ABVC BIOPHARMA, INC. - FORM 10-Q

Attached files

file	filename
EX-31.2 - CFO CERTIFICATION - ABVC BIOPHARMA, INC.	cfocertification3rdq2011.htm
EX-31.1 - CEO CERTIFICATION - ABVC BIOPHARMA, INC.	ceocertification3rdq2011.htm
EX-32.1 - JOINT CERTIFICATION - ABVC BIOPHARMA, INC.	jointcertification3rdq2011.htm

UNITED STATES

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011


o		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.)

24663 Mound Road, Warren MI 48091

(Address of principal executive offices) (Zip Code)

(586) 486-5308

(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 x No □

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o	Accelerated Filer o
Non-accelerated filer o	Smaller Reporting Company x

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 stock, as of the latest practicable date.

As of July 15, 2011, there were 10,658,506 shares of our common stock, $0.001 par value per share (“common stock”), 268 shares of our Preferred Series B stock and 1,580 shares of our Preferred Series C stock issued and outstanding.

ECOLOGY COATINGS, INC.

FORM 10-Q INDEX

FOR THE QUARTER ENDED JUNE 30, 2011

		Page

PART I — FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)
		5
	Unaudited Consolidated Balance Sheets at June 30, 2011 and September 30, 2010 Unaudited Consolidated Statements of Operations for the For the Three Months Ended June 30, 2011 and 2010 and For the Nine Months Ended June 30, 2011 and 2010	7

	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2011 and 2010	8

	Notes to Unaudited Condensed Consolidated Financial Statements	10

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26

ITEM 4.	CONTROLS AND PROCEDURES	26

PART II — OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	26

ITEM 1A.	RISK FACTORS	26

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	33

ITEM 6.	EXHIBITS	34

SIGNATURES		35

EXHIBIT INDEX		34

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Unaudited Consolidated Balance Sheets
ASSETS
	June 30, 2011		September 30, 2010

Current assets
Cash	$	73,346	$	2,814
Prepaid expenses		46,329		30,337

Current Assets		119,675		33,151

Property, plant and equipment
Computer equipment		31,650		30,111
Furniture and fixtures		22,803		21,027
Test equipment		40,598		11,096
Signs		213		213
Software		6,057		6,057
Video		48,177		48,177
Property, plant and equipment		149,498		116,681
Accumulated depreciation		(86,059)		(74,756)

Property, plant and equipment, net		63,439		41,925

Other
Patents-net		202,641		211,845
Trademarks-net		6,835		7,014

Other assets		209,476		218,859

Total Assets	$	392,590	$	293,935

See the accompanying notes to the unaudited consolidated financial statements.

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Unaudited Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
	June 30, 2011			September 30, 2010

Current liabilities
Accounts payable	$	15,153	$		989,459
Accounts payable - related party		-			242,730
Credit card payable		-			114,622
Accrued liabilities		224,951			71,500
Interest payable		360,856			398,191
Notes payable		250,000			1,110,300
Notes payable - related party		900,332			300,332
Preferred dividends payable		7,197			60,618
Total current liabilities		1,758,489			3,287,752

Commitments and Contingencies (Note 5)

Stockholders' (deficit)
Preferred stock - 10,000,000 $.001 par value shares authorized; 1,848 and 3,657 shares issued and outstanding as of June 30, 2011 and September 30, 2010, respectively		2			4
Common stock - 90,000,000 $.001 par value shares authorized; 10,658,506 and 6,582,137 issued and outstanding as of June 30, 2011 and September 30, 2010, respectively		10,659			32,934
Additional paid-in capital		26,711,456			22,738,182
Accumulated deficit		(28,088,016)			(25,764,937)

Total Stockholders' (deficit)		(1,365,899)			(2,993,817)

Total liabilities and stockholders'
(Deficit)	$	392,590		$	293,935

See the accompanying notes to the unaudited consolidated financial statements.

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
	For the three months ended	For the three months ended	For the nine months ended	For the nine months ended
	June 30, 2011	June 30, 2010	June 30, 2011	June 30, 2010


Revenues	$ -	$ 2,829	$3,190	$ 13,714

Officer salaries and fringe benefits	144,597	112,439	409,216	423,616
Professional fees	49,438	84,204	192,462	355,985
Other general and administrative expense	579,320	145,085	871,760	781,440
Total general and administrative expenses	773,355	341,728	1,473,438	1,561,040

Operating loss	(773,355)	(338,899)	(1,470,248)	(1,547,326)

Other income (expense)
Income from forgiveness of payables and debt	-	191,555	872,861	191,555
Other non-operating income	500	-	1,268	-
Interest expense	(42,557)	(61,969)	(160,498)	(168,048)
Total other income (expenses) - net	(42,057)	(129,586)	713,631	23,507

Net loss	$(815,412)	$(209,313)	$(756,617)	$(1,523,819)

Preferred dividend – beneficial
conversion	(333,334)	-	(1,498,334)	(988,544)
Preferred dividends – stock dividends	(20,104)	(44,349)	(68,128)	(141,335)

Net loss available to common shareholders	(1,168,850)	(253,662)	(2,323,079)	(2,653,699)

Basic and diluted net loss per share	$(0.11)	$(0.04)	$(0.25)	$(0.40)

Basic and diluted weighted average
shares outstanding	10,658,506	6,582,137	9,248,566	6,582,137

See the accompanying notes to the unaudited consolidated financial statements.

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
	For the	For the
	nine months ended	nine months ended
	June 30, 2011	June 30, 2010
OPERATING ACTIVITIES
Net loss	$(756,617)	$(1,523,819)
Adjustments to reconcile net loss
to net cash used in operating activities:
Income from forgiveness of payables and debt	(872,861)	-
-Depreciation and amortization	25,627	34,134
Option expense	641,614	361,138
Issuance of stock for payables, services	114,500	22,500
Loss from patent abandonment	-	222,112
Changes in Asset and Liabilities
Prepaid expenses	(15,993)	(43,297)
Bank overdraft	-	(200)
Accounts payable	(540,662)	(98,911 )
Accrued liabilities	171,837	(9,155)
Credit card payable	(22,719)	-
Interest payable	(37,335)	158,618
Net Cash Used In Operating Activities	(1,292,609)	(876,880)
INVESTING ACTIVITIES
Purchase of fixed assets	(32,817)	(1,400)
Purchase of patents and trademarks	(4,940)	(1,316)
Net Cash Used in Investing Activities	(37,757)	(2,716)
FINANCING ACTIVITIES
Repayment of debt	(236,103)	-
Proceeds from issuance of debt	292,000	402,616
Proceeds from issuance of convertible preferred stock	1,345,000	491,000
Net Cash Provided By Financing Activities	1,400,897	893,616

Net Change in Cash	70,531	14,020

CASH AT BEGINNING
BEGINNING OF PERIOD	2,814	-
CASH AT END
OF PERIOD	$73,346	$ 14,020

See the accompanying notes to the unaudited consolidated financial statements.

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
	For the	For the
	nine months ended	nine months ended
	June 30, 2011	June 30, 2010
Debt converted into preferred shares	220,000	-

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid	$193,897	$ -

See the accompanying notes to the unaudited consolidated financial statements.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011 AND JUNE 30, 2010

Note 1 — Summary of Significant Accounting Policies

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 EcoBloc™ 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”).

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, 2010 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, 2010 annual consolidated financial statements included in the Form 10-K we filed with the Securities and Exchange Commission on January 13, 2011.

Our operating results for the nine months ended June 30, 2011 are not necessarily indicative of the results that can be expected for the year ending September 30, 2011 or for any other period.

Reclassifications have been made to prior period financial statements to conform with the current quarter presentation.

Basis of Presentation. On February 7, 2011, our shareholders approved a one for five reverse stock split. In accordance with U.S. Generally Accepted Accounting Principles, we have restated all share and per share related information to conform to this reverse split for all periods presented. This includes information related to stock options, warrants, and convertible preferred shares. See Note 6.

