,585
|
||||||
|
Beneficial
conversion feature on preferred stock
|
-
|
-
|
-
|
-
|
2,225,415
|
(2,225,415)
|
-
|
|||||
|
Warrants
issued with preferred stock
|
-
|
-
|
-
|
-
|
509,415
|
-
|
509,415
|
|||||
|
Beneficial
conversion feature on convertible debt
|
-
|
-
|
-
|
-
|
358,654
|
-
|
358,654
|
|||||
|
Stock
option expense
|
-
|
-
|
-
|
-
|
1,847,639
|
-
|
1,847,639
|
|||||
|
Warrants
issued with convertible debt
|
-
|
-
|
-
|
-
|
841,887
|
-
|
841,887
|
|||||
|
Preferred
dividends
|
-
|
-
|
-
|
-
|
-
|
(6,300)
|
(6,300)
|
|||||
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
(6,770,322)
|
(6,770,322)
|
|||||
|
Balance
at September 30, 2008
|
32,210,684
|
$32,234
|
2,010
|
$2
|
$13,637,160
|
$(14,909,206)
|
$(1,239,810)
|
|||||
See the
accompanying notes to the audited consolidated financial
statements.
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
|
Consolidated
Statements of Cash Flows
|
||
|
For
the Year
|
For
the Year
|
|
|
Ended
|
Ended
|
|
|
September
30, 2008
|
September
30, 2007
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||
|
Net loss
|
$(6,770,322)
|
$(4,650,870)
|
|
Adjustments
to reconcile net loss
|
||
|
to
net cash (used in) operating activities:
|
||
|
Depreciation
and amortization
|
37,486
|
12,757
|
|
Option
expense
|
1,847,639
|
1,288,670
|
|
Interest
paid through conversion to stock
|
-
|
137,391
|
|
Beneficial
conversion expense
|
374,476
|
116,819
|
|
Issuance
of stock for debt extension
|
162,000
|
412,500
|
|
Warrants
|
868,231
|
4,497
|
|
Changes
in Asset and Liabilities
|
||
|
Miscellaneous
receivable
|
1,118
|
(1,118)
|
|
Prepaid
expenses
|
45,683
|
(39,531)
|
|
Accounts
payable
|
929,539
|
144,122
|
|
Accrued
payroll taxes and wages
|
(13,960)
|
(28,428)
|
|
Accrued
liabilities
|
12,033
|
-
|
|
Credit
card payable
|
77,533
|
14,772
|
|
Interest
payable
|
117,481
|
(62,893)
|
|
Deferred
revenue
|
(24,884)
|
(41,668)
|
|
Net
Cash Used in Operating Activities
|
(2,335,947)
|
(2,692,980)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||
|
Purchase
of fixed assets
|
(77,094)
|
(12,050)
|
|
Purchase
of intangibles
|
(138,848)
|
(85,514)
|
|
Net
Cash Used in Investing Activities
|
(215,942)
|
(97,564)
|
|
Repayment
of notes payable - related parties
|
-
|
(53,530)
|
|
Repayment
of notes payable
|
(591,998)
|
(67,642)
|
|
Proceeds
from notes payable and warrants
|
1,300,000
|
500,000
|
|
Issuance
of preferred stock
|
2,010,000
|
-
|
|
Issuance
of common stock
|
-
|
2,483,500
|
|
Net
Cash Provided by Financing Activities
|
2,718,002
|
2,862,328
|
|
Net
Increase in Cash and Cash Equivalents
|
166,113
|
71,784
|
|
CASH
AND CASH EQUIVALENTS AT BEGINNING
|
||
|
OF
PERIOD
|
808,163
|
736,379
|
|
CASH
AND CASH EQUIVALENTS AT END
|
||
|
OF
PERIOD
|
$974,276
|
$808,163
|
See the
accompanying notes to the audited consolidated financial
statements.
|
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
|
Consolidated
Statements of Cash Flows
|
||
|
For
the Year
|
For
the Year
|
|
|
Ended
|
Ended
|
|
|
September
30, 2008
|
September
30, 2007
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
|
||
|
INFORMATION
|
||
|
Interest
paid
|
$79,284
|
$114,253
|
|
Income
taxes paid
|
-
|
-
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH
|
||
|
FINANCING
ACTIVITIES
|
||
|
Conversion
of notes and interest for common stock
|
$-
|
$1,749,470
|
|
Issuance
of common stock for services
|
$-
|
$412,500
|
|
Issuance
of common stock for debt extension
|
$162,000
|
$-
|
See the
accompanying notes to the audited consolidated financial
statements.
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Summary of Significant Accounting Policies, Nature of Operations and Use of
Estimates
Description of
the Company. The terms “we”, “us”, “Ecology”, and “the
Company” refer to Ecology Coatings, Inc. We were originally incorporated in
Nevada on February 6, 2002 as OCIS Corp. (“OCIS”). OCIS completed a merger
with Ecology Coatings, Inc. a California corporation (“Ecology-CA”) on
July 26, 2007 (the “Merger”). In the Merger, OCIS changed its name from
OCIS Corporation to Ecology Coatings, Inc. We develop nanotechnology-enabled,
ultra-violet curable coatings that are designed to drive efficiencies and clean
processes in manufacturing. We create proprietary coatings with unique
performance and environmental attributes by leveraging our platform of
integrated nano-material technologies that reduce overall energy consumption and
offer a marked decrease in drying time. Ecology’s market consists electronics,
automotive and trucking, paper products and original equipment manufacturers
(“OEMs”).
Principles of
Consolidation. The consolidated financial statements include
all of our accounts and the accounts of our wholly owned subsidiary Ecology-CA.
All significant intercompany transactions have been eliminated in
consolidation.
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 affect the
amounts of 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.
