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ABVC BIOPHARMA, INC. - Quarter Report: 2008 December (Form 10-Q)

ecologydvi10q.htm

UNITED STATES
 
Securities and Exchange Commission
Washington, D.C. 20549
 
Form 10-Q
     
þ
  
QUARTERLY REPORT PURUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2008
 

     
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.)
 
2701 Cambridge Court, Suite 100, Auburn Hills, MI  48326
 
(Address of principal executive offices) (Zip Code)
 
(248) 370-9900
 
(Registrant’s telephone number)
 

 
    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes þ No o
 
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
    Large Accelerated Filer o                                                     Accelerated Filer o                      Non-accelerated filer o                   Smaller Reporting Company  x
 
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 

APPLICABLE ONLY TO CORPORATE ISSUERS:

    Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of common stock of the issuer outstanding as of January 31, 2009 was 32,233,600.

 
 
 

 
1
 


PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements
 
ECOLOGY COATINGS, INC. AND SUBSIDIARY
  
Consolidated Balance Sheets
  
   
ASSETS
  
             
   
December 31, 2008
    
September 30, 2008
  
   
Unaudited
        
             
Current Assets
            
Cash and cash equivalents
   $ -     $ 974,276  
Prepaid expenses
    
8,937
       25,206  
                 
Total Current Assets
     8,937       999,482  
                 
Property and Equipment
                
Computer equipment
     30,111       22,933  
Furniture and fixtures
     21,027       18,833  
Test equipment
     9,696       7,313  
Signs
     213       213  
Software
     6,057       1,332  
Video
     48,177       48,177  
Total property and equipment
     115,281       98,801  
Less: Accumulated depreciation
     (28,885 )     (22,634 )
                 
Property and Equipment, net
     86,396       76,167  
                 
Other Assets
                
Patents-net
     424,900       421,214  
Trademarks-net
     4,969       5,029  
                 
Total Other Assets
     429,869       426,243  
                 
Total Assets
   $ 525,202     $ 1,501,892  
 

 

 

 
See the accompanying notes to the unaudited consolidated financial statements.

 
2
 

 

ECOLOGY COATINGS, INC. AND SUBSIDIARY
  
Consolidated Balance Sheets
  
             
LIABILITIES AND STOCKHOLDERS' DEFICIT
  
   
December 31, 2008
    
September 30, 2008
  
   
Unaudited
        
Current Liabilities
            
Book overdraft
   $ 4,528     $ -  
Accounts payable
     1,428,789       1,359,328  
Credit card payable
     94,372       92,305  
Accrued liabilities
     19,583       12,033  
Franchise tax payable
     -       800  
Interest payable
     58,287       133,332  
Convertible notes payable
     602,301       894,104  
Notes payable - related party
     243,500       243,500  
Preferred dividends payable
     8,359       6,300  
Total Current Liabilities
     2,459,719       2,741,702  
                 
Total Liabilities
     2,459,719       2,741,702  
                 
Commitments and Contingencies (Note 5)
     -       -  
                 
Stockholders' Deficit
                
Preferred Stock - 10,000,000 $.001 par value and 10,000,000
     2       2  
no par value authorized; 2,010 and 2,010 shares issued and outstanding
                
as of December 31, 2008 and September 30, 2008, respectively
                
Common Stock - 90,000,000 $.001 par value and 50,000,000
                
no par value authorized; 32,233,600 and 32,233,600
                
outstanding as of December 31, 2008 and
                
September 30, 2008, respectively
     32,234       32,234  
Additional paid in capital
     15,722,528       13,637,160  
Accumulated Deficit
     (17,689,281 )     (14,909,206 )
                 
Total Stockholders' Deficit
     (1,934,517 )     (1,239,810 )
                 
                 
Total Liabilities and Stockholders' Deficit
   $ 525,202     $ 1,501,892  
 

 

 
See the accompanying notes to the unaudited consolidated financial statements.

 
3
 

 

ECOLOGY COATINGS, INC. AND SUBSIDIARY
  
Consolidated Statements of Operations
  
(Unaudited)
  
   
   
For the three months ended
    
For the three months ended
  
   
December 31, 2008
    
December 31, 2007
  
             
             
Revenues
   $ -     $ 10,417  
                 
Salaries and fringe benefits
     482,570       532,014  
Professional fees
     2,048,747       776,834  
Other general and administrative costs
     98,312       144,408  
Total General and Administrative Expenses
     2,629,629       1,453,256  
                 
Operating Loss
     (2,629,629 )     (1,442,839 )
                 
Other Income (Expense)
                
Interest Income
     142       5,531  
Interest Expense
     (124,622 )     (26,892 )
Total Other Expenses - net
     (124,480 )     (21,361 )
                 
Net Loss
   $ (2,754,109 )   $ (1,464,200 )
                 
Basic and diluted net loss per share
   $ (0.09 )   $ (0.05 )
                 
Basic and diluted weighted average of
                
common shares outstanding
     32,233,600       32,150,684  
 

 

 

 

 

 

 
See the accompanying notes to the unaudited consolidated financial statements.

 
4
 

 

ECOLOGY COATINGS, INC. AND SUBSIDIARY
  
Consolidated Statements of Cash Flows
  
(Unaudited)
  
             
   
For the three months ended
    
For the three months ended
  
   
December 31, 2008
    
December 31, 2007
  
             
OPERATING ACTIVITIES
            
Net  loss
   $ (2,754,109 )   $ (1,464,200 )
Adjustments to reconcile net loss
                
to net cash  flows from operating activities:
                
Depreciation and amortization
     11,026       6,570  
Option expense
     1,997,949       534,438  
Warrant expense
     63,512          
Beneficial conversion expense
     -       15,821  
Changes in Asset and Liabilities
                
Miscellaneous receivable
             1,118  
Prepaid expenses
     16,268       52,408  
Book overdraft
     4,528          
Accounts payable
     69,461       184,188  
Accrued payroll taxes and wages
     -       (3,079 )
Accrued liabilities
     7,549       -  
Credit card payable
     2,068       26,398  
Franchise tax payable
     (800 )        
Interest payable
     (75,045 )     9,112  
Deferred revenue
     -       (10,417 )
Net Cash Used in Operating Activities
     (657,593 )     (647,643 )
                 
INVESTING ACTIVITIES
                
Purchase of fixed assets
     (16,480 )     (49,345 )
Purchase of intangibles
     (8,400 )     (5,900 )
Net Cash Used in Investing Activities
     (24,880 )     (55,245 )
                 
FINANCING ACTIVITIES
                
Repayment of debt
     (311,803 )     -  
Proceeds from debt
     20,000       -  
Net Cash Used in Financing Activities
     (291,803 )     -  
                 
Net Decrease in Cash and Cash Equivalents
     (974,276 )     (702,888 )
                 
CASH AND CASH EQUIVALENTS AT BEGINNING
                
OF PERIOD
     974,276       808,163  
CASH AND CASH EQUIVALENTS AT END
                
OF PERIOD
   $ -     $ 105,275  
 

 
See the accompanying notes to the unaudited consolidated financial statements.

 
5
 

 
ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
     
     
 
For the three months ended
For the three months ended
 
December 31, 2008
December 31, 2007
     
     
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
    
INFORMATION
    
Interest paid
$132,000
$1,958
Income taxes paid
$---
$---

 
See the accompanying notes to the unaudited consolidated financial statements.

 
6
 

 
ECOLOGY COATINGS, INC. AND SUBSIDIARY
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 

 
Note 1 — Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates
 
           Interim Reporting. While the information presented in the accompanying interim consolidated financial statements is unaudited, it includes all normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America.  These interim consolidated financial statements follow the same accounting policies and methods of their application as the September 30, 2008 audited annual consolidated financial statements of Ecology Coatings, Inc. (“we”, “us”, the “Company” or “Ecology”).  It is suggested that these interim consolidated financial statements be read in conjunction with our September 30, 2008 annual consolidated financial statements included in the Form 10-KSB we filed with the Securities and Exchange Commission on December 23, 2008.
 
Our operating results for the three months ended December 31, 2008 are not necessarily indicative of the results that can be expected for the year ending September 30, 2009 or for any other period.
 
      Going Concern. In connection with their audit report on our consolidated financial statements as of September 30, 2008, the Company’s independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern.  As such, continuance is dependent upon our ability to raise sufficient capital.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
 
Description of the Company.  We were originally incorporated on March 12, 1990 in California (“Ecology-CA”).  Our current entity was incorporated in Nevada on February 6, 2002 as OCIS Corp. (“OCIS”).  OCIS completed a merger with Ecology-CA on July 26, 2007 (the “Merger”). In the Merger, OCIS changed its name from OCIS Corporation to Ecology Coatings, Inc.  We develop nanotechnology-enabled, ultra-violet curable coatings that are designed to drive efficiencies and clean processes in manufacturing.  We create proprietary coatings with unique performance and environmental attributes by leveraging our platform of integrated nano-material technologies that reduce overall energy consumption and offer a marked decrease in drying time. Ecology’s market consists of electronics, automotive and trucking, paper products and original equipment manufacturers (“OEMs”).
 
