UNITED
STATES
Securities
and Exchange Commission
Washington,
D.C. 20549
Form 10-Q/A
þ
|
QUARTERLY
REPORT PURUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31, 2009
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
Commission
file number: 333-91436
ECOLOGY
COATINGS, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
|
26-0014658
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
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2701
Cambridge Court, Suite 100, Auburn Hills, MI 48326
(Address
of principal executive offices) (Zip Code)
(248) 370-9900
(Registrant’s
telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. The number of shares of common stock
of the issuer outstanding as of February 1, 2010 was 32,910,684.
1
EXPLANATORY
NOTE
In connection with our quarterly report on Form 10-Q for the three
months ended on December 31, 2009, we are filing this Amendment No. 1 to include
the following information:
1. We have concluded that our internal control over financial
reporting was ineffective due to our failure to disclose the impact on earnings
per share of preferred stock dividends and the beneficial conversion feature
associated with our convertible preferred shares and, therefore, we
have amended Item 4T, "Controls and Procedures" of Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
2. We have amended Item 3, "Defaults Upon Senior Securities" to
disclose that certain other notes were also in default as of December 31,
2009.
With the exception of the foregoing changes, no other information in
the report on Form 10-Q for the three months ended December 31, 2009 has been
supplemented, updated or amended.
2
Item
1. Financial Statements
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
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||
Consolidated
Balance Sheets
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ASSETS
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||
December
31, 2009
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September
30, 2009
|
|
Unaudited
|
||
Current
Assets
|
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Cash
and cash equivalents
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$27,323
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$ -
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Accounts
Receivable
|
5,457
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-
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Prepaid
expenses
|
1,400
|
1,400
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Total
Current Assets
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34,180
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1,400
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Property
and Equipment
|
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Computer
equipment
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30,111
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30,111
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Furniture
and fixtures
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21,027
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21,027
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Test
equipment
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9,696
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9,696
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Signs
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213
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213
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Software
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6,057
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6,057
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Video
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48,177
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48,177
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Total
property and equipment
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115,281
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115,281
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Less:
Accumulated depreciation
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(55,178)
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(48,609)
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Property
and Equipment, net
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60,103
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66,672
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Other
Assets
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Patents-net
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217,103
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443,465
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Trademarks-net
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7,180
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6,637
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Total
Other Assets
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224,283
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450,102
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Total
Assets
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$318,566
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$518,174
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See the
accompanying notes to the unaudited consolidated financial
statements.
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
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Consolidated
Balance Sheets
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LIABILITIES
AND STOCKHOLDERS' DEFICIT
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December
31, 2009
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September
30, 2009
|
|
Unaudited
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Current
Liabilities
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Bank
overdraft
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$ -
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$ 200
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Accounts
payable
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1,256,612
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1,272,057
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Credit
card payable
|
114,622
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114,622
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Accrued
liabilities
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50,321
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76,084
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Interest
payable
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238,715
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189,051
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Convertible
notes payable
|
582,301
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582,301
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Notes
payable - related party
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261,316
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257,716
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Preferred
dividends payable
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14,612
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36,800
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Total
Current Liabilities
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2,518,499
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2,528,831
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Total
Liabilities
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2,518,499
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2,528,831
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Commitments
and Contingencies (Note 5)
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-
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-
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Stockholders'
Deficit
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Preferred
Stock - 10,000,000 $.001 par value shares
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4
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2
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authorized;
3,513 and 3,002 shares issued and outstanding
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as
of December 31, 2009 and September 30, 2009, respectively
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Common
Stock - 90,000,000 $.001 par value shares
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authorized;
32,910,684 and 32,835,684
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outstanding
as of December 31, 2009 and
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September
30, 2009, respectively
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32,934
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32,859
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Additional
paid in capital
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22,112,573
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20,645,299
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Accumulated
Deficit
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(24,345,444)
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(22,688,817)
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Total
Stockholders' Deficit
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(2,199,933)
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(2,010,657)
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Total
Liabilities and Stockholders' Deficit
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$ 318,566
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$ 518,174
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See the
accompanying notes to the unaudited consolidated financial
statements.
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
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|||
Consolidated
Statements of Operations
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|||
(Unaudited)
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|||
For
the three months ended
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For
the three months ended
|
||
December
31, 2009
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December
31, 2008
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||
Revenues
|
$ 5,457
|
$
-
|
|
Salaries
and fringe benefits
|
316,258
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482,570
|
|
Professional
fees
|
184,143
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2,048,747
|
|
Other
general and administrative costs
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288,184
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98,312
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Total
General and Administrative Expenses
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788,585
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2,629,629
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Operating
Loss
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(783,128)
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(2,629,629)
|
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Other
Income (Expense)
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|||
Interest
Income
|
-
|
142
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Interest
Expense
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(52,788)
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(124,622)
|
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Total
Other Expenses - net
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(52,788)
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(124,480)
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Net
Loss
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$
(835,916)
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$ (2,754,109)
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Preferred
Dividends—Beneficial Conversion
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|||
Feature
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(768,544)
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-
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Preferred
Dividends—Stock Dividends
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(53,074)
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(44,461)
|
|
Net
Loss available to common shareholders
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$
(1,657,534)
|
$
(2,798,570)
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Basic
and diluted net loss per share
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$ (0.05)
|
$ (0.09)
|
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Basic
and diluted weighted average of
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|||
common
shares outstanding
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32,873,456
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32,233,600
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See the
accompanying notes to the unaudited consolidated financial
statements.