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.

Revenue Recognition. Revenues from licensing contracts are recorded ratable 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 from forgiveness of payables and Debt. Income from the forgiveness of payables and/or debt is recognized when all of the conditions associated with the forgiveness have been met. During the three and nine months ended June 30, 2011, we recognized $0 and $872,861 in income from forgiveness of payables and debt. We also reached a settlement with a law firm to whom we owed approximately $340,000. In exchange for a cash payment and the issuance of 650,000 shares of our common stock, the firm released its claim subject to two conditions. The first condition involves an additional payment of the first $100,000 in revenue we receive from a potential future patent licensing agreement plus 25% of revenue in excess of $100,000, or, if we fail to consummate a licensing agreement by December 29, 2011, the issuance of an additional 25,000 shares of our common stock. The second condition requires that if we file bankruptcy on or before December 29, 2011, the entire amount of the payable not yet settled—approximately $178,000 – could be filed as a bankruptcy claim. The amount of the payable not yet settled - $178,000 - is reflected in the accrued liabilities figure on our balance sheet dated June 30, 2011.

Loss Per Share. Basic loss per share is computed by dividing the net loss available to common shareholders 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 available to common shareholders 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. None of the stock options 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 June 30, 2011 and June 30, 2010, there were 33,274,578 and 5,246,820 potentially dilutive shares outstanding, respectively.

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
Signs	7 years
Software	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.

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. Five patents were issued as of June 30, 2011 and are being amortized over 8 years.

Long-Lived Assets. 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 undiscounted 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.

Stock-Based Compensation. Employee and director stock-based compensation expense is measured utilizing the fair-value method with expense charged to earnings over the vesting period on a straight-line basis.

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 $144,897 and $112,439 for the three months ended June 30 , 2011 and 2010, respectively, include wages paid to and insurance benefits for our officers. Professional fees of $49,438 and $84,204 for the three months ended June 30, 2011 and 2010, respectively, include amounts paid to attorneys, accountants, and consultants, as well as the stock based compensation expense for those services. Salaries and Fringe Benefits of $409,216 and $423,616 for the nine months ended June 30, 2011 and 2010, respectively, include wages paid to and insurance benefits for our officers. Professional fees of $192,462 and $355,985 for the nine months ended June 30, 2011 and 2010, respectively, include amounts paid to attorneys, accountants, and consultants, as well as the stock based compensation expense for those services.

Recent Accounting Pronouncements

We have reviewed all Accounting Standards Updates issued by the Financial Accounting Standards Board since we last issued financial statements as part of our Form 10-Q filed on May 12, 2011 and have determined none of them would have a material effect on the consolidated financial statements upon adoption.

Note 2 — Concentrations

For the nine months ended June 30, 2011 and 2010, we had revenue of $0 and $13,714, respectively. One customer accounted for all of our revenues for the nine months ended June 30, 2010.

For the three months ended June 30, 2011 and 2010, we had revenues of $0 and $2,829, respectively. One customer accounted for all of our revenues for the three months ended June 30, 2010. As of June 30, 2011, $0 was due from this customer.

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 June 30, 2011 and September 30, 2010, the note had an outstanding balance of $110,500. The accrued interest on the note was $22,154 and $19,561 as of June 30, 2011 and September 30, 2010, respectively. The note is currently in default and carries 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.

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 June 30, 2011 and September 30, 2010, the note had an outstanding balance of $133,000. The accrued interest on the note was $26,671 and $23,551 as of June 30, 2011 and September 30, 2010, respectively. The note is currently in default and carries 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.

We have an unsecured note payable to Equity 11, Ltd. (“Equity 11”) which is controlled by James Juliano, our Chairman. 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 June 30, 2011 and September 30, 2010, the note had an outstanding balance of $7,716. Accrued interest of $805 and $598 was outstanding of June 30, 2011 and September 30, 2010, respectively.

We have an unsecured note payable to Equity 11. 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 June 30, 2011 and September 30, 2010, the note had an outstanding balance of $6,500. Accrued interest of $609 and $436 was outstanding of June 30, 2011 and September 30, 2010, respectively.

We have an unsecured note payable to Equity 11. 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 June 30, 2011 and September 30, 2010, the note had an outstanding balance of $3,600. Accrued interest of $294 and $200 was outstanding of June 30, 2011 and September 30, 2010, respectively.

We have an unsecured note payable to Equity 11. 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 June 30, 2011 and September 30, 2010, the note had an outstanding balance of $3,516. Accrued interest of $235 and $144 was outstanding of June 30, 2011 and September 30, 2010, respectively.

We have an unsecured note payable to Equity 11. 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 June 30, 2011 and September 30, 2010, the note had an outstanding balance of $5,000. Accrued interest of $320 and $190 was outstanding as of June 30, 2011 and September 30, 2010, respectively.

We have an unsecured note payable to Equity 11. 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 June 30, 2011 and September 30, 2010, the note had an outstanding balance of $6,500. Accrued interest of $409 and $241 was outstanding as of June 30, 2011 and September 30, 2010, respectively.

We have an unsecured note payable to Nirta Enterprises, LLC. This note bears interest at five percent 5% per annum and is convertible under certain conditions. The note was payable in full on June 30, 2010 and is in default. Nirta Enterprises, LLC is wholly owned by Joseph Nirta, a member of our Board of Directors. As of June 30, 2011 and September 30, 2010, the note had an outstanding balance of $24,000. Accrued interest of $1,485 and $865 was outstanding as of June 30, 2011 and September 30, 2010, respectively.

We have a secured note payable to John Salpietra, a member of our Board of Directors. This note bears interest at 4.75% per annum, is secured by a lien on our intellectual property, and is convertible into shares of our common stock at $.06 per share. It is due in full on December 4, 2011. As of June 30, 2011 and September 30, 2010, the note had an outstanding balance of $600,000 and $528,000, respectively. Accrued interest of $28,837 and $7,294 was outstanding as of June 30, 2011 and September 30, 2010, respectively.

On March 30, 2011, we paid $74,862 to James Juliano to reimburse him for legal fees that he paid on our behalf for counsel to our Board of Directors, shareholder communications, negotiating our new investment agreement, and for negotiations with two note holders.

On September 2, 2010, we entered into a lease with Omega Development Corporation for office space for our headquarters located in Warren, Michigan. Omega Development Corporation is owned by James Juliano. The lease was effective June 17, 2010 with a term ending December 17, 2010. Effective May 1, 2011, we entered into a lease with J.M. Land Co. for the same office space. J.M. Land Co. is owned by James Juliano. We pay monthly rent of $1,000, and the gas and electric utilities which has historically averaged approximately $1,000 per month. See also Note 5—Commitments and Contingencies—Lease Agreements.

Note 4 — Notes Payable

We have the following notes:

	June 30, 2011	September 30, 2010

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 3,000 shares of the Company’s common stock at $8.75 per share. Additionally, the Company granted the note holder warrants to purchase 2,500 shares of the Company’s common stock at $8.75 per share. The note, together with accrued interest of $29,067 then owing, was settled on March 4, 2011.	$-		$38,743

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 3,000 shares of the Company’s common stock at $8.75 per share. Additionally, the Company granted the note holder warrants to purchase 25,000 shares of the Company’s common stock at $8.75 per share. The note, together with accrued interest of $164,830 was settled on March 4, 2011	-		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 20,000 shares of the Company’s common stock at a price equal to $3.75 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 $2.50 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 $163,990 and $127,653 was outstanding as of June 30, 2011 and September 30, 2010, respectively. This note is currently in default.	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 20,000 shares of the Company’s common stock at a price equal to $2.50 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 $2.50 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 $112,462 and $87,878 was outstanding as of June 30, 2011 and September 30, 2010, respectively. This note is currently in default.	100,000		100,000

	$250,000		$1,100,300

$250,000 and $1,100,300 of the notes payable in the foregoing table were in default as of June 30, 2011 and September 30, 2010, respectively.