Principles of Consolidation.  The consolidated financial statements include all of our accounts and the accounts of our wholly owned subsidiary Ecology-CA.  All significant intercompany transactions have been eliminated in consolidation.
 
Use of Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Cash and Cash Equivalents.  We consider all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.
 
Revenue Recognition.  Revenues from licensing contracts are recorded ratably over the life of the contract.  Contingency earnings such as royalty fees are recorded when the amount can reasonably be determined and collection is likely.
 
Loss Per Share.  Basic loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period.  Diluted loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and potentially dilutive securities outstanding during the period.  Potentially dilutive shares consist of the incremental common shares issuable upon the exercise of stock options and warrants and the conversion of convertible debt and convertible preferred stock. Potentially dilutive shares are excluded from the weighted average number of shares if their effect is anti-dilutive.  We had a net loss for all periods presented herein; therefore, none of the stock options and/or warrants outstanding or stock associated with the convertible debt or with the convertible preferred shares during each of the periods presented were included in the computation of diluted loss per share as they were anti-dilutive.  As of December 31, 2008 and 2007, there were 14,364,256 and 3,792,900 potentially dilutive securities outstanding.
 
Income Taxes and Deferred Income Taxes.  We use the asset and liability approach for financial accounting and reporting for income taxes.  Deferred income taxes are provided for temporary differences in the bases of assets and liabilities as reported for financial statement purposes and income tax purposes and for the future use of net operating losses.  We have recorded a valuation allowance against the net deferred income tax asset.  The valuation allowance reduces deferred income tax assets to an amount that represents management’s best estimate of the amount of such deferred income tax assets that more likely than not will be realized.  We cannot be assured of future income to realize the net deferred income tax asset; therefore, no deferred income tax asset has been recorded in the accompanying consolidated financial statements.
 
  Property and Equipment.  Property and equipment is stated at cost less accumulated depreciation.  Depreciation is recorded using the straight-line method over the following useful lives:

         
Computer equipment
  
3-10 years
Furniture and fixtures
  
3-7 years
Test equipment
  
5-7 years
Software Computer
  
3 years
Marketing and Promotional Video
  
3 years
 
Repairs and maintenance costs are charged to operations as incurred. Betterments or renewals are capitalized as incurred.
 
We review long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
 
Patents.  It is our policy to capitalize costs associated with securing a patent.  Costs consist of legal and filing fees.  Once a patent is issued, it will be amortized on a straight-line basis over its estimated useful life.  Six patents were issued as of December 31, 2008 and are being amortized over 8 years.
 
Stock-Based Compensation.  Our stock option plans are subject to the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment. Under the provisions of SFAS No. 123(R), employee and director stock-based compensation expense is measured utilizing the fair-value method.
 
We account for stock options granted to non-employees under SFAS No. 123(R) using EITF 96-18, requiring the measurement and recognition of stock-based compensation to consultants under the fair-value method with stock-based compensation expense being charged to earnings on the earlier of the date services are performed or a performance commitment exists.
 
Expense Categories.  Salaries and Fringe Benefits of $482,570 and $532,014 for the three months ended December 31, 2008 and 2007, respectively, include wages paid to and insurance benefits for our officers and employees as well as stock based compensation expense for those individuals.  Professional fees of $2,048,747 and $776,834 for the three months ended December 31, 2008 and 2007, respectively, include amounts paid to attorneys, accountants, and consultants, as well as the stock based compensation expense for those services.
 
Recent Accounting Pronouncements
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141(R)) and No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 141(R) which will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. SFAS 141(R) and SFAS 160 are effective for both public and private companies for fiscal years beginning on or after December 15, 2008 (October 1, 2009 for Ecology).  Early adoption is prohibited for both standards. SFAS 141(R) will be applied prospectively. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests.  All other requirements of SFAS 160 shall be applied prospectively. The adoption of SFAS 160 would have no impact on our financial position or results of operations for the year ended September 30, 2008.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”.  This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 will become effective for us beginning in the three months ending March 31, 2009.  The adoption of this pronouncement would have had no impact on our results or financial position as of September 30, 2008.
 
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”.  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 will not have an impact on our financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.”  The scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60.  Accordingly, SFAS 163 does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables).  SFAS 163 also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 163 will not have an impact on our financial statements.
 
Note 2 — Concentrations
 
For the three months ended December 31, 2008, we had no revenues. For the three months ended December 31, 2007 we had one customer representing 100% of revenues.  As of December 31, 2008 and 2007, there were no amounts due from this customer.
 
We occasionally maintain bank account balances in excess of the federally insurable amount of $250,000.  The Company had cash deposits in excess of this limit on December 31, 2008 and September 30, 2008 of $0 and $724,276, respectively.
 
Note 3 — Related Party Transactions
 
We have borrowed funds for our operations from certain major stockholders, directors and officers as disclosed below:
 
We have an unsecured note payable due to a principal shareholder and former director that bears interest at 4% per annum with principal and interest due on December 31, 2008.  As of December 31, 2008 and September 30, 2008, the note had an outstanding balance of $110,500.  The accrued interest on the note was $9,606 and $8,407 as of December 31, 2008 and September 30, 2008, respectively.  The note carries certain conversion rights that allow the holder to convert all or part of the outstanding balance into shares of our common stock.  This note is in default as to the payment of principal and interest as of December 31, 2008.
 
We have an unsecured note payable due to a principal shareholder and former director that bears interest at 4% per annum with principal and interest due on December 31, 2008.  As of December 31, 2008 and September 30, 2008, the note had an outstanding balance of $133,000.  The accrued interest on the note was $11,568 and $10,125 as of December 31, 2008 and September 30, 2008, respectively.  The note carries certain conversion rights that allow the holder to convert all or part of the outstanding balance into shares of our common stock.  This note is in default as to the payment of principal and interest as of December 31, 2008.
 
We had an unsecured note payable due to a majority shareholder, officer and director that bore interest at 4% per annum with principal and interest due on December 31, 2008.  As of both December 31, 2008 and September 30, 2008, the note had an outstanding balance of $0. The unpaid accrued interest on the note was $2,584 as of December 31, 2008 and September 30, 2008.  The note carries certain conversion rights which allow the holder to convert all or part of the outstanding balance into shares of the our common stock.
 
We have an unsecured convertible note payable to a company that is wholly owned by a member of our Board of Directors.  The note bears interest at 5% per annum with principal and interest due at June 30, 2009.  The note and accrued interest can be converted into shares of our common stock at $.66 per share at the sole discretion of the note holder.  As of December 31, 2008 and September 30, 2008, the note had an outstanding balance of $20,000 and $0, respectively.  The accrued interest on this note was $19 and $0 as of December 31, 2008 and September 30, 2008, respectively.
 
    Future maturities of related party long-term debt as of December 31, 2008 are as follows:
         
12 Months Ending December 31,
        
                   2009
  
$
263,500
  
       
 
We have a payable to a related party totaling $63,775 as of both December 31, 2008 and September 30, 2008, included in accounts payable on the consolidated balance sheets.

Note 4 — Notes Payable
 
We have the following convertible notes:

     
December 31, 2008
September 30, 2008
Convertible note payable, 15% per annum interest rate, principal and interest payment was due May 31, 2008; unsecured, convertible at holder’s option into common shares of the Company at $1.60 per share. Accrued interest of $0 and $15,367 was outstanding as of December 31, 2008 and September 30, 2008, respectively.
  
$
---
    
$
94,104
  
                 
Convertible subordinated note payable, 25% per annum, unsecured, principal and interest was due June 30, 2008; the Company extended the maturity for 30 days, to July 30, 2008 in exchange for warrants to purchase 15,000 shares of the Company’s common stock at $1.75 per share. Additionally, the Company granted the note holder warrants to purchase 12,500 shares of the Company’s common stock at $1.75 per share. All outstanding principal and interest is convertible, at the note holder’s option, into the Company’s common shares at the lower of the closing price of the shares on the last trading date prior to conversion or at the average share price at which the Company sells its debt or equity securities in its next public offering or other private offering made pursuant to Section 4(2) of the Securities Act of 1933, as amended. Demand for repayment was made on September 8, 2008. On November 14, 2008, we agreed to pay the note holder $10,000 per month until the principal and accrued interest is paid off. We made such payment in October and November of 2008, but did not make the December payment. Accrued interest of $1,274 and $7,329 was outstanding as of December 31, 2008 and September 30, 2008, respectively.
  