Cash and Cash
Equivalents. We consider all highly liquid investments with
original maturities of three months or less to be cash and cash
equivalents.
Revenue
Recognition. Revenues from licensing contracts are recorded
ratably over the life of the contract. Contingency earnings such as royalty fees
are recorded when the amount can reasonably be determined and collection is
likely.
Loss Per
Share. Basic loss per share is computed by dividing the net
loss by the weighted average number of shares of common stock outstanding during
the period. Diluted loss per share is computed by dividing the net loss by the
weighted average number of shares of common stock and potentially dilutive
securities outstanding during the period. Potentially dilutive shares consist of
the incremental common shares issuable upon the exercise of stock options and
warrants and the conversion of convertible debt and convertible preferred stock.
Potentially dilutive shares are excluded from the weighted average number of
shares if their effect is anti-dilutive. We had a net loss for all periods
presented herein; therefore, none of the stock options and/or warrants
outstanding or stock associated with the convertible debt or with the
convertible preferred shares during each of the periods presented were included
in the computation of diluted loss per share as they were anti-dilutive. As of
September 30, 2008 and 2007, there were 12,031,220 and 3,792,080
potentially dilutive securities outstanding.
Income Taxes and
Deferred Income Taxes. We use the asset and liability approach
for financial accounting and reporting for income taxes. Deferred income taxes
are provided for temporary differences in the bases of assets and liabilities as
reported for financial statement purposes and income tax purposes and for the
future use of net operating losses. We have recorded a valuation allowance
against the net deferred income tax asset. The valuation allowance reduces
deferred income tax assets to an amount that represents management’s best
estimate of the amount of such deferred income tax assets that more likely than
not will be realized. We cannot be assured of future income to realize the net
deferred income tax asset; therefore, no deferred income tax asset has been
recorded in the accompanying consolidated financial statements.
Property and
Equipment. Property and equipment is stated at cost less
accumulated depreciation. Depreciation is recorded using the straight-line
method over the following useful lives:
|
Computer
equipment
|
3-10
years
|
|||
|
Furniture
and fixtures
|
3-7
years
|
|||
|
Test
equipment
|
5-7
years
|
|||
|
Software
Computer
|
3
years
|
|||
|
Marketing
and Promotional Video
|
3
years
|
|||
Repairs
and maintenance costs are charged to operations as incurred. Betterments or
renewals are capitalized as incurred.
We review
long lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets.
Patents. It
is our policy to capitalize costs associated with securing a patent. Costs
consist of legal and filing fees. Once a patent is issued, it will be amortized
on a straight-line basis over its estimated useful life. Six patents were issued
as of September 30, 2008 and are being amortized over 8 years.
Stock-Based
Compensation. Our stock option plans are subject to the
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
Share-Based Payment.
Under the provisions of SFAS No. 123(R), employee and director
stock-based compensation expense is measured utilizing the fair-value
method.
We
account for stock options granted to non-employees under SFAS No. 123(R) using
EITF 96-18, requiring the measurement and recognition of stock-based
compensation to consultants under the fair-value method with stock-based
compensation expense being charged to earnings on the earlier of the date
services are performed or a performance commitment exists.
Expense
Categories. Salaries and Fringe Benefits of $2,006,776 and
$1,409,840 for the years ended September 30, 2008 and 2007, respectively,
include wages paid to and insurance benefits for our officers and employees as
well as stock based compensation expense for those individuals. Professional
fees of $2,735,360 and $2,583,927 for the years ended September 30, 2008 and
2007, respectively, include amounts paid to attorneys, accountants, and
consultants, as well as the stock based compensation expense for those
services.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS 141(R)) and No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160).
SFAS 141(R) will significantly change how business acquisitions are accounted
for and will impact financial statements both on the acquisition date and in
subsequent periods. SFAS 160 will change the accounting and reporting for
minority interests, which will be re-characterized as non-controlling interests
and classified as a component of equity. SFAS 141(R) and SFAS 160 are effective
for both public and private companies for fiscal years beginning on or after
December 15, 2008 (October 1, 2009 for Ecology). Early adoption is
prohibited for both standards. SFAS 141(R) will be applied prospectively. SFAS
160 requires retroactive adoption of the presentation and disclosure
requirements for existing minority interests. All other requirements of SFAS 160
shall be applied prospectively. The adoption of SFAS 160 would have no impact on
our financial position or results of operations for the year ended September 30,
2008
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement
No. 133”. This statement changes the disclosure requirements for derivative
instruments and hedging activities. SFAS 161 will become effective for us
beginning in the three months ending March 31, 2009. The adoption of this
pronouncement would have had no impact on our results or financial position as
of September 30, 2008.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are
presented
in conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). SFAS 162 will not have an impact on our financial
statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of
SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 163 will not have an impact on our
financial statements.
Note 2 — Concentrations
For the
years ended September 30, 2008 and 2007, we had one customer representing 100%
of revenues. As of September 30, 2008 and 2007, there were no amounts due from
this customer.
We
occasionally maintain bank account balances in excess of the federally insurable
amount of $100,000. The Company had cash deposits in excess of this limit on
September 30, 2008 and 2007 of $874,276 and $708,163, respectively.
Note
3 — Related Party Transactions
We have
borrowed funds for our operations from certain major stockholders, directors and
officers as disclosed below:
We have
an unsecured note payable due to a principal shareholder and former director
that bears interest at 4% per annum with principal and interest due on
December 31, 2008. As of September 30, 2008 and September 30, 2007,
the note had an outstanding balance of $110,500. The accrued interest on the
note was $8,407 and $3,836 as of September 30, 2008 and September 30, 2007,
respectively. The note carries certain conversion rights that allow the holder
to convert all or part of the outstanding balance into shares of our common
stock.