Note 5 — Commitments and Contingencies

Consulting Agreements.

On September 17, 2008, we entered into an agreement with RJS Consulting LLC (“RJS”), an entity owned by our former 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. Stromback has not performed any services under this agreement since its inception. We therefore stopped accruing amounts due under this agreement and wrote off the amount previously due.

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 Rich Stromback. Under this agreement, DAS will provide business development services for which it 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.

Employment Agreements.

On January 1, 2007, we entered into an employment agreement with Sally J.W. Ramsey who is our founder and serves as VP of New Product Development. The agreement expires on January 1, 2012. She was paid an annual base salary of $180,000 in 2007. From January 1, 2008 through December 15, 2008, she received an annual base salary of $200,000. On December 15, 2008, we amended the agreement to reduce Ms. Ramsey’s annual base salary to $60,000 and on September 21, 2009 her annual salary was increased to $75,000. On May 18, 2011, we increased her annual base salary to $100,000. Additionally, on April 22, 2011, she forfeited previously issued stock options and received options to purchase 2.1 million shares of our common stock at a price of $0.20 per share. The options vested upon issuance and expire on April 22, 2021.

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 receives an annual base salary of $200,000. On April 22, 2011, Mr. Crockett forfeited previously issued stock options and he received options to purchase 1.8 million shares of our common stock at a price of $.20 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. As of June 30, 2011, Mr. Crockett had deferred $40,000 of his salary since May 2010.

On September 21, 2009, we entered into an employment agreement with Daniel V. Iannotti, our Vice President, General Counsel & Secretary. Mr. Iannotti served as our Vice President, General Counsel from August 11, 2008 until March 23, 2010 and rejoined us on May 17, 2010. His employment agreement expires on September 17, 2012. Mr. Iannotti receives an annual base salary of $100,000. On April 22, 2011, Mr. Iannotti forfeited previously issued stock options and received options to purchase 300,000 shares of our common stock at a price of $.20 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 Vice President, Business Development. Effective November 1, 2009, Mr. Krotine received an annual base salary of $65,000. On April 22, 2011, we amended our employment agreement with Mr. Krotine. Under the new amendment, he will receive an annual salary of $100,000 and, in exchange for forfeiting previously issued stock options, was granted options to purchase 300,000 shares of our common stock at $0.20 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.

On April 22, 2011, our Board of Directors approved compensation for our Chairman, James Juliano, of $4,000 per month.

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 25% interest, attorneys’ fees and costs. We have previously made payments totaling $300,000 to Investment Hunter. On March 15, 2010, the Court found in favor of Investment Hunter, LLC and awarded it $367,000 plus interest from the date of the lawsuit. A judgment against us in the amount of $367,000 plus interest was entered on August 4, 2010. We had accrued $440,267 including interest relating to this note, as of December 31, 2010. We settled this lawsuit on March 4, 2011. .

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 had previously paid McLarty Associates $210,000 and issued 18,000 shares of common stock On August 5, 2010, the court granted McLarty’s motion for summary judgment and on August 6, 2010 the court entered a judgment against us in the amount of $150,000. The amount was included in accounts payable on our balance sheet as of September 30, 2010. We settled this lawsuit on February 28, 2011.

On September 12, 2010, Thomson Reuter (Markets), LLC filed suit in the 37th Judicial District Court in Warren, Michigan for nonpayment of services provided in the amount of $20,297 plus interest. We settled this lawsuit on February 28, 2011.

On October 26, 2010, Mitch Shaheen, one of our note holders, filed suit in the United States District Court for the Eastern District of Michigan seeking repayment of principal, 25% interest and attorneys’ fees for amounts under promissory notes we issued to him in the original principal amount of $250,000. Our position is that a settlement was reached by the parties. We have filed an answer and have been engaged in discussions to resolve his suit. We have recorded a liability of $526,452 on our balance sheet including interest relating to this note as of June 30, 2011.

On October 26, 2010, Semple, Marchal & Cooper, LLP, our former auditor, filed suit in the Superior Court of the County of Maricopa Arizona for nonpayment of professional fees in the amount of $37,882 plus interest. We had accrued $61,845 in our accounts payable as of December 31, 2010 for this vendor. We settled this lawsuit on February 28, 2011.

Lease Commitments.


	a.		We lease office and lab facilities in Akron, OH on a month-to-month basis for $1,200 per month. Rent expense for the three months ended June 30, 2011 and 2010 was $3,600 and $5,400, respectively. Rent expense for the six months ended June 30, 2011 and 2010 was $9,000 and $10,800, respectively.

	b.		Effective May 1, 2011, we entered into a lease with J.M. Land Company for office space for our headquarters located in Warren, Michigan. The lease was effective May 1, 2011 and expires on April 30, 2012. This lease replaces the earlier lease agreement on the same premises. Monthly rent is $1,000 and we pay the gas and electric utilities for our headquarters building which has historically averaged approximately $1,000 per month. Rent and utilities expenses for the nine months and the three months ended June 30, 2011 totaled $12,438 and $3,114 respectively.

Note 6 — Equity

Warrants. On December 16, 2006, we issued warrants to Trimax, LLC to purchase 100,000 shares of our stock at $10.00 per share. On November 11, 2008, the exercise price of the warrants was changed to $4.50 per share. The warrants vested on December 17, 2007. As of June 30, 2011, the remaining life of the warrants is 5.5 years.

On February 6, 2008, we issued warrants to Hayden Capital to purchase 52,500 shares of our common stock at the lower of $10.00 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. As of June 30, 2011, the remaining life of the warrants is 6.5 years.

On March 1, 2008, we issued warrants to George Resta to purchase 2,500 shares of our common stock at the lower of $10.00 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. As of June 30, 2011, the remaining life of the warrants is 6.5 years.

On March 1, 2008, we issued warrants to Investment Hunter, LLC to purchase 25,000 shares of our common stock at the lower of $10.00 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. As of June 30, 2011, the remaining life of the warrants is 6.5 years.

On June 9, 2008, we issued warrants to Hayden Capital to purchase 42,000 shares of our common stock at the lower of $10.00 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. As of June 30, 2011, the remaining life of the warrants is 6.8 years.

On June 21, 2008, we issued warrants to Mitchell Shaheen to purchase 20,000 shares of our common stock at $3.75 per share. The warrants vested upon issuance. As of June 30, 2011, the remaining life of the warrants is 6.8 years.

On July 14, 2008, we issued warrants to Mitchell Shaheen to purchase 20,000 shares of our common stock at $2.50 per share. The warrants vested upon issuance. As of June 30, 2011, the remaining life of the warrants is 6.8 years.

On July 14, 2008, we issued warrants to George Resta to purchase 3,000 shares of our common stock at $8.75 per share. The warrants vested upon issuance. As of June 30, 2011, the remaining life of the warrants is 6.8 years.

On July 14, 2008, we issued warrants to Investment Hunter, LLC to purchase 3,000 shares of our common stock at $8.75 per share. The warrants vested upon issuance. As of June 30, 2011, the remaining life of the warrants is 6.8 years.