$
38,744
      
50,000
  
                 
Convertible subordinated note payable, 25% per annum, unsecured, principal and interest was due June 30, 2008; the Company extended the maturity for 30 days, to July 30, 2008 in exchange for warrants to purchase 15,000 shares of the Company’s common stock at $1.75 per share. Additionally, the Company granted the note holder warrants to purchase 125,000 shares of the Company’s common stock at $1.75 per share. All outstanding principal and interest is convertible, at the note holder’s option, into the Company’s common shares at the lower of the closing price of the shares on the last trading date prior to conversion or at the average share price at which the Company sells its debt or equity securities in its next public offering or other private offering made pursuant to Section 4(2) of the Securities Act of 1933, as amended. Demand for repayment was made on September 5, 2008. On November 13, 2008, we agreed to pay the note holder $100,000 per month until the principal and accrued interest is paid off. The payments for October, November, and December were made.  Accrued interest of $5,227 and $73,288 was outstanding as of December 31, 2008 and September 30, 2008, respectively.
  
$
293,557
      
500,000
  
                 
Convertible subordinated note payable, 25% per annum, unsecured, principal and interest was due July 18, 2008. Additionally, the Company issued a warrant to purchase 100,000 shares of the Company’s common stock at a price equal to $.75 per share (the “Warrant”). The Warrant is exercisable immediately and carries a ten (10) year term. The Holder may convert all or part of the then-outstanding Note balance into shares at $.50 per share. If applicable, the Company has agreed to include the Conversion Shares in its first registration statement filed with the Securities and Exchange Commission. Demand for repayment was made on August 27, 2008. Accrued interest of $15,810 and $10,685 was outstanding as of December 31, 2008 and September 30, 2008, respectively.
    
150,000
      
150,000
  
                 
Convertible subordinated note payable, 25% per annum, unsecured, principal and interest was due August 10, 2008. Additionally, the Company issued a warrant to purchase 100,000 shares of the Company’s common stock at a price equal to $.50 per share (the “Warrant”). The Warrant is exercisable immediately and carries a ten (10) year term. The Holder may convert all or part of the then-outstanding Note balance into shares at $.50 per share. If applicable, the Company has agreed to include the Conversion Shares in its first registration statement filed with the Securities and Exchange Commission. Demand for repayment was made on August 27, 2008. Accrued interest of $12,199 and $5,548 was outstanding as of  December 31, 2008 and September 30, 2008, respectively.
    
100,000
      
100,000
  
                 
    $
582,301
     $
894,104
  

 
Future maturities of the notes payable as of December 31, 2008 are as follows:
         
12 Months Ending December 31,
        
        2009
  
$
582,301
  
       
 
The above notes payable have conversion rights and detachable warrants.  These Notes may be converted for the principal balance and any unpaid accrued interest to Common Stock.  In accordance with guidance issued by the FASB and the Emerging Issue Task Force (“EITF”) regarding the Accounting for Convertible Securities with a Beneficial Conversion Feature (EITF No. 98-5), the Company recognized an embedded beneficial conversion feature present in these Notes.  The Company allocated the proceeds based on the fair value of $340,043 to the warrants.  The warrants are exercisable through March 31, 2018 and the fair value was amortized to interest expense over the term of the Notes.
 

 Note 5 — Commitments and Contingencies
 
Consulting Agreements.
 
On June 1, 2007, we entered into a consulting agreement with The Rationale Group, LLC (“Rationale Group”).  The managing member of Rationale Group is Dr. William Coyro, Jr., who serves as the chairman of Ecology’s business advisory board.  The agreement expires June 1, 2009.  Ecology pays Rationale Group $11,000 per month.  Additionally, Ecology granted Rationale Group 200,000 options to purchase shares of our common stock for $2.00 per share.  Of these options, 50,000 options vested on December 1, 2007, 50,000 options vested on June 1, 2008, 50,000 options vested on December 1, 2008, and the remaining 50,000 options vest on June 1, 2009.  Additionally, we reimburse Rationale Group for all reasonable expenses incurred in the conduct of our business.
 
On July 26, 2007, we entered into a consulting agreement with DMG Advisors, LLC, owned by two former officers and directors of OCIS Corporation.  The terms of the agreement call for the transfer of the $100,000 standstill deposit paid to OCIS as a part of a total payment of $200,000.  The balance will be paid in equal installments on the first day of each succeeding calendar month until paid in full.  The agreement calls for the principals to provide services for 18 months in the area of investor relations programs and initiatives; facilitate conferences between Ecology and members of the business and financial community; review and analyze the public securities market for our securities; and introduce Ecology to broker-dealers and institutions, as appropriate.  The agreement expires on February 28, 2009.

On April 2, 2008, we entered into a letter agreement with Dr. Robert Matheson to become chairman of our Scientific Advisory Board.  The letter agreement provides that we will grant Dr. Matheson options to purchase 100,000 shares of our common stock.  Each option is exercisable at a price of $2.05 per share.  The options vest as follows: 25,000 immediately upon grant; 25,000 on October 3, 2008; 25,000 on April 3, 2009, and the remaining 25,000 on October 3, 2009.  The options will all expire on April 3, 2018.
 
On September 17, 2008, we entered into an agreement with Sales Attack LLC, an entity owned by Douglas Stromback, a shareholder and former director of the Company.  This agreement is for business and marketing consulting services.  This agreement expires on September 17, 2010 and calls for monthly payments of $20,000, commissions on licensing revenues equal to 15% of said revenues, commissions on product sales equal to 3% of said sales, and a grant of options to purchase 531,000 shares of our common stock for $1.05 per share. 177,000 of the options become exercisable on March 17, 2009, 177,000 of the options become exercisable on September 17, 2009, and 177,000 of the options become exercisable on March 17, 2010.  The options expire on December 31, 2020.

On September 17, 2008, we entered into an agreement with RJS Consulting LLC (“RJS”), an entity owned by our chairman of the board of directors, Richard Stromback, under which RJS will provide advice and consultation to us regarding strategic planning, business and financial matters, and revenue generation.  The agreement expires on September 17, 2011 and calls for monthly payments of $16,000, commissions on licensing revenues equal to 15% of said revenues, commissions on product sales equal to 3% of said sales, $1,000 per month to pay for office rent reimbursement, expenses associated with RJS’s participation in certain conferences, information technology expenses incurred by the consultant in the performance of duties relating to the Company, and certain legal fees incurred by Richard Stromback during his tenure as our Chief Executive Officer.

On September 17, 2008 we entered into an agreement with DAS Ventures LLC (“Sales Attack”) under which Sales Attack will act as a consultant to us.  Under this agreement, Sales Attack will provide business development services for which he will receive commissions on licensing revenues equal to 15% of revenues and commissions on product sales equal to 3% of said sales and reimbursement for information technology expenses incurred by the consultant in the performance of duties relating to the Company. This agreement expires on September 17, 2011.
 
On November 11, 2008, we settled the lawsuit we filed against Trimax, LLC (“Trimax”) on September 11, 2008 for breach of contract.  Under the terms of the settlement, we will pay Trimax $7,500 per month for twelve months under a new consulting agreement and will pay $15,000 in 12 equal monthly payments of $1,250 to Trimax’s attorney.   Additionally, we will pay Trimax a commission of 15% for licensing revenues and 3% for product sales that Trimax generates for the Company.

 
Employment Agreements.
 
On January 1, 2007, we entered into an employment agreement with Sally J.W. Ramsey, Vice President New Product Development, that expires on January 1, 2012.  Upon expiration, the agreement calls for automatic one-year renewals until terminated by either party with thirty days written notice.  Pursuant to the agreement, the officer will be paid an annual base salary of $180,000 in 2007; an annual base salary of $200,000 for the years 2008 through 2011; and an annual base salary of $220,000 for 2012.  On December 15, 2008, we amended the agreement to reduce Ms. Ramsey’s  base salary to $60,000.  In addition, 450,000 options were granted to the officer to acquire our common stock at $2.00 per share. 150,000 options will vest on January 1, 2010, 150,000 options will vest on January 1, 2011 and the remaining 150,000 options will vest January 1, 2012.  The options expire on January 1, 2022.
 
On February 1, 2007, we entered into an employment agreement with Kevin Stolz, Controller and Chief Accounting Officer, that expired on February 1, 2008. Pursuant to the agreement, the officer was paid an annual base salary of $120,000 and was granted 25,000 options to acquire our common stock at $2.00 per share.  These options were re-priced to $1.05 per share on September 15, 2008.  All of the options vested on February 1, 2008. The options expire on February 1, 2017. On February 1, 2008, we entered into a new agreement with this officer.  This new agreement expires on February 1, 2010 and calls for an annual salary of $140,000.  Further, Mr. Stolz was granted 50,000 options to purchase shares of our common stock at $3.00 per share.  These options were re-priced to $1.05 per share on September 15, 2008.  25,000 options vest on February 1, 2009 and the remaining 25,000 options vest on February 1, 2010.  This agreement was modified effective October 1, 2008.  Under the modified agreement, Mr. Stolz receives an annual base salary of $70,000, subject to increase to $140,000 upon the achievement by the Company of revenues of at least $100,000.  Additionally, we granted Mr. Stolz options to purchase 10,000 shares of our common stock at $1.05 per share.  The options become exercisable on September 17, 2009 and expire on September 17, 2018.
 