We have
an unsecured note payable due to a principal shareholder and former director
that bears interest at 4% per annum with principal and interest due on
December 31, 2008. As of September 30, 2008 and September 30, 2007,
the note had an outstanding balance of $133,000. The accrued interest on the
note was $10,125 and $4,617 as of September 30, 2008 and September 30,
2007, respectively. The note carries certain conversion rights that allow the
holder to convert all or part of the outstanding balance into shares of our
common stock.
We had an
unsecured note payable due to a majority shareholder, officer and director that
bore interest at 4% per annum with principal and interest due on
December 31, 2008. As of September 30, 2008 and September 30, 2007,
the note had an outstanding balance of $0. The unpaid accrued interest on the
note was $2,584 as of September 30, 2008 and September 30, 2007. The note
carries certain conversion rights which allow the holder to convert all or part
of the outstanding balance into shares of the our common stock..
Future
maturities of related party long-term debt as of September 30, 2008 are as
follows:
|
Year Ending September 30,
|
||||
|
2009
|
$
|
243,500
|
||
We have a
payable to a related party totaling $63,775 and $49,191 as of September 30, 2008
and September 39, 2007, respectively, included in accounts payable on the
consolidated balance sheets.
We also
paid consulting fees for contracted administrative support to a related party
company totaling $8,244 for the year ended September 30, 2007.
Note
4 — Notes Payable
We have
the following convertible notes:
|
September
30, 2008
|
September
30, 2007
|
|||||||
|
Convertible
note payable, 20% per annum interest rate, principal and interest payment
due December 31, 2007; unsecured, accrued interest of $130
outstanding at September 30, 2007, convertible at holder’s option
into common shares of the Company. Conversion price is $1.60 per share.
This note is stated net of an unamortized discount of $2,400 at September
30, 2007.
|
$-
|
708
|
||||||
|
Convertible
subordinated note payable, 7.5% per annum interest rate. Principal and
interest payment due December 31, 2007; unsecured, convertible at
holder’s option into common shares of the Company at a price per share of
$2.00. Accrued interest of $415 is outstanding as of September 30,
2007.
|
-
|
26,461
|
||||||
|
Convertible
note payable, 15% per annum interest rate, principal and interest payment
was due May 31, 2008; unsecured, convertible at holder’s option into
common shares of the Company at $1.60 per share. Accrued interest of
$15,367 and $4,268 was outstanding as of September 30, 2008 and
September 30, 2007, respectively. This note is stated net of
unamortized discount of $0 and $13,422 as of September 30, 2008 and
September 30, 2007, respectively. The holder made demand
upon the Company for repayment of this note on August 18, 2008. See Note
10-Subsequent Evens for further discussion.
|
94,104
|
145,873
|
||||||
|
Convertible
subordinated note payable, 25% per annum, unsecured, principal and
interest was due June 30, 2008; the Company extended the maturity for
30 days, to July 30, 2008 in exchange for warrants to purchase 15,000
shares of the Company’s common stock at $1.75 per share. Additionally, the
Company granted the note holder warrants to purchase 12,500 shares of the
Company’s common stock at $1.75 per share. All outstanding principal and
interest is convertible, at the note holder’s option, into the Company’s
common shares at the lower of the closing price of the shares on the last
trading date prior to conversion or at the average share price at which
the Company sells its debt or equity securities in its next public
offering or other private offering made pursuant to Section 4(2) of
the Securities Act of 1933, as amended. Demand for repayment was made on
September 8, 2008. See Note 10-Subsequent Events for further discussion.
Accrued interest of $7,329 was outstanding as of September 30, 2008. This
note is stated net of unamortized discount of $0 as of September 30,
2008.
|
$
|
50,000
|
$
|
—
|
||||
|
Convertible
subordinated note payable, 25% per annum, unsecured, principal and
interest was due June 30, 2008; the Company extended the maturity for
30 days, to July 30, 2008 in exchange for warrants to purchase 15,000
shares of the Company’s common stock at $1.75 per share. Additionally, the
Company granted the note holder warrants to purchase 125,000 shares of the
Company’s common stock at $1.75 per share. All outstanding principal and
interest is convertible, at the note holder’s option, into the Company’s
common shares at the lower of the closing price of the shares on the last
trading date prior to conversion or at the average share price at which
the Company sells its debt or equity securities in its next public
offering or other private offering made pursuant to Section 4(2) of
the Securities Act of 1933, as amended. Demand for repayment was made on
September 5, 2008. See Note 10-Subsequent Events for further discussion.
Accrued interest of $73,288 was outstanding as of September 30, 2008. This
note is stated net of unamortized discount of $0 as of September 30,
2008.
|
$
|
500,000
|
$
|
-
|
||||
|
Convertible
subordinated note payable, 25% per annum, unsecured, principal and
interest was due July 18, 2008. Additionally, the Company issued a warrant
to purchase 100,000 shares of the Company’s common stock at a price equal
to $.75 per share (the “Warrant”). The Warrant is exercisable immediately
and carries a ten (10) year term. The Holder may convert all or part
of the then-outstanding Note balance into shares at $.50 per share. If
applicable, the Company has agreed to include the Conversion Shares in its
first registration statement filed with the Securities and Exchange
Commission. Demand for repayment was made on August 27, 2008. Accrued
interest of $10,685 was outstanding as of September 30, 2008. This note is
stated net of unamortized discount of $0 as of September 30,
2008.
|
150,000
|
$
|
-
|
|||||
|
Convertible
subordinated note payable, 25% per annum, unsecured, principal and
interest was due August 10, 2008. Additionally, the Company issued a
warrant to purchase 100,000 shares of the Company’s common stock at a
price equal to $.50 per share (the “Warrant”). The Warrant is exercisable
immediately and carries a ten (10) year term. The Holder may convert
all or part of the then-outstanding Note balance into shares at $.50 per
share. If applicable, the Company has agreed to include the Conversion
Shares in its first registration statement filed with the Securities and
Exchange Commission. Demand for repayment was made on August 27, 2008.