We issued the following immediately vested warrants to Equity 11 in conjunction with Equity 11’s purchases of our convertible preferred stock:

	Strike	Date	Expiration
Number	Price	Issued	Date
20,000	$3.75	July 28, 2008	July 28, 2018
1,000	$3.75	August 20, 2008	August 20, 2018
5,000	$3.75	August 27, 2008	August 27, 2018
100,000	$3.75	August 29, 2008	August 29, 2018
75,000	$3.75	September 26, 2008	September 26, 2018
9,400	$3.75	January 23, 2009	January 23, 2014
3,000	$3.75	February 10, 2009	February 10, 2014
2,500	$3.75	February 18, 2009	February 18, 2014
4,000	$3.75	February 26, 2009	February 26, 2014
2,300	$3.75	March 10, 2009	March 10, 2014
8,000	$3.75	March 26, 2009	March 26, 2014
2,150	$3.75	April 14, 2009	April 14, 2014
3,350	$3.75	April 29, 2009	April 29, 2014

On November 11, 2008, we issued warrants to purchase 400,000 shares of our common stock at $2.50 per share to Trimax. The warrants vested upon issuance. The remaining life of the warrants is 7.5 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. 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 $2.50 per share. The preferred securities carry “as converted” voting rights. As of December 1, 2010, we had issued 2,623 of these convertible preferred shares. The shares were converted into 1,049,200 common shares on December 22, 2010. Each convertible preferred security sold under this agreement had warrants (100 warrants for each $1,000 convertible preferred share sold) attached to it. The warrants are immediately exercisable, expire in five years, and entitle the investor to purchase one share of our common stock at $3.75 per share for each warrant issued. The table above identifies warrants issued in conjunction with Equity 11’s additional purchases of our 5% convertible preferred stock through December 31, 2010. On December 1, 2010, we issued 62 shares of convertible preferred stock in lieu of dividends. These shares were converted into 24,800 shares of common stock on December 22, 2010.

On May 15, 2009, we entered into an agreement with Equity 11 to issue convertible preferred securities at $1,000 per share. 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, 2010, we had issued 872 of these convertible preferred securities. These shares were converted into 2,352,115 common shares on December 22, 2010. Included in this converted shares figure were 200,000 common shares resulting from the issuance of 20 shares of convertible preferred stock on December 1, 2010 in lieu of cash dividends. On June 1, 2011, we issued 10 shares of convertible preferred stock, Series B, in settlement of a partial dividend owing to Equity 11. These shares are convertible into 482,786 shares of our common stock.

On September 30, 2009, Ecology Coatings, Inc. and Stromback Acquisition Corporation (SAC), entered into a Securities Purchase Agreement for the issuance and sale of our 5.0% Cumulative Convertible Preferred Shares, Series B at a purchase price of $1,000 per share. SAC is owned by Richard Stromback, a former member of our Board of Directors. Until April 1, 2010, SAC had the right to purchase up to 3,000 Convertible Preferred Shares. The Convertible Preferred Shares have a liquidation preference of $1,000 per share. SAC may convert the Convertible Preferred Shares into our common stock at a conversion price that is seventy seven percent (77%) of the average closing price of our common stock on the OTCQB marketplace for the five trading days prior to each investment. The Convertible Preferred 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 SAC under a Registration Rights Agreement. One investment of $240,000 was made under this agreement, on October 1, 2009. Per the terms of the agreement and at Mr. Stromback’s direction, we paid $120,000 to him on that date in settlement of past payables owed to him directly or to RJS Ventures, LLC, a company controlled by him. As of June 30, 2011, we had issued 258 of these Preferred Series B shares. These shares are convertible into 223,353 of our common shares.

In the event of a voluntary or involuntary dissolution, liquidation or winding up, Equity 11 and SAC will be entitled to be paid a liquidation preference equal to the stated value of the convertible preferred 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 our common stock.

On March 1, 2011, we issued 25,000 shares of our common stock to Quarles and Brady, a law firm to whom we owed approximately $143,000. These shares, along with a cash payment, were accepted in full settlement of the amounts then owing.

On March 1, 2011, we issued 650,000 shares of our common stock to Wilson, Sonsini, a law firm to whom we owed approximately $340,000. They accepted these shares, along with a cash payment, in full settlement of the amounts then owing subject to the conditions discussed in Note 1 (“Summary of Accounting Policies”) above.

On March 9, 2011 and March 11, 2011, respectively, we entered into agreements with Fairmount Five, LLC and John Bonner to sell a minimum of an aggregate of 2,520 of our 5.0% Cumulative Convertible Preferred Shares, Series C at a purchase price of $1,000 per share. The securities accrue cumulative dividends at 5% per annum and the entire amount then outstanding is convertible at the option of the investors into shares of our common stock at $.06 per share. The preferred securities carry “as converted” voting rights. We issued 1,580 of these shares as of June 30, 2011, including the transactions discussed below. These shares are convertible into 26,334,795 shares of our common stock. In the event of a voluntary or involuntary dissolution, liquidation or winding up, the holders of these shares will be entitled to be paid a liquidation preference equal to the stated value of the convertible preferred 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 our common stock.

On March 9, 2011, we issued James Juliano 100 of our 5.0% Cumulative Convertible Preferred Shares, Series C, in settlement of a note for $100,000 and the accrued interest thereon that we had previously issued on December 22, 2010.

On March 9, 2011, we issued John Salpietra 120 of our 5.0% Cumulative Convertible Preferred Shares, Series C, in settlement of a note for $120,000 and the accrued interest thereon that we had previously issued on February 14, 2011. These shares are convertible into 2,000,000 of our common shares.

On April 12, 2011, we sold 100 of our convertible preferred shares, Series C, to Fairmount Five for $100,000. These shares are convertible into 1,666,667 of our common shares.

On May 9, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000. These shares are convertible into 1,666,667 of our common shares.

On May 31, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000. These shares are convertible into 1,666,667 of our common shares.

On June 1, 2011, we issued 15 shares of our convertible preferred shares, Series C, to Fairmount Five as a dividend in lieu of cash. These shares are convertible into 1,666,667 of our common shares.

On June 29, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000. These shares are convertible into 1,666,667 of our common shares.

Note 7 — Stock Options

Stock Option Plan. On May 9, 2007, we adopted a stock option plan and reserved 900,000 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 200,000 shares of our common stock to the 2007 Plan. On February 7, 2011, our shareholders voted to add 4,400,000 shares of our common stock to the stock option 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 did not grant any non-statutory options during the quarter ended June 30, 2011.

	Weighted Average Exercise Price Per Share	Number of Options	Weighted Average (Remaining) Contractual Term
Outstanding as of September 30, 2010	$5.25	1,086,224	-
Granted	$.20	4,860,000	-
Exercised	-	-	-
Forfeited	$4.32	595,044	-
Outstanding as of June 30, 2011	$.79	5,351,180	9.6
Exercisable	$1.40	2,588,180	9.3

The options are subject to various vesting periods between June 26, 2007 and April 22, 2014. The options expire on various dates between March 1, 2017 and April 22, 2021. Additionally, the options had no intrinsic value as of June 30, 2011. Intrinsic value arises when the exercise price is lower than the trading price on the date of grant.

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 assumptions:


Dividend	None
Expected volatility	86.04%-260%
Risk free interest rate	0.10%-5.11%
Expected life	3-5 years

For options issued prior to June 2010, 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 us. Beginning with options granted after June 2010, we began to use our stock to calculate the expected volatility. We made this change because we believe that the options granted in September 2010 will be exercised within three years, thus our trading history should be used.

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 $0.79 exercise price, the options outstanding at June 30, 2011 had a total unrecognized compensation cost of $473,919 which will be recognized over the remaining weighted average vesting period of 2.7 years. Option costs of $641,614 were recorded as an expense for the nine months ended June 30, 2011, all of which was recorded as compensation expense. Option costs of $469,163 were recorded as an expense for the three months ended June 30, 2011, all of which was recorded as compensation expense.

Note 8 – Going Concern

The accompanying consolidated 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 nine months ended June 30, 2011 and 2010, we incurred net losses of ($756,617) and ($1,523,819), respectively. As of June 30, 2011 and September 30, 2010, we had stockholders’ deficits of ($1,365,899) and ($2,993,817), respectively. These factors, amongst others, raise substantial doubt the Company's ability to continue as a going concern.

