Attached files

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EX-3.3 - BYLAWS OF ECOLOGY COATINGS, INC. - ECOLOGY COATINGS, INC.bylaws.htm
EX-31.2 - CFO CERTIFICATION - ECOLOGY COATINGS, INC.cfocert.htm
EX-31.1 - CEO CERTIFICATION - ECOLOGY COATINGS, INC.ceocert.htm
EX-32.1 - JOINT CERTIFICATION - ECOLOGY COATINGS, INC.jointcert.htm
EX-23.1 - CONSENT OF UHY, LLP FOR INCORPORATION OF AUDIT OPINION INTO FORM S-8 - ECOLOGY COATINGS, INC.consentuhys8.htm

 
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UNITED STATES
 
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-K
     
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 
For the fiscal year ended September 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)
 
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
 
Securities registered pursuant to Section 12(g) of the Exchange Act:
     
Common Stock, $0.001 par value
 
OTCQB
(Title of class)
 
(Name of exchange on which registered)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes □  No x
 
Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
 
Yes o No x
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
 
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes     No  o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  □
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.
 
Large accelerated filer  □                       Accelerated filer  □
 
Non-accelerated filer  □                         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
 
As of March 31, 2011, approximately 1,625,677 shares of our common stock, par value $0.001 per share, were held by non-affiliates, which had a market value of approximately $260,108 based on the available OTCQB closing price of $.15 per share on December 8, 2011.

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 30, 2011, the number of shares of common stock of the registrant outstanding was 16,158,506 and the number of shares of convertible preferred stock outstanding was 1,988.
 
 
 
 

 
 


 
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FORM 10-K
ECOLOGY COATINGS, INC.
SEPTEMBER 30, 2011
 
TABLE OF CONTENTS
 
PART I
Page
     
ITEM 1
5
     
ITEM 1A.
10
     
ITEM 1B.
17
     
ITEM 2.
17
     
ITEM 3.
17
     
ITEM 4.
18
     
     
 
PART II
 
     
ITEM 5.
19
     
ITEM 6.
20
     
ITEM 7.
20
     
ITEM 7A.
25
     
ITEM 8.
25
     
ITEM 9.
25
     
ITEM 9A.
25
     
ITEM 9B.
26
     
     
 
PART III
 
     
ITEM 10.
26
     
ITEM 11.
30
     
ITEM 12.
36
     
ITEM 13.
38
     
ITEM 14.
40
     
ITEM 15.
41
     
 
44


 
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PART I
 
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 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.
 
Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on our forward-looking statements, which speak only as of the date of this report.  Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
 
“Ecology”, “we”, “us”, or “our” refer to Ecology Coatings, Inc. and its wholly-owned subsidiary, Ecology Coatings, Inc., a California corporation.
 
 
Ecology Coatings, Inc. (“Ecology-CA”) was originally incorporated in California on March 12, 1990.  OCIS Corp. (“OCIS”) was incorporated in Nevada on February 6, 2002.  OCIS completed a merger with Ecology-CA on July 27, 2007 (the “Merger”).  In the Merger, OCIS issued approximately 6,106,137 shares of common stock to the Ecology-CA stockholders.  In this transaction, OCIS changed its name from OCIS Corporation to Ecology Coatings, Inc. and our ticker symbol on the OTC Bulletin Board association changed to “ECOC.”  As a result of the merger, we became a Nevada corporation and Ecology-CA became a wholly owned subsidiary.
 
Company 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.
 
Our patent and intellectual property activities to date include:
 
 
seven patents covering elements of our technology from the United States Patent and Trademark Office (“USPTO”)
 
 
five European validations of European patent EP 1723180
 
 
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one PCT international patent application
     
  three trademarks issued by the USPTO – “EZ Recoat™”, “Ecology Coatings™” and “Liquid Nanotechnology™”
     
  200+ proprietary coatings formulations.
 
We continue to work independently on further developing our clean technology products. Our target markets include electronics, steel, construction, automotive and trucking, paper and packaging 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.

Business in General

We have focused on developing products that support inexpensive mass production utilization of protective coatings that are cured under UV light. Some of our coatings include nano-particles for improved performance.  We believe that our coatings represent a paradigm shift in coatings technology.   We have strived for technological breakthroughs.  We have developed over 200 individual coating formulations that we believe address the limitations of traditional coatings.  The USPTO has issued seven patents and has allowed a eighth covering many of these formulations as well as their application.  Additionally, we have taken actions so that the formulations that are not currently patent protected are protected as trade secrets.

Nearly every manufactured product has a protective coating on it, including metal, plastic, glass or electronic products.  These coatings are important for providing protection, such as scratch and abrasion resistance, as well as for enabling added durability and maintenance of the overall aesthetic appearance of the product.  Coatings that use water or organic carriers remain the standard in the large OEM coatings market.  However, the use of traditional, carrier-based coatings continues to burden manufacturers with cost, performance, and environmental health and safety disadvantages.

Our coatings are 100% solids and UV curable.  They contain almost no volatile carriers and are generally comprised of polymers that react to UV light, all of which becomes part of the final coating bound to the substrate.  Thus, our coatings are environmentally sustainable.  Traditional coatings, such as paint, are composed of a solid resin and a carrier, such as an organic solvent or water, used to adjust the viscosity to allow application.  Thus, during the curing process the carrier evaporates either by application of heat or air-drying, both of which require time to complete the process.  Moreover, the evaporation of the carrier can generate environmentally harmful airborne emissions.


Our Solution - Clean Technology

Our 100% solids UV-cured clean technology addresses limitations of conventional coatings and provides unique performance combinations.  We have developed over 200 specific individual coating formulations that address the limitations of traditional carrier-based coatings. Our coatings cure in less than a minute after application without the use of heat.  This changes the manufacturing dynamic in six ways.  First, some of our coatings are bio-based using components that are generally recognized as safe for human consumption allowing them to come in direct contact with food.  Second, the use of UV curing eliminates the need for thermal heating equipment and/or drying space, allowing manufacturers to use less floor space.  Third, the elimination of thermal heating from the manufacturing process produces dramatic energy cost savings.  Fourth, the use of 100% solids results in fewer harmful airborne emissions being released during production or application. Fifth, in metal applications, UV curing eliminates the bottleneck effect and makes product disassembly unnecessary, increasing the speed with which coated products are produced.    Sixth, a crucial advantage of our products is that they are more cost effective than conventional coatings.  Our 100% solid coatings offer increased efficiency and result in minimal wasted product - if a manufacturer needs one mil of dry film thickness, it need only apply and cure one mil of our coating.

 
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Cleantech Products

Paper & Film – Our paper, film and packaging coatings provide:

·
The substitution of lower cost paper instead of expensive and non-recyclable plastic.  EcoQuick™ coated paper can replace polymer laminates on paper, labels and packaging.
·
High speed curing – seconds, not minutes - compatible with high speed print operations e.g. 400 feet per minute for use on flexographic, digital and gravure printed labels and packaging.
·
Barrier protection – revolutionary thin film properties with tremendous resistance to water, gas and chemical barriers and low oxygen transmission.
·
Nanotechnology-enhanced formulations provide coating performance including superior adhesion and abrasion resistance.

Metals - Our metal coatings provide:

·
The UV curing process uses 80 percent less energy, reduces manufacturing floor space needs by up to 80 percent, and eliminates curing bottlenecks.
·
High speed curing – seconds compared to minutes for heat-cured solvent-based and powder coatings.
·
Barrier protection –Unique thin film properties such as water and chemical resistance, and low oxygen transmission reducing corrosion.
·
EcoBloc™ enhanced formulations provide unique coating performance including superior adhesion to difficult-to-adhere-to metals with improved scratch resistance.
·
Increases manufacturing productivity since UV curing uses no heat; so complex products containing metal parts with rubber gaskets do not need to be disassembled prior to the coating and curing.
·
Reduces and/or eliminates EPA compliance burden and cost.
 
Plastics - Our coatings have improved hardness and abrasion resistance over conventional carrier-based coatings.  The coatings are also noteworthy for their ability to achieve either optical clarity or accept pigments.  Based on laboratory tests, we believe our formulations offer excellent adhesion to many common plastics, such as polycarbonate.
 
Glass - Our UV curable glass coatings product has achieved solid optical clarity in both high and low viscosity formulations that have significant thermal conductivity.  The product also offers adhesion between separate glass products that is less breakable than a single layer product.  Potential applications for this technology include electronics and visible light consumer products.
 
Electronics - Our coatings do not contain water or organic solvents that may damage delicate electronic components.  Moreover, these coatings are also UV curable and may be applied and cured without thermal shock to the substrate. We believe this technology also offers potential for various electronics applications, including RFIDs
 
Medical - We have successfully developed a flexible, urethane based coating used to bond metal and plastic parts for use on a cardiovascular device.

License Arrangements

We have not yet been successful in generating substantial licensing or sales revenue and our coatings have been incorporated into only a few manufacturers’ products.  Many of our potential customers require extensive performance tests of our technology which can take several years to complete.   In addition, some potential customers are concerned about our long-term financial viability.  Licenses signed with DuPont in 2004 and Red Spot in 2005 have not generated any royalties.  We signed a non-exclusive license with BASF Coatings GmbH in November 2011 for the use of four of our patents worldwide. BASF Coatings GmbH has the right to sub-license its rights in these patents.  We are unable to make predictions regarding the timing and size of any future royalty payments and/or product sales.  
 
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Marketing Strategy

Our target markets include paper, film and packaging, electronics, automotive and trucking, health care and OEMs.  Our business model contemplates both a licensing strategy and direct sales strategy.  We intend to license our technology to industry leaders in the electronics, steel, construction, automotive and medical applications markets, through which our product will be sold to end users.  We plan to use direct sales teams in certain target markets, such as OEMs, and third party distributors in broad product markets, such as paper products, to develop our product sales. Thus, our key promotional activities may include:

 
 
Attendance and technical presentations at industry trade shows and conventions;
       
 
 
Internal and external sales forces, with a force of industry-specific sales people who will identify, call upon and build ongoing relationships with key purchasers and targeted industries;
       
 
 
Fostering joint development agreements and other research arrangements with industry leaders and third party consortiums;
       
 
 
Print advertising in journals with specialized industry focus;
       
 
 
Web advertising, including supportive search engines and Web site registration with appropriate sourcing entities;
       
 
 
Public relations, industry-specific venues, as well as general media, to create awareness of us and our products. This will include membership in appropriate trade organizations; and
       
 
 
Brand identification through trade names associated with us and our products.
 