Accrued interest of $5,548 was outstanding as of September 30, 2008. This
note is stated net of unamortized discount of $0 as of September 30,
2008.
|
100,000
|
$
|
173,042
|
|||||
|
$894,104
|
$173,042
|
|||||||
Future
maturities of the notes payable as of September 30, 2008 are as
follows:
|
Year Ending
|
||||
|
2009
|
$
|
894,104
|
||
The above
notes payable have conversion rights and detachable warrants. These Notes may be
converted for the principal balance and any unpaid accrued interest to Common
Stock. In accordance with guidance issued by the FASB and the Emerging Issue
Task Force (“EITF”) regarding the Accounting for Convertible Securities with a
Beneficial Conversion Feature (EITF No. 98-5), the Company recognized an
embedded beneficial conversion feature present in these Notes. The Company
allocated the proceeds based on the fair value of $1,767,881to the warrants. The
warrants are exercisable through March 31, 2018 and the fair value was
amortized to interest expense over the term of the Notes.
Note
5 — Commitments and Contingencies
Consulting
Agreements. On July 15, 2006, we entered into an
agreement that provides for six months of international business development
consulting services. We agreed to pay the consultant $15,000 per month payable
in cash and an additional $15,000 per month payable in shares of our common
stock at a
share
price of $2.00. We further agreed to pay the consultant a fee of 2% of any
royalties that we receive pursuant to royalty agreements that are a direct
result of the consultant’s material efforts under the consulting agreement. In
addition, we agreed to pay the consultant a fee of 2% of any net sales that we
receive pursuant to joint venture agreements that are a direct result of the
consultant’s material efforts under the consulting agreement. We will pay the
fees to the consultant for the term of any royalty or joint venture agreements
for a period of time not to exceed a period of 48 months. The agreement was
extended for six month increments in January 2007, July 2007, and January
2008.
On
February 1, 2007, we amended an agreement with a consultant. The consultant
provides various business and financial consulting services, including but not
limited to assistance with raising capital. The original agreement was dated
June 1, 2006 and called for $12,500 to be paid to the consultant in
18 monthly payments commencing February 1, 2007. The amendment called
for additional monthly payments of $9,250 on February 1, 2007, $9,375 on
March 1, 2007, and $9,000 per month from April 1, 2007 and continuing
through September 1, 2007. This agreement was further amended on
December 28, 2007 to extend the agreement until November 1, 2010. The
effective date of the agreement was November 1, 2007. Additionally, the
agreement calls for monthly payments of $16,000. Finally, the agreement calls
for an option grant of 100,000 shares at an exercise price of $3.05 per share.
25,000 options will vest on June 28, 2008, 25,000 options will vest on
December 28, 2008, 25,000 options will vest on June 28, 2009, and
25,000 options will vest on December 28, 2009. All of the options expire on
December 27, 2017. This agreement was terminated on July 31, 2008. See the
caption Contingencies under this Note for further discussion.
On
May 1, 2007, we entered into an agreement with a consultant to provide
information system consulting services. The agreement calls for six monthly
payments of $5,000 plus reimbursement for any out of pocket costs. Additionally,
options to purchase 1,000 shares of common stock at $2.00 per share were issued
to the consultant, with additional options to purchase 500 shares upon the
achievement of certain performance measures. The options are restricted for 12
months and expire 10 years from date of issuance. On October 8, 2007,
we extended the contract with the consultant for six months, and, on May 8,
2008, extended the contract for an additional six months. The expiration date is
now November 8, 2008 and provides for monthly payments of $5,000. This agreement
was terminated on July 31, 2008. See the caption Contingencies under this Note
for further discussion.
On
June 1, 2007, we entered into a consulting agreement with an individual who
serves as the chairman of Ecology’s business advisory board. The agreement
expires June 1, 2009. Ecology will pay the consultant $11,000 per month.
Additionally, Ecology granted the consultant 200,000 options to purchase shares
of our common stock for $2.00 per share. Of these options, 50,000 options vest
on December 1, 2007, 50,000 options vest on June 1, 2008, 50,000
options vest on December 1, 2008, and the remaining 50,000 options vest on
June 1, 2009. Additionally, we will reimburse the consultant for all
reasonable expenses incurred by the consultant in the conduct of Ecology
business.
On
July 26, 2007, we entered into a consulting agreement with a company owned
by two former officers and directors of OCIS Corporation. The terms of the
agreement call for the transfer of the $100,000 standstill deposit paid to OCIS
as a part of a total payment of $200,000. The balance will be paid in equal
installments on the first day of each succeeding calendar month until paid in
full. The agreement calls for the principals to provide services for
18 months in the area of investor relations programs and initiatives;
facilitate conferences between Ecology and members of the business and financial
community; review and analyze the public securities market for our securities;
and introduce Ecology to broker-dealers and institutions, as
appropriate.
On
December 13, 2007, we entered into an agreement with a consultant to
provide investor relations services. The agreement expires on December 13,
2008. The consultant will bill against a non-refundable monthly retainer of
$5,000. The consultant charges on an hourly basis ranging from $35 to $225 per
hour. The term of the contract is 12 months.
On
April 2, 2008, we entered into a letter agreement with an individual to
become chairman our Scientific Advisory Board. The letter agreement provides
that we will grant the individual options to purchase 100,000 shares of our
common stock. Each option is exercisable at a price equal to the
final
closing
price as quoted on the Over The Counter Bulletin Board on April 3, 2008.
The options vest as follows: 25,000 immediately upon grant; 25,000 on
October 3, 2008; 25,000 on April 3, 2009, and the remaining 25,000 on
October 3, 2009. The options will all expire on April 3,
2018.