On May 21, 2007, we entered into an employment agreement with David W. Morgan, Chief Financial Officer, that will expire on May 21, 2009.  Pursuant to the agreement, Mr. Morgan will be paid an annual base salary of $160,000 and was granted 300,000 options to acquire our common stock at $2.00 per share.  These options were re-priced to $1.05 per share on September 15, 2008. 75,000 of the options vested on May 21, 2008, and 225,000 of the options will vest on May 21, 2009.  The options expire on May 21, 2017. On October 1, 2007, the Company modified the employment agreement to increase the salary from $160,000 to $210,000.  This agreement was terminated on December 3, 2008 and Mr. Morgan continues to serve as our Chief Financial Officer and is being paid $60,000 per annum.
 
On December 28, 2007, we entered into an employment agreement with Richard Stromback, our Chairman of the Board of Directors and Chief Executive Officer.  Under this agreement, Mr. Stromback was to be paid at a rate of $320,000 per year through August 8, 2010.  This agreement was terminated by consent of both parties on September 17, 2008.  See also Consulting Agreements under this Note 5.
 
Contingencies.  On September 11, 2008, we filed a lawsuit against a consultant in the Circuit Court of Oakland County, Michigan for violation of fiduciary duties.  See Note 10 – Subsequent Events for further discussion.
 
A lawsuit was filed against us on September 16, 2008 in the Circuit Court of Oakland County, Michigan for breach of contract by a consultant previously contracted by the Company to provide information technology services.  On November 6, 2008, we settled the lawsuit.  We paid $26,500 in full settlement of all claims. This amount was included in Accounts Payable at September 30, 2008.
 
Lease Commitments.
 
a.
  
On August 1, 2005, we leased our office facilities in Akron, Ohio for a rent of $1,800 per month. The lease expired July 1, 2006 and was renewed under the same terms through August 31, 2007.  The Company now leases that property on a month-to-month basis for the same rent.  Rent expense for the three months ended December 31, 2008 and 2007 was $5,400 and $5,400, respectively.
       
 
c.
  
On September 1, 2008, we executed a lease for our office space in Auburn Hills, Michigan.  The lease calls for average monthly rent of $2,997 and expires on September 30, 2010.  The landlord is a company owned by a shareholder and director of Ecology.


Note 6 — Equity

Reverse Merger.  A reverse merger with OCIS Corporation was consummated on July 26, 2007.  The shareholders of Ecology-CA acquired 95% of the voting stock of OCIS. OCIS had no significant operating history.  The purpose of the acquisition was to provide Ecology with access to the public equity markets in order to more rapidly expand its business operations.  The consideration to the shareholders of OCIS was approximately 5% of the stock, at closing, of the successor company.  The final purchase price was agreed to as it reflects the value to Ecology of a more rapid access to the public equity markets than a more traditional initial public offering.
 
 
Warrants.  On December 16, 2006, we issued warrants to purchase 500,000 shares of our stock at $2.00 per share.  On November 11, 2008, the exercise price of the warrants was reset to $.90 per share.  The warrants were issued to the holder of the $1,500,000 convertible note.  The warrants vested on December 17, 2007. The weighted average remaining life of the warrants is 8.2 years.
 
On February 6, 2008, we issued warrants to purchase 262,500 shares of our common stock at the lower of $2.00 per share or at the average price per share at which the Company sells its debt or and/or equity in its next private or public offering.  The warrants vested upon issuance.  The weighted average remaining life of the warrants is 9.2 years.
 
On March 1, 2008, we issued warrants to purchase 137,500 shares of our common stock at the lower of $2.00 per share or at the average price per share at which the Company sells its debt or and/or equity in its next private or public offering.  The warrants vested upon issuance.  The weighted average remaining life of the warrants is 9.2 years.
 
On June 9, 2008, we issued warrants to purchase 210,000 shares of our common stock at the lower of $2.00 per share or at the average price per share at which the Company sells its debt or and/or equity in its next private or public offering.  The warrants vested upon issuance.  The weighted average remaining life of the warrants is 9.5 years.
 
On June 21, 2008, we issued warrants to purchase 100,000 shares of our common stock at $.75 per share.  The warrants vested upon issuance. The weighted average remaining life of the warrants is 9.5 years.
 
On July 14, 2008, we issued warrants to purchase 100,000 shares of our common stock at $.50 per share.  The warrants vested upon issuance.  The weighted average remaining life of the warrants is 9.5 years.
 
On July 14, 2008, we issued warrants to purchase 30,000 shares of our common stock at $1.75 per share. The warrants vested upon issuance.  The weighted average remaining life of the warrants is 9.5 years.
 
We issued warrants as shown below to the holder of our convertible preferred stock.
 

     
Strike
  
Date
Expiration
Number
    
Price
  
Issued
Date
 
100,000
     $
0.75
  
July 28, 2008
July 28, 2018
 
5,000
     $ 0.75  
August 20, 2008
August 20, 2018
 
25,000
     $ 0.75  
August 27, 2008
August 27, 2018
 
500,000
     $ 0.75  
August 29, 2008
August 29, 2018
 
375,000
     $ 0.75  
September 26, 2008
September 26, 2018
 
On November 11, 2008, we issued warrants to purchase 2,000,000 shares of our common stock at $.50 per share. The warrants vested upon issuance.  The weighted average remaining life of the warrants is 9.9 years.
 
Shares.  On February 5, 2008, we entered into an agreement with a convertible note holder.  The amount owed the note holder, including principal and accrued interest, totaled $142,415 and the note matured on December 31, 2007 (See Note 4).  The maturity date of the note was extended to May 31, 2008, with interest continuing at 15% per annum.  In consideration of this extension, we issued 60,000 shares of our common stock to the note holder and granted the holder certain priority payment rights.
 
On August 28, 2008, we entered into an agreement with an investor to issue up to $5,000,000 in convertible preferred securities.  The securities accrue cumulative dividends at 5% per annum and the entire amount then outstanding is convertible at the option of the investor into shares of our common stock at $.50 per share.  The preferred securities carry “as converted” voting rights.  As of December 31, 2008, we had issued 2,010 of these convertible preferred shares.  In the event that we sell additional convertible preferred securities under this agreement, we will issue attached warrants (500 warrants for each $1,000 convertible preferred share sold).  The warrants will be immediately exercisable, expire in five years, and entitle the investor to purchase one share of our common stock at $.75 per share for each warrant issued.
 
Note 7 — Stock Options
 
Stock Option Plan.  On May 9, 2007, we adopted a stock option plan and reserved 4,500,000 shares for the issuance of stock options or for awards of restricted stock. On December 2, 2008, our Board of Directors authorized the addition of 1,000,000 shares of our common stock to the 2007 Plan.  All prior grants of options were included under this plan.  The plan provides for incentive stock options, nonqualified stock options, rights to restricted stock and stock appreciation rights.  Eligible recipients are employees, directors, and consultants.  Only employees are eligible for incentive stock options.
 
The vesting terms are set by the Board of Directors. All options expire 10 years after issuance.
 
The Company granted non-statutory options as follows during the three months ended December 31, 2008:
                                 
                   
Weighted
    
   
Weighted
          
Average
    
   
Average
          
(Remaining)
    
   
Exercise Price
  
Number of
  
Contractual
  
Aggregate
   
per Share
  
Options
  
Term
  
Fair Value
Outstanding as of September 30, 2008
  
$
1.83
      
4,642,119
      
9.2
    
$
5,011,500
  
Granted
  
$
.75
      
430,000
      
10.0
    
$
217,864
  
Exercised
    
---
      
---
      
---
      
---
  
Forfeited
    
---
      
---
      
---
      
---
  
Outstanding as of December 31, 2008
  
$
1.52
      
5,072,119
      
9.0
    
$
5,229,364
  
Exercisable
  
$
1.78
      
2,121,119
      
8.4
    
$
2,117,071
  
 
 
2,121,119 of the options were exercisable as of December 31, 2008.  The options are subject to various vesting periods between June 26, 2007 and January 1, 2012.   The options expire on various dates between June 1, 2016 and January 1, 2022. Additionally, the options had no intrinsic value as of December 31, 2008.  Intrinsic value arises when the exercise price is lower than the trading price on the date of grant.
 
Our stock option plans are subject to the provisions of Statement of Financial Accounting Standards (“SFAS”) Number 123(R), Accounting for Stock-Based Compensation.  Under the provisions of SFAS Number 123(R), employee and director stock-based compensation expense is measured utilizing the fair-value method.
 
We account for stock options granted to non-employees under SFAS Number 123(R) using EITF 96-18 requiring the measurement and recognition of stock-based compensation to consultants under the fair-value method with stock-based compensation expense being charged to earnings on the earlier of the date services are performed or a performance commitment exists.
 