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 funding in fiscal year 2012 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 subsequent to the date of the balance sheet. The following was noted for disclosure:

On July 26, 2011, we issued 100 shares of convertible preferred shares, Series C, to Fairmount Five for $100,000. These shares are convertible into 1,666,667 shares of our common stock.

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”, EcoBloc ™ 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”). An additional PCT patent application has been initially approved by the USPTO for accelerated treatment.

two European patents allowed and nine pending patent applications in foreign countries

three trademarks issued by the USPTO – “EZ Recoat™”, “Ecology Coatings™” and “Liquid Nanotechnology™”; and

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, printing and 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

Nine Months Ended June 30, 2011 and 2010

Revenues. Product sales generated revenues of $3,190 for the nine months ended June 30, 2011. We had product sales of $13,714 for the corresponding period in 2010. Revenues for both periods all came from one customer.

Salaries and Fringe Benefits. These expenses remained approximately the same for the nine months ended June 30, 2011 compared with the corresponding period for the year earlier.

Professional Fees. The decrease of approximately $163,000 in these expenses for the nine months ended June 30, 2011 compared to the nine months ended June 30, 2010 is due to the elimination of consulting agreements for general business consulting and investor relations as well as a reduction in legal fees.

Other General and Administrative. The increase of approximately $90,000 in these expenses for the nine months ended June 30, 2011 compared to the nine months ended June 30, 2010 is due largely to an increase of $286,000 in compensatory options expense associated with options granted to officers and directors in April, 2011 as well as salaries associated with hiring three employees during the 2011 period. This was offset by a reduction in the expense associated with the abandonment of certain patents in the 2010 period.

Operating Loss. The decreased operating loss of approximately $77,000 between the reporting periods is explained in the discussion of other expenses above.

Income From Forgiveness of Payables and Debt. This income stems from settlements reached with certain debt holders and vendors during the nine months ended June 30, 2011 as well as the write off of certain payables that will not be paid due to non-performance by the vendors. The amount - $872,861 - is the difference between what was owed prior to the settlement and the amounts of the settlements paid. All settlement amounts were paid prior to June 30, 2011. The income from these sources totaled $191,555 for the nine months ended June 30, 2010 and resulted from settlements with vendors.

Interest Expense. These expenses remained approximately the same for the nine months ended June 30, 2011 compared with the corresponding period for 2010.

Income Tax Provision. No provision for income tax benefit from net operating losses has been made for the nine months ended June 30, 2011 and 2010 as we have fully reserved the asset until realization is more likely than not.

Net Loss. The change from a net loss of $1,523,819 for the nine months ended June 30, 2010 compared to net loss of $756,617 for the nine months ended June 30, 2011 is explained in the foregoing discussions of the various expense categories as well as in the discussion of Income From Forgiveness of Payables and Debt.

Basic and Diluted Loss per Share. The change in basic and diluted net loss per share for the nine months ended June 30, 2011 reflects the changes in the net loss position discussed above as well as the increase in weighted average shares outstanding during the nine months ended June 30, 2011. The improvement in net loss was substantially offset by the increase by the preferred dividend – beneficial conversion. This is because our newly issued convertible preferred shares can be converted to common shares at $0.06 per share. On June 30, 2011, our common shares were trading at $0.10 per share.

Three Months Ended June 30, 2011 and 2010

Revenues. We generated no revenues from product sales for the three months ended June 30, 2011. Product sales generated revenues of $2,829 for the three months ended June 30, 2010. Revenues for the 2010 period came from one customer.

Salaries and Fringe Benefits. The increase of approximately $32,000 in such expenses for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 is the result of the increase in the salary of two officers effective May 15, 2011, and an increase in health care expense due to the addition of three new employees.

Professional Fees. The decrease of approximately $35,000 in these expenses for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 is due to elimination of consulting agreements for general business consulting and investor relations as well as a reduction in other legal fees.

Other General and Administrative. The increase of approximately $435,000 in these expenses for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 is due to an increase of $380,000 in compensatory options expense associated with options granted to officers and directors in April, 2011 as well as salaries associated with hiring three employees during the reporting period.

Operating Losses. The increased operating loss of approximately $435,000 between the reporting periods is explained in the discussion above.

Income From Forgiveness of Payables and Debt. This income for the three months ended June 30, 2010, stems from settlements reached with certain vendors during that time period.

Interest Expense. The decrease of approximately $19,000 for the three months ended June 30, 2011 compared to the three months ended June 30, 2010 results from a decrease in average outstanding debt in the current period. This decrease in average outstanding debt occurred as a result of those settlements which occurred in early March, 2011.

Income Tax Provision. No provision for income tax benefit from net operating losses has been made for the three months ended June 30, 2011 and 2010 as we have fully reserved the asset until realization is more likely than not.

Net Loss. The change from a net loss of $209,313 for the three months ended June 30, 2010 compared to net loss of $815,412 for the three months ended June 30, 2011 is explained in the foregoing discussions of the various expense categories as well as in the discussion of Income From Forgiveness of Payables and Debt.

Basic and Diluted Loss per Share. The change in basic and diluted net loss per share for the three months ended June 30, 2011 reflects the change in net loss position discussed above as well as by the increase in weighted average shares outstanding during the three months ended June 30, 2011. The net loss was further increased in preferred dividend – beneficial conversion. This is because our newly issued convertible preferred shares can be converted to common shares at $0.06 per share. On June 30, 2011, our common shares were trading at $0.10 per share.

Liquidity and Capital Resources

We had $73,346 in cash as of June 30, 2011. Prior to June 30, 2011, Fairmount Five established an escrow in the amount of $1,355,000 for future purchases of our Preferred Series C stock. As of June 30, 2011, $955,000 was still available. In the nine months ended June 30, 2011, we used approximately $1,293,000 in cash to fund our operations, approximately $33,000 to purchase fixed and intangible assets, and approximately $236,000 to pay off debt using money borrowed under short term notes and proceeds from the sale of our Preferred Series C stock.

We have incurred an accumulated deficit of $28,088,016. Of this amount, approximately $18,561,000 stems from non-cash items such as options expense, beneficial conversion expense, depreciation and amortization, and changes in working capital accounts. 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 $3,190 in revenue in the nine months ended June 30, 2011.

We expect to continue using substantial amounts of cash to: (i) fund ongoing salaries, professional fees, and general and administrative expenses; (ii) further develop and commercialize our products; (iii) develop and protect our intellectual property. 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 Preferred Series C stock to Fairmount Five pursuant to our Convertible Preferred Securities Agreement dated March 7, 2011. As of June 30, 2011, Fairmount Five had committed to acquiring an additional $955,000 of Preferred Series C stock. The Preferred Series C stock is convertible into our common stock at a price of $0.06 per share.

As of June 30, 2011, we had notes payable to nine separate parties, including related parties, on which we owed approximately $1,511,000 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 $526,452 owing to one note holder were due prior to September 30, 2009 and the holder has demanded payment. Additionally, we have notes owing to shareholders totaling $294,909 including accrued interest as of June 30, 2011. These notes were due and payable on December 31, 2009. None of the debt is subject to restrictive covenants. All of the debt is unsecured except for the $600,000 owing on the Salpietra note which is secured by our patents and intellectual property. There was approximately $628,837 outstanding, including accrued interest, on the Salpietra note as of June 30, 2011.

On December 22, 2010, Equity 11 converted almost all of its Preferred Series A and B stock into 3,401,311 shares of our common stock. In addition, Stromback Acquisition Corporation purchased 240 Preferred Series B shares on October 1, 2009 and, together with the June 1, 2010, December 1, 2010 and June 1, 2011 dividends issued in lieu of cash, now holds 258 Preferred Series B shares. Equity 11’s and SAC’s ability to purchase additional Preferred Series B shares has now lapsed. On March 7, 2011, we entered into a definitive agreement with Fairmount Five for a $2.4 million investment. We also entered into a separate agreement with John Bonner for the purchase of $120,000 of our Preferred Series C stock.