On
April 10, 2008, we entered into an agreement with a consultant to assist us
in securing equity and/or debt financing. The agreement called for payment of
$5,000 at inception and an additional payment of $5,000 on May 1, 2008. The
agreement was terminable upon notice of either party and was terminated on May
31, 2008.
On
September 17, 2008, we entered into an agreement with an entity controlled by an
investor in and a director of Ecology Coatings, Inc. This agreement is for
business and marketing consulting services. This agreement expires on September
17, 2010 and calls for monthly payments of $20,000, commissions on licensing
revenues equal to 15% of said revenues, commissions on product sales equal to 3%
of said sales, and a grant of options to purchase 531,000 shares of our common
stock for $1.05 per share. 177,000 of the options become exercisable on March
17, 2009, 177,000 of the options become exercisable on September 17, 2009, and
177,000 of the options become exercisable on March 17, 2010. The options expire
on December 31, 2020.
On
September 17, 2008, we entered into an agreement with our Chairman of the Board
of Directors under which the Chairman will provide advice and consultation to us
regarding strategic planning, business and financial matters, and revenue
generation. The agreement expires on September 17, 2011 and calls for monthly
payments of $16,000, commissions on licensing revenues equal to 15% of said
revenues, commissions on product sales equal to 3% of said sales, $1,000 per
month to pay for office rent reimbursement, expenses associated with the
consultant’s participation in certain conferences, information technology
expenses incurred by the consultant in the performance of duties relating to the
Company, and certain legal fees incurred by the consultant during his tenure as
our Chief Executive Officer.
On
September 17, 2008 we entered into an agreement with a shareholder under which
that shareholder will act as a consultant to us. Under this agreement, the
shareholder will provide business development services for which he will receive
commissions on licensing revenues equal to 15% of said revenues and commissions
on product sales equal to 3% of said sales and reimbursement for information
technology expenses incurred by the consultant in the performance of duties
relating to the Company. This agreement expires on September 17,
2011.
Employment
Agreements. On October 30, 2006, we entered into an
employment agreement with an officer that expires on October 30, 2008.
Pursuant to the agreement, the officer is paid an annual base salary of
$160,000. We also granted the officer 321,217 options to purchase its common
stock at $2.00 per share. Twenty-five percent (25%) of the options vested on
November 1, 2007 and the remaining seventy-five percent (75%) will vest on
November 1, 2008. The options expire on November 1, 2016.
On
November 1, 2006, we entered into an employment agreement with an officer
that expires on November 1, 2008. Pursuant to the agreement, the officer
was paid an annual base salary of $100,000. We also granted the officer 150,000
options to acquire its common stock at $2.00 per share. The options will all
vest on November 1, 2008. The options expire on November 1, 2016. On
July 1, 2007, we amended this employment agreement. The amended agreement
will expire on November 1, 2009, and calls for an annual salary $140,000, a
one time bonus of $12,500 and the grant of 87,500 options to purchase our common
stock at $2.00 per share. Upon grant, 25,000 of the options vested, 37,500
options will vest on July 1, 2008, and 25,000 options will vest on
July 1, 2009. All of the options expire on July 1, 2017. This employee
resigned effective July 31, 2008.
On
January 1, 2007, we entered into an employment agreement with an officer
that expires on January 1, 2012. Upon expiration, the agreement calls for
automatic one-year renewals until terminated by either party with thirty days
written notice. Pursuant to the agreement, the officer will be paid an annual
base salary of $180,000 in 2007; an annual base salary of $200,000 for the years
2008 through 2011; and an annual base salary of $220,000 for 2012. In addition,
450,000 options were granted to the officer to acquire our common stock at $2.00
per share. 150,000 options will vest on January 1, 2010, 150,000 options
will vest on January 1, 2011 and the remaining 150,000 options will vest
January 1, 2012. The options expire on January 1, 2022.
On
February 1, 2007, we entered into an employment agreement with an officer
that expired on February 1, 2008. Pursuant to the agreement, the officer
was paid an annual base salary of $120,000 and was granted 25,000 options to
acquire our common stock at $2.00 per share. All of the options vested on
February 1, 2008. The options expire on February 1, 2017. On
February 1, 2008, we entered into a new agreement with this officer. This
new agreement expires on February 1, 2010 and calls for an annual salary of
$140,000. Further, the officer was granted 50,000 options to purchase shares of
our common stock at $3.00 per share. 25,000 options vest on February 1,
2009 and the remaining 25,000 options vest on February 1, 2010. This
agreement was modified effective October 1, 2008. Under the modified agreement,
the employee receives an annual base salary of $70,000, subject to increase to
$140,000 upon the achievement by the Company of revenues of at least $100,000.
Additionally, we granted the employee options to purchase 10,000 shares of our
common stock at $1.05 per share. The options become exercisable on September 17,
2009 and expire on September 17, 2018.
On
May 21, 2007, we entered into an employment agreement with an officer that
expires on May 21, 2009. Pursuant to the agreement, the officer will be
paid an annual base salary of $160,000 and was granted 300,000 options to
acquire our common stock at $2.00 per share. 75,000 of the options vested on
May 21, 2008, and 225,000 of the options will vest on May 21, 2009.
The options expire on May 21, 2017. On October 1, 2007, the Company
modified the employment agreement to increase the salary from $160,000 to
$210,000.
On
December 28, 2007, we entered into an employment agreement with our
Chairman of the Board of Directors and Chief Executive Officer. Under this
agreement, he will continue to be paid at a rate of $320,000 per year through
August 8, 2010. This agreement was terminated by consent of both parties on
September 17, 2008. See also Consulting Agreements under this Note
5.
On August
11, 2008, we employed, on an at-will basis, an individual to serve as Vice
President and General Counsel. The letter documenting the employment calls for a
probationary period of 90 days and stipulates a salary of $150,000 per
year.