In calculating the compensation related to employee/consultants and directors stock option grants, the fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:
         
Dividend
  
None
Expected volatility
    
88.60%-101.73%
  
Risk free interest rate
    
.10%-5.11%
  
Expected life
  
5 years
 
The expected volatility was derived utilizing the price history of another publicly traded nanotechnology company.  This company was selected due to the fact that it is widely traded and is in the same equity sector as our Company.
 
The risk free interest rate figures shown above contain the range of such figures used in the Black-Scholes calculation.  The specific rate used was dependent upon the date of option grant.
 
Based upon the above assumptions and the weighted average $1.52 exercise price, the options outstanding at December 31, 2008 had a total unrecognized compensation cost of $1,363,789 which will be recognized over the remaining weighted average vesting period of .5 years. Options cost of $1,997,949 was recorded as an expense for the three months ended December 31, 2008 of which $245,631 was recorded as compensation expense and $1,752,318 was recorded as consulting expense.
 
 
Note 8 — Going Concern
 
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  For the three months ended December 31, 2008 and 2007, we incurred net losses of ($2,754,109) and ($1,464,200), respectively.  As of December 31, 2008 and September 30, 2008, we had stockholders’ deficits of ($1,934,517) and ($1,239,810), respectively.
 
Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to obtain additional financing or refinancing as may be required, to develop commercially viable products and processes, and ultimately to establish profitable operations.  We have financed operations primarily through the issuance of equity securities and debt and through some limited operating revenues.  Until we are able to generate positive operating cash flows, additional funds will be required to support operations.  We will need to acquire additional immediate funding to continue our operations in February of 2009.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
 
 
Note 9 — Subsequent Events
 
On January 1, 2009, we entered into a new agreement with a consultant who provides investor relations services to us.  The new agreement calls for monthly payments of $5,500 for 12 months.  In addition, the consultant forgave $51,603 in past due amounts owed by the Company in exchange for a reset of the exercise price on options to purchase 25,000 shares of our common stock that we issued to the consultant on April 8, 2008. The exercise price at the time of issuance was $4.75 per share.  This price was reset to $.88 on February 6, 2009.
 
On January 8, 2009, we borrowed $34,000 under a note issued to Seven Industries. Seven Industries is wholly-owned by a director who is also the chief executive officer of Equity 11, Ltd.  Equity 11 holds 2,010 of our convertible preferred shares.  The note bears interest at 5% and is payable on demand.  The principal and accrued interest can be converted by the note holder into shares of our common stock at the lower of  $.70 per share or at the average price at which we sell our common shares or securities convertible into common shares in any public offering.
 
On January 23, 2009, an investor purchased 94 shares of our 5% convertible preferred stock for $94,000.  We issued warrants to purchase 47,000 shares of our common stock for $.75 per share in conjunction with this purchase.

 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Except for statements of historical fact, the information presented herein constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as, Ecology Coatings (the “Company”), by and through its management, “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “foresees,” “intends,” “plans,” “strengthens” or other words of similar import.  Similarly, statements herein that describe the Company’s 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 the actual results, performance or achievements of the Company 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, the Company’s ability to: successfully commercialize its 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 consistently provide us a reliable source of raw materials; acquire, develop, or identify for our own use, a manufacturing capacity; attract and retain talented individuals; continue operations during periods of adverse changes in 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 “Cautionary Factors that May Affect Future Results” enumerated herein.
 
 
Overview
 
We develop nano-enabled, ultra-violet curable coatings that are designed to drive efficiencies and clean processes in manufacturing.  We create proprietary coatings with unique performance attributes by leveraging our platform of integrated nano-material technologies.  We collaborate with industry leaders to develop high-value, high-performance coatings for applications in the specialty paper, automotive, general industrial, electronic and medical areas.  Our target markets include the electronics, steel, construction, automotive and trucking, paper products 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 products, to develop our product sales.
 
Operating Results
 
Three Months Ended December 31, 2008 and 2007
 
Revenues for the three months ended December 31, 2007 were $10,417 and derived from our licensing agreement with Red Spot.  These revenues stem from the amortization of the initial payment of $125,000 by Red Spot to the Company in May 2005 and not from any subsequent transactions.  We generated no revenues for the three months ended December 31, 2008.
 
Salaries and Fringe Benefits The decrease of approximately $50,000 in such expenses for the three months ended December 31, 2008 compared to the three months ended December 31, 2007 is the result of the elimination of one salaried employee, the reduction of the salary of one employee effective October 1, 2008, and the reduction of  the salaries of three employees in December of 2008.  These reductions were partially offset by the expense associated with options issued to two employees in September of 2008.
 
Professional Fees The increase of approximately $1,272,000 in these expenses for the three months ended December 31, 2008 compared to the three months ended December 31, 2007 is the result of the issuance of 2,000,000 options issued to a consultant in November of 2008.  These options vested upon issuance, so the entire charge of $1,368,000 was recognized in that month.
 
Other General and Administrative The decrease of approximately $46,000 in these expenses for the three months ended December 31, 2008 compared to the three months ended December 31, 2007 reflects reductions in legal fees, travel costs, and accounting fees.
 
Operating Losses The increased loss between the reporting periods is explained by the increases in the expense categories discussed above.
 
Interest Income The decrease of approximately $5,000 for the three months ended December 31, 2008 compared with the three months ended December 31, 2007 is due to lower investable cash balances on hand for the 2008 period.
 
 Interest Expense The increase of approximately $100,000 for the three months ended December 31, 2008 compared to the three months ended December 31, 2007 is the result of average outstanding debt for the 2008 period being higher, by approximately $700,000, than the average outstanding debt for the 2007 period.  Additionally, approximately $65,000 of the difference is due to expense associated with resetting the exercise price on 500,000 options from $2 per share to $.90 per share.
 
Income Tax Provision.  No provision for income tax benefit from net operating losses has been made for the three months ended December 31, 2008 and 2007 as we have fully reserved the asset until realization is more reasonably assured.
 
Net Loss The increase in the Net Loss of approximately $1,290,000 for the three months ended December 31, 2008 compared to the three months ended December 31, 2007, while more fully explained in the foregoing discussions of the various expense categories, is due primarily to the expensing of a grant of 2,000,000 options awarded to a consultant in November of 2008.
 
Basic and Diluted Loss per Share The change in basic and diluted net loss per share for the three months ended reflects the increased Net Loss discussed above partially offset by the increase in weighted average shares outstanding during the three months ended December 31, 2008.
 
Liquidity and Capital Resources
 
Cash and cash equivalents as of December 31, 2008 and September 30, 2008 totaled $0 and $974,276, respectively.  The decrease reflects cash used in operations of $657,593, cash used to purchase fixed and intangible assets of $24,880, and cash used to pay down debt of $311,803.  This decrease was partially offset by borrowings of $20,000.
 
We are an early stage company and have incurred an accumulated deficit of ($17,689,281).  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.  Accordingly, we have received a 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; (iii) purchase and acquire captive installations with our customers, and; (iv) 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 revenues
 
Historically, we have financed operations primarily through the issuance of debt and the sale of equity securities.  In the near future, as additional capital is needed, we expect to rely primarily on the sale of convertible preferred securities.
 
As of December 31, 2008, we had convertible notes payable to four separate parties on which we owed approximately $636,830 in principal and accrued interest.  These convertible notes do not contain any restrictive covenants with respect to the issuance of additional debt or equity securities by the Company.  Notes and the accrued interest totaling $616,811 owing to three note holders were due prior to September 30, 2008 and their holders demanded payment.  We have reached agreement to make combined monthly payments of $110,000 against the remaining principal and interest balance on two of these notes until such time as they are paid off (March of 2009).  We did not make the payments on these notes as agreed in January of 2009.  We have not yet reached an agreement with the third note holder to whom we owed approximately $278,000 in principal and accrued interest as of December 31, 2008.  There can be no assurance that we will reach such an agreement with the note holder.  Additionally, we have notes owing to shareholders totaling $243,500 plus accrued interest as of December 31, 2008.  These notes are due and payable on December 31, 2008. None of the debt is subject to restrictive covenants.  All of the debt is unsecured.
 
  On January 23, 2009, Equity 11, Ltd. Purchased 94 of our convertible preferred shares at $1,000 per share.  This brought their total holdings of such shares to 2,104.  We will need to raise immediate additional funds in February of 2009 to continue our operations. At present, we do not have any binding commitments for additional financing.  If are unable to obtain additional financing, we would seek to negotiate with other parties for debt or equity financing, pursue additional bridge financing, and negotiate with creditors for a reduction and/or extension of debt and other obligations through the issuance of stock.  At this point, we cannot assess the likelihood of achieving these objectives.  If we are unable to achieve these objectives, we would be forced to cease our business, sell all or part of our assets, and/or seek protection under applicable bankruptcy laws.
 
On December 31, 2008, we had 32,233,600 common shares issued and outstanding. 2,010 in convertible preferred shares were also outstanding at that date.  These preferred shares and accumulated an unpaid dividends can be converted into 4,084,533 of our common stock.  As of that same date, options and warrants to purchase up to 9,471,119 shares of common stock had been granted.  Additionally, approximately $636,830 in convertible notes and accrued interest were outstanding that could be converted into 862,604 shares of common stock.           
 