As of June 30, 2011, there were 10,658,506 shares of our common stock, 268 shares of our Preferred Series B, and 1,580 shares of our Preferred Series C stock issued and outstanding. As of June 30, 2011, options and warrants to purchase up to 6,209,760 shares of common stock had been granted and were outstanding.

Off-Balance Sheet Arrangements

See Notes to the Consolidated Financial Statements in this Form 10-Q beginning on page 1. The details of off-balance sheet arrangements are all identified in Note 5 – Commitments and Contingencies.

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 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.

Income from forgiveness of payables and debt. Income from the forgiveness of payables and debt is recognized when all of the conditions associated with the forgiveness have been met.

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
Signs		7 years
Software		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 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. Employee and director stock-based compensation expense is measured utilizing 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. Our valuation method uses a Black-Scholes option pricing model. In so doing, we estimate certain key assumptions used in the model.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable since we are a smaller reporting company under applicable SEC rules.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Exchange Act as of the end of the period covered by this report.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

During the three months ended June 30, 2011, we did not make any changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

Prospective and existing investors should carefully consider the following risk factors in evaluating our business. The factors listed below represent the known material risks that we believe could cause our business results to differ from the statements contained herein.

We have generated minimal revenue and have a history of significant operating losses

We are a company that has failed to generate significant revenue as yet. We had an accumulated deficit of $28,088,016 as of June 30, 2011. Approximately $18,561,000 of this amount is due to non-cash items, including options expense, the issuance of warrants, beneficial conversion provisions associated with issuance of preferred stock and certain debt, preferred stock dividends, and stock issued to pay for services, payables, and debt extensions. Our prospects must be considered in light of the problems, expenses, delays and complications associated with a business that seeks to generate more significant revenue. We have generated nominal revenue to date and have incurred significant operating losses. Our operating losses have resulted principally from costs incurred in connection with our capital raising efforts and becoming a public company through a merger, promotion of our products, and from salaries and general and administrative costs. We have maintained minimal cash reserves since October 2008 and until March 2011 had relied primarily on additional investment from Equity 11 and from Stromback Acquisition Corporation (“SAC”) as well as debt from private sources. On March 7, 2011 and March 11, 2011, respectively, we consummated an agreement with Fairmount Five and John Bonner for $2,520,000 in new investment. These investors have acquired our Preferred Series C stock at a total purchase price of $1,565,000. We have a commitment of $945,000 from Fairmount Five for future purchases of Preferred Series C stock as of June 30, 2011.

We have entered the emerging business of nanotechnology, which carries significant developmental and commercial risk

We have expended in excess of $1,300,000 to develop our EcoBloc™ enabled and other products. We expect to continue expending significant sums in pursuit of further development of our technology. Such research and development involves a high degree of risk as to whether a commercially viable product will result.

We expect to continue to generate operating losses and experience negative cash flow and it is uncertain whether we will achieve future profitability

We expect to continue to incur operating losses. Our ability to generate significant revenue and achieve profitability will depend on our products functioning as intended, the market acceptance of our liquid nano-technology™ products and our capacity to develop, introduce and bring additional products to market. We cannot be certain that we will ever generate significant sales or achieve profitability. The extent of future losses and the time required to achieve profitability, if ever, cannot be predicted at this point.

Our auditors have expressed a going concern opinion

We have incurred losses, primarily as a result of our inception stage, general and administrative, and pre-production expenses and our limited amount of revenue. Accordingly, we have received a report from our independent auditors included in our 2010 annual report that includes an explanatory paragraph describing their substantial doubt about our ability to continue as a going concern.

We need additional financing in 2012 to continue our operations.

Although investors agreed to invest $2,520,000 in us in March 2011, we will likely use those funds for our operations for the remainder of 2011. Unless we are able to generate significant revenue by then, we will need additional financing in 2012 to continue operations.

We are dependent on key personnel

Our success will be largely dependent upon the efforts of our executive officers. The loss of the services of our executive officers could have a material adverse effect on our business and prospects. We cannot be certain that we will be able to retain the services of such individuals in the future. Our research and development efforts are dependent upon a single executive, Sally Ramsey, with whom we have entered into an employment agreement which expires on January 1, 2012. Our success will be dependent upon our ability to hire and retain qualified technical, research, management, sales, marketing, operations, and financial personnel. We will compete with other companies with greater financial and other resources for such personnel. Although we have not to date experienced difficulty in attracting qualified personnel, we cannot be certain that we will be able to retain our present personnel or acquire additional qualified personnel as and when needed. On September 21, 2009, we entered into new employment agreements with our Chief Executive Officer, Chief Operating Officer, and General Counsel and entered into an amendment to Ms. Ramsey’s employment agreement. On May 17, 2010, we entered into a new employment agreement with our VP, General Counsel & Secretary.

We rely on computer systems for financial reporting and other operations and any disruptions in our systems would adversely affect us

We rely on computer systems to support our financial reporting capabilities and other operations. As with any computer systems, unforeseen issues may arise that could affect our ability to receive adequate, accurate and timely financial information, which in turn could inhibit effective and timely decisions. Furthermore, it is possible that our information systems could experience a complete or partial shutdown. If such a shutdown occurred, it could impact our ability to report our financial results in a timely manner or to otherwise operate our business. In this regard, our financial data in our accounting software (QuickBooks) became corrupted and unusable in late June 2009 and the backup system for our computer systems failed to backup the data. This resulted in a delay in our ability to complete our financial statements for the June 30, 2009 quarter and to file our Form 10-Q with the SEC for such period.

We are operating in both mature and developing markets, and there is a risk that we may not achieve acceptance of our technology and products in these markets

We have conducted limited test marketing and, thus, have relatively little information on which to estimate our levels of sales, the amount of revenue our planned operations will generate and our operating and other expenses. We cannot be certain that we will be successful in our efforts to market our products or to develop our markets in the manner we contemplate.

Certain markets, such as electronics and specialty packaging, are developing and rapidly evolving and are characterized by an increasing number of market entrants who have developed or are developing a wide variety of products and technologies, a number of which offer certain of the features that our products offer. Because of these factors, demand and market acceptance for new products may be difficult. In mature markets, such as automotive or general industrial, we may encounter resistance by our potential customers in changing to our technology because of the capital investments they have made in their present production or manufacturing facilities. Thus, we cannot be certain that our technology and products will become widely accepted. We do not know our future growth rate, if any, and size of these markets. If a substantial market fails to develop, develops more slowly than expected, becomes saturated with competitors or if our products do not achieve market acceptance, our business, operating results and financial condition will be materially adversely affected.

Our technology is also intended to be marketed and licensed to component or device manufacturers for inclusion in the products they market and sell as an embedded solution. As with other new products and technologies designed to enhance or replace existing products or technologies or change product designs, these potential partners may be reluctant to adopt our coating solution into their production or manufacturing facilities unless our technology and products are proven through extensive testing to be both reliable and available at a competitive price and the cost-benefit analysis is favorable to the particular industry. Even assuming acceptance of our technology, our potential customers may be required to redesign their production or manufacturing facilities to effectively use our coatings. The time and costs necessary for such redesign could delay or prevent market acceptance of our technology and products. A lack of, or delay in, market acceptance of our products would adversely affect our operations. We do not know if we will be able to market our technology and products successfully or that any of our technology or products will be accepted in the marketplace.

We expect that our products will have a long sales cycle

One of our target markets is the OEM market. OEMs traditionally have substantial capital investments in their plant and equipment, including the coating portion of the production process. In this market, the sale of our coating technology will be subject to budget constraints, lengthy testing periods and resistance to change with respect to long-established production techniques and processes, which could result in a significant reduction or delay in our anticipated revenues. We cannot assure investors that such customers will have the necessary funds to purchase our technology and products even though they may want to do so. Further, even if such customers have the necessary funds, we may experience delays and relatively long sales cycles due to their internal-decision making policies and procedures and reticence to change.