On
September 15, 2008, we employed, on an at-will basis, an individual to serve as
Chief Executive Officer. The letter documenting the employment calls for a
probationary period of 90 days and stipulates a salary of $200,000 per year.
Additionally, we issued options to the individual to purchase 330,000 shares of
our common stock at $1.05 per share. 110.000 of the options become exercisable
on March 15, 2010, 110,000 of the options become exercisable on September 15,
2010, and 110,000 of the options become exercisable on March 15, 2011. The
options expire on September 15, 2018.
Contingencies. On
September 11, 2008, we filed a lawsuit against a consultant in the Circuit Court
of Oakland County, Michigan for violation of fiduciary duties. See Note 10 –
Subsequent Events for further discussion.
A lawsuit
was filed against us on September 16, 2008 in the Circuit Court of Oakland
County, Michigan for breach of contract by a consultant previously contracted by
the Company to provide information technology services. The suit seeks damages
in excess of $42,335 plus court costs and attorney fees. See Note 10 –
Subsequent Events for further discussion. Our financial statements
reflect an accrual for the amount of the damages.
Lease
Commitments.
|
a.
|
On
August 1, 2005, we leased our office facilities in Akron, Ohio for a
rent of $1,800 per month. The lease expired July 1, 2006 and was
renewed under the same terms through August 31, 2007. The Company now
leases that property on a month-to-month basis for the same rent. Rent
expense for the years ended September 30, 2008 and 2007 was $21,600 and
$21,600, respectively.
|
||
|
b.
|
On
September 1, 2006, we leased our office space in Bloomfield Hills,
Michigan for monthly rent of $1,800. A new lease was executed on
April 1, 2007 with monthly payments of $3,200. The lease is on a
month-to-month basis until terminated by tenant or landlord upon
60 days notice. The monthly lease amount was reduced to $2,400 on
September 1, 2007. We vacated this space on August 31, 2008 and have
no further obligation under the lease. Rent expense for the years ended
September 30, 2008 and 2007 was $26,400 and $28,850,
respectively
|
||
|
c.
|
On
September 1, 2008, we executed a lease for our office space in Auburn
Hills, Michigan. The lease calls for average monthly rent of $2,997 and
expires on September 30, 2010. The landlord is a company owned by a
shareholder and director of Ecology.
|
||
|
d.
|
On
January 9, 2006, we leased computer equipment with 24 monthly
payments of $147.
We
recognized expense of $588 and $1,764 for the years ended
September 30, 2008 and 2007, respectively, related to this
lease.
|
||
|
e.
|
On
April 17, 2006, we leased computer equipment with 36 monthly
payments of $75. We recognized expense of $901 for each of the
years ended September 30, 2008 and September 30, 2007 related to
this lease.
|
||
|
f.
|
On
June 17, 2007, we leased computer equipment with 36 monthly
payments of $42. We recognized expense of $504 and $126 for the years
ended September 30, 2008 and 2007, respectively, related to
this lease.
|
||
|
g.
|
On
July 17, 2007, we leased computer equipment with 36 monthly
payments of $44. We recognized expense of $528 and $88 for the
years ended September 30, 2008 and 2007, respectively, related to this
lease.
|
||
|
h.
|
On
September 22, 2008, we leased a multi-purpose copier with 36 monthly
payments of $526. The first payment was due November 3,
2008.
|
Minimum
future rental payments under the above operating leases as of September 30,
2008 are as follows:
|
Year
Ending September 30,
|
||||
|
2009
|
$
|
42,589
|
||
|
2010
|
44,364
|
|||
|
2011
|
6,312
|
|||
|
$
|
93,265
|
|||
Note
6 — Equity
Reverse
Merger. A reverse merger with OCIS Corporation was consummated
on July 26, 2007. The shareholders of Ecology acquired 95% of the voting stock
of OCIS. OCIS had no significant operating history. The purpose of the
acquisition was to provide Ecology with access to the public equity markets in
order to more rapidly expand its business operations. The consideration to the
shareholders of OCIS was approximately 5% of the stock, at closing, of the
successor company. The final purchase price was agreed to as it reflects the
value to Ecology of a more rapid access to the public equity markets than a more
traditional initial public offering.
Warrants. On
December 16, 2006, we issued warrants to purchase 500,000 shares of our
stock at $2.00 per share. The warrants were issued to the holder of the
$1,500,000 convertible note. The warrants vested on December 17, 2007. The
weighted average remaining life of the warrants is 8.5 years.
On
February 6, 2008, we issued warrants to purchase 262,500 shares of our
common stock at the lower of $2.00 per share or at the average price per share
at which the Company sells its debt or and/or equity in its next private or
public offering. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.5 years.
On
March 1, 2008, we issued warrants to purchase 137,500 shares of our common
stock at the lower of $2.00 per share or at the average price per share at which
the Company sells its debt or and/or equity in its next private or public
offering. The warrants vested upon issuance. The weighted average remaining life
of the warrants is 9.5 years.
On June
9, 2008, we issued warrants to purchase 210,000 shares of our common stock at
the lower of $2.00 per share or at the average price per share at which the
Company sells its debt or and/or equity in its next private or public offering.
The warrants vested upon issuance. The weighted average remaining life of the
warrants is 9.8 years.
On June
21, 2008, we issued warrants to purchase 100,000 shares of our common stock at
the $.75 per share. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.8 years.
On July
14, 2008, we issued warrants to purchase 100,000 shares of our common stock at
$.50 per share. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.8 years.
On July
14, 2008, we issued warrants to purchase 30,000 shares of our common stock at
$1.75 per share. The warrants vested upon issuance. The weighted average
remaining life of the warrants is 9.8 years.