 
Off-Balance Sheet Arrangements
 
See Notes to the Consolidated Financial Statements in this Form 10-Q beginning on page 1. The details of such arrangements are found in Note 5 – Commitments and Contingencies and Note 9 – Subsequent Events.
 
Critical Accounting Policies and Estimates
 
Our financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles. Preparation of the statements in accordance with these principles requires that we make estimates, using available data and our judgment, for such things as valuing assets, accruing liabilities and estimating expenses.  The following is a discussion of what we feel are the most critical estimates that we must make when preparing our financial statements.
 
Revenue Recognition.  Revenues from licensing contracts are recorded ratably over the life of the contract. Contingency earnings such as royalty fees are recorded when the amount can reasonably be determined and collection is likely.
 
Income Taxes and Deferred Income Taxes.  We use the asset and liability approach for financial accounting and reporting for income taxes.  Deferred income taxes are provided for temporary differences in the bases of assets and liabilities as reported for financial statement purposes and income tax purposes and for the future use of net operating losses.  We have recorded a valuation allowance against our net deferred income tax asset.  The valuation allowance reduces deferred income tax assets to an amount that represents management’s best estimate of the amount of such deferred income tax assets that more likely than not will be realized.
 
Property and Equipment.  Property and equipment is stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the following useful lives:
     
Computer equipment
3-10 years
Furniture and fixtures
3-7 years
Test equipment
5-7 years
Software
3 years
 
Repairs and maintenance costs are charged to operations as incurred.  Betterments or renewals are capitalized as incurred.
 
We review long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset with future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
 
Patents.  It is our policy to capitalize costs associated with securing a patent. Costs consist of legal and filing fees.  Once a patent is issued, it is amortized on a straight-line basis over its estimated useful life.  For purposes of the preparation of the audited, consolidated financial statements found elsewhere in this Form 10-Q, we have recorded amortization expense associated with the patents based on an eight year useful life.
 
Stock-Based Compensation.  We have a stock incentive plan that provides for the issuance of stock options, restricted stock and other awards to employees and service providers.  We calculate compensation expense under SFAS 123(R) using a Black-Scholes option pricing model.  In so doing, we estimate certain key assumptions used in the model.  We believe the estimates we use, which are presented in Note 7 of Notes to the Consolidated Financial Statements, are appropriate and reasonable.
 
Recent Accounting Pronouncements
 
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 allows companies to choose to measure many financial instruments and certain other items at fair value.  This statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007, although earlier adoption is permitted. SFAS 159 will become effective for us beginning with fiscal 2009.  We are currently evaluating what effects the adoption of SFAS 159 will have on our future results of operations and financial condition.
 
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R) (revised 2007), “Business Combinations” (SFAS 141(R)) and No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (SFAS 160). SFAS 141(R) which will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods.  SFAS 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. SFAS 141(R) and SFAS 160 are effective for both public and private companies for fiscal years beginning on or after December 15, 2008 (October 1, 2009 for us).  Early adoption is prohibited for both standards. SFAS 141(R) will be applied prospectively.  SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively.  The adoption of SFAS 160 would have no impact on our financial position or results of operations. Management is in the process of evaluating SFAS 141(R) and determining what effect, if any, it may have on our financial position and results of operations going forward.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”.  This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 will become effective for us beginning in the three months ending March 31, 2009.  The adoption of this pronouncement would have had no impact on our results or financial position as of September 30, 2008.
 
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 will not have an impact on our financial statements.
 
In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). SFAS 163 also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 163 will not have an impact on our financial statements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We do not currently hold any financial instruments to which this requirement applies.

Item 4.  Controls and Procedures
 
   Under the supervision and with the participation of the 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 Rules 13a-15e promulgated under the Exchange Act as of this report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
 
          A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.  Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process.
 
Management is aware that there is a lack of segregation of certain duties at the Company due to the small number of employees with responsibility for general administrative and financial matters.  This constitutes a deficiency in financial reporting.  Because of this, we made changes to certain of our internal controls, specifically those pertaining to the control of cash, credit card expenditures and the calculation of options expenses.  These changes were in effect as of December 31, 2008.  Management is satisfied that these changes have satisfactorily addressed areas of risk identified in our assessment of our internal and disclosure controls for the fiscal year ended September 30, 2008.
 
During the three months ended December 31, 2008, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except as described above.

 
 
PART II – OTHER INFORMATION
 
 
ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

 
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
 
Prospective and existing investors should carefully consider the following risk factors in evaluating our business.  The factors listed below represent certain important factors that we believe could cause our business results to differ from these forward looking statements.  These factors are not intended to represent a complete list of the general or specific risks that may affect us. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated.
 
Risks Related to the Company
 
We are largely an inception stage company and have a history of operating losses
 
We are largely an inception stage company and had an accumulated deficit of $17,689,281 as of December 31, 2008.  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 will need to raise additional capital in February 2009 in order to continue to fund our operations.  Operating losses have resulted principally from costs incurred in the preparation of our private placement memorandum, preparing our company for the Merger, promotion of our products, and from salaries and general and administrative costs.  We have generated nominal revenue to date.
 
We have entered the emerging business of nanotechnology, which carries significant developmental
 
and commercial risk
 
We have expended in excess of $1,000,000 to develop our nanotechnology-enabled products.  We expect to continue expending such sums in pursuit of further development of our technology. Such research and development involves a high degree of risk with significant uncertainty 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.  There can be no assurance that we will ever generate significant sales or achieve profitability.  Accordingly, 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 that includes an explanatory paragraph describing their substantial doubt about our ability to continue as a going concern.
 
We will need additional financing in February of 2009
 
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, and the results of future research and development and competition.  We believe that our past capital raising activities may not be sufficient to fund our working and other capital requirements.  We will need to raise additional funds through private or public financings in February 2009. 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.  In addition, such securities may contain rights, preferences or privileges senior to those of the rights of our current shareholders.  During our last fiscal year, we relied on short term debt financing, most of which carried a 25% interest rate.  As of December 31, 2008, we were in default on approximately $616,811 in short term debt, including accrued interest, and raised only $20,000 from the issuance of a convertible note to Seven Industries in the three months ended December 31, 2008.  We do not currently have any commitments for additional financing.  There can be no assurance that additional funds will be available on terms attractive to us or at all.  If adequate funds are not available, we may be required to curtail our pre-production, sales and research and development activities and/or otherwise materially reduce our operations.  Our inability to raise adequate funds could have a material adverse effect on our business, results of operations and financial condition.
 
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.  There can be no assurance 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.  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, there can be no assurance that we will be able to retain our present personnel or acquire additional qualified personnel as and when needed.  We do not have employment agreements with our General Counsel or our Chief Executive Officer.
 
Risks Related to our Business
 
We are operating in both mature and developing markets, and there is uncertainty as to 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.  There can be no assurance 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 are subject to a high level of uncertainty.  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, there can be no assurance that our technology and products will become widely accepted. It is also difficult to predict with any assurance the 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 Liquid Nanotechnology™ 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 Liquid Nanotechnology™ products would adversely affect our operations.  There can be no assurance that we will be able to market our technology and products successfully or that any of our technology or products will be accepted in the marketplace.
 
We expect that our products will have a long sales cycle
 
One of our target markets is the original equipment manufacturer (OEM) market. OEMs traditionally have substantial capital investments in their plant and equipment, including the coating portion of the production process.  In this market, the sale of our coating technology will be subject to budget constraints and resistance to change of long-established production techniques and processes, which could result in a significant reduction or delay in our anticipated revenues.  We cannot assure investors that such customers will have the necessary funds to purchase our technology and products even though they may want to do so.  Further, even if such customers have the necessary funds, we may experience delays and relatively long sales cycles due to their internal-decision making policies and procedures and reticence to change.
 
Our target markets are characterized by new products and rapid technological change
 
The target markets for our products are characterized by rapidly changing technology and frequent new product introductions.  Our success will depend on our ability to enhance our planned technologies and products and to introduce new products and technologies to meet changing customer requirements.  We intend to devote significant resources toward the development of our Liquid Nanotechnology™ solutions.  There can be no assurance 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.  There can also be no assurance that Liquid Nanotechnology™ products and technologies developed by others will not 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.  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.  Further, there can be no assurance that new companies will not enter our markets in the future.  Although we believe that our products will be distinguishable from those of our competitors on the basis of their technological features and functionality at an attractive value proposition, there can be no assurance that we will be able to penetrate any of our anticipated competitors’ portions of the market.  Many of our anticipated competitors may have existing relationships with manufacturers that may impede our ability to market our technology to potential customers and build market share.  There can be no assurance that we will be able to compete successfully against currently anticipated or future competitors or that competitive pressures will not have a material adverse effect on our business, operating results and financial condition.
 