Sales Strategy
 
To date, we have conducted all of our business development and sales efforts through our senior management team who are active in other roles.  In fiscal year 201l, we added two salespeople and one product development person to our staff.  We intend to build dedicated sales, marketing, and business development teams to sell our products.  Our initial focus will be either the direct sales of our products to end users and/or the formation of joint venture arrangements with established market participants through which our products will be sold.  We also intend to engage in strategic licensing activities targeted at key markets.  Eventually, we hope to also use strategic external sales forces who can extend the reach of our marketing efforts.
 
Our sales cycle is often longer than one year.   The sales process begins with the identification of potential customers in selected markets. If the customer is interested, the customer will generally send application samples to us for initial analysis and testing.  We then coat the application samples using our product. Provided we are able to demonstrate the efficacy of our product on the application sample to the customer, the customer will then perform extended durability tests.  In most cases, we are unable to exert any control or influence over the durability test. Upon conclusion of the durability test, we plan to work with the customer while it decides whether to purchase our product.   We did not generate any significant sales revenues in fiscal year 2011.
 
In some cases, the potential customer will have to modify its coating production line to add UV curing to replace its thermal curing equipment.  We plan to work with the customer to assist in the transition of its traditional coating operations to our technology.  We expect that the customer’s resistance to change, costs, access to capital, and payback on investment will be factors in its decision to adopt our technology.
 
Fiscal Year 2012 Goals
 
     Our fiscal year 2012 goals are to generate new sources of revenue from licensing and product sales and to raise additional capital.
 
 
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Competition
 
The industrial coatings industry is extremely competitive.  There are several hundred sources in the United States of conventional paints and coatings for general metal use, including major sources such as Akzo Nobel, PPG, Sherwin-Williams and Valspar, who also offer UV coatings primarily for flooring, graphics, paper and container lithography applications.  Direct competition comes from a variety of UV-cure producers such as Allied Photochemical, Rad-Cure (Altana Chemie), BASF, Red Spot (Fujikura), R&D Coatings, Northwest (Ashland),  DSM Desotech, Prime and other small sources.  Although certain of these competitors offer 100% solids products, our product technology is unique as demonstrated by our patents and trade secrets.
 
Competitive factors in this industry include ease of use, quality, versatility, reliability, and cost.  Our primary competitors include companies with substantially greater financial, technological, marketing, personnel and research and development resources than we currently have.  We might not be able to compete successfully in this market.  Further, existing and new companies may enter the industrial coatings markets in the future.
 
Intellectual Property
 
Our ability to compete effectively will depend on our success in protecting our proprietary technology, both in the United States and abroad.  Our patent and intellectual property activities to date include:
 
 
·
Seven patents covering elements of our technology from the United States Patent and Trademark Office (“USPTO”)
 
 
·
Five European validations of European patent EP 1723180.
 
 
·
One PCT international patent application
 
 
·
Three trademarks issued by the USPTO – “EZ Recoat™”, “Ecology Coatings™” and “Liquid Nanotechnology™”
 
 
·
200+ coatings formulations.
 
The USPTO has issued all patents to Sally J.W. Ramsey, our founder and Vice President for New Product Development, which she irrevocably assigned to us.
 
We have taken actions to protect our formulations under trade secret laws.

It is possible that no additional patents relating to our existing technology will be issued from the United States or any foreign patent offices, or that we will not receive any patents in the future based on our continued development of our technology, or that our patent protection within and/or outside of the United States will not be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.   In addition to seeking patent protection, we will rely on trade secrets, know-how and continuing technological advancement to seek to achieve and thereafter maintain a competitive advantage.  Although we have entered into or intend to enter into confidentiality agreements with our employees, consultants, advisors, and other third parties that we are engaged with, 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.  Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.

Research and Development

Most of our efforts are focused on inventive research to discover new ways to coat substrates using UV curing.  Those efforts resulted in a variety of new UV cured coatings and patents and patent applications to protect those inventions.  Since 2007 most of our commercialization efforts are related to the application of our cumulative expertise to a different array of substrates for specific customer applications.  By working closely with potential customers, we believe we position ourselves to better understand their needs and increase the likelihood they will use our technology and speed the adoption of our technology in the marketplace.  During this process, our initial customers and we are each responsible for costs incurred in the development process.

 
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For fiscal years 2011 and 2010 we spent approximately $169,000 and $80,000 on research and development, respectively.  This includes contracted research, salary expenses of Sally Ramsey, our Vice President of New Product Development, laboratory expenses, equipment purchases, and raw materials. During these fiscal years, we did not undertake any customer-sponsored research and development.

Manufacturing

We presently have a limited manufacturing capacity. We currently have no contracts in place for the manufacturing of our products.   The raw materials used in our coatings are liquids and we do not believe such materials have any negative environmental impact.  Our business is subject to different federal, state, local and foreign governmental regulations related to the use, storage, discharge and disposal of hazardous substances.  We must conduct our business in compliance with these regulations.  Any changes in such regulations or any change in our business that requires us to use hazardous materials, could force us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations.  Increasing public attention has been focused on the environmental impact of manufacturing operations.  While we have not experienced any adverse effects on our operations from environmental regulations, and our products are designed to have no adverse impact on the environment, our business and results of operations could suffer if for any reason we are unable to comply with present or future environmental regulations.

Our principal raw materials suppliers are Cytec Industries, Inc., Chem-Materials Co., Hanse Chemie, Nyacol, Sartomer Company, Inc., Rahn USA Corp. and GMZ, Inc.

Employees

As of September 30, 2011, we had seven full-time employees and one part-time employee.  As of that date, we had employment agreements with four of our employees.



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.  We had an accumulated deficit of $28,774,419 as of September 30, 2011. $17,711,292 of this amount was 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.  We have a limited operating history upon which investors may rely to evaluate our prospects.  Such 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 have relied primarily on additional investment from Fairmount Five, LLC (“Fairmount Five”), Equity 11, Ltd. (“Equity 11”),  Stromback Acquisition Corporation (“SAC”) and John Bonner as well as small amounts of debt.  The Equity 11 and SAC investment agreements are no longer effective. We have an agreement in place with Fairmount Five, LLC (“Fairmount Five”) for investment of $2,400,000. As of September 30, 2011, we had used $1,865,000 of this amount. We will need to raise additional capital in fiscal year 2012 in order to continue to fund our operations.
 
 
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We have entered the emerging business of cleantech coatings, which carries significant developmental and commercial risk
 
We have expended in excess of $1,500,000 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 commence revenue generating operations 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 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 the spring of 2012 to continue our operations.

As of September 30, 2011, we were in default on approximately $517,500 in principal of short term debt, plus  $365,789 in accrued interest.  Our past capital raising activities have not been sufficient to fund our working capital, operational and debt requirements and we will need to raise additional funds in fiscal year 2012 through private or public financings to continue our operations. Such financing could include equity financing, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to make acquisitions and borrow from other sources.

During our last fiscal year ended September 30, 2011, we relied on the sale of convertible preferred securities and the issuance of debt to fund our operations.  We raised $1,865,000 from the sale of Convertible Preferred Series C shares during the twelve months ended September 30, 2011.  We raised $292,000 from the issuance of debt, of which $220,000 was converted into and included in the issuance of the Convertible Preferred Series shares discussed above.  After September 30, 2011, we had only $655,000 in additional funds available to us under our investment agreement with Fairmount Five.  At our current rate of cash use, such funds will last only until March 2012.

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 January1, 2012.  We are working on an extension of Ms. Ramsey’s employment agreement but there is no guarantee that an agreement will be reached.  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 and Secretary.

 
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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 back up 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 researched the markets for our products using our own personnel rather than third parties.  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 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
 
The sale of our coatings and the license of our technology will be subject to budget constraints 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 resistance to change.
 
 
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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 Akzo Nobel, PPG, Sherwin-Williams and Valspar, BASF, Allied Photochemical, Rad-Cure (Altana Chemie), Red Spot (Fujikura), R&D Coatings, Northwest (Ashland), DSM Desotech, Prime.  Competitive factors our products face include ease of use, quality, portability, versatility, reliability, accuracy, 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.   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”; and/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.
 
 
13

 
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 a number of aspects of our coatings.  The U.S. Patent Office (“USPTO”) has issued seven patents to us.  
 
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 and/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 three competitors - BASF, DuPont and Red Spot - regarding their use of our technology for specific formulations for designated applications.  The DuPont license, signed in 2004, and the Red Spot license, signed in 2005, have not generated any ongoing royalty payments thus far and are unlikely to do so in the future.  The BASF license, signed in 2011, is dependent on BASF marketing products with our coatings and has not yet generated any royalties.
 
 
14

 
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 and/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 and/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 2011, our low and high market prices of our stock were $0.01 per share (December 1, 2010) and $.51 per share (September 1, 2011).  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 shareholder to sell our common stock.
 
Control by key stockholders
 
As of September 30, 2011, Fairmount Five, Richard D. Stromback, Douglas Stromback, Deanna Stromback, Sally J.W. Ramsey, and Equity 11 held shares representing approximately 83.9%.   In addition, pursuant to the investment agreement we entered into with Fairmount Five, Fairmount Five has the right to appoint two of the seven members of our Board of Directors.  Additionally, Fairmount Five has the right to appoint our Chief Executive Officer.  The stock ownership and governance rights of such parties 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.

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 and it trades for less than $5.00 per share. The OTCQB is generally regarded as a less efficient trading market than the NASDAQ Capital or Global Markets or the New York Stock Exchange.

 
15

 
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 cash 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 agreement with Fairmount Five prevents the payment of any dividends to our common stockholders without the prior approval of Fairmount Five.  Dividends for the Preferred Series A, Preferred Series B and Preferred Series C shares held by Equity 11, SAC, Fairmount Five and John Bonner have not been paid in cash.  Thus far, the dividends have been paid through the issuance of additional preferred shares.

