PINX:ECOC Quarterly Report 10-Q Filing - 8/13/2012

Effective Date 8/13/2012


UNITED STATES
 
Securities and Exchange Commission
Washington, D.C. 20549
 
Form 10-Q
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 

     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission file number: 333-91436
 
 
ECOLOGY COATINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)

     
Nevada
 
26-0014658
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
24663 Mound Road, Warren MI  48091
 
(Address of principal executive offices) (Zip Code)
 
(586) 486-5308
 
(Registrant’s telephone number)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x  No o
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes   x            No 
 
 
1

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

 
Large Accelerated Filer o
Accelerated Filer  o
Non-accelerated filer  o
Smaller Reporting Company   x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 

APPLICABLE ONLY TO CORPORATE ISSUERS:


State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of July 30, 2012, the number of shares of common stock of the registrant outstanding was 54,539,814 and the number of shares of convertible preferred stock outstanding was 271.


 
2

 

ECOLOGY COATINGS, INC.
FORM 10-Q INDEX
FOR THE QUARTER ENDED JUNE 30, 2012
 
 
PART I – FINANCIAL INFORMATION
Page
     
Item I
FINANCIAL STATEMENTS (UNAUDITED)
4
     
 
Unaudited Consolidated Balance Sheets at June 30, 2012 and September 30, 2011
4
     
 
Unaudited Consolidated Statements of Operations for the Three and Nine
Months Ended June 30, 2012 and 2011
6
     
 
Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 2012 and 2011
7
     
 
Notes to Unaudited Consolidated Financial Statements
9
     
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
19
     
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
23
     
ITEM 4
CONTROLS AND PROCEDURES
23
     
 
PART II – OTHER INFORMATION
 
     
ITEM 1
LEGAL PROCEEDINGS
23
     
ITEM 1A
RISK FACTORS
24
     
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
30
     
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
31
     
ITEM 4
MINE SAFETY DISCLOSURES
31
     
ITEM 5
OTHER INFORMATION
31
     
ITEM 6
EXHIBITS
31
     
SIGNATURES
 
32

 
3

 


 
ECOLOGY COATINGS, INC. AND SUBSIDIARY
 
Unaudited Consolidated Balance Sheets
 
ASSETS
 
   
June 30, 2012
   
September 30, 2011
 
             
Current assets
           
Cash
 
$
62,875
   
$
71,784
 
Prepaid expenses
   
52,854
     
30,137
 
                 
Total current assets
   
115,729
     
101,921
 
                 
Property and equipment
               
Computer equipment
   
32,000
     
31,650
 
Furniture and fixtures
   
22,803
     
22,803
 
Test and laboratory equipment
   
40,598
     
40,598
 
Signs
   
213
     
213
 
Software
   
6,057
     
6,057
 
Video
   
48,177
     
48,177
 
Total property and equipment
   
149,848
     
149,498
 
Less: accumulated depreciation
   
(99,887)
     
(89,837)
 
                 
Property and equipment, net
   
49,961
     
59,661
 
                 
Other
               
Patents-net
   
202,630
     
198,915
 
Trademarks-net
   
9,334
     
8,899
 
                 
Total other assets
   
211,964
     
207,814
 
                 
Total Assets
 
$
377,654
   
$
369,396
 

 
See the accompanying notes to the unaudited consolidated financial statements.

 
4

 


 
ECOLOGY COATINGS, INC. AND SUBSIDIARY
 
Unaudited Consolidated Balance Sheets
 
 
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
 
   
June  30, 201
 
September 30, 2011
 
             
Current liabilities
           
Accounts payable
   
24,786
     
27,945
 
Credit card payable
   
5,523
     
-
 
Accrued liabilities
   
45,833
     
217,952
 
Interest payable
   
125,804
     
405,274
 
Notes payable
   
-
     
250,000
 
Judgment payable
   
604,330
         
Notes payable - related party
   
1,020,093
     
900,332
 
Preferred dividends payable
   
1,116
     
31,566
 
Total current liabilities
   
1,827,485
     
1,833,069
 
                 
Commitments and Contingencies (Note 5)
               
                 
Stockholders' (deficit)
               