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
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Consolidated
Statements of Cash Flows
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(Unaudited)
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For
the three months ended
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For
the three months ended
|
|
December
31, 2009
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December
31, 2008
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|
OPERATING
ACTIVITIES
|
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Net loss
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$ (835,916)
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$ (2,754,109)
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Adjustments
to reconcile net loss
|
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to
net cash used in operating activities:
|
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Depreciation
and amortization
|
11,185
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11,026
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Option
expense
|
165,044
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1,997,949
|
Warrant
expense
|
-
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63,512
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Shares
issued in exchange for services
|
22,500
|
-
|
Patent
Abandonment
|
222,112
|
- |
Changes
in Asset and Liabilities
|
||
Accounts
Receivable
|
(5,457)
|
-
|
Prepaid
expenses
|
-
|
16,268
|
Bank
overdraft
|
(200)
|
4,528
|
Accounts
payable
|
(15,445)
|
69,461
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Accrued
liabilities
|
(25,763)
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7,549
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Credit
card payable
|
-
|
2,069
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Franchise
tax payable
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-
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(800)
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Interest
payable
|
49,663
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(75,045)
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Net
Cash Used in Operating Activities
|
(412,277)
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(657,593)
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INVESTING
ACTIVITIES
|
||
Purchase
of fixed assets
|
-
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(16,480)
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Purchase
of intangibles
|
-
|
(8,400)
|
Net
Cash Used in Investing Activities
|
-
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(24,880)
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FINANCING
ACTIVITIES
|
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Repayment
of debt
|
-
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(311,803)
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Proceeds
from issuance of convertible preferred shares
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436,000
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- |
Proceeds
from debt
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3,600
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20,000
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Net
Cash From (Used) in Financing Activities
|
439,600
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(291,803)
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Net
Increase (Decrease) in Cash and Cash Equivalents
|
27,323
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(974,276)
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CASH
AND CASH EQUIVALENTS AT BEGINNING
|
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OF
PERIOD
|
-
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974,276
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CASH
AND CASH EQUIVALENTS AT END
|
||
OF
PERIOD
|
$ 27,323
|
$ -
|
See the
accompanying notes to the unaudited consolidated financial
statements.
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
|
||
Consolidated
Statements of Cash Flows
|
||
(Unaudited)
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||
For
the three months ended
|
For
the three months ended
|
|
December
31, 2009
|
December
31, 2008
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
|
||
INFORMATION
|
||
Interest
paid
|
$ -
|
$ 132,000
|
Income
taxes paid
|
$ -
|
$
-
|
See the
accompanying notes to the unaudited consolidated financial
statements.
ECOLOGY
COATINGS, INC. AND SUBSIDIARY
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND DECEMBER 31, 2008
Note
1 — Summary of Significant Accounting Policies
Interim
Reporting. While the information presented in the accompanying interim
consolidated financial statements is unaudited, it includes all normal recurring
adjustments, which are, in the opinion of management, necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods presented in accordance with accounting principles generally
accepted in the United States of America. These interim consolidated
financial statements follow the same accounting policies and methods of their
application as the September 30, 2009 audited annual consolidated financial
statements of Ecology Coatings, Inc. (“we”, “us”, the “Company” or
“Ecology”). It is suggested that these interim consolidated financial
statements be read in conjunction with our September 30, 2009 annual
consolidated financial statements included in the Form 10-K/A we filed with the
Securities and Exchange Commission on February 16, 2010.
Our
operating results for the three months ended December 31, 2009 are not
necessarily indicative of the results that can be expected for the year ending
September 30, 2010 or for any other period.
Going
Concern. In connection with their audit report on our consolidated
financial statements as of September 30, 2009, the Company’s independent
registered public accounting firm expressed substantial doubt about our ability
to continue as a going concern. Continuance of our operations is
dependent upon our ability to raise sufficient capital. The
consolidated 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.
Description of
the Company. We were originally incorporated on March 12, 1990
in California (“Ecology-CA”). Our current entity was incorporated in
Nevada on February 6, 2002 as OCIS Corp. (“OCIS”). OCIS
completed a merger with 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 target markets consist of 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 product sales are recognized on the
date that the product is shipped. 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 potential conversion of debt and
Preferred Series A and Preferred Series B 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 potential conversion of debt or with Preferred Series A and
Preferred Series B shares during each of the periods presented were included in
the computation of diluted loss per share as they were
anti-dilutive. As of December 31, 2009 and September 30, 2009, there
were 24,183,419 and 20,323,996 potentially dilutive shares outstanding,
respectively.
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.
As of
December 31, 2009 and September 30, 2009, we had no unrecognized tax benefits
due to uncertain tax positions.
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. Seven patents were issued as of September 30,
2009 and are being amortized over 8 years. During the three months ended
December 31, 2009, we abandoned a number of patent applications and recognized
an expense of $222,112 as a result of this.
Stock-Based
Compensation. Employee and director stock-based compensation
expense is measured utilizing the fair-value method.
We
account for stock options granted to non-employees 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 $316,258 and
$482,570 for the three months ended December 31, 2009 and 2008, 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 $181,143 and $2,048,747,
for the three months ended December 31, 2009 and 2008, respectively,
include amounts paid to attorneys, accountants, and consultants, as well as the
stock based compensation expense for those services. Of the
$2,048,747 in professional fees incurred in the three months ended December 31,
2008, $1,752,318 was for options expense. Of this amount, $1,368,450
arose from the issuance of warrants in November 2008 to Trimax to acquire
2,000,000 shares of our common stock.
Recent
Accounting Pronouncements
In
June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, as amendment to SFAS No. 140 (SFAS166). SFAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred financial
assets. SFAS 166 is effective for fiscal years beginning after November 15,
2009. We will adopt SFAS 166 in fiscal 2010 as applicable. It would not have had
any impact on any of the financial statements that we’ve issued to
date.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” (SFAS 167). SFAS 167 amends FASB Interpretation No. 46
(Revised December 2003), “Consolidation of Variable Interest Entities—an
interpretation of ARB No. 51,” (FIN 46(R)) to require an enterprise to
perform an analysis to determine whether the enterprise’s variable interest or
interests give it a controlling financial interest in a variable interest
entity; to require ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity; to eliminate the quantitative
approach previously required for determining the primary beneficiary of a
variable interest entity; to add an additional reconsideration event for
determining whether an entity is a variable interest entity when any changes in
facts and circumstances occur such that holders of the equity investment at
risk, as a group, lose the power from voting rights or similar rights of those
investments to direct the activities of the entity that most significantly
impact the entity’s economic performance; and to require enhanced disclosures
that will provide users of financial statements with more transparent
information about an enterprise’s involvement in a variable interest entity.