We issued
warrants as shown below to the holder of our convertible preferred
stock.
|
Strike
|
Date
|
Expiration
|
||||
|
Number
|
Price
|
Issued
|
Date
|
|||
|
100,000
|
$ 0.75
|
July
28, 2008
|
July
28, 2018
|
|||
|
5,000
|
$ 0.75
|
August
20, 2008
|
August
20, 2018
|
|||
|
25,000
|
$ 0.75
|
August
27, 2008
|
August
27, 2018
|
|||
|
500,000
|
$ 0.75
|
August
29, 2008
|
August
29, 2018
|
|||
|
375,000
|
$ 0.75
|
September
26, 2008
|
September
26, 2018
|
Shares. On
February 5, 2008, we entered into an agreement with a convertible note
holder. The amount owed the note holder, including principal and accrued
interest, totaled $142,415 and the note matured on December 31, 2007 (See
Note 4). The maturity date of the note was extended to May 31, 2008, with
interest continuing at 15% per annum. In consideration of this extension, we
issued 60,000 shares of our common stock to the note holder and granted the
holder certain priority payment rights.
On August
28, 2008, we entered into an agreement with an investor to issue up to
$5,000,000 in convertible preferred securities. The securities accrue cumulative
dividends at 5% per annum and the entire amount then outstanding is convertible
at the option of the investor into shares of our common stock at $.50 per share.
The preferred securities carry “as converted” voting rights. As of September 30,
2008, we had issued 2,010 of these convertible preferred shares. In the event
that we sell additional convertible preferred securities under this agreement,
we will issue attached warrants (500 warrants for each $1,000 convertible
preferred share sold). The warrants will be immediately exercisable, expire in
five years, and entitle the investor to purchase one share of our common stock
at $.75 per share for each warrant issued.
Note
7 — Stock Options
Stock Option
Plan. On May 9, 2007, we adopted a stock option plan and
reserved 4,500,000 shares for the issuance of stock options or for awards of
restricted stock. All prior grants of options were included under this plan. The
plan provides for incentive stock options, nonqualified stock options, rights to
restricted stock and stock appreciation rights. Eligible recipients are
employees, directors, and consultants. Only employees are eligible for incentive
stock options. The vesting terms are set by the Board of Directors. All options
expire 10 years after issuance.
The
Company granted non-statutory options as follows during the year ended September
30, 2008:
|
Weighted
|
||||||||||||||||
|
Weighted
|
Average
|
|||||||||||||||
|
Average
|
(Remaining)
|
|||||||||||||||
|
Exercise
Price
|
Number
of
|
Contractual
|
Aggregate
|
|||||||||||||
|
per
Share
|
Options
|
Term
|
Fair
Value
|
|||||||||||||
|
Outstanding
as of September 30, 2006
|
$
|
2.00
|
150,000
|
8.7
|
$
|
184
|
||||||||||
|
Granted
|
$
|
2.04
|
3,036,119
|
9.5
|
$
|
3,681,425
|
||||||||||
|
Exercised
|
---
|
---
|
---
|
---
|
||||||||||||
|
Forfeited
|
---
|
---
|
---
|
---
|
||||||||||||
|
Excersisable
|
$
|
2.00
|
375,800
|
9.8
|
$
|
552,540
|
||||||||||
|
Outstanding
as of September 30, 2007
|
$
|
2.03
|
3,186,119
|
9.5
|
$
|
3,681,609
|
||||||||||
|
Granted
|
$
|
1.49
|
1,456,000
|
10.3
|
$
|
1,329,891
|
||||||||||
|
Exercised
|
—
|
—
|
—
|
—
|
||||||||||||
|
Forfeited
|
—
|
—
|
—
|
—
|
||||||||||||
|
Outstanding
as of September 30, 2008
|
$
|
1.83
|
4,642,119
|
9.2
|
$
|
5,011,500
|
||||||||||
|
Exercisable
|
$
|
2.09
|
1,605,228
|
8.4
|
$
|
1,966,657
|
||||||||||
1,605,228
of the options were exercisable as of September 30, 2008. The options are
subject to various vesting periods between June 26, 2007 and
January 1, 2012. The options expire on various dates between June 1,
2016 and January 1, 2022. Additionally, the options had no intrinsic value
as of June 30, 2008. Intrinsic value arises when the exercise price is lower
than the trading price on the date of grant.
Our stock
option plans are subject to the provisions of Statement of Financial Accounting
Standards (“SFAS”) Number 123(R), Accounting for Stock-Based
Compensation. Under the provisions of SFAS Number 123(R), employee and
director stock-based compensation expense is measured utilizing the fair-value
method.
We
account for stock options granted to non-employees under SFAS Number 123(R)
using EITF 96-18 requiring the measurement and recognition of stock-based
compensation to consultants under the fair-value method with stock-based
compensation expense being charged to earnings on the earlier of the date
services are performed or a performance commitment exists.
On
September 15, 2008, the Board of Directors approved a change in exercise price
on option grants previously made to two officers. This change was effective for
options to purchase 375,000 shares of our common stock. The new exercise price
is $1.05 per share. The weighted average of the price of the options at original
issuance was $2.13. This change resulted in a total incremental compensation
increase of $240,641, combined, for the two officers.
In
calculating the compensation related to employee/consultants and directors stock
option grants, the fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model and the following weighted average
assumptions:
|
Dividend
|
None
|
|||
|
Expected
volatility
|
91.69%-101.73
|
%
|
||
|
Risk
free interest rate
|
1.50%-5.11
|
%
|
||
|
Expected
life
|
5.5
years
|
|||
The
expected volatility was derived utilizing the price history of another publicly
traded nanotechnology company. This company was selected due to the fact that it
is widely traded and is in the same equity sector as our Company.