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

As of September 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 of September 30, 2011, we had issued warrants to purchase 906,580 shares of our common stock. As of September 30, 2011, Fairmount Five, Equity 11, John Bonner and SAC purchased Preferred Series C, Preferred Series A, and Preferred Series B shares and have been issued additional Preferred Series B and C as dividends that are convertible into 28,537,501 common shares.  
 
 
In addition, at our 2011 annual shareholder meeting, our shareholders approved a 1-for-5 reverse stock split which reduced by a factor of five the number of shares held by each our shareholders.  The reverse stock split was a condition of our obtaining additional investment from Fairmount Five.  Any future investment we obtain will likely dilute the ownership interests of our existing shareholders.

To the extent that our outstanding stock options and warrants are exercised, Preferred Series A, Preferred Series B and Preferred Series C shares and promissory notes are converted to common stock and/or we secure additional future investment, dilution to the ownership interests of our stockholders will occur.

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.  The issuance of common stock and preferred stock can be authorized by our Board of Directors without stockholder approval which will dilute the ownership interests of our stockholders.  Such dilution is likely since we need to secure additional funds in fiscal year 2012 to continue operations.

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.

 
16

 
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 Equity 11 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 for Equity 11’s and Fairmount Five’s shares as the SEC rules may permit.  Once registered, these shares may be sold on the OTCQB.  Future sales of a substantial number of shares by Equity 11 or Fairmount Five 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.  The ability of Equity 11 to sell a substantial number of shares if a registration statement ever becomes effective and the downward pressure on the price of our common stock that may result may encourage short selling of our common stock by third parties.  Such short selling will cause additional downward pressure on the price of our stock.


Not applicable to us since we are not an accelerated filer, a large accelerated filer or a well-known seasoned issuer under SEC rules.
 
 
Our executive office consists of approximately 800 square feet and is located at 24663 Mound Road, Warren, MI  48091.  The lease commenced on June 17, 2010 and continued through December 17, 2010 at an average rate of $1,000 per month.  We entered a new lease on these premises in May 2011 that continues through 2012 that calls for monthly rent payments of $1,000 as well as payment of the entire building’s utilities. The lessor, J.M. Land Company, is wholly owned by James Juliano, the Chairman of our Board of Directors.  We believe this space is adequate for our current needs and that suitable additional space is available on reasonable terms if required.
 
We also lease approximately 3,600 square feet of laboratory space at 1238 Brittain Road, Akron, Ohio 44310.  We use this facility for manufacturing, storing and testing of our products.  We are currently leasing this property on a month-to-month basis and the monthly rent is $1,200.
 
Management believes that our existing facilities are adequate for our current needs. We are considering upgrading our laboratory space and we believe suitable additional space will be available on reasonable terms if required.  Management also believes that our facilities are adequately insured.
 


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, interest and attorney fees for amounts under promissory notes we issued to him in the original principal amount of $250,000 with 25% interest.  As of September 30, 2011, Mr. Shaheen claims he is owed approximately $590,000.  We have filed an answer in the case and have been engaged in discussions to resolve his suit.
 
17

 




 
18

 

PART II
     
 
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Prices
 
Our common stock, par value $.001 per share (the “Common Stock”), is currently quoted on the OTCQB under the symbol “ECOC”. The high/low market prices of our common stock were as follows for the periods below, as reported on www.OTCQB.com. The quotations below reflect inter-dealer bid prices without retail markup, markdown, or commission and may not represent actual transactions.

 
High Close
 
Low Close
       
Fiscal Year Ended September 30, 2011
     
1st Quarter
$.09
 
$.01
2nd Quarter
$.08
 
$.04
3rd Quarter
$.20
 
$.10
4th Quarter
$.51
 
$.02
       
Fiscal Year Ended September 30, 2010
     
1st Quarter
$.49
 
$.21
2nd Quarter
$.28
 
$.15
3rd Quarter
$.18
 
$.09
4th Quarter
$.09
 
$.04


As of September 30, 2011, we had approximately 400 shareholders of record of our common stock.  As of that date, Fairmount Five held 29,310,411 shares of our common stock if it converted all of its preferred shares into common shares.  We have agreed to register common shares to be converted by Fairmount Five from its convertible preferred shares pursuant to our Convertible Preferred Securities Agreement with Fairmount Five.  On October 6, 2011, John Bonner converted all of his convertible preferred shares into 2,024,284 of our common shares.  The sale of all or a significant portion of the shares held by our large shareholders (Fairmount Five, John Bonner, Richard Stromback, Doug Stromback, Deanna Stromback, SAC and Equity 11) could have a material negative effect on the price of our common stock.

Dividends

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 Convertible Preferred Securities Purchase Agreement with Fairmount Five prevents the payment of any dividends to our common stockholders without the prior approval of Fairmount Five.  We have paid dividends due Fairmount Five, Equity 11, John Bonner and SAC on their preferred shares by issuing additional preferred shares in lieu of cash.

Securities Authorized For Issuance Under Equity Compensation Plans

Our shareholders approved the 2007 Stock Option Plan and authorized 4,500,000 common shares to be reserved for options exercised under the plan.  In fiscal year 2008, our Board of Directors authorized an additional 1,000,000 common shares to be reserved for exercises under the plan. On February 7, 2011, our shareholders ratified and approved 5,500,000 common shares to be reserved for exercises under the plan. The following table sets forth certain information as of September 30, 2011, concerning outstanding options and rights to purchase common stock granted to participants in all of our equity compensation plans and the number of shares of common stock remaining available for issuance under such equity compensation plans.

 
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
       
Equity compensation plans approved by security holders
5,351,180
$.79
148,820
       

 
19

 
Recent Issuances of Unregistered Securities

Set forth below is a description of all of our sales of unregistered securities during the fiscal year ended September 30, 2011.  All sales were made to “accredited investors” as such term is defined in Regulation D promulgated under the Securities Act of 1933, as amended (the “Act”). All such sales were exempt from registration under Section 4(2) of the Act, as transactions not involving a public offering. We did not pay any commissions to third parties in connection with the sales.


   
Number of
 
Conversion
Issued to
Issue Date
Preferred Shares
Price
Price (1)
Fairmount Five
2/28/2011
      350
$ 1,000
 $           0.06
John Bonner
3/3/2011
       120
   1,000
              0.06
Fairmount Five
3/4/2011
        475
   1,000
              0.06
Fairmount Five
3/9/2011
        220
   1,000
              0.06
Fairmount Five
4/12/2011
        100
   1,000
              0.06
Fairmount Five
5/9/2011
         100
   1,000
              0.06
Fairmount Five
5/31/2011
         100
   1,000
              0.06
Fairmount Dividend
6/1/2011
       14
   1,000
              0.06
Bonner Dividend
6/1/2011
        2
   1,000
              0.06
Fairmount Five
6/29/2011
         100
   1,000
              0.06
Fairmount Five
7/26/2011
         100
   1,000
              0.06
Fairmount Five
8/26/2011
         100
   1,000
              0.06
Fairmount Five
9/23/2011
         100
   1,000
              0.06

(1)  
Each share is convertible into shares of common stock at $.06 per share.


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

 
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.

 
20

 
Overview

We develop ultra-violet curable coatings that are designed to drive efficiencies and clean processes in manufacturing.  We create proprietary coatings with unique performance attributes.  In certain applications, we integrate nano-material technologies.  We develop high-value, high-performance coatings for applications in the specialty packaging, automotive, general industrial, electronics and medical areas.  Our target markets include the electronics, steel, construction, automotive and trucking, paper products, film packaging and OEMs.  We plan to use direct sales teams in certain target markets, such as OEMs, and third party distributors in broad product markets, such as paper and packaging products, to develop our product sales.
 
Operating Results
 
Years Ended September 30, 2011 and 2010
 
Results From Operations
 
Revenues Product sales generated revenues of $3,190 for the fiscal year ended September 30, 2011. We had $14,860 in revenue for the fiscal year ended September 30, 2010.  The decrease was due to slower than anticipated adoption of our coatings by new customers.

Officer Salaries and Fringe Benefits.   The increase of approximately $18,000 in such expenses for the year ended September 30, 2011 compared to the year ended September 30, 2010 is due primarily to an increase in medical insurance premiums.
 
Professional Fees. The decrease of approximately $216,000 in these expenses for the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 is the result of:

·  
The elimination of consulting contracts that cost approximately $221,000 in the fiscal year ended September 30, 2010.
·  
A decrease of approximately $25,000 in reimbursed expenses to consultants.
·  
These decreases were partially offset by an increase in legal fees of approximately $29,000 associated with advice to our Board of Directors regarding additional investment, our 2011 shareholder meeting, and our reverse stock split.
 
Other General and Administrative Expenses. The increase of approximately $185,000 in these expenses for the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 reflects:

·  
An increase of approximately $310,000 in non-cash compensation option expense associated with the issuance of employee options in April 2011.
·  
Approximately $68,000 in salary and benefits paid to new sales and laboratory employees starting in April 2011.
·  
$20,000 paid in directors fees in 2011.

 
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 These increases were partially offset by a $221,000 reduction in expenses associated with the abandonment of patents that were written off in 2010.

Operating Losses. The decreased Operating Loss of approximately $2,000 between the reporting periods is explained in the discussion above.

 Income from Forgiveness of Accounts Payable. The income in this category resulted from the settlement of amounts owed to several vendors and note holders at a discount of approximately 75%. The figure for fiscal year ended September 30, 2011 represents an increase of approximately $666,000 over the fiscal year ended September 30, 2010.

Interest Expense. The decrease of approximately $14,000 for the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 is the result of a reduction in average debt outstanding for fiscal year 2011 through repayment and settlements.
 
Income Tax Provision.  No provision for income tax benefit from net operating losses has been made for the years ended September 30, 2011 and 2010 as we have fully reserved the asset associated with operating loss carry forwards until realization is more likely than not.
 
Net Loss.  The decrease in the Net Loss of approximately $682,000 for the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 is explained in the foregoing discussions of the various expense and income categories.
 
Basic and Diluted Loss per Share. The change in basic and diluted net loss per share for the fiscal year ended September 30, 2011 reflects the decreased Net Loss discussed above as well as the increase in average shares outstanding of approximately 3,156,000 for fiscal year 2011.