SFAS 167 becomes effective on January 1, 2010. We do not anticipate SFAS
167 will have a material impact on our consolidated financial statements upon
adoption.
Note 2 — Concentrations
For the
three months ended December 31, 2009 and 2008, we had revenues of
$5,457 and $-0-, respectively. One customer accounted for all of our
revenues for the three months ended December 31, 2009. As of December 31,
2009 $5,457 was due from this customer.
We
occasionally maintain bank account balances in excess of the federally insurable
amount of $250,000. We did not exceed this limit as of December 31,
2009 and September 30, 2009.
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 Deanna Stromback, a principal shareholder and
former director and sister of our former Chairman, Rich Stromback, that bears
interest at 4% per annum with principal and interest due on December 31,
2009. As of December 31, 2009 and September 30, 2009, the note
had an outstanding balance of $110,500. The accrued interest on the
note was $14,486 and $13,235 as of December 31, 2009 and September 30,
2009, 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 upon mutually agreeable terms and conversion price.
The note is in default and is currently due and payable.
We have
an unsecured note payable due to Doug Stromback, a principal shareholder and
former director and brother of our former Chairman, Rich Stromback, that bears
interest at 4% per annum with principal and interest due on December 31,
2009. As of December 31, 2009 and September 30, 2009, the note
had an outstanding balance of $133,000. The accrued
interest on the note was $17,442 and $15,936 as of December 31, 2009
and September 30, 2009, 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 upon mutually agreeable
terms and conversion price. The note is in default and is currently due
and payable.
We had an
unsecured note payable due to Rich Stromback, our former Chairman and a
principal shareholder, that bore interest at 4% per annum
with principal and interest due on December 31, 2009. As of December
31, 2009 and September 30, 2009, the note had an outstanding balance of $0.
The unpaid accrued interest on the note was $2,584 as of December 31, 2009 and
September 30, 2009, respectively. The note carries certain
conversion rights which allow the holder to convert all or part of the
outstanding balance into shares of our common stock upon mutually agreeable
terms and conversion price. The interest is in default and is
currently due and payable.
We have
an unsecured note payable to an entity controlled by J.B. Smith, a
director of the company. This note bears interest at 5% per annum and is
convertible under certain conditions. It is due within 15 days of demand by the
holder. As of December 31, 2009 and September 30, 2009, the note had an
outstanding balance of $7,716. Accrued interest of $195 and $96 was
outstanding of December 31, 2009, September 30, 2009.
We have
an unsecured note payable to an entity controlled by J.B. Smith, a director of
the company. This note bears interest at 5% per annum and is convertible under
certain conditions. It is due within 15 days of demand by the holder. As of
December 31, 2009 and September 30, 2009, the note had an outstanding
balance of $6,500 Accrued interest of $100 and $18 was outstanding of
December 31, 2009 and September 30, 2009.
We have
an unsecured note payable to an entity controlled by J.B. Smith, a director of
the company. This note bears interest at 5% per annum and is convertible under
certain conditions. It is due within 15 days of demand by the holder. As of
December 31, 2009 and September 30, 2009, the note had an outstanding
balance of $3,600 and $0, respectively. Accrued interest of $15 and $0 was
outstanding of December 31, 2009 and September 30, 2009.
Future
maturities of related party long-term debt as of September 30, 2009 are as
follows:
12
Months Ended December 31,
|
||||
2010
|
$
|
261,316
|
||
We have a
payable to Richard Stromback and an entity controlled by him totaling
$98,730 and $145,191 as of December 31, 2009 and September 30, 2009,
respectively, included in accounts payable on the consolidated balance
sheets.
Note
4 — Notes Payable
We have
the following notes:
December
31, 2009
|
September
30, 2009
|
||||||
George
Resta Note: 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.
On November 14, 2008, we agreed to pay the note holder $10,000 per month
until the principal and accrued interest is paid off. We made such
payments in October and November of 2008, but did not make payments
thereafter. Accrued interest of $12,264 and $9,232 was outstanding as of
December 31, 2009 and September 30, 2009, respectively.
|
$38,744
|
$38,744
|
|||||
Investment
Hunter, LLC Note: 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.
On November 13, 2008, we agreed to pay the note holder $100,000 per month
until the principal and accrued interest is paid off. The payments for
October, November, and December 2008 were made, but none have been made
since. Accrued interest of $87,284 and $64,650 was outstanding
as of December 31, 2009 and September 30, 2009,
respectively.
|
293,557
|
293,557
|
|||||
Mitchell
Shaheen Note: 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 $61,348 and $48,787 was
outstanding as of December 31, 2009 and September 30, 2009,
respectively.
|
150,000
|
150,000
|
|||||
Mitchell
Shaheen Note: 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 $43,013 and $34,513was outstanding
as of
December
31, 2009 and September 30, 2009, respectively.
|
100,000
|
100,000
|
|||||
$582,301
|
$582,301
|
All of
the notes shown in the table above are in default and are currently due and
payable.
The notes
held by Investment Hunter, LLC, George Resta and Mitchell Shaheen had
convertibility features when they were issued. As of December 31,
2009, the convertibility features had expired.
All of
the notes payable in the table above initially had conversion rights and
warrants. These Notes may be converted for the principal balance and
any unpaid accrued interest to Common Stock. We recognized an embedded
beneficial conversion feature present in these Notes. We allocated
the proceeds based on the fair value of $340,043 to 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 26, 2007, we entered into a consulting agreement with DMG Advisors,
LLC, 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. The agreement
expired on February 28, 2009.