Preferred stock - 10,000,000 $.001 par value shares authorized; 271 and 1,938 shares issued and outstanding as of June 30, 2012 and September 30, 2011, respectively
   
1
     
7
 
Common stock - 90,000,000 $.001 par value shares authorized; 54,539,814 and 14,158,506 issued and outstanding as of June 30, 2012 and September 30, 2011, respectively
   
54,540 
     
14,159 
 
Additional paid-in capital
   
28,615,490
     
27,296,580
 
Accumulated deficit
   
(30,119,862)
     
(28,774,419)
 
                 
Total stockholders' (deficit)
   
(1,449,831)
     
(1,463,673)
 
                 
Total liabilities and stockholders'
               
(Deficit)
 
$
377,654
   
$
369,396
 

 

 

 
See the accompanying notes to the unaudited consolidated financial statements.

 
5

 


 
 
ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
 
For the three months ended
For the three months ended
For the nine months ended
For the nine months ended
 
 
June 30, 2012
June 30, 2011
June 30, 2012
June 30, 2011
 
           
           
Revenues
$       -
$      -
$5,714
$         3,190
 
           
Salaries and fringe benefits
115,981
144,597
413,006
409,216
 
Professional fees
19,161
49,438
98,039
192,462
 
Other general and
administrative costs
110,305
579,320
529,647
871,760
 
Total general and
administrative expenses
245,447
773,355
1,040,692
1,473,438
 
           
Operating loss
(245,447)
(773,355)
(1,034,978)
(1,470,248)
 
           
Other income (expense)
         
Income from forgiveness of payables and debt
-
-
228,802
872,861
 
Other income
-
500
-
1,268
 
Interest expense
(13,499)
(42,557)
(72,750)
(160,498)
 
Total other income (expenses) - net
(13,499)
(42,057)
156,052
713,631
 
           
Net loss
(258,946)
(815,412)
(878,926)
(756,617)
 
           
Preferred dividend – beneficial
         
conversion
(63,333)
(333,334)
(395,000)
(1,498,334)
 
Preferred dividends – stock
dividends
(32,516)
(20,104)
(79,518)
(68,128)
 
           
Net loss available to common
shareholders
$(354,795)
$(1,168,850)
$(1,353,444)
$(2,323,079)
 
           
Basic and diluted net loss per share
$(0.01)
$(0.11)
$(0.07)
$(0.25)
 
           
Basic and diluted weighted average
         
shares outstanding
28,927,903
10,658,506
20,450,211
9,248,566
 
 

See the accompanying notes to the unaudited consolidated financial statements.

 
6

 


 
ECOLOGY COATINGS, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows
(Unaudited)
 
For the
For the
 
nine months ended
nine months ended
 
June 30, 2012
June 30, 2011
OPERATING ACTIVITIES
   
Net loss
$(878,926)
$(756,617)
Adjustments to reconcile net loss
   
to net cash used in operating activities:
   
Income from forgiveness of payables and debt
(228,802)
(872,861)
Depreciation and amortization
224,375
25,627
Option expense
196,121
641,614
Issuance of stock for payables, services
11,195
114,500
Changes in Asset and Liabilities
   
Prepaid expenses
(22,718)
(15,993)
     
Accounts payable
(3,159)
(540,662)
Accrued liabilities
5,833
171,837
Credit card payable
5,523
(22,719)
Judgment payable
354,330
 
Interest payable
(284,729)
(37,335)
     
Net cash used in operating activities
(820,956)
(1,292,609)
INVESTING ACTIVITIES
   
Purchase of property and equipment
(350)
(32,817)
Investment in patents and trademarks
(19,196)
(4,940)
Net cash used in investing activities
(19,546)
(37,757)
FINANCING ACTIVITIES
   
Repayment of debt
-
(236,103)
Proceeds from issuance of debt
176,593
292,000
Proceeds from issuance of convertible preferred stock
655,000
1,345,000
Net cash provided by financing activities
831,593
1,400,897
     
Net Change in Cash and Cash Equivalents
(8,909)
70,531
     
CASH AND CASH EQUIVALENTS AT BEGINNING
   
OF PERIOD
71,784
2,814
CASH AND CASH EQUIVALENTS AT END
   
OF PERIOD
$62,875
$               73,346


See the accompanying notes to the unaudited consolidated financial statements.
 