Liquidity and Capital Resources

Current and Expected Liquidity

Cash as of September 30, 2011 and September 30, 2010 totaled $71,784 and $2,814, respectively.  The increase reflects cash used in operations of $1,593,182, cash used to purchase fixed and intangible assets of $38,745, and cash used to pay off debt of $236,103.  This usage was offset by borrowings of $292,000 and the issuance of $1,865,000 in convertible preferred stock.  Included in the issuance of convertible preferred shares was the conversion of $220,000 of debt.  Thus, net proceeds from the issuance of convertible preferred stock were $1,645,000.

We are a company that has failed to generate significant revenues as yet and have incurred an accumulated deficit of ($28,774,419).  $17,771,292 of this amount is due to non-cash items, including options expense, the issuance of warrants, preferred stock dividends paid with preferred stock, beneficial conversion provisions associated with issuances of preferred stock and certain debt, and stock issued to pay for services, payables, and debt extensions.  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.  We have received an unqualified audit report from our independent auditors that includes an explanatory paragraph describing their substantial doubt about our ability to continue as a going concern.

We expect to continue using substantial amounts of cash to: (i) develop and protect our intellectual property, (ii) further develop and commercialize our products, and (iii) fund ongoing salaries, professional fees, and general administrative expenses.  Our cash requirements may vary materially from those now planned depending on numerous factors, including the status of our marketing efforts, our business development activities, the results of future research and development, competition and our ability to generate revenue.

 
22

 
On February 28, 2011, we entered into agreements with Fairmount Five ($2,400,000) and John Bonner ($120,000) to sell them our Convertible Preferred Shares, Series C.  In fiscal year 2011, we sold $1,865,000 of such Series C shares leaving an additional $655,000 to sell to Fairmount Five in fiscal year 2012.

Historically, we have financed operations primarily through the issuance of debt and the sale of equity securities.  In the near future, as additional capital is needed, we expect to rely primarily on the sale of convertible preferred securities.
 
Past Due Notes Payable

As of September 30, 2011, we had notes payable to five separate parties on which we owed approximately $517,500 in principal, plus $365,789 in accrued interest.  These notes do not contain any restrictive covenants with respect to the issuance of additional debt or equity securities by us.  The notes and the accrued interest totaling were due prior to September 30, 2011 and their holders have demanded payment.    

Other Unsecured Notes Payable

As of September 30, 2011, we had notes payable to Equity 11, an entity controlled by Jim Juliano who is the Chairman of our Board of Directors, on which we owed $35,952 in principal and accrued interest. Also as of September 30, 2011, we had a note payable to Nirta Enterprises, an entity controlled by Joe Nirta who is a member of our Board of Directors, on which we owed $25,806 in principal and accrued interest. On November 3, 2011, the Equity 11 notes were converted into 71,556 shares of our common stock (with a conversion price of $.50/share) and the Nirta Enterprises note was converted into 51,830 shares of our common stock (with a conversion price of $.50/share).

Secured Notes Payable

As of September 30, 2010, we had a note payable to John M. (“Pete”) Salpietra who is a member of our board of directors on which we owed $636,366 in principal and accrued interest. It is secured by a first lien on all of our intellectual property.

On September 30, 2011, we had 14,158,506 common shares issued and outstanding and 1,938 convertible preferred shares issued and outstanding.  These preferred shares and accumulated and unpaid dividends can be converted into a total of 28,537,501 shares of our common stock.  As of September 30, 2011, options and warrants to purchase up to 6,257,760 shares of common stock had been granted.  Additionally, some of our outstanding notes and accrued interest may be converted into shares of common stock in order to conserve cash.           

Capital Commitments

                                         
Contractual
                             
Obligations
 
Total
   
Less Than 1 Year
   
1-3 Years
   
4-5 Years
   
After 5 Years
 
Notes Payable
 
$
1,150,332
   
$
1,150,332
   
$
-
   
$
-
   
$
-
 
                                         
Interest on notes payable
   
405,274
     
405,274
     
-
     
-
     
-
 
Contractual Service Agreements
   
433,333
     
433,333
     
-
     
-
     
-
 
Office Leases
   
14,000
     
14,000
     
-
     
-
     
-
 
Equipment Leases
   
-
     
-
     
-
     
-
     
-
 
                               
Total Contractual Obligations
 
$
2,002,939
   
$
2,002,939
   
$
-
   
$
-
   
$
-
 
                               

 
23

 
Off-Balance Sheet Arrangements

Our off-balance sheet contractual service agreements include services provided by vendors and services by our employees under employment agreements.  Vendor services include investor and public relations services, legal services and business and revenue generation consulting services.  

We have a lease for our headquarters in Warren, MI.  The space for our laboratory in Akron, OH is not currently subject to a written lease – we lease that space on a month to month basis.  A summary of our Warren, MI office lease is summarized in the table below:

Contract Service
Provider
Purpose
Monthly Amount
Expiration
 
Less Than
1 Year
1-3
Years
4-5
Years
After 5
Years
Total
                 
J.M. Land Company
Warren, MI Headquarters
$
4/17/12
$14,000
     
$14,000
 
See also Notes to the Consolidated Financial Statements in this report. The details of such arrangements are found 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 the most critical estimates that we must make when preparing our financial statements.
 
Revenue Recognition.  Revenues from licensing contracts are recorded ratably over the life of the contract. Contingency earnings such as royalty fees are recorded when the amount can reasonably be determined and collection is likely. Revenues from product sales are recognized upon shipment of product.
 
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.

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.
 
Property and Equipment.  Property and equipment is stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the following useful lives:
     
Computer equipment
 
3-10 years
Furniture and fixtures
 
3-7 years
Test equipment
 
5-7 years
Software
 
3 years
 
Repairs and maintenance costs are charged to operations as incurred. Betterments or renewals are capitalized as incurred.
 
We review long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset with future undiscounted 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.
 
 
24

 
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 found elsewhere in this report, we have recorded amortization expense associated with the patents based on an eight year useful life.
 
Stock-Based Compensation.  We have a stock incentive plan that provides for the issuance of stock options, restricted stock and other awards to employees and service providers. We calculate compensation expense in accordance with GAAP using a Black-Scholes option pricing model. In so doing, we estimate certain key assumptions used in the model. We believe the estimates we use, which are presented in Note 7 of Notes to the Consolidated Financial Statements, are appropriate and reasonable.
 
Recent Accounting Pronouncements

We evaluate all accounting pronouncements issued by the Financial Accounting Standards Board during each reporting period to assess their impact on and applicability to our accounting practices and our financial reporting and disclosures.

We have reviewed all accounting pronouncements issued by the Financial Accounting Standards Board since we last issued financial statements as part of our 10-Q filed on  August 15, 2011 and have determined that none of them have a material effect on the consolidated financial statements.
 
Not applicable since we are a smaller reporting company under the applicable SEC rules.

 
Our financial statements are included following the signature page to this Form 10-K commencing on page 40.

 
None.
 
    
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.
 
 
25

 
Management’s Report on Internal Control over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or Rule 15d-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was not effective as of September 30, 2011 because we lack effective monitoring of financial controls and lack segregation of duties in financial reporting due to the small size of our financial staff (1 person).
 
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
 
Changes in Internal Control over Financial Reporting
 
During the three months ended September 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.
 
 
None. 

PART III
 
 
The following table sets forth as of September 30, 2011, the name, age, and position of each executive officer and director and the term of office of each such person.
 

Name
Age
Position
James Juliano
58
Chairman
Joe Nirta
48
Director
James Orchard
61
Director
Sally Ramsey
58
Director and Vice President – New Product Development
Nick DeMiro
45
Director
John M. (“Pete”) Salpietra
57
Director
Bob Crockett
53
Chief Executive Officer
F. Thomas Krotine
70
Vice President – Business Development
Daniel V. Iannotti
56
Vice President, General Counsel & Secretary
Kevin Stolz
48
CFO, Controller and Chief Accounting Officer

As of September 30, 2011, our Bylaws authorized up to seven directors but only six members were currently serving. Fairmount Five has the right to elect two of the directors to our Board of Directors and they are Messrs. Juliano and Nirta.   Each Director serves for a term of one year and until his or her successor is duly elected and qualified. Each officer serves at the pleasure of the Board of Directors subject to any applicable employment agreements.

 
26

 
Set forth below is certain biographical information regarding each of our directors and officers as of September 30, 2011.

James Juliano.  Mr. Juliano joined our Board of Directors on June 29, 2010 as one of the Board appointments made by Equity 11.  Mr. Juliano is a Fairmount Five and  Equity 11 shareholder and, since 1981, the President and Founder of Michigan-based Omega Development Corporation, a full service general contracting services company with clients such as Best Buy, Discount Tire, Babies R Us, CVS Drugs and the University of Michigan. Mr. Juliano has extensive experience in creating and evaluating investment proposals, including acting as the lead investor for investment groups. His ability to attract investment is a valuable and important skill to us.

Joseph Nirta.  On October 20, 2008, Joseph Nirta joined our Board of Directors as one of the Board appointments made by Equity 11.  Mr. Nirta was the co-founder of BondExchange LLC and BondDesk Group LLC. The electronic bond trading platform created by Mr. Nirta revolutionized the online bond trading market. Nirta served as Bond Desk Group’s chief information officer and a board member since 1999. He has a Bachelor of Mathematics in Computer Science from the University of Waterloo, Waterloo, Ontario, and is a Certified Oracle DBA.  Mr. Nirta’s prior experience in the operation and sale of a startup company is especially valuable to us.

James Orchard. Mr. Orchard was elected to our Board on September 13, 2010.  Mr. Orchard is the Co-CEO of Mark IV LLC a privately held, leading global diversified manufacturer of highly engineered systems and components for vehicles, transportation infrastructure and equipment. Mr. Orchard has an extensive background in the automotive industry where he held the positions of COO of Noble International and President of Faurecia, a global supplier the automotive industry.  Mr. Orchard holds a B.S. in Marketing and Business Operations from Indiana University. Mr. Orchard was nominated to serve on our Board of Directors due to his extensive business, operational and financial experience.