We have limited marketing capability
 
We have limited marketing capabilities and resources.  In order to achieve market penetration we will have to undertake significant efforts and expenditures to create awareness of, and demand for, our technology and products.  Our ability to penetrate the market and build our customer base will be substantially dependent on our marketing efforts, including our ability to establish strategic marketing arrangements with OEMs and suppliers.  No assurance can be given 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.  Further, there can be no assurance that, if developed, such marketing capabilities will lead to sales of our technologies and products.
 
We have limited manufacturing capacity
 
We have limited manufacturing capacity for our products.  In order to fully execute our contemplated direct sales strategy, we will need to either: (i) acquire existing manufacturing capacity; (ii) develop a manufacturing capacity “in-house” or (iii) identify suitable third parties with whom we can contract for the manufacture of our products.  To either acquire existing manufacturing capacity or to develop such capacity, significant capital or outsourcing will be required.  There are no assurances that we can raise the necessary capital to acquire existing manufacturing capacity or to develop such capacity.  Moreover, we have not identified potential third parties with whom we could contract for the manufacture of our coatings.  There can be no guarantee that such arrangements, if consummated, would be suitable to meet our needs.
 
We are dependent on manufacturers and suppliers
 
We purchase, and intend to continue to purchase, all of the raw materials for our products from a limited number of manufacturers and suppliers.  We do not intend to directly manufacture any of the chemicals or other raw materials used in our products.  Our reliance on outside manufacturers and suppliers is expected to continue and involves several risks, including limited control over the availability of raw materials, delivery schedules, pricing and product quality.  We may experience delays, additional expenses and lost sales if we are required to locate and qualify alternative manufacturers and suppliers.
 
A few of the raw materials for our products are produced by a very 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 Liquid Nanotechnology™, 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 Liquid Nanotechnology™.  The U.S. Patent Office (“USPTO”) has issued six patents to us.  We have five applications still pending before the USPTO and twenty-two patent applications pending in other countries, plus three pending ICT international patent applications.
 
No assurance can be given that 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.
 
There can be no assurance that 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, there can be no assurance that we will be successful in enforcing our patent rights.
 
Further, there can be no assurance that patent infringement claims in the United States or in other countries will not be asserted against us by a competitor or others, or if asserted, that we will 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 some of our employees, consultants, certain potential customers and advisors, no assurance can be given 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, no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.
 
Risks related to our license arrangements
 
We have licensing agreements with DuPont and Red Spot Paint & Varnish regarding their use of our technology for specific formulations for designated applications.  The DuPont license provides multiple formulas for use on metal parts in the North American automotive market.  To date, this license has not generated any ongoing royalty payments.  We also have a licensing agreement with Red Spot that provides formulations for specific tank coatings. Such licenses are renewable provided the parties are in compliance with the agreements.  Although these licenses provide for royalties based upon net sales of our UV-cured coating formulations, there can be no assurance that Red Spot or DuPont will aggressively market products with our coatings and thus entitle us to receive royalties at any level.
 
We have not completed our trademark registrations
 
We have received approval of “EZ Recoat™”, “Liquid Nanotechnology™”, “Ecology Coatings™” as trademarks in connection with our proposed business and marketing activities.  Although we intend to pursue the registration of our marks in the United States and other countries, there can be no assurance that prior registrations and/or uses of one or more of such marks, or a confusingly similar mark, does not 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 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 recent slowdown in the U.S. automotive industry have made it more difficult to market our technology to that industry.
 
Risk Related to our Common Stock
 
Our stock prices have 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 will likely make our price more volatile. This 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 2008, our low and high market prices of our stock were $.51 (August 18, 2008) and $3.65 (January 7, 2008).  Any future market prices for our shares are likely to continue to be very volatile. This price volatility may make it more difficult for our shareholders to sell our shares when desired.  We do not know of any one particular factor that has caused volatility in our stock price.  However, the stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies.  Broad market factors and the investing public’s negative perception of our business may reduce our stock price, regardless of our operating performance. Further, the volume of our traded shares and the market for our common stock is very limited.  During the past fiscal year, there have been several days where no shares of our stock have traded.  A larger market for our shares may never develop or be maintained. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our market price.  As a result, this may make it very difficult for our shareholders to sell our common stock.
 
Control by key stockholders
 
As of December 31, 2008, our largest stockholders, Richard D. Stromback, Douglas Stromback, and Deanna Stromback, who are the brother and sister of Richard D. Stromback, respectively, and Sally J.W. Ramsey held shares representing approximately 78.3% of the voting power of our outstanding capital stock.  In addition, pursuant to the Securities Purchase Agreement we entered into with Equity 11, Equity 11 has the right to effectively control our Board of Directors with the right to appoint three of the five members of our Board of Directors.  Additionally, Equity 11 has the right to appoint our Chief Executive Officer.  The stock ownership and governance rights constitute effective voting control in 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.  These rights 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 listed on the OTC Bulletin Board and it trades for less than $5.00 per share. The OTC Bulletin Board is generally regarded as a less efficient trading market than the NASDAQ Capital or Global Markets or the New York Stock Exchange.
 
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.”  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market.  The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account.  In addition, the penny stock rules require that, prior to effecting a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.  These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.
 
Since our common stock will be subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus the ability of our shareholders to sell our common stock in the secondary market in the future.
 
We have never paid dividends and have no plans to do so in the future
 
To date, we have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future.  We intend to retain future earnings, if any, to provide funds for the operations of our business.  Our Securities Purchase Agreement with Equity 11, Ltd. prevents the payment of any dividends to our common stockholders without prior approval of Equity 11, Ltd.
 
The issuance of options, warrants, and convertible securities may dilute the ownership interest of our stockholders
 
As of December 31, 2008, we had granted options to purchase 5,072,119 shares of our common stock under our 2007 Stock Option and Restricted Stock Plan (the “2007 Plan).  Under the Securities Purchases Agreement that we entered into with Equity 11, Equity 11 can purchase up to $5,000,000 in convertible preferred shares at $1,000 per preferred share.  The preferred shares are convertible into 10,000,000 shares of our common stock at $.50 per common share.  As of December 31, 2008, Equity 11 had purchased $2,010,000 in convertible preferred shares, potentially convertible into 4,020,000 shares of our common stock. If Equity 11 were to purchase the remaining $2,990,000 in convertible preferred stock, these additional shares would be convertible into 5,980,000 shares of our common stock.  The same Securities Purchase Agreement awards 500 warrants for each convertible preferred share issued.  These warrants entitle Equity 11 to purchase one share of our common stock at $.75 per common share for each warrant.  As of December 31, 2008, we had issued warrants to purchase 4,345,000 shares of our common stock.  This figure included 1,005,000 warrants issued to Equity 11.  If Equity 11 purchases the remaining $2,990,000 in Convertible Preferred Shares it is entitled to under the Securities Purchase Agreement, an additional 1,495,000 warrants to purchase shares of our common stock at $.75 per common share will be issued.  As of December 31, 2008, there was $636,830 outstanding in principal and accrued interest on convertible notes.  These notes could be converted into 862,604 shares of common stock.  Since December 31, 2008, we have issued an additional 47,000 warrants and sold an additional $94,000 in convertible preferred shares to Equity 11.  To the extent that our outstanding stock options and warrants are exercised and Convertible Preferred Shares are converted to common stock, 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 common stock and preferred stock can be issued by our Board of Directors without stockholder approval.  Any future issuances of our common stock or preferred stock could further dilute the percentage ownership of our Company held by existing stockholders.
 
Indemnification of officers and directors
 
Our Articles of Incorporation and Bylaws contain broad indemnification and liability limiting provisions regarding our officers, directors and employees, including the limitation of liability for certain violations of fiduciary duties.  In addition, we maintain Directors and Officers liability insurance.  Our shareholders will have only limited recourse against directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of our company under Nevada law or otherwise, we have been advised 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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Set forth below is a description of all of our sales of unregistered securities during the quarter ended December 31, 2008.  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 Regulation D or under Section 4(2) of the Act, as transactions not involving a public offering.  Unless indicated, we did not pay any commissions to third parties in connection with the sales.

 
Issuance of warrants in relation to new debt
 
None.
 
Other issuances of stock and warrants
 
On November 11, 2008, we issued warrants to purchase 2,000,000 shares of our common stock at $.50 per share to a consultant.  The warrants vested upon issuance
 
From October 1, 2008 through December 31, 2008, we issued approximately 430,000 options to a director and to an employee under our Stock Option and Restricted Stock Plan.  The options have varying exercise prices and restriction periods and will expire approximately ten years from the date of issuance.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
As of December 31, 2008, the Company was in default in the payment of principal and interest on the following promissory notes:
 
Note Holder
  
Principal In Default
    
Interest Rate
  
Initial Default Date
Default Report on 8-K Filed On
Investment Hunter, LLC
   $
200,000
      
25
 %
June 30, 2008
September 8, 2008
Mitchell Shaheen
   $
145,000
      
25
 %
July 18, 2008
September 3, 2008
Mitchell Shaheen
   $
100,000
      
25
 %
August 10, 2008
September 3, 2008
George Resta
   $
30,000
      
25
 %
June 30, 2008
September 8, 2008
Richard D. Stromback
            
4
 %
December 31, 2008
  
Douglas Stromback
            
4
 %
December 31, 2008
  
Deanna Stromback
            
4
 %
December 31, 2008
  
 
                 As of December 31, 2008, the Company had not paid the 5% dividend on the 2,010 shares of convertible preferred shares held by Equity 11.   The dividend of $23,908 was due on December 1, 2008.  Under the terms of the Securities Purchase Agreement with Equity 11, the amount of the preferred shares held by Equity 11 will increase by the dividend amount.
 