On July
21, 2009, we entered into a Settlement and Release Agreement with DMG Advisors,
LLC, Kirk Blosch and Jeff Holmes which terminated the parties’ July 26, 2007
Consulting Agreement. We agreed to issue 500,000 shares of our common stock as
payment for services owed under the Former Consulting Agreement.
On July
21, 2009, we entered into a new Consulting Agreement with DMG
Advisors. DMG Advisors will provide investor, business and financial
services to us under the New Consulting Agreement and will be paid $5,000 per
month for services by the issuance of 25,000 shares of the our common stock per
month. The Agreement has a term of six months and terminates on
January 15, 2010.
On
April 2, 2008, we entered into a letter agreement with Dr. Robert Matheson
to become chairman of our Scientific Advisory Board. The letter
agreement provides that we will grant Dr. Matheson options to purchase 100,000
shares of our common stock. Each option is exercisable at a price of
$2.05 per share. 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
September 17, 2008, we entered into an agreement with RJS Consulting LLC
(“RJS”), an entity owned by our chairman of the board of directors, Richard
Stromback, under which RJS 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 RJS’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 Richard Stromback during his tenure as our Chief
Executive Officer.
On
September 17, 2008, we entered into an agreement with DAS Ventures LLC (“DAS”)
under which DAS will act as a consultant to us. DAS Ventures, LLC is
wholly owned by Doug Stromback, a principal shareholder and former director and
brother of our Chairman, Rich Stromback, Under this agreement, DAS
will provide business development services for which he will receive commissions
on licensing revenues equal to 15% of 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.
On
November 11, 2008, we settled the lawsuit we filed against Trimax, LLC
(“Trimax”) on September 11, 2008 for breach of contract. Under the
terms of the settlement, we will pay Trimax $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 Trimax’s attorney. Additionally, we will
pay Trimax a commission of 15% for licensing revenues and 3% for product sales
that Trimax generates for the Company. On June 12, 2009, we
terminated the agreement and replaced it with a new one in which the sole
compensation paid to Trimax will be a commission of 15% for licensing revenues
and 3% for product sales to Daewoo. This new agreement expires June 12, 2010 and
can be terminated on 90 days written notice by either party.
On
January 1, 2009, we entered into a new agreement with McCloud Communication to
provide investor relations services to us. The new agreement calls
for monthly payments of $5,500 for 12 months. In addition, the
consultant forgave $51,603 in past due amounts owed by the Company in exchange
for a reset of the exercise price on options to purchase 25,000 shares of our
common stock that we issued to the consultant on April 8, 2008. The exercise
price at the time of issuance was $4.75 per share. This price was
re-set by our Board to $.88 per share on February 6, 2009.
Employment
Agreements.
On
January 1, 2007, we entered into an employment agreement with Sally J.W.
Ramsey, Vice President New Product Development, 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. On
December 15, 2008, we amended the agreement to reduce Ms. Ramsey’s annual base
salary to $60,000. 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
September 21, 2009, we entered into a second amendment to the employment
agreement with Ms. Ramsey that amends her employment agreement with us dated
January 1, 2007 to provide for an annual salary of $75,000 effective November 1,
2009. From December 15, 2008 until September 21, 2009, Ms. Ramsey's annual
salary was $60,000.
On
September 21, 2009, we entered into an employment agreement with Robert G.
Crockett , our CEO. Mr. Crockett has served as our CEO since September 15, 2008.
The agreement expires on September 21, 2012. Mr. Crockett will receive an
annual base salary of $200,000. The Compensation Committee of the Board of
Directors may review Mr. Crockett’s salary to determine what, if any, increases
shall be made thereto. In addition, the vesting for Mr. Crockett’s previously
awarded stock options was adjusted so that 110,000 stock options will vest 12
months, 18 months and 24 months, respectively, from Mr. Crockett’s initial date
of employment (September 15, 2008). Mr. Crockett was also
granted stock options to purchase 670,000 shares of our common stock,
one-quarter of which shall vest at 30, 36, 42 and 48 months from Mr. Crockett’s
initial date of employment with us (September 15, 2008) with an exercise price
of $.51 per share. The agreement may be terminated prior to the end of the term
for cause. If Mr. Crockett’s employment is terminated without cause or for
“good reason,” as defined in the agreement, he is entitled to 50% of the salary
that would have been paid over the balance of the term of the agreement.
Further, a termination within one year after a change in control shall be
deemed to be a termination without cause.
On
September 21, 2009, we entered into an employment agreement with Daniel V.
Iannotti, our Vice President, General Counsel & Secretary. Mr.
Iannotti has served as our Vice President, General Counsel since
August 11, 2008. The agreement expires on September 21, 2012. Effective November
1, 2009, Mr. Iannotti will receive an annual base salary of $150,000. The
Compensation Committee of the Board of Directors may review Mr. Iannotti’s
salary to determine what, if any, increases shall be made thereto. In addition,
the vesting for Mr. Iannotti’s previously awarded stock options was adjusted so
that 110,000 stock options will vest 12 months, 18 months and 24 months,
respectively, from Mr. Iannotti’s initial date of employment (August 11,
2008). Mr. Iannotti was also granted stock options to purchase
70,000 shares of our common stock, one-quarter of which shall vest at 30, 36, 42
and 48 months from Mr. Iannotti’s’s initial date of employment with us (August
11, 2008) with an exercise price of $.51 per share. The agreement may be
terminated prior to the end of the term for cause. If Mr. Iannotti’s
employment is terminated without cause or for “good reason,” as defined in the
agreement, he is entitled to 50% of the salary that would have been paid over
the balance of the term of the agreement. Further, a termination within one
year after a change in control shall be deemed to be a termination without
cause.