The risk
free interest rate figures shown above contain the range of such figures used in
the Black-Scholes calculation. The specific rate used was dependent upon the
date of option grant.
Based
upon the above assumptions and the weighted average $1.83 exercise price, the
options outstanding at September 30, 2008 had a total unrecognized compensation
cost of $1,582,378 which will be recognized over the remaining weighted average
vesting period of .7 years. Options cost of $1,847,639 was recorded as an
expense for the year ended September 30, 2008 of which $623,518 was recorded as
compensation expense and $1,224,121 was recorded as consulting
expense.
The
Company has incurred losses since operations commenced in 1990. The
Company has a net operating loss carry forward for income tax purposes of
approximately $7,464,662. The total loss carry forward expiring on September 30,
2028 is $3,109,937, expiring on September 30, 2027 is $3,488,598, expiring on
September 30, 2026 is $427,056, expiring on September 30, 2025 is $203,978,
expiring on September 30, 2024 is $189,988, expiring on September 30, 2023 is $
25,364 and expiring on September 30, 2022 is $19,741. The Company
changed its year-end to September 30th from
February 28th
effective in fiscal 2006.
Deferred
income taxes arise from timing differences resulting from income and expense
items reported for financial accounting and tax purposes in different
periods.
The
principal sources of timing differences are different accrual versus cash
accounting methods used for financial accounting and tax purposes; the timing of
the utilization of the net operating losses, and different book versus tax
depreciation methods.
As of
September 30, 2008 and 2007, the deferred tax asset based on a 34% tax bracket
consists of the following:
|
2008
|
2007
|
||||
|
Assets:
|
|||||
|
Federal
loss carry forwards
|
$2,537,985
|
$1,481,936
|
|||
|
Cash
basis accounting differences
|
451,603
|
89,925
|
|||
|
Depreciation
timing differences
|
939
|
||||
|
Liability:
|
|||||
|
Depreciation
timing differences
|
(804)
|
-
|
|||
|
Deferred
tax asset
|
2,988,784
|
1,572,800
|
|||
|
Valuation allowance
|
(2,988,784)
|
(1,572,800)
|
|||
|
Net
deferred tax asset
|
$-
|
$-
|
|||
The tax
benefit from net operating losses and differences in timing differ from the
federal statutory rate primarily due to the $1,415,984 change in the deferred
tax asset valuation allowance from September 30, 2007.
Note
9 — Going Concern
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. For the years ended September 30, 2008
and 2007, we incurred net losses of ($6,770,322) and ($4,560,870),
respectively. As of September 30, 2008 and September 30, 2007, we had
stockholders’ deficit and equity of ($1,239,810) and $290,287,
respectively.
Our
continuation as a going concern is dependent upon our ability to generate
sufficient cash flow to meet our obligations on a timely basis, to obtain
additional financing or refinancing as may be required, to develop commercially
viable products and processes, and ultimately to establish profitable
operations. We have financed operations through operating revenues and,
primarily, through the issuance of equity securities and debt. Until we are able
to generate positive operating cash flows, additional funds will be required to
support operations. We believe that cash investments subject to a securities
purchase agreement with a investor will be sufficient to enable us to continue
as a going concern through the fiscal year ending September 30, 2009. This
securities purchase agreement does not legally bind the investor to make the
investments and there can be no assurances that the investments will continue.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to
continue as a going concern. Please see also Note 10 — Subsequent
Events.
Note
10 — Subsequent Events
On
November 6, 2008, we settled the lawsuit filed against us on September 16, 2008
by a consultant for breach of contract. We paid $26,500 in full settlement of
all claims. This amount was included in Accounts Payable at September 30,
2008.
On
November 11, 2008, we settled the lawsuit we filed against one of two
consultants on September 11, 2008 for breach of contract. Under the terms of the
settlement, we will pay the consultant $7,500 per month for twelve months under
a new consulting agreement and will pay $15,000 in 12 equal monthly payments of
$1,250 to the consultant’s attorney. Additionally, we will pay the
consultant a commission of 15% for licensing revenues and 3% for product sales
that the consultant generates for the Company.
On
November 11, 2008, we paid in full the principal and accrued interest on the
note payable shown in Note 4 with a September 30, 2008 principal balance of
$94,104. In addition, we issued warrants to the note holder for the purchase of
2,000,000 shares of our common stock at $.50 per share and reset the strike
price of warrants and options previously issued to the note holder to purchase
1,500,000 shares of our common stock at $2 per share. The new price is $.80 per
share.
On
November 13, 2008, we reached agreement with a convertible note holder. The note
holder made demand for payment on September 5, 2008. We made a payment of
$100,000 on October 6, 2008 on the outstanding principal and interest on that
date. On November 13, we made another payment of $100,000 against the
outstanding principal and interest on that date. Further, we agreed to make
additional payments on the remaining principal and interest. These payments will
be $100,000 for each month beginning in December of 2008 and continuing until
all principal and interest has been paid. This note payable is shown in Note 4
with a September 30, 3008 principal balance of $500,000.
On
November 14, 2008, we reached agreement with a convertible note holder. The note
holder made demand for payment on September 8, 2008. We made a payment of
$10,000 on October 8, 2008 on the outstanding principal and interest on that
date. On November 14, we made another payment of $10,000 against the outstanding
principal and interest on that date. Further, we agreed to make additional
payments on the remaining principal and interest. These payments will be $10,000
for each month beginning in December of 2008 and continuing until all principal
and interest has been paid. This note payable is shown in Note 4 with a
September 30, 3008 principal balance of $50,000.
On
December 2, 2008, our Board of Directors authorized the addition of 1,000,000
shares of our common stock to the 2007 Plan.
On
December 3, 2008, we terminated the employment agreement with our Chief
Financial Officer. The Chief Financial Officer continues to be employed by the
Company in that capacity as an at-will employee.