 

 
7

 


 

 
ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
 
 
For the
For the
 
nine months ended
nine months ended
 
June 30, 2012
June 30, 2011
     
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
   
INFORMATION
   
Interest paid
$160
$            193,897
     

 
 
See the accompanying notes to the unaudited consolidated financial statements.
 

 
8

 

ECOLOGY COATINGS, INC.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  
 
JUNE 30, 2012 AND SEPTEMBER 30, 2011
 
Note 1 — Summary of Significant Accounting Policies

Description of the Company.  We were originally incorporated on March 12, 1990 in California (“Ecology-CA”).  Our current entity was incorporated in Nevada on February 6, 2002 as OCIS Corp. (“OCIS”).  OCIS completed a merger with Ecology-CA on July 26, 2007 (the “Merger”). In the Merger, OCIS changed its name from OCIS Corporation to Ecology Coatings, Inc.  We develop ultra-violet curable coatings that are designed to drive efficiencies and clean processes in manufacturing.  We create proprietary coatings with unique performance and environmental attributes by leveraging our platform of integrated nano-material technologies that reduce overall energy consumption and offer a marked decrease in drying time. Ecology’s target markets consist of electronics, automotive and trucking, paper products and original equipment manufacturers (“OEMs”).

Interim Reporting. While the information presented in the accompanying interim consolidated financial statements is unaudited, it includes all normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America.  These interim consolidated financial statements follow the same accounting policies and methods of their application as the September 30, 2011 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, 2011 annual consolidated financial statements included in the Form 10-K/A we filed with the Securities and Exchange Commission on December 28, 2011.

Our operating results for the nine months ended June 30, 2012 are not necessarily indicative of the results that can be expected for the year ending September 30, 2012 or for any other period.

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

Basis of Presentation. On February 7, 2011, our shareholders approved a 1-for-5 reverse stock split.  In accordance with U.S. Generally Accepted Accounting Principles, we have restated all per share related information to conform to this reverse split for all periods presented. This includes information related to stock options, warrants, and convertible preferred shares. See Note 6.
     
Principles of Consolidation.   The consolidated financial statements include all of our accounts and the accounts of our wholly owned subsidiary Ecology-CA.  All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates.   The preparation of consolidated 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Revenue Recognition.   Revenues from licensing contracts are recorded ratably over the life of the contract.  Contingency earnings such as royalty fees are recorded when the amount can reasonably be determined and collection is likely.

Income from Forgiveness of Payables and Debt.   Income from the forgiveness of payables and/or debt is recognized when all of the conditions associated with the forgiveness have been met. During the three  months ended June 30, 2012 and 2011, we recognized no income from forgiveness of payables and debt. In the nine months ended June 30, 2012 and 2011, we recognized $228,802 and $872,861, respectively, in income from the forgiveness of payables and debt.
 
 
9

 
Loss Per Share. Basic loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of shares of common stock outstanding during the period.  Diluted loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of shares of common stock and potentially dilutive securities outstanding during the period.  Potentially dilutive shares consist of the incremental common shares issuable upon the exercise of stock options and warrants and the conversion of convertible debt and convertible preferred stock. Potentially dilutive shares are excluded from the weighted average number of shares if their effect is anti-dilutive.  None of the stock options or warrants outstanding or stock associated with the convertible debt or with the convertible preferred shares during each of the periods presented was included in the computation of diluted loss per share as they were anti-dilutive.  As of June 30, 2012 and September 30, 2011, there were 5,243,807 and 34,795,261 potentially dilutive shares outstanding, respectively.  
 
Property and Equipment.   Property and equipment is stated at cost.  Depreciation is recorded using the straight-line method over the following useful lives:
 
         
Computer equipment
 
3-10 years
Furniture and fixtures
 
3-7 years
Test equipment
 
5-7 years
Signs
 
7 years
Software
 
3 years
Marketing and promotional video
 
3 years
 
Repairs and maintenance costs are charged to operations as incurred. Betterments or renewals are capitalized as incurred.
 