On
September 21, 2009, we entered into an employment agreement with F. Thomas
Krotine, our COO. The agreement expires on September 21, 2010. Effective
November 1, 2009, Mr. Krotine will receive an annual base salary of
$65,000. The Compensation Committee of the Board of Directors may review Mr.
Krotine’s salary to determine what, if any, increases shall be made thereto.
Mr. Krotine was also granted stock options to purchase 169,000 shares of
our common stock, one-quarter of which shall vest at 6, 12, 18 and 24 months
from September 21, 2009 with an exercise price of $.51 per share. The agreement
may be terminated prior to the end of the term for cause. If Mr. Krotine’s
employment is terminated without cause or for “good reason,” as defined in the
agreement, he is entitled to 50% of the salary that would have been paid over
the balance of the term of the agreement. Further, a termination within one year
of a change in control shall be deemed to be a termination without
cause.
Contingencies.
On
November 18, 2009, Investment Hunter, LLC, one of our note holders, filed suit
in the Supreme Court of New York for repayment of $360,920 plus interest,
attorneys fees and costs. We have previously made payments totaling
$300,000 to Investment Hunter. We have engaged counsel in New York
and filed a response to Investment Hunter’s pleadings.
On
December 15, 2009, McLarty Associates LLC, one of our prior consultants, filed
suit in the Superior Court in Washington, D.C. against us seeking an additional
$150,000 from us under our consulting agreement. We have previously
paid McLarty Associates $210,000 and issued 90,000 shares of common stock yet we
have not received anything tangible from McLarty Associates. We are
in the process of filing a response to the complaint.
On
January 11, 2010, John Henke, the attorney who represented Trimax, LLC, filed
suit in the 52nd District
Court in Rochester Hills, MI to recover $13,750 owed to him as attorneys fees
under the Settlement Agreement we reached with Trimax on November 11,
2008. We are in the process of filing a response to the
complaint.
Lease
Commitments.
a.
|
The
Company leases office and lab facilities in Akron, OH on a month-to-month
basis for $1,800. Rent expense for the three
months ended December 31, 2009 and 2008 was $5,400 and $5,400,
respectively.
|
||
b.
|
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. Rent expenses for
the three months ended December 31, 2009 and 2008 were $9,023
and $8,133, respectively.
|
||
Note
6 — Equity
Reverse
Merger. A reverse merger with OCIS Corporation was consummated
on July 26, 2007. The shareholders of Ecology-CA 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 Trimax, LLC to purchase 500,000
shares of our stock at $2.00 per share. On November 11, 2008, the
exercise price of the warrants was reset to $.90 per share. The
warrants vested on December 17, 2007. The weighted average remaining life
of the warrants is 7.0 years.
On
February 6, 2008, we issued warrants to Hayden Capital 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
8.0 years.
On
March 1, 2008, we issued warrants to George Resta to purchase 12,500 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 8.0 years.
On
March 1, 2008, we issued warrants to Investment Hunter, LLC to purchase
125,000 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
8.0 years.
On June
9, 2008, we issued warrants to Hayden Capital 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 8.3 years.
On June
21, 2008, we issued warrants to Mitchell Shaheen to purchase 100,000 shares of
our common stock at $.75 per share. The warrants vested upon
issuance. The weighted average remaining life of the warrants is
8.3 years.
On July
14, 2008, we issued warrants to Mitchell Shaheen 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 8.3
years.
On July
14, 2008, we issued warrants to George Resta to purchase 15,000 shares of our
common stock at $1.75 per share. The warrants vested upon
issuance. The weighted average remaining life of the warrants is 8.3
years.
On July
14, 2008, we issued warrants to Investment Hunter, LLC to purchase 15,000 shares
of our common stock at $1.75 per share. The warrants vested upon
issuance. The weighted average remaining life of the warrants is 8.3
years.
We issued
the following immediately vested warrants to Equity 11 in conjunction with
Equity 11’s purchases of our Preferred Series A 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
|
|||
47,000
|
$
0.75
|
January
23, 2009
|
January
23, 2014
|
|||
15,000
|
$
0.75
|
February
10, 2009
|
February
10, 2014
|
|||
12,500
|
$
0.75
|
February
18, 2009
|
February
18, 2014
|
|||
20,000
|
$
0.75
|
February
26, 2009
|
February
26, 2014
|
|||
11,500
|
$
0.75
|
March
10, 2009
|
March
10, 2014
|
|||
40,000
|
$
0.75
|
March
26, 2009
|
March
26, 2014
|
|||
10,750
|
$0.75
|
April
14, 2009
|
April
14, 2014
|
|||
16,750
|
$0.75
|
April
29, 2009
|
April
29, 2014
|
On
November 11, 2008, we issued warrants to purchase 2,000,000 shares of our common
stock at $.50 per share to Trimax. The warrants vested upon
issuance. The weighted average remaining life of the warrants is 9.0
years.
Shares. On August
28, 2008, we entered into an agreement with Equity 11 to issue up to $5,000,000
in convertible preferred securities “Preferred Series A”). 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 Series A shares carry
“as converted” voting rights. As of December 31, 2009, we had issued
2,497 of these Preferred Series A shares. As we sold additional
Preferred Series A shares under this agreement, we issued attached warrants (500
warrants for each $1,000 Preferred Series A 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. The table above identifies warrants issued in conjunction
with Equity 11’s additional purchases of our Preferred Series A stock through
December 31, 2009.
On May
15, 2009, we entered into an agreement with Equity 11 to issue convertible
preferred securities at $1,000 per share (“Preferred Series B”). 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 a price equal to 20% of the average closing price of our common
shares for the five trading days immediately preceding the date of issuance. The
preferred securities carry “as converted” voting rights. As of
December 31, 2009, we have issued 776 of these Preferred Series B shares. These
shares are convertible into 8,954,371 of our common shares at the sole
discretion of Equity 11. In the event of a voluntary or involuntary
dissolution, liquidation or winding up, Equity 11 will be entitled to be paid a
liquidation preference equal to the stated value of the Preferred Series B
shares, plus accrued and unpaid dividends and any other payments that may be due
on such shares, before any distribution of assets may be made to holders of
capital stock ranking junior to the preferred shares.