Our target markets are characterized by new products and rapid technological change

The target markets for our products are characterized by rapidly changing technology and frequent new product introductions. Our success will depend on our ability to enhance our planned technologies and products and to introduce new products and technologies to meet changing customer requirements. We intend to devote significant resources toward the development of our solutions. We are not certain that we will successfully complete the development of these technologies and related products in a timely fashion or that our current or future products will satisfy the needs of the coatings market. We do not know if technologies developed by others will adversely affect our competitive position or render our products or technologies non-competitive or obsolete.

There is a significant amount of competition in our market

The industrial coatings market is extremely competitive. Our competitors include Sun Chemical, Flint Inks, Ashland, Actega, and Minus Nine. Competitive factors our products face include ease of use, quality, portability, versatility, reliability, accuracy, product cost, switching costs and other factors. Our primary competitors include companies with substantially greater financial, technological, marketing, personnel and research and development resources than we currently have. There are direct competitors who have competitive technology and products for many of our products. New companies will likely enter our markets in the future. Although we believe that our products are distinguishable from those of our competitors on the basis of their technological features and functionality at an attractive value proposition, we may not be able to penetrate any of our anticipated competitors’ portions of the market. Many of our anticipated competitors have existing relationships with manufacturers that may impede our ability to market our technology to potential customers and build market share. We do not know that we will be able to compete successfully against currently anticipated or future competitors or that competitive pressures will not have a material adverse effect on our business, operating results and financial condition.

We have limited marketing capability

We have limited marketing capabilities and resources. In order to achieve market penetration, we will have to undertake significant efforts and expenditures to create awareness of, and demand for, our technology and products. Our ability to penetrate the market and build our customer base will be substantially dependent on our marketing efforts, including our ability to establish strategic marketing arrangements with OEMs and suppliers. We cannot be certain that we will be able to enter into any such arrangements or if entered into that they will be successful. Our failure to successfully develop our marketing capabilities, both internally and through third-party alliances, would have a material adverse effect on our business, operating results and financial condition. Even if developed, such marketing capabilities may not lead to sales of our technologies and products.

We have limited manufacturing capacity

We have limited manufacturing capacity for our products. In order to execute our contemplated direct sales strategy, we will need to either: (i) acquire existing manufacturing capacity; (ii) develop a manufacturing capacity “in-house”; or (iii) identify suitable third parties with whom we can contract for the manufacture of our products. To either acquire existing manufacturing capacity or to develop such capacity, significant capital or outsourcing will be required. We may not be able to raise the necessary capital to acquire existing manufacturing capacity or to develop such capacity. We cannot be certain that such arrangements, if consummated, would be suitable to meet our needs.

We are dependent on manufacturers and suppliers

We purchase, and intend to continue to purchase, all of the raw materials for our products from a limited number of manufacturers and suppliers.

We do not intend to directly manufacture any of the chemicals or other raw materials used in our products. Our reliance on outside manufacturers and suppliers is expected to continue and involves several risks, including limited control over the availability of raw materials, delivery schedules, pricing and product quality. We may experience delays, additional expenses and lost sales if we are required to locate and qualify alternative manufacturers and suppliers.

A few of the raw materials for our products are produced by a small number of specialized manufacturers. While we believe that there are alternative sources of supply, if, for any reason, we are precluded from obtaining such materials from such manufacturers, we may experience long delays in product delivery due to the difficulty and complexity involved in producing the required materials and we may also be required to pay higher costs for our materials.

We are uncertain of our ability to protect our technology through patents

Our ability to compete effectively will depend on our success in protecting our proprietary coatings, both in the United States and abroad. We have filed for patent protection in the United States and certain other countries to cover some of our coatings. The U.S. Patent Office (“USPTO”) has issued five patents to us. We have four applications still pending before the USPTO, including a PCT application that has been approved for accelerated treatment, and five patent applications pending in other countries.

We do not know if any additional patents relating to our existing technology will be issued from the United States or any foreign patent offices, that we will receive any additional patents in the future based on our continued development of our technology, or that our patent protection within or outside of the United States will be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.

We do not know if any of our current or future patents will be enforceable to prevent others from developing and marketing competitive products or methods. If we bring an infringement action relating to any of our patents, it may require the diversion of substantial funds from our operations and may require management to expend efforts that might otherwise be devoted to our operations. Furthermore, we may not be successful in enforcing our patent rights.

Further, patent infringement claims in the United States or in other countries will likely be asserted against us by competitors or others, and if asserted, we may not be successful in defending against such claims. If one of our products is adjudged to infringe patents of others with the likely consequence of a damage award, we may be enjoined from using and selling such product or be required to obtain a royalty-bearing license, if available on acceptable terms. Alternatively, in the event a license is not offered, we might be required, if possible, to redesign those aspects of the product held to infringe so as to avoid infringement liability. Any redesign efforts undertaken by us might be expensive, could delay the introduction or the re-introduction of our products into certain markets, or may be so significant as to be impractical.

We are uncertain of our ability to protect our proprietary technology and information

In addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement in special formulations to achieve and thereafter maintain a competitive advantage. Although we have entered into confidentiality and employment agreements with employees, consultants, certain potential customers and advisors, we cannot be certain that such agreements will be honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.

Risks related to our license arrangements

We have licensing agreements with DuPont and Red Spot Paint & Varnish regarding their use of our technology for specific formulations for designated applications. The DuPont license provides multiple formulas for use on metal parts in the North American automotive market. To date, this license has not generated any ongoing royalty payments. We also have a licensing agreement with Red Spot that provides formulations for specific tank coatings. Such licenses are renewable provided the parties are in compliance with the agreements. Although these licenses provide for royalties based upon net sales of our UV-cured coating formulations, it is unlikely that Red Spot or DuPont will aggressively market products with our coatings and thus entitle us to receive royalties at any level.

We may be precluded from registering our trademark registrations in other countries

We have received approval of “EcoQuick”, “EZ Recoat™”, “Liquid Nanotechnology™”, “Ecology Coatings™” as trademarks in connection with our proposed business and marketing activities in the United States. Although we intend to pursue the registration of our marks in the United States and other countries, prior registrations or uses of one or more of such marks, or a confusingly similar mark, may exist in one or more of such countries, in which case we might be precluded from registering or using such mark in certain countries.

There are economic and general risks relating to our business

The success of our activities is subject to risks inherent in business generally, including demand for products and services, general economic conditions, changes in taxes and tax laws, and changes in governmental regulations and policies. For example, difficulties in obtaining credit and financing and the slowdown in the U.S. automotive industry have made it more difficult to market our technology to that industry.

Our stock price has been volatile and the future market price for our common stock is likely to continue to be volatile. Further, the limited market for our shares may make it difficult for our investors to sell our common stock for a positive return on investment

The public market for our common stock has historically been very volatile. During fiscal year 2010, our low and high market prices of our (post-reverse split) stock were $0.208 per share (August 20, 2010) and $2.751 per share (October 1, 2009). On June 30, 2011, the closing price of our stock was $.10 per share. Any future market prices for our shares are likely to continue to be very volatile. This price volatility may make it more difficult for our shareholders to sell our shares when desired. We do not know of any one particular factor that has caused volatility in our stock price. However, the stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies. Broad market factors and the investing public’s negative perception of our business may reduce our stock price, regardless of our operating performance. Further, the volume of our traded shares and the market for our common stock is very limited. During the past fiscal year, there have been several days where no shares of our stock have traded. A larger market for our shares may never develop or be maintained. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our market price. As a result, this may make it very difficult for our shareholders to sell our common stock.