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of our shareholders during the quarter ended December 31, 2008.
 

 
ITEM 5. OTHER INFORMATION
 
None.

 

 

 

 


 
7
 

 

 
ITEM 6. EXHIBITS

 
 
 
10.12
First Amendment to the Employment Agreement between Ecology Coatings, Inc., a California corporation and Adam S. Tracy dated July 1, 2007. (2)
   
10.13
Employment Agreement between Ecology Coatings, Inc., a California corporation and Sally J.W. Ramsey dated January 1, 2007. (2)
   
10.14
License Agreement with E.I. Du Pont De Nemours and Ecology Coatings, Inc., a California corporation, dated November 8, 2004. (2)
   
10.15
License Agreement between Ecology Coatings, Inc., a California corporation and Red Spot Paint & Varnish Co., Inc., dated May 6, 2005. (2)
   
10.16
Lease for office space located at 35980 Woodward Avenue, Suite 200, Bloomfield Hills, Michigan 48304. (2)
   
10.17
Lease for laboratory space located at 1238 Brittain Road, Akron, Ohio  44310. (2)
   
10.18
2007 Stock Option and Restricted Stock Plan. (2)
   
10.19
Form of Stock Option Agreement.  (2)
   
10.20
Form of Subscription Agreement between Ecology Coatings, Inc., a California corporation and the Investor to identified therein.  (2)
   
10.21
Consulting Agreement by and between Ecology Coatings, Inc., a California corporation, and MDL Consulting Group, LLC, a Michigan limited liability company dated April 10, 2006.  (2)
   
10.22
Consulting Agreement by and between Ecology Coatings, Inc., a California corporation, and MDL Consulting Group, LLC, a Michigan limited liability company dated July 1, 2006.  (2)
   
10.23
Antenna Group Client Services Agreement by and between Ecology Coatings, Inc., a California corporation and Antenna Group, Inc. dated March 1, 2004, as amended effective as of July 6, 2007.  (2)
   
10.24
Consulting Agreement by and between Ecology Coatings, Inc., a California corporation and Kissinger McLarty Associates, date July 15, 2006, as amended.  (2)
   
10.25
Business Advisory Board Agreement by and between Ecology Coatings, Inc., a California corporation, and The Rationale Group, LLC, a Michigan limited liability corporation, dated June 1, 2007.  (2)
   
10.26
Consulting Agreement by and between Ecology Coatings, Inc., a California corporation , and Trimax, LLC, a Michigan limited liability company dated June 26, 2007.  (2)
   
10.27
Series I Promissory Note made in favor of Hayden Capital USA, LLC dated February 5, 2008. (3)
   
10.28
 Series II Promissory Note made in favor of Hayden Capital USA, LLC dated February 5, 2008. (3)
   
10.29
Series III Promissory Note made in favor of Hayden Capital USA, LLC dated February 5, 2008. (3)
   
10.30
Allonge to Promissory Note dated November 13, 2003 made in favor of Richard D. Stromback dated February 6, 2008. (3)
   
10.31
Allonge to Promissory Note dated December 15, 2003 made in favor of Deanna. Stromback dated February 6, 2008. (3)
   
10.32
Allonge to Promissory Note dated August 10, 2003 made in favor of Douglas Stromback dated February 6, 2008. (3)
   
10.33
Third Allonge to Promissory Note dated February 28, 2006 made in favor of Chris Marquez dated February 6, 2008. (3)
   
10.34
Employment Agreement with Kevin Stolz dated February 1, 2008. (4)
   
10.35
Promissory Note made in favor of Hayden Capital USA, LLC dated May 20, 2008. (5)
   
10.36
Extension of Series I, II and III Promissory Notes in favor of Hayden Capital USA, LLC dated June 9, 2008. (6)
   
10.37
Promissory Note made in favor of George Resta dated March 1, 2008. (7)
   
10.38
Promissory Note made in favor of Investment Hunter, LLC dated March 1, 2008. (7)
   
10.39
Scientific Advisory Board Agreement with Dr. Robert Matheson dated February 18, 2008. (8)
   
10.40
Promissory Note made in favor of Mitch Shaheen dated June 18, 2008. (9)
   
10.41
Promissory Note made in favor of Mitch Shaheen dated July 10, 2008. (10)
   
10.42
Extension of Promissory Note made in favor of Richard D. Stromback dated July 10, 2009. (10)
   
10.43
Extension of Promissory Note made in favor of George Resta dated July 14, 2008. (10)
   
10.44
Extension of Promissory Note made in favor of Investment Hunter, LLC dated July 14, 2008. (10)
   
10.45
Equity 11, Ltd. commitment letter dated August 25, 2008. (11)
   
10.46
Securities Purchase Agreement with Equity 11, Ltd. dated August 28, 2008. (11)
   
10.47
First Amendment to Employment Agreement of Richard D. Stromback dated August 27, 2008. (11)
   
10.48
Second Amendment to Employment Agreement of David W. Morgan dated August 27, 2008. (11)
   
10.49
Second Amendment to Employment Agreement of F. Thomas Krotine dated August 27, 2008. (11)
   
10.50
First Amendment to Employment Agreement of Kevin Stolz dated August 29, 2008. (11)
   
10.51
Consulting Services Agreement with RJS Consulting LLC dated September 17, 2008. (12)
   
10.52
Consulting Services Agreement with DAS Ventures LLC dated September 17, 2008. (12)
   
10.53
Consulting Services Agreement with Sales Attack LLC dated September 17, 2008. (12)
   
10.54
First Amendment to Securities Purchase Agreement with Equity 11, Ltd. dated October 27, 2008. (13)
   
10.55
Consulting Services Agreement with Trimax, LLC dated November 11, 2008. (14)
   
14.1
Charter of Audit Committee. (15)
   
14.2
Charter of Compensation Committee. (15)
   
21.1
List of subsidiaries. (2)
   
24.1
Power of Attorney. (2)
   
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.*
   
 
*  Filed herewith.
 
(1) Incorporated by reference from OCIS’ registration statement on Form SB-2 filed with the Commission, SEC file no. 333-91436.
 
(2) Incorporated by reference from our Form 8-K filed with the Commission on July 30, 2007, SEC file no. 333-91436.
 
(3) Incorporated by reference from our From 8-K filed with the Commission on February 12, 2008, SEC file no. 333-91436.
 
(4) Incorporated by reference from our Form 8-K filed with the Commission on February 22, 2008, SEC file no. 333-91436.
 
(5) Incorporated by reference from our Form 8-K filed with the Commission on May 22, 2008, SEC file no. 333-91436
 
(6) Incorporated by reference from our Form 8-K filed with the Commission on June 11, 2008, SEC file no. 333-91436.
 
(7) Incorporated by reference from our Form 8-K filed with the Commission on March 20, 2008, SEC file no. 333-91436.
 
(8) Incorporated by reference from our Form 8-K filed with the Commission on April 3, 2008, SEC file no. 333-91436.
 
(9) Incorporated by reference from our Form 8-K filed with the Commission on June 24, 2008, SEC file no. 333-91436.
 
(10) Incorporated by reference from our Form 8-K filed with the Commission on July 17, 2008, SEC file no. 333-91436.
 
(11) Incorporated by reference from our Form 8-K/A filed with the Commission on August 9, 2007, SEC file no. 333-91436.
 
(12) Incorporated by reference from our Form 8-K filed with the Commission on September 19, 2008, SEC file no. 333-91436.
 
(13) Incorporated by reference from our Form 8-K filed with the Commission on October 28, 2008, SEC file no. 333-91436.
 
(14) Incorporated by reference from our Form 8-K filed with the Commission on November 13, 2008, SEC file no. 333-91436.
 
(15) Incorporated by reference from our Form 10-KSB filed with the Commission on December 23, 2008, SEC file no. 333-91436.
 
(16) Incorporated by reference from our Form 8-K filed with the Commission on September 30, 2008, SEC file no. 333-91436.
 

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


Date:
February 11, 2009
  
ECOLOGY COATINGS, INC.
     
(Registrant)
       
     
By: /s/ Robert G. Crockett
     
Robert G. Crockett
     
Its:  CEO
       
     
By:  /s/ David W. Morgan
     
David W. Morgan
     
Its:  CFO




 
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