On
September 30, 2009, Ecology Coatings, Inc. we and Stromback Acquisition
Corporation, entered into a Securities Purchase for the issuance and sale
of our 5.0% Cumulative Convertible Preferred Shares, Series B at a purchase
price of $1,000 per share (“Preferred Series B”). Stromback
Acquisition Corporation is owned by Richard Stromback a former
member of our Board of Directors. Until April 1, 2010, Purchaser
has the right to purchase up to 3,000 Preferred Series B shares. The
Preferred Series B shares have a liquidation preference of $1,000 per
share. Purchaser may convert the Preferred Series B shares into
common stock of the Company at a conversion price that is seventy seven
percent (77%) of the average closing price of Company’s common stock on the
Over-The-Counter Bulletin Board for the five trading days prior to each
investment. The Preferred Series B shares will pay cumulative cash
dividends at a rate of 5% per annum, subject to declaration by our Board of
Directors, on December 1 and June 1 of each year. We have agreed to
provide piggyback registration rights for common stock converted by Purchaser
under a Registration Rights Agreement. As of December 31, 2009, we
had issued 240 of these Preferred Series B shares. Those shares are convertible
into 571,429 shares of our common stock. Fifty percent (50%) of each
investment, up to a maximum of $500,000, will be placed in a fund and disbursed
as directed by Purchaser to satisfy our outstanding debts, accounts payable
and/or investor relations programs (“Discretionary Fund”).
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. On December 2, 2008, our Board of Directors authorized the
addition of 1,000,000 shares of our common stock to the 2007
Plan. 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.
We
granted non-statutory options as follows during the three months ended December
31, 2009:
Weighted
Average Exercise Price Per Share
|
Number
of Options
|
Weighted
Average (Remaining) Contractual Term
|
|
Outstanding
as of September 30, 2009
|
$1.13
|
5,131,119
|
8.5
|
Granted
|
$-
|
-
|
-
|
Exercised
|
$-
|
-
|
-
|
Forfeited
|
$-
|
-
|
-
|
Outstanding
as of December 31, 2009
|
$1.13
|
5,131,119
|
8.5
|
Exercisable
|
$1.01
|
3,070,119
|
6.2
|
3,070,119 of
the options were exercisable as of December 31, 2009. 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 December 31, 2009. Intrinsic value
arises when the exercise price is lower than the trading price on the date of
grant.
Employee
and director stock-based compensation expense is measured utilizing the
fair-value method.
We
account for stock options granted to non-employees 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.
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
|
86.04%-101.73%
|
Risk
free interest rate
|
.10%-5.11%
|
Expected
life
|
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
Ecology.
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 the option grant.
Based
upon the above assumptions and the weighted average $1.13 per share exercise
price, the options outstanding at December 31, 2009 had a total unrecognized
compensation cost of $483,287 which will be recognized over the remaining
weighted average vesting period of .5 years. Options cost of $165,044 was
recorded as an expense for the three months ended December 31, 2009 of which
$162,212 was recorded as compensation expense and $2,832 was recorded as
consulting expense.
Note
8 — 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 three months ended December
31, 2009 and 2008, we incurred net losses of ($835,916) and ($2,754,109),
respectively. As of December 31, 2009 and September 30, 2009, we
had stockholders’ deficits of ($2,199,933) and ($2,010,657),
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 primarily through the
issuance of equity securities and debt and through some limited operating
revenues. Until we are able to generate positive operating cash
flows, additional funds will be required to support our
operations. We will need to acquire additional immediate funding in
fiscal year 2010 to continue our operations. 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.
Note
9 — Subsequent Events
We
evaluated subsequent events for potential recognition and/or disclosure through
February 16, 2010, the date the consolidated financial statements were
issued.
On
January 13, 2010, we issued 55 Preferred Series B, at an aggregate price of
$55,000 to Equity 11. These shares can be converted into 1,100,000 shares of our
common stock.
On February 3, 2010, we entered into a Commercialization Agreement with WS
Packaging Group, Inc. (“WSP”). The Agreement provides the terms and
conditions for WSP’s purchase of our coatings for use on labels and packaging
manufactured by WSP.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Except
for statements of historical fact, the information presented herein constitutes
forward-looking statements. These forward-looking statements generally can be
identified by phrases such as “anticipates,” “believes,” “estimates,” “expects,”
“forecasts,” “foresees,” “intends,” “plans,” or other words of similar import.
Similarly, statements herein that describe our business strategy, outlook,
objectives, plans, intentions or goals also are forward-looking
statements. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, but are not limited to, our ability
to: successfully commercialize our technology; generate revenues and achieve
profitability in an intensely competitive industry; compete in products and
prices with substantially larger and better capitalized competitors;
secure, maintain and enforce a strong intellectual property portfolio; attract
immediate additional capital sufficient to finance our working capital
requirements, as well as any investment of plant, property and equipment;
develop a sales and marketing infrastructure; identify and maintain
relationships with third party suppliers who can provide us a reliable source of
raw materials; acquire, develop, or identify for our own use, a manufacturing
capability; attract and retain talented individuals; continue operations during
periods of uncertain general economic or market conditions, and; other events,
factors and risks previously and from time to time disclosed in our filings with
the Securities and Exchange Commission, including, specifically, the “Risk
Factors” enumerated herein.
Overview
We
develop “clean tech”, nanotechnology-enabled, ultra-violet (“UV”) curable
coatings that are designed to drive efficiencies, reduce energy consumption,
create new performance characteristics and virtually eliminate pollutants in the
manufacturing sector. We create proprietary coatings with unique
performance and environmental attributes by leveraging our platform of
integrated clean technology products that reduce overall energy consumption and
offer a marked decrease in drying time.