Control by key stockholders

As of June 30, 2011, Fairmount Five, John Bonner, Richard D. Stromback, Douglas Stromback, Deanna Stromback, who are the brother and sister of Richard D. Stromback, respectively, Sally J.W. Ramsey, and Equity 11 held shares representing approximately 94.1% of the voting power of our outstanding capital stock. Fairmount Five has the right to appoint two directors to our Board. Such stock ownership and governance rights may constitute effective voting control over all matters requiring stockholder approval. These voting and other control rights mean that our other stockholders will have only limited rights to participate in our management. The rights of our controlling stockholders may also have the effect of delaying or preventing a change in our control and may otherwise decrease the value of the shares and voting securities owned by other stockholders.

Trading in our common stock on the OTCQB marketplace is dependent on brokerage houses making a market for the stock

Our common stock trades on the OTCQB marketplace. Historically, several brokers made a “market” in our stock by quoting bid and ask prices. Such brokers will only continue to make a market in our stock if they believe they can continue to make a profit. Thus, continued trading in our common stock on the OTCQB marketplace is contingent on these brokers, or new brokers, continuing to make a market in our common stock. If such brokers do not continue to make a market in our stock, our stock will be traded on the “pink sheets” which is generally considered to be a less efficient market.

Our common stock is considered a “penny stock,” any investment in our shares is considered to be a high-risk investment and is subject to restrictions on marketability

Our common stock is considered a “penny stock” because it is traded on the OTCQB marketplace and it trades for less than $5.00 per share. The OTCQB marketplace is generally regarded as a less efficient trading market than the NASDAQ Capital or Global Markets or the New York Stock Exchange.

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to effecting a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.

Since our common stock will be subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus the ability of our shareholders to sell our common stock in the secondary market in the future.

We have never paid dividends and have no plans to do so in the future

To date, we have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, to provide funds for the operation of our business. Our investment agreements with Fairmount Five, John Bonner and SAC prevent the payment of any dividends to our common stockholders without their prior approval. Dividends for Preferred Series B and Preferred Series C shares held by Fairmount Five, John Bonner and SAC have not been paid in cash. Thus far, the dividends for our preferred shares have been paid through the issuance of additional preferred shares.

The issuance and exercise of additional options, warrants, and convertible securities may dilute the ownership interest of our stockholders

To the extent that our outstanding stock options and warrants are exercised, preferred shares are converted to common stock or promissory notes are converted into common stock, dilution to the ownership interests of our stockholders will occur. On December 22, 2010, Equity 11 converted almost all of its convertible preferred shares into 3,401,311 shares of our common stock. SAC held 258 shares of our Preferred Series B stock, Equity 11 holds 10 shares of our Preferred Series B stock and Fairmount Five and John Bonner held 1,580 of our Preferred Series C shares as of June 30, 2011 both of which are convertible into our common stock.

As of June 30, 2011, we had granted options to purchase 5,351,180 shares of our common stock under our 2007 Stock Option and Restricted Stock Plan (the “2007 Plan). As June 30, 2011, we had issued warrants to purchase 906,580 shares of our common stock which includes 235,700 warrants issued to Equity 11. As of June 30, 2011, there was $526,452 outstanding in principal and accrued interest on notes held by Mitchell Shaheen. These notes are no longer convertible but it is possible that we may grant conversion rights to such holder to reduce our need for cash.

We have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock

Our Articles of Incorporation authorize the issuance of 90,000,000 shares of common stock and 10,000,000 shares of preferred stock. As of June 30, 2011, we had 10,658,506 common shares, stock options to acquire 5,303,180 common shares and warrants to acquire 906,580 common shares issued and outstanding. Our common stock and preferred stock can be issued by our Board of Directors without stockholder approval. Any future issuances of our common stock or preferred stock by our Board could further dilute the percentage ownership of our existing stockholders.

Indemnification of officers and directors

Our Articles of Incorporation and Bylaws contain broad indemnification and liability limiting provisions regarding our officers, directors and employees, including the limitation of liability for certain violations of fiduciary duties. In addition, we maintain Directors and Officers liability insurance. Our shareholders will have only limited recourse against such directors and officers.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of our company under Nevada law or otherwise, we have been advised that the opinion of the Securities and Exchange Commission is that such indemnification is against public policy as expressed in the Securities Act and may, therefore, be unenforceable.

Sales of our stock by large equity holders may drive the price of our stock down

Our common stock is “thinly” traded as it has very low daily trading volume. On some trading days, no shares of our stock are sold. In addition, we have filed a registration statement for a portion of the shares held by Equity 11 and may file additional registration statements as the SEC rules may permit. Once registered, these shares may be sold on the OTCQB marketplace or “pink sheets”. Future sales of a substantial number of shares by large equity holders will likely put a downward pressure on the price of our stock.

Short Selling may drive the price of our stock down

Short selling is the practice of selling securities that have been borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale and the repurchase, as the short seller will pay less to buy the securities than the short seller received on selling them. Conversely, the short seller will make a loss if the price of the security rises. Short selling will cause additional downward pressure on the price of our stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Other than the convertible preferred shares, Series C, sold to Fairmount Five discussed in Note 6, Equity, to our financial statements, we did not have any sales of unregistered securities and we did not repurchase any of our securities during the three months ended June 30, 2011.

Item 3. Defaults Upon Senior Securities

As of June 30, 2011, we were in default in the payment of principal and interest on the following promissory notes:

Note Holder	Issue Date(s)	Amount Owing on June 30, 2011

Mitchell Shaheen I	September 21, 2008	$313,990

Mitchell Shaheen II	July 14, 2008	$212,462

Richard Stromback	December 31, 2003	$2,584

Douglas Stromback	August 10, 2004	$159,671

Deanna Stromback	December 15, 2003	$132,654

Nirta Enterprises	April 15, 2010	$25,485

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number	Description
2.1	Agreement and Plan of Merger entered into effective as of April 30, 2007, by and among OCIS Corp., a Nevada corporation, OCIS-EC, INC., a Nevada corporation and a wholly-owned subsidiary of OCIS, Jeff W. Holmes, R. Kirk Blosch and Brent W. Schlesinger and ECOLOGY COATINGS, INC., a California corporation, and Richard D. Stromback, Deanna Stromback and Douglas Stromback. (2)

3.1	Amended and Restated Articles of Incorporation of Ecology Coatings, Inc., a Nevada corporation.(2)

3.2	By-laws. (1)

4.1	Form of Common Stock Certificate. (2)

10.1*	Third Amendment of Employment Agreement with Sally Ramsey dated May 18, 2011. (3)**

10.2*	First Amendment of Employment Agreement with F. Thomas Krotine dated May 25, 2011. (4)**

10.3*	Headquarters Lease with J.M. Land Co. effective May 1, 2011. (5)

31.1*	Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*	Certification of the Chief Executive Officer and Chief Financial Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*	The following financial statements and notes from the Ecology Coatings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed on August XX, 2011, formatted in XBRL: (i) Condensed Consolidated Statement of Earnings; (ii) Condensed Consolidated Statement of Cash Flows; (iii) Condensed Consolidated Balance Sheet; and (iv) the notes to the condensed consolidated financial statements.

* Filed herewith.

** Management contract or compensatory plan or arrangement.

(1) Incorporated by reference from OCIS’ registration statement on Form SB-2 originally filed with the SEC on September 28, 2002 and amended on September 20, 2002, November 7, 2002 and March 27, 2003.

(2) Incorporated by reference from our Form 8-K filed with the SEC on July 30, 2007.

(3) Incorporated by reference from our Form 8-K/A filed with the SEC on May 19, 2011.

(4) Incorporated by reference from our Form 8-K filed with the SEC on June 6, 2011.

(5) Incorporated by reference from our Form 8-K filed with the SEC on July 15, 2011.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:	August 15, 2011	ECOLOGY COATINGS, INC.
		(Registrant)

		By: /s/ Robert G. Crockett
		Robert G. Crockett
		Its: Chief Executive Officer
		(Authorized Officer)

		By: /s/ Kevin Stolz
		Kevin Stolz
		Its: Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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