Sally Ramsey. Ms. Ramsey founded our company in 1990 and serves as VP - New Product Development.  She was elected to our Board on September 13, 2010.   She was nominated to serve on our Board of Directors since she is the creator of substantially all of the Company’s intellectual property. From 1990 to the present, Ms. Ramsey served as Vice President of Ecology-California and from 1990 to November 2006 served as Secretary.  As of July 27, 2007, Ms. Ramsey was elected our Vice President of New Product Development.  Ms. Ramsey is a graduate of the Bronx School of Science and holds a B.S. in Chemistry with honors from Hiram College. Ms. Ramsey is

Nick DeMiro. Mr. DeMiro was elected to our Board of Directors on March 24, 2011.  He was nominated to serve on our Board of Directors due to his financial and operational expertise.  Since 2006, Mr. DeMiro has been the President of Mayco International, LLC, a privately held, global leader in automotive design, engineering, tooling, and manufacturing of plastic systems and modules.  Mr. DeMiro has 8 years of active and reserve military service as an Aviation Officer in the U.S. Army.  Mr. DeMiro holds a B.S. in Mechanical Engineering from the United States Military Academy, West Point and an M.S. in Systems Management from the University of Southern California.

John M. (“Pete”) Salpietra.  Mr. Salpietra was elected to our Board of Directors on March 24, 2011.  He was nominated to serve on our Board of Directors due to financial and operational expertise.  Mr. Salpietra co-founded Val-Tec Plastics, a manufacturer of plastic injection molds, in 2005 and is a shareholder.  In addition, since 2005, Mr. Salpietra has been the majority owner and managing partner of Moose Ridge Golf Course in South Lyon, MI.  Mr. Salpietra retired from C.H. Robinson Company in 2005 as its National Vice President.  Mr. Salpietra attended Youngstown State University (1972-1976).  Mr. Salpietra founded the Salpietra Family Charitable Foundation in 2007 and has funded an endowed scholarship at Youngstown State University. 

Robert G. Crockett.  Mr. Crockett joined us as our Chief Executive Officer on September 15, 2008.  From 2007 to September, 2008, Mr. Crockett served in Advanced Sales Development for JCIM L.L.C., a an automotive plastics supplier and joint venture between Johnson Controls Inc. and private equity.  In 2007, Mr. Crockett served as President – Exterior Painted Products for Plastech, a privately held plastic component supplier.  From 2004 to 2006, he also served as Vice President of Plastech as part of the executive team acquired from LDM Technologies Inc.  From 1997 through 2004, Mr. Crockett served as Director for LDM Technologies Inc., a privately held automotive exterior and interior supplier.  From 1996 to 1997, he was a Vice President at the Becker Group, a privately held automotive interior supplier.  Mr. Crockett holds a B.S. in Business from Central Michigan University.

 
27

 
F. Thomas Krotine.  Since October 30, 2006, Mr. Krotine has served as our President and from October 30, 2006 until August 15, 2007, he served as our Chief Executive Officer.  From August 15, 2007 to April 2011, he also served as the Chief Operating Officer.  From April 2011, he served as our Vice President – Business Development.  Mr. Krotine is an industry veteran with extensive coatings industry and materials-based experience.  From 2001 to 2006, Mr. Krotine was a Principal of TBD Associates, a technology and business development consulting company.   From 1996 to 2001, he served as Chairman of CV Materials, a privately-held a supplier of porcelain enamel materials and coatings.  Prior to his role at CV Materials, from 1992 to 1996 he was the Manager of TK Holdings, a private company which he formed to acquire equity holdings in small-to-medium-sized manufacturing companies.  From 1990 to 1992, he served as a Vice President at Valspar, a publicly-held coatings company, where he managed Valspar’s North American powder coating business.  From 1980 to 1990, he served as Senior Vice President at Sherwin-Williams Company, a publicly-held paint and coatings concern, where he was responsible for technology management and corporate environmental and health compliance.  Mr. Krotine holds a B.A., an M.S. and a Ph.D. in Metallurgy and Materials Science from Case Western Reserve University in Cleveland, Ohio.
 
Daniel V. Iannotti.  Mr. Iannotti served as our General Counsel and Secretary from August 11, 2008 to March 23, 2010 and rejoined us on May 17, 2010.  From 2004 to 2008, Mr. Iannotti served as a Principal of TheGeneralCounsel.com.  From 2003 to 2004, he served as the General Counsel and Secretary of Origen Financial, LLC.  During his career, Mr. Iannotti previously served as general counsel for three publically held companies including Prodigy Communications, Hoover’s, Inc. and Origen Financial.  He also spent several years as a staff attorney for Ameritech, now AT&T.  Mr. Iannotti holds a BA and MBA from Michigan State University. He received his Juris Doctor degree, cum laude, from the Wayne State University Law School, where he was an editor of the Wayne Law Review.  Iannotti is licensed to practice law in Michigan and Illinois.
 
Kevin Stolz.  Mr. Stolz became our Controller and Chief Accounting Officer on February 1, 2007 and our Chief Financial Officer on March 26, 2009.  From 1999 until 2007, Mr. Stolz was the principal of Kevin Stolz and Associates, Ltd., a Troy, Michigan-based management consulting firm specializing in providing financial and operations consulting services.  From 1985 to 1987, Mr. Stolz worked as an auditor at Coopers & Lybrand, a public accounting firm, and from 1988 to 1992 he worked in commercial lending at JP Morgan/Chase.  From 1997 to 1999, he was the Vice President of Manufacturing of Unique Fabricating, Inc. a privately held Detroit automotive supplier; from 1996 to 1997, a Controller at Broner Glove and Safety, Inc. a privately held wholesale distributor, and; from 1992 to 1995 the Director of Operations for Virtual Services, Inc., a privately held computer services firm.  Mr. Stolz has an M.B.A. from the University of Notre Dame and a B.B.A. in Accounting from the University of Portland.

Composition of the Board of Directors.  Since the adoption of the Sarbanes-Oxley Act in July 2002, there has been a growing public and regulatory focus on the independence of directors. Additional requirements relating to independence are imposed by the Sarbanes-Oxley Act with respect to members of the Audit Committee. The Board has established procedures consistent with the Sarbanes-Oxley Act of 2002, and the Securities and Exchange Commission. Our Board of Directors has determined that Messrs. Orchard and DeMiro are “independent” members of the Board.
 
During the fiscal year ended September 30, 2011, the Board of Directors held 9 meetings. During fiscal year 2011, all members of the Board of Directors attended at least 75% of all the meetings that such director was eligible to attend.
 
Board’s Leadership Structure and Role in Risk Oversight; Audit Committee.  The Board comprises six directors, two of whom the Board has determined are “independent” - James Orchard and Nick DeMiro. The Board has designated James Juliano as Chairman. Our Board’s leadership structure involves an Audit Committee and a Compensation Committee.  Our Audit Committee is comprised of Messrs. DeMiro (Chair), Juliano and Orchard.  Our Compensation Committee is comprised of Messrs. DeMiro, Salpietra and Orchard.  Nick DeMiro is the Audit Committee Chairman and has been designated by our Board of Directors as a “financial expert”.  With input from management, our entire Board is involved in risk oversight for our business, including risk identification and the evaluation of our need for insurance to reduce our risk exposure.
 
 
28

 
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
   Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and persons holding more than 10% of a registered class of the equity securities of the Company to file with the SEC and to provide us with initial reports of ownership, reports of changes in ownership and annual reports of ownership of common stock and other equity securities of the Company. Based solely on a review of the reports furnished to us, or written representations from reporting persons that all reportable transaction were reported, we believe that during the fiscal year ended 2011, our officers, directors and greater than ten percent owners timely filed all reports they were required to file under Section 16(a).

Code of Ethics

We have adopted a Code of Ethics that applies to all directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.  Our Code of Ethics is posted on our website at:  http://www.ecologycoatings.com/profiles/investor/Governance.asp?BzID=1672. We intend to disclose future amendments to certain provisions of the Code of Ethics, or waiver of such provisions granted to executive officers and directors, on our website within four business days following the date of such amendment or waiver.
 
29

 
 
 
We seek to have compensation programs for our Named Executive Officers that achieve a variety of goals, including to:

 
     
 
• 
attract and retain talented and experienced executives in the coatings industry;
     
 
• 
motivate and fairly reward executives whose knowledge, skills and performance are critical to our success; and
     
 
• 
provide fair and competitive compensation.
 

The Board’s Compensation Committee is comprised of Messrs. DeMiro, Salpietra and Orchard.  In determining executive compensation for fiscal 2011, the Compensation Committee continued its process to focus more on pay-for-performance objectives, to attempt to better link pay and performance, and to assure that its compensation practices are competitive with those in the industry and consistent with our ability to pay such compensation. The Chief Executive Officer, as he did for fiscal 2009 and fiscal 2010, assisted the Board of Directors in determining compensation for the other Named Executive Officers.
 
Overview.  Total compensation paid to our executive officers is divided among two principal components, salaries and stock option awards.
 
Base Salary.  We pay our executives a base salary, which we review and adjust consistent with our level of working capital. We believe that a competitive base salary is a necessary element of any compensation program. Base salaries are established based on the individual position, responsibility, experience, skills, historic salary levels and the executive’s performance during the prior year. We are also seeking over a period of years to align base compensation levels comparable to our competitors and other companies similarly situated. We do not view base salaries as primarily serving our objective of paying for performance.

 
 
30

 
   
Current
   
Annual
Name
Title
Salary
Robert G. Crockett
CEO
$200,000(1)
Daniel Iannotti
VP, General Counsel
$100,000
Sally Ramsey
VP-New Product Development
$100,000(2)
Tom Krotine
VP-Business Development
$100,000(3)
Kevin Stolz
CFO
$42,000(4)
     
(1)  
Beginning on May 15, 2010 and continuing through April 30, 2011, Mr. Crockett deferred $6,666.67 of his monthly salary. As of 9/30/11, Mr. Crockett had deferred $40,000 of his salary.
(2)  
Ms. Ramsey’s salary was increased from $60,000 on May 1, 2011 to $100,000.
(3)  
Mr. Krotine’s salary increased from $65,000 to $100,000 on May 1, 2011.
(4)  
Mr. Stolz’s salary has been  $42,000 per year since September 1, 2009.

Equity Compensation.  We believe that restricted stock awards and stock options are an important long-term incentive for our executive officers and employees and align officer interests with those of our stockholders. We review our equity compensation plan annually.
 