Our
patent and intellectual property activities to date include:
|
·
|
five patents
covering elements of our technology from the United States Patent and
Trademark Office(“USPTO”)
|
|
·
|
one European
patents allowed and five pending patent applications in foreign
countries
|
|
·
|
three
trademarks issued by the USPTO – “EZ Recoat™”, “Ecology Coatings™” and
“Liquid Nanotechnology™”
|
·
|
200+
proprietary coatings formulations.
|
We
continue to work independently on developing our clean technology products
further. Our target markets include the electronics, steel, construction,
automotive and trucking, paper products and original equipment manufacturers
(“OEMs”). Our business model contemplates both licensing and direct
sales strategies. We intend to license our technology to industry
leaders in our target markets, through which products will be sold to end
users. We plan to use direct sales teams and third party agents in
certain target markets, such as OEMs, and third party distributors in broad
product markets, such as paper products, to develop our product sales.
Operating
Results
Three
Months Ended December 31, 2009 and 2008
Revenues. Product
sales generated revenues of $5,457 for the three months ended
December 31, 2009. We had no revenue for the corresponding period in
2008.
Salaries and
Fringe Benefits. The decrease of approximately $157,000 in
such expenses for the three months ended December 31, 2009 compared to the three
months ended December 31, 2008 is the result of the elimination of one salaried
employee and the reduction of the salary of one employee effective September 1,
2009. These reductions were partially offset by the expense
associated with options issued to three employees in September of 2009, and the
restoration, in November, 2009, of certain salary reductions that were made in
November, 2008 .
Professional
Fees. The decrease
of approximately $1,864,000 in these expenses for the three months ended
December 31, 2009 compared to the three months ended December 31, 2008 is
the result of the issuance of 2,000,000 options to Trimax in November,
2008. These options vested upon issuance, so the entire charge of
$1,368,000 was recognized in that month. Additionally, approximately $360,000
associated with options issued to Sales Attack were recognized in the three
months ended December 31, 2008 and approximately $90,000 in consulting fees were
recognized in the three months ended December 31, 2008 and they did not recur in
the corresponding period for 2009.
Other General and
Administrative. The increase of approximately $180,000 in
these expenses for the three months ended December 31, 2009 compared to the
three months ended December 31, 2008 reflects the recognition of the write off
of certain patents totaling approximately $222,000. This was partially offset by
a reduction in travel expenses for the three months ended December 31,
2009.
Operating
Losses. The decreased loss between the reporting periods is
explained in the discussion above.
Interest Expense.
The decrease of approximately $62,000 for the three months ended December
31, 2009 compared to the three months ended December 31, 2008 is the result of
the revaluing of previously issued detachable warrants during the three months
ended December 31, 2008.
Income Tax
Provision. No provision for income tax benefit from net
operating losses has been made for the three months ended December 31, 2009 and
2008 as we have fully reserved the asset until realization is more reasonably
assured.
Net
Loss. The decrease in the Net Loss of approximately $1,920,000
for the three months ended December 31, 2009 compared to the three months ended
December 31, 2008 is fully explained in the foregoing discussions of the various
expense categories.
Basic and Diluted
Loss per Share. The change in basic and diluted net loss per share for
the three months ended December 31, 2009 reflects the decreased Net Loss
discussed as well as by the increase in weighted average shares outstanding
during the three months ended December 31, 2009.
Liquidity and Capital
Resources
Cash and
cash equivalents as of December 31, 2009 and September 30, 2008 totaled
$27,323 and $0, respectively. The increase reflects cash used in
operations of $411,195 and cash used to purchase fixed and intangible assets of
$1,082. These uses were more than offset by borrowings of $3,600 and
the issuance of $436,000 in Preferred Series B stock.
We have
incurred an accumulated deficit of $24,343,256. We have incurred
losses primarily as a result of general and administrative expenses, salaries
and benefits, professional fees, and interest expense. Since our
inception, we have generated very little revenue, though we did generate $5,457
in the three months ended December 31, 2009.
We expect
to continue using substantial amounts of cash to: (i) develop and protect
our intellectual property; (ii) further develop and commercialize our
products; (iii) fund ongoing salaries, professional fees, and general
administrative expenses. Our cash requirements may vary materially
from those now planned depending on numerous factors, including the status of
our marketing efforts, our business development activities, the results of
future research and development, competition and our ability to generate revenue
.
Historically,
we have financed operations primarily through the issuance of debt and the sale
of equity securities. In the near future, as additional capital is
needed, we expect to rely primarily on the sale of convertible preferred
securities.
As of
December 31, 2009, we had notes payable to five separate parties on which
we owed approximately $804,336 in principal and accrued
interest. These notes do not contain any restrictive covenants with
respect to the issuance of additional debt or equity securities by
us. Notes and the accrued interest totaling $786,209 owing to three
note holders were due prior to September 30, 2008 and their holders demanded
payment. We have paid $320,000 in principal and accrued interest
against the remaining principal and interest balance on two of these
notes. We have not made any payment to the third note holder to whom
we owed approximately $294,351 in principal and accrued interest as of December
31, 2009. Additionally, we have notes owing to shareholders totaling
approximately $278,01 including accrued interest as of December 31,
2009. These notes are due and payable on December 31, 2009. None
of the debt is subject to restrictive covenants. All of the debt is
unsecured.
On four
separate occasions beginning November 9, 2009 and concluding December 30, 2009,
Equity 11 purchased a total of 186 Preferred Series B shares under our May 15,
2009 agreement at $1,000 per share. This brought their total holdings
of such shares to 776 Preferred Series B shares. Equity 11 also holds
2,497 Preferred Series A shares and 1,178,500 warrants under our August 28, 2008
agreement. In addition, Stromback Acquisition Corporation purchased
240 Preferred Series B shares on October 1, 2009. We will need to
raise immediate additional funds in the first quarter of calendar year 2010 to
continue our operations. At present, we do not have any binding
commitments for additional financing. If we are unable to obtain
additional financing, we would seek to negotiate with other parties for debt or
equity financing, pursue additional bridge financing, and negotiate with
creditors for a reduction and/or extension of debt and other obligations through
the issuance of stock. At this point, we cannot assess the likelihood
of achieving these objectives. If we are unable to achieve these
objectives, we would be forced to cease our business, sell all or part of our
assets, and/or seek protection under applicable bankruptcy laws.
On
December 31, 2009, we had 32,910,684 common shares issued and outstanding and
3,513 Preferred Series A and Preferred Series B shares issued and
outstanding. These preferred shares and accumulated and unpaid
dividends can be converted into a total of 14,519,799 shares of our common
stock. As of December 31, 2009, options and warrants to purchase up
to 8,058,019 shares of common stock had been granted.
Off-Balance Sheet
Arrangements
See Notes
to the Consolidated Financial Statements in this Form 10-Q beginning on page 1.
The details of such arrangements are found in Note 5 – Commitments and
Contingencies and Note 9 – Subsequent Events.
Critical Accounting Policies
and Estimates
Our
financial statements are prepared in accordance with U.S. Generally Accepted
Accounting Principles. Preparation of the statements in accordance with these
principles requires that we make estimates, using available data and our
judgment, for such things as valuing assets, accruing liabilities and estimating
expenses. The following is a discussion of what we feel are the most critical
estimates that we must make when preparing our financial
statements.
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.
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 our 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.
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
|
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 with 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 is amortized on a
straight-line basis over its estimated useful life. For purposes of the
preparation of the audited, consolidated financial statements, we have recorded
amortization expense associated with the patents based on an eight year useful
life.
Stock-Based
Compensation. We have a stock incentive plan that provides for
the issuance of stock options, restricted stock and other awards to employees
and service providers. We calculate compensation expense under SFAS 123(R) using
a Black-Scholes option pricing model. In so doing, we estimate certain key
assumptions used in the model. We believe the estimates we use, which are
presented in Note 7 of Notes to the Consolidated Financial Statements, are
appropriate and reasonable.
Recent Accounting
Pronouncements
In
June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets, as amendment to SFAS No. 140 (SFAS166). SFAS 166
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures in order to enhance information reported to users of financial
statements by providing greater transparency about transfers of financial
assets, including securitization transactions, and an entity’s continuing
involvement in and exposure to the risks related to transferred financial
assets. SFAS 166 is effective for fiscal years beginning after November 15,
2009. We will adopt SFAS 166 in fiscal 2010 as applicable. It would not have had
any impact on any of the financial statements that we’ve issued to
date.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” (SFAS 167). SFAS 167 amends FASB Interpretation
No. 46 (Revised December 2003), “Consolidation of Variable Interest
Entities—an interpretation of ARB No. 51,” (FIN 46(R)) to require an
enterprise to perform an analysis to determine whether the enterprise’s variable
interest or interests give it a controlling financial interest in a variable
interest entity; to require ongoing reassessments of whether an enterprise is
the primary beneficiary of a variable interest entity; to eliminate the
quantitative approach previously required for determining the primary
beneficiary of a variable interest entity; to add an additional reconsideration
event for determining whether an entity is a variable interest entity when any
changes in facts and circumstances occur such that holders of the equity
investment at risk, as a group, lose the power from voting rights or similar
rights of those investments to direct the activities of the entity that most
significantly impact the entity’s economic performance; and to require enhanced
disclosures that will provide users of financial statements with more
transparent information about an enterprise’s involvement in a variable interest
entity. SFAS 167 becomes effective on January 1, 2010. We do not anticipate
SFAS 167 will have a material impact on our consolidated financial statements
upon adoption.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Not
applicable since we are a smaller reporting company under the applicable SEC
rules.
Item
4T. Controls and Procedures
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures were ineffective as of the end of the period covered by this
report to ensure that information we are required to disclose in reports that we
file or submit under the Securities Exchange Act of 1934 (i) is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure in that our auditors made adjustments to our Black-Scholes
calculations used to expense stock options and warrants.
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), and
for the assessment of the effectiveness of internal control over financial
reporting. As defined by the Securities and Exchange Commission, internal
control over financial reporting is a process designed by, or under the
supervision of, our principal executive officer and principal financial officer
and effected by our Board, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the consolidated financial statements in accordance with U.S.
generally accepted accounting principles.
Our
internal control over financial reporting is supported by policies and
procedures that: (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect our transactions and dispositions of our
assets; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of the consolidated financial statements in
accordance with U.S. generally accepted accounting principles, and that our
receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the consolidated financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect
misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
We made changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rules 13a-15 or
15d-15 under the Exchange Act that occurred during our last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. Those changes includes
implementation of controls concerning the issuance of invoices upon the sale of
our coatings and the generation of sales and accounts receivable
reporting. Additionally, our CFO no longer backs up our accounting
software on a weekly basis on CDs as our IT consultant has reported that the
automatic back up is functional.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
As of
December 31, 2009, the Company was in default in the payment of principal and
interest on the following promissory notes:
Note Holder
|
Issue Date(s)
|
Amount Owing on December 31,
2009
|
Investment
Hunter, LLC
|
March
1, 2008
|
$380,841
|
Mitchell
Shaheen I
|
September
21, 2008
|
$211,348
|
Mitchell
Shaheen II
|
July
14, 2008
|
$143,013
|
George
Resta
|
March
1, 2008
|
$51,008
|
Rich Stromback | November 13, 2003 | $2,584 |
Deanna Stromback | December 15, 2003 | $124,986 |
Douglas Stromback | August 10, 2004 | $150,442 |