We do not have any formal plan or obligation that requires us to grant equity compensation to any executive officer on specified dates. The authority to make equity grants to our executive officers rests with our Board of Directors. The Board of Directors considers the input of our chief executive officer in setting the compensation of our other executive officers, including in the determination of appropriate levels of equity grants.
 
Severance and Change-in-Control Benefits.  Three of our executives have employment agreements – Messrs. Crockett, and Iannotti and Ms. Ramsey as described below.

On January 1, 2007, we entered into an employment agreement with Sally J.W. Ramsey, Vice President New Product Development, which expires on January 1, 2012. We are currently working on an extension of Ms. Ramsey’s employment agreement.  The agreement may be terminated prior to the end of the term for cause. If Ms. Ramsey’s employment is terminated without cause or for “good reason,” as defined in the agreement, she 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.  Upon expiration, the agreement calls for automatic one-year renewals until terminated by either party with thirty days written notice.   On December 15, 2008, we amended the agreement to reduce Ms. Ramsey’s annual base salary to $60,000 and on May 18, 2011, we increased her annual base salary to $100,000.   On September 21, 2009, we entered into a second amendment to the employment agreement with Ms. Ramsey that amended her employment agreement to provide for an annual salary of $75,000 effective November 1, 2009.  Additionally, on April 22, 2011, she forfeited all 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 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. The agreement expires on September 21, 2012. Mr. Crockett will receive an annual base salary of $200,000. The Board of Directors may review Mr. Crockett’s salary to determine what, if any, increases should be made thereto. In addition, the vesting for Mr. Crockett’s previously awarded stock options was adjusted so that 22,000 stock options were to vest 12 months, 18 months and 24 months, respectively, from Mr. Crockett’s initial date of employment (September 15, 2008).  Mr. Crockett was also granted stock options to purchase 670,000 shares of our common stock, one-quarter of which were to vest at 30, 36, 42 and 48 months from Mr. Crockett’s initial date of employment with us (September 15, 2008) with an exercise price of $2.55 per share. 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 options vest in 600,000 share tranches on each of the first three anniversaries of the date of issuance.  The agreement may be terminated prior to the end of the term for cause. If Mr. Crockett’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause.

On September 21, 2009, we entered into an employment agreement with Daniel V. Iannotti, our Vice President, General Counsel & Secretary.  On March 23, 2010, Mr. Iannotti resigned his position and the original employment agreement was terminated. On May 17, 2010, we re-hired Daniel Iannotti as our Vice President, General Counsel & Secretary and on that date we entered into a new employment agreement with Mr. Iannotti. 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. Under his new employment agreement, Mr. Iannotti will receive an annual base salary of $100,000. The Compensation Committee of the Board of Directors may review Mr. Iannotti’s salary to determine what, if any, increases should be made thereto.  In addition, the vesting for Mr. Iannotti’s previously awarded stock options was adjusted so that 22,000 stock options were to vest 12 months, 18 months and 24 months, respectively, from Mr. Iannotti’s initial date of employment (August 11, 2008).  Mr. Iannotti was also granted stock options to purchase 14,000 shares of our common stock, one-quarter of which shall vest at 30, 36, 42 and 48 months from Mr. Iannotti’s initial date of employment with us (August 11, 2008) with an exercise price of $2.55 per share. 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 options vest in 100,000 share tranches on each of the first three anniversaries of the date of issuance. 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.

 
31

 
Non-Compete and Confidentiality Restrictions.  Each of the employment agreements of Ms. Ramsey and Messrs. Crockett and Iannotti has a provision that restricts each employee from using our confidential information for two years after severance or termination and restricts use of our trade secrets for as long as they qualify as trade secrets under applicable law.  Ms. Ramsey’s employment agreement has a two year restriction upon her severance or termination that prevents her from working, directly or indirectly, for any of our competitors, soliciting business from our customers or soliciting employment of our employees.  The employment agreements for Messrs. Crockett and Iannotti have a one year restriction upon their severance or termination that prevents each of them from working, directly or indirectly, for any of our competitors soliciting business from our customers or soliciting employment of our employees.

Share Retention
 
We do not have a share retention policy or share ownership guidelines for executive officers.
 
Regulatory Considerations
 
We account for the equity compensation expense for our employees under the rules of FASB Accounting Standard Codification 718, “Compensation — Stock Compensation,” or ASC 718.

 
32

 
 
THE COMPENSATION COMMITTEE REPORT

 
Three members of our Board of Directors have reviewed and discussed the foregoing Compensation Discussion and Analysis with management. Based on this review and these discussions, the Board has recommended  that the Compensation Discussion and Analysis be included in this Report.

Submitted by,

Nick DeMiro, Director
James Orchard, Director
John M. (“Pete”) Salpietra, Director

 
 
COMPENSATION COMMITTEE/BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION

 
Our Board is currently comprised of six members. Only one member – Sally Ramsey - is an employee or a current or former officer. Ms. Ramsey does not participate in compensation decisions as a member of the Board of Directors or Compensation Committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our Board of Directors or our Compensation Committee.

 
SUMMARY COMPENSATION TABLE

 
The following table contains information about compensation earned (bonus) or received (all other categories of compensation) by the named executive officers for the last three fiscal years.
 

                                 
All Other
       
   
Fiscal
   
Salary
   
Bonus
   
Stock Awards
   
Option Awards
   
Compensation
   
Total
 
Name and Principal Position
 
Year
   
($)
   
($)
   
($)
   
($)(1)
   
($)(2)
   
($)
 
                                                         
Robert G. Crockett
   
2011
     
$200,000
     
-0-
 
   
 
     
$352,920
     
$11,298
     
$564,218
 
CEO
   
2010
     
$200,000
     
-0-
     
-0-
     
$-0-
     
$22,023
     
$22,023
 
     
2009
     
$200,000
     
-0-
     
-0-
     
$411,867
     
$21,261
     
$633,128
 
                                                         
                                                         
Daniel V. Iannotti
   
2011
     
$100,000
     
-0-
     
-0-
     
$58,820
 
   
$11,364
     
$170,184
 
VP, General Counsel & Secretary
   
2010
     
$105,875
     
-0-
     
-0-
     
$-0-
     
$17,388
     
$123,263
 
     
2009
     
$115,000
     
-0-
     
-0-
     
$280,264
     
$17,015
     
$412,279
 
                                                         
                                                         
Sally Ramsey
   
2011
     
$85,417
     
-0-
     
-0-
     
$411,740
 
   
$11,364
     
$508,521
 
Vice President New Product Development
   
2010
     
$73,750
     
-0-
     
-0-
     
-0-
     
$17,388
     
$91,588
 
     
2009
     
$89,167
     
-0-
     
-0-
     
-0-
     
$17,265
     
$106,432
 
                                                         
                                                         
F. Thomas Krotine
   
2011
     
$79,583
     
-0-
     
-0-
     
$58,820
     
$5,296
     
$138,999
 
Vice President Business Development
   
2010
     
$63,583
     
-0-
     
-0-
     
-0-
     
$6,170
     
$69,753
 
     
2009
     
$50,667
     
-0-
     
-0-
     
$104,288
     
$8,873
     
$163,828
 
                                                         
                                                         
Kevin P. Stolz
   
2011
     
$42,000
     
-0-
     
-0-
     
$9,803
     
$14,205
     
$66,008
 
Chief Financial Officer
   
2010
     
$42,000
     
-0-
     
-0-
     
-0-
     
$12,698
     
$54,698
 
     
2009
     
$67,667
     
-0-
     
-0-
     
$18,304
     
$22,438
     
$108,409
 
                                                         

 
                                                         
 
(1)
 
 Represents the grant date fair value of the award, calculated in accordance with ASC 718. A summary of the assumptions made in the valuation of these awards is provided under Notes 1 and 7 to our financial statements.
     
(2)
 
 Represents medical insurance premiums paid on behalf of the executives shown as well as health care deductible reimbursements.
 
 
33

 

GRANTS OF PLAN BASED AWARDS

 
The following Named Executive Officers received stock options or restricted stock awards during fiscal year 2011 as follows:

Name 
(a)
Grant Date 
(b)
Estimated Future Payouts Under Non-Equity Incentive Plan Awards
Estimated Future Payouts Under Equity Incentive Plan Awards
All Other Stock Awards: Number of Shares of Stocks or Units 
(#)
(i)
All Other Option Awards: Number of Securities Underlying Options
(#) 
(j)
Exercise or Base Price of Option Awards
($/Share)
(k)
Grant Date Fair Value of Stock and Option Awards
(l)
Threshold ($) 
(c)
Target
($)
(d)
Max. ($)
(e)
Threshold
(#)
(f)
Target
(#)
(g)
Max
(#) 
(h)
         
                         
Robert Crockett
 4/28/11
             
 1,800,000
 .20
 $352,920
 
                         
Daniel Iannotti
 4/28/11
             
 300,000
 .20
 $58,820
 
                         
Kevin Stolz
 4/28/11
             
 50,000
 .20
 $9,803
 
                         
Sally Ramsey
 4/28/11
             
 2,100,000
 .20
 $411,740
 
                         
Thomas Krotine
 4/28/11
             
 300,000
 .20
 $58,820
 

 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 
The following table provides information on exercisable and unexercisable options and unvested stock awards held by the Named Executive Officers on September 30, 2011.

 
34

 
 
                                                   
   
Option Awards
   
Stock Awards
 
   
Number of
   
Number of
                         
   
Securities
   
Securities
                         
   
Underlying
   
Underlying
                     
Market Value of
 
   
Unexercised
   
Unexercised
               
Number of Shares or
   
Shares or Units of
 
   
Options
   
Options
   
Option
         
Units of Stock That
   
Stock That
 
   
(#)
   
(#)
   
Exercise Price
   
Option
   
Have Not Vested
   
Have Not Vested
 
Name
 
Exercisable
   
Unexercisable
   
($)
   
Expiration Date
   
(#)
   
($)(1)
 
                                                 
Robert G. Crockett
   
-0-
     
600,000
     
.20
     
4/28/21
     
-
     
-
 
     
-0-
     
600,000
     
.20
     
4/28/21
     
-
     
-
 
     
-0-
     
600,000
     
 .20
     
4/28/21
     
-
     
-
 
     
 
     
 
 
   
 
     
 
     
 
     
 
 
Daniel Iannotti
   
-0-
     
100,000
     
.20
     
4/28/21
     
-
     
-
 
     
-0-
     
100,000
     
.20
     
4/28/21
     
-
     
-
 
     
-0-
     
100,000
     
.20
     
4/28/21
     
-
     
-
 
                                                 
                                                 
Sally Ramsey
   
2,100,000
     
0
     
.20
     
4/28/21
                 
                                                 
                                                 
F. Thomas Krotine
   
-0-
     
100,000
     
.20
     
4/28/21
     
-
     
-
 
     
-0-
     
100,000
     
.20
     
4/28/21
     
-
     
-
 
     
-0-
     
100,000
     
.20
     
4/28/21
     
-
     
-
 
                                                 
                                                 
Kevin P. Stolz
   
-0-
     
16,667
     
.20
     
4/28/21
                 
     
-0-
     
16,667
     
.20
     
4/28/21
                 
     
-0-
     
16,666
     
.20
     
4/28/21
                 
 
 
STOCK OPTION EXERCISES AND VESTING OF RESTRICTED STOCK AWARDS
 
The following table provides information on stock option exercises and vesting of restricted stock awards of Named Executive Officers during the fiscal year ended September 30, 2011:
 
   
Option Awards
   
Stock Awards
 
   
Number of
   
Value
   
Number of
   
Value
 
   
Shares
   
Realized
   
Shares
   
Realized
 
   
Acquired
   
On
   
Acquired
   
on
 
   
on Exercise
   
Exercise
   
on
   
Vesting
 
Name
 
(#)
   
($)
   
Vesting (#)
   
($)
 
                                 
Robert Crockett
   
-
     
-
     
-
     
-
 
                                 
Daniel Iannotti
   
-
     
-
     
-
     
-
 
                                 
Sally Ramsey
   
-
     
-
     
-
     
-
 
                                 
                                 
F. Thomas Krotine
   
-
     
-
     
-
     
-
 
                                 
                                 
Kevin P. Stolz
   
-
     
-
     
-
     
-
 
                                 
 
 
 
 
35

 

Employment and Consulting Agreements
 
Three of our executives have employment agreements – Messrs. Crockett and Iannotti and Ms. Ramsey. Each was discussed above under “Compensation Discussion & Analysis”.

DIRECTOR COMPENSATION
 
 
All of our non-employee directors (i.e. other than Ms. Ramsey) received a one-time stock option award to acquire 100,000 shares of our common stock at the inception of their service.  The following summarizes stock option awards and compensation to our directors as of September 30, 2011:

Name
Fees Earned or Paid in Cash
($)(1)
Stock Awards
Option Awards
($) (1)
Non-Equity Incentive Plan compensation
($)
Nonqualified Deferred Compensation Earnings
($)
All Other Compensation
($)
Total Compensation
($)
James Juliano
$20,000
-
$3,921
-
-
-
$ 23,921
Joseph Nirta
-
$ 3,921
-
-
-
-
$3,921
James Orchard
-
-
$19,607
-
-
-
$19,607
Nick DeMiro(2)
-
-
$19,607
-
-
-
$19,607
John Salpietra(3)
-
-
$3,921
-
-
-
$3,921
 
(1)  
Represents the grant date fair value of the award, calculated in accordance with ASC 718.  A summary of the assumptions made in the valuation of these awards is provided under Note A to our financial statements.
(2)  
On March 24, 2011, Mr. DeMiro was appointed as a member of our Board of Directors.  
(3)  
On March 24, 2011, Mr. Salpietra was appointed as a member of our Board of Directors.
 
I
 
Beneficial Owners

At September 30, 2011, 46,685,292 shares of our common stock, $.001 par value per share, were issued and beneficially outstanding. The following table sets forth information as of September 30, 2011 with respect to beneficial ownership of our common stock by (i) each director and executive officer acting in the capacity as such on September 30, 2011 including any person holding the position of CEO or CFO at any time during the fiscal year of 2010, (ii) each person known by us to own beneficially more than five percent of our outstanding common stock, and (iii) all directors and executive officers as a group. This table has been prepared based on 46,685,292 shares of common stock beneficially outstanding on September 30, 2011. Unless otherwise indicated, the address of each such person is c/o Ecology Coatings, Inc., 24663 Mound Road, Warren, MI  48091. All persons listed have sole voting and investment power with respect to their shares unless otherwise indicated.


 
36

 
 
 
Amount and
 
   
 
 
Nature
 
   
 
 
of Beneficial
 
   
Name and Address of Beneficial Owner(1)
 
Ownership
 
 
Percentage
               
James Juliano/Fairmount Five/Equity 11, Ltd.(2)
 
 
34,269,620
     
73.4%
24663 Mound Road
Warren, MI  48091
 
 
 
 
     
               
Sally Ramsey(3)
   
2,700,000
 
   
5.8%
1238 Brittain Road
Akron, OH  44310
     
 
     
               
Richard Stromback(4)
   
2,361,381
     
5.1%
1050 Northover
Bloomfield Hills, MI  48304
   
 
       
               
John Bonner
43230 Garfield Rd Ste 160
Clinton Township, MI 48038
   
2,024,284
     
4.3%
               
Doug Stromback
   
600,000
     
1.3%
2000 Delaware
Redford, MI  48240
             
               
Deanna Stromback
   
600,000
     
1.3%
2000 Delaware
Redford, MI  48240
             
               
Joseph Nirta(2)
   
-0-
       
5600 Orion Road
Rochester, MI  48306
             
               
James Orchard
   
-0-
       
24663 Mound Road
Warren, MI  48091
   
 
       
               
Nick DeMiro
   
-0- 
       
24663 Mound Road
Warren, MI  48091
             
               
John M. (“Pete”) Salpietra
             
24663 Mound Road
             
Warren, MI 48091
             
               
Robert Crockett
   
-0- 
       
24663 Mound Road
Warren, MI  48091
             
               
F. Thomas Krotine
   
2,000 
     
*
1238 Brittain Road
Akron, OH  44310
             
               
Daniel Iannotti
     
 
     
24663 Mound Road
Warren, MI  48091
   
 
       
               
Kevin Stolz
   
 
 
     
24663 Mound Road
Warren, MI  48091
             
               
All executive officers and directors as a group (10 persons)
   
42,557,285
     
91.2%

 
37

 

*Less than 1%
(1) Any shares of common stock that any person named above has the right to acquire within 60 days of November 30, 2011, are deemed to be outstanding for purposes of calculating the ownership percentage of such person, but are not deemed to be outstanding for purposes of calculating the beneficial ownership percentage of any other person not named in the table above.  Both Mr. Juliano and Mr. Nirta are shareholders of Equity 11 and Fairmount Five.
(2) Represents common shares, warrants to purchase shares of our common stock and stock options.  The warrants are for the purchase of shares of our common stock at $3.75 per share. The options are for the purchase of shares of our common stock at $4.50 per share.  The warrants were issued in conjunction with the purchase of convertible preferred shares between July 28, 2008 and March 26, 2009 and expire five years after issuance.
(3)  Represents shares of common stock and options to acquire shares of our common stock.
(4)  Represents shares of common stock, shares of our common stock from conversion of convertible preferred shares and options to acquire shares of our common stock.
(5)  Represents common shares.

We anticipate that transactions with officers, directors and affiliates will be approved by a majority of the Board of Directors, including a majority of the disinterested members of the Board of Directors, and will be made on terms no less favorable to the Company than could be obtained from unaffiliated third parties.

We had the following unsecured notes payable to Equity 11 as of September 30, 2011.  All of the notes had an interest rate of 5% and were convertible into shares of our common stock.  All of these notes were converted on November 3, 2011 into shares of our common stock at a conversion price of $.50 per share.

Outstanding Principal Balance on 9/30/2011
Outstanding Principal Balance on 9/30/2010
Accrued Interest on 9/30/2011
Accrued Interest on 9/30/2010
       
$7,716
$7,716
$913
$494
$6,500
$6,500
$699
$350
$3,600
$3,600
$343
$152
$3,516
$3,516
$282
$98
$5,000
$5,000
$387
$125
$6,500
$6,500
$496
$157

We had 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 September 30, 2011 and September 30, 2010, the note had an outstanding balance of $24,000 and $24,000, respectively. Accrued interest of $1,806 and $555 was outstanding as of September 30, 2011 and September 30, 2010, respectively.  On November 3, 2011, this note was converted into shares of our common stock at a conversion price of $.50 per share.

 
38

 
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. On December 15, 2011, the parties agreed to extend the due date to December 4, 2012. As of September 30, 2011 and September 30, 2010, the note had an outstanding balance of $600,000 and $528,000, respectively. Accrued interest of $36,366 and $7,294 was outstanding as of September 30, 2011 and September 30, 2010, respectively.

Effective May 1, 2011, we entered into a lease with J.M. Land Co. for the office space in Warren, Michigan. J.M. Land Co. is owned by James Juliano. We pay monthly rent of $1,000, and the gas and electric utilities which historically averaged approximately $1,000 per month.   See also Note 5 - Commitments and Contingencies - Lease Agreements.

Both James Juliano and Joseph Nirta are stockholders of Equity 11.  Equity 11 was the holder of our Series A and B convertible preferred shares which have been converted into 3,401,315 shares of our common stock.  Messrs. Juliano, Nirta and Salpietra are members of Fairmount Five which held 1,549 shares of our Series C convertible preferred shares and 3,500,000 shares of our common stock as of September 30, 2011.
 
 
39

 
 
During fiscal 2011 and 2010, UHY LLP provided various audit, audit related and non-audit services to us as follows:

                 
 
For the Year Ended September 30,
 
 
2011
 
2010
       
                 
Audit Fees
$61,900
 
$
61,900
     
               
Audit Related Fees
-0-
   
11,500
     
               
Tax Fees
14,385
   
3,450
     
               
All Other Fees
-0-
   
-0-
     
               
Total Fees
$76,285
 
$
76,450
     
 

Audit Fees.  Audit Fees consists of fees for professional services rendered by our principal accountants for the contemporaneous audit of our annual financial statements and the review of quarterly financial statements or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.

 
Audit Related Fees.  Audit Related Fees consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.”

 
Tax Fees and All Other Fees.  Tax Fees and All Other Fees Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit Fees,” “Audit-Related Fees” and “Tax Fees” above.

The firm of UHY LLP acts as our principal independent registered public accounting firm.  UHY LLP personnel work under the direct control of UHY LLP partners and are leased from wholly-owned subsidiaries of UHY Advisors, Inc. in an alternative practice structure.

 
The Board has approved the engagement of UHY LLP as our independent registered public accounting firm. The Board requires our independent registered public accounting firm to advise the Board in advance of the independent registered public accounting firm’s intent to provide any professional services to us other than services provided in connection with an audit or a review of our financial statements. The Board shall approve, in advance, any non-audit services to be provided to us by our independent registered public accounting firm.

Exchange Act rules generally require any engagement by a public company of an accountant to provide audit or non-audit services to be pre-approved by the audit committee of that company. This pre-approval requirement is waived with respect to the provision of services other than audit, review or attest services if certain conditions as set forth in Rule 2-01(c)(7) under the Exchange Act are met. All of the audit-related and tax services described above were pre-approved by our Board of Directors and, therefore, were not provided pursuant to a waiver of the pre-approval requirements set forth in such rule.

 
40

 

(a)  
Financial Statements






 
41

 
(b)  
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. (1)
   
3.2
Amended and Restated Articles of Incorporation of Ecology Coatings, Inc., a Nevada corporation.(1)
   
3.3*
By-laws.
   
4.1
Form of Common Stock Certificate. (1)
   
10.1
Promissory Note between Ecology Coatings, Inc., a California corporation, and Richard D. Stromback, dated November 13, 2003. (1)
   
10.2
Promissory Note between Ecology Coatings, Inc., a California corporation, and Deanna Stromback, dated December 15, 2003. (1)
   
10.3
Promissory Note between Ecology Coatings, Inc., a California corporation, and Douglas Stromback, dated August 10, 2004. (1)
   
10.4
Employment Agreement between Ecology Coatings, Inc., a California corporation and Sally J.W. Ramsey dated January 1, 2007. (1)
   
10.5
License Agreement with E.I. Du Pont De Nemours and Ecology Coatings, Inc., a California corporation, dated November 8, 2004. (1)
   
10.6
License Agreement between Ecology Coatings, Inc., a California corporation and Red Spot Paint & Varnish Co., Inc., dated May 6, 2005. (1)
   
10.7
Lease for laboratory space located at 1238 Brittain Road, Akron, Ohio  44310. (1)
   
10.8
2007 Stock Option and Restricted Stock Plan. (1)
   
10.9
Form of Stock Option Agreement.  (1)
   
10.10
Allonge to Promissory Note dated November 13, 2003 made in favor of Richard D. Stromback dated February 6, 2008. (2)
   
10.11
Allonge to Promissory Note dated December 15, 2003 made in favor of Deanna. Stromback dated February 6, 2008. (2)
   
10.12
Allonge to Promissory Note dated August 10, 2004 made in favor of Douglas Stromback dated February 6, 2008. (2)
   
10.13
Promissory Note made in favor of Mitch Shaheen dated June 18, 2008. (3)
   
10.14
Promissory Note made in favor of Mitch Shaheen dated July 10, 2008. (4)
   
10.15
Extension of Promissory Note made in favor of Richard D. Stromback dated July 10, 2008. (3)
   
10.16
Warrant W-6. (5)
   
10.17
Warrant W-8. (6)
   
10.18
Warrant W-9. (7)
   
10.19
Warrant W-10. (8)
   
10.20
Warrant W-11. (9)
   
10.21
Warrant W-12. (10)
   
10.22
First Amendment to Employment Agreement of Sally J.W. Ramsey dated December 15, 2008. (11)
   
10.23
Employment Agreement with Robert G. Crockett dated September 21, 2009. (12)
   
10.24
Second Amendment of Employment Agreement with Sally J.W. Ramsey dated September 15, 2009. (12)
   
10.25
Promissory note dated May 11, 2010 in favor of John Salpietra (13)
   
10.26
Employment Agreement with Daniel Iannotti dated May 17, 2010 (14)
   
10.27
Headquarters Lease with Omega Development Corporation dated June 17, 2010 (15)
   
10.28
Extension of Salpietra Promissory Note Due Date dated October 15, 2010 (16)
   
10.29
Salpietra Note extension dated January 18, 2011 (17)
   
10.30
Fairmount Five Convertible Preferred Securities Agreement dated March 9, 2011 (18)
   
10.31
John Bonner Convertible Preferred Securities Agreement dated March 11, 2011 (18)
   
10.32
Extension of Salpietra Promissory Note dated December 4, 2011(19)
   
10.33
BASF License Agreement.(20)
   
21.1
List of subsidiaries. (2)
   
23.1*
Consent of UHY LLP, an independent registered public accounting firm for incorporation of audit opinion by reference into Form S-8.
   
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 information from the Ecology Coatings, Inc. Annual Report on Form 10-K for the fiscal year ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) CONSOLIDATED BALANCE SHEETS – ASSETS; (ii) CONSOLIDATED BALANCE SHEETS – LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT); (iii) CONSOLIDATED STATEMENTS OF OPERATIONS; (iv) STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT); (v) CONSOLIDATED STATEMENTS OF CASH FLOWS; and (vi) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
 
 
42

 
*           Filed herewith.

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

(2) Incorporated by reference from our Form 8-K filed with the SEC on February 12, 2008.

(3) Incorporated by reference from our Form 8-K filed with the SEC on June 24, 2008.

(4) Incorporated by reference from our Form 8-K filed with the SEC on July 17, 2008.

(5) Incorporated by reference from our Form 8-K filed with the SEC on January 23, 2009.

(6) Incorporated by reference from our Form 8-K filed with the SEC on February 18, 2009.

(7) Incorporated by reference from our Form 8-K filed with the SEC on February 27, 2009.

(8) Incorporated by reference from our Form 8-K filed with the SEC on March 10, 2009.

(9) Incorporated by reference from our Form 8-K filed with the SEC on March 27, 2009.

(10) Incorporated by reference from our Form 8-K/A filed with the SEC on April 16, 2009.

(11) Incorporated by reference from our Amendment No. 2 to S-1 registration statement filed with the SEC on October 20, 2009.

(12) Incorporated by reference from our Form 8-K filed with the SEC on September 23, 2009.

(13) Incorporation by reference from our Form 8-K filed with the SEC on May 17, 2010.

(14) Incorporation by reference from our Form 8-K filed with the SEC on May 21, 2010.

(15) Incorporation by reference from our Form 8-K filed with the SEC on September 2, 2010.

(16) Incorporation by reference from our Form 8-K filed with the SEC on October 18, 2010.

(17) Incorporation by reference from our Form 8-K filed with the SEC on January 24, 2011.

(18) Incorporation by reference from our Form 8-K filed with the SEC on March 14, 2011.

(19) Incorporation by reference from our Form 8-K filed with the SEC on December 16, 2011

(20) Incorporation by reference from our Form 8-K filed with the SEC on November 29, 2011.

 
43

 



 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, thisth day of December, 2011.
 
Date:
  December 16 , 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)

     Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by following persons on behalf of the Registrant and in the capacities and on the dates indicated.
         
Signatures
 
Title
 
Date
         
         
/s/ Robert G. Crockett
Robert G. Crockett
 
Chief Executive Officer
(Principal Executive Officer)
 
December 16 , 2011
         
/s/Kevin P. Stolz
Kevin P. Stolz
 
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
 
December 16  , 2011
     
/s/ James Juliano
James Juliano
 
Director 
 
December 16  , 2011
         
/s/ Sally Ramsey
Sally Ramsey
 
Director & Vice President – New Product Development
 
December 16 , 2011
         
/s/ Joseph Nirta
Joseph Nirta
 
Director
 
December 16  , 2011
         
/s/ James Orchard
James Orchard
 
Director
 
December 16  , 2011
         
/s/ Nick DeMiro
Nick DeMiro
 
Director
 
December 16 , 2011
         
/s/ John M. (“Pete”) Salpietra
John M. (“Pete”) Salpietra
 
Director
 
December 16 , 2011

 
44

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors
Ecology Coatings, Inc.

We have audited the accompanying consolidated balance sheets of Ecology Coatings, Inc. and Subsidiary (the “Company”) as of September 30, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ecology Coatings, Inc. and Subsidiary as of September 30, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.  As discussed in Note 9 to the consolidated financial statements, the Company’s recurring losses, negative cash flow from operations and net working capital deficiency raise substantial doubt about its ability to continue as a going concern.  Management’s plans as to these matters are also discussed in Note 9.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ UHY LLP
Farmington Hills, Michigan
December 16, 2011

 
 


 
45

 


ECOLOGY COATINGS, INC. AND SUBSIDIARY
 
Consolidated Balance Sheets
 
ASSETS
 
   
September 30, 2011
 
   
September 30, 2010
 
             
Current assets
           
Cash
 
$
71,784
   
$
2,814
 
Prepaid expenses
   
30,137
     
30,337
 
                 
Current Assets
   
101,921
     
33,151
 
                 
Property 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 and equipment
   
149,498
     
116,681
 
Accumulated depreciation
   
(89,837)
     
(74,756)
 
                 
Plant and equipment, net
   
59,661
     
41,925
 
                 
Other
               
Patents-net
   
198,915
     
211,845
 
Trademarks-net
   
8,899
     
7,014
 
                 
Other assets
   
207,814
     
218,859
 
                 
Total Assets
 
$
369,396
   
$
293,935
 

 

 

 
The accompanying notes to the consolidated financial statements are an integral part of these balance sheets.

 
46

 


 
ECOLOGY COATINGS, INC. AND SUBSIDIARY
 
Consolidated Balance Sheets
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
   
September 30, 2011
   
September 30, 2010
 
             
Current liabilities
           
Accounts payable
 
  $
27,945
 
$
 
989,459
 
Accounts payable - related party
   
-
     
242,730
 
Credit card payable
   
-
     
114,622
 
Accrued liabilities
   
217,951
     
71,500
 
Interest payable
   
405,274
     
398,191
 
Notes payable
   
250,000
     
582,300
 
Notes payable - related party
   
900,332
     
828,332
 
Preferred dividends payable
   
31,566
     
60,618
 
Total current liabilities