Patents.   It is our policy to capitalize costs associated with securing a patent.  Costs consist of legal and filing fees.  Once a patent is issued, it is amortized on a straight-line basis over its estimated useful life.  Seven patents were issued as of June 30, 2012 and are being amortized over 8 years.
 
Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Stock-Based Compensation.   Employee and director stock-based compensation expense is measured utilizing the fair-value method with expense charged to earnings over the vesting period on a straight-line basis.
 
We account for stock options granted to non-employees under the fair-value method with stock-based compensation expense being charged to earnings on the earlier of the date services are performed or a performance commitment exists.
 
Expense Categories.  Salaries and Fringe Benefits of $115,981 and $144,597 for the three months ended June 30, 2012 and 2011, respectively, include wages paid to and insurance benefits for our officers.  Professional fees of $19,161 and $49,438 for the three months ended June 30, 2012 and 2011, respectively, include amounts paid to attorneys, accountants, and consultants, as well as any stock based compensation expense for those services.    Salaries and Fringe Benefits of $413,006 and $409,216 for the nine months ended June 30, 2012 and 2011, respectively, include wages paid to and insurance benefits for our officers and employees.  Professional fees of $98,039 and $192,462 for the nine months ended June 30, 2012 and 2011, respectively, include amounts paid to attorneys, accountants, and consultants, as well as the stock based compensation expense for those services. 
 
 
10

 
Recent Accounting Pronouncements
 
We have reviewed all Accounting Standards Updates issued by the Financial Accounting Standards Board since we last issued financial statements as part of our Form 10-K/A filed on December 28, 2011 and have determined none of them would have a material effect on our consolidated financial statements upon adoption.
 
Note 2 Concentrations

For the three months ended June 30, 2012 and 2011, we had  no revenues.  For the nine months ended June 30, 2012 and 2011, we had revenues of $5,714 and $3,190, respectively.  Three customers accounted for all of our revenues for the nine months ended June 30, 2012 and one customer accounted for all of our revenues for the nine months ended June 30, 2011.   No amounts were owing from any customers as of June 30, 2012 and September 30, 2011.
 
Note 3 — Related Party Transactions
 
We have borrowed funds for our operations from certain major stockholders, directors and officers as disclosed below.
 
We have an unsecured note payable due to Deanna Stromback, a principal shareholder and former director and sister of our former Chairman, Rich Stromback, which bears interest at 4% per annum with principal and interest due on December 31, 2009.  As of June 30, 2012 and September 30, 2011, the note had an outstanding balance of $110,500.  The accrued interest on the note was $27,555 and $23,491 as of June 30, 2012 and September 30, 2011, respectively.  The note is currently in default and carries conversion rights that allow the holder to convert all or part of the outstanding balance into shares of our common stock upon mutually agreeable terms and conversion price.
 
We have an unsecured note payable due to Doug Stromback, a principal shareholder and former director and brother of our former Chairman, Rich Stromback, which bears interest at 4% per annum with principal and interest due on December 31, 2009.  As of June 30, 2012 and September 30, 2011, the note had an outstanding balance of $133,000.  The accrued interest on the note was $33,173 and $28,281 as of June 30, 2012 and September 30, 2011, respectively.  The note is currently in default and carries conversion rights that allow the holder to convert all or part of the outstanding balance into shares of our common stock upon mutually agreeable terms and conversion price.
 
We have a secured note payable to John Salpietra, a member of our Board of Directors. This note bears interest at 4.75% per annum, is secured by a lien on our intellectual property, and is convertible into shares of our common stock at $.06 per share. On December 15, 2011, the parties agreed to extend the due date to December 4, 2012. As of June 30, 2012 and September 30, 2011, the note had an outstanding balance of $600,000.  Accrued interest of $59,328 and $36,366 was outstanding as of June 30, 2012 and September 30, 2011, respectively. On June 26, 2012, we issued a note for $40,000 to Mr. Salpietra. The note bears interest at 5% per annum, is unsecured, and matures on September, 26, 2012. Accrued interest of $27 was owing as of June 30, 2012.Additionally, on June 28, 2012, we issued a note for $100,000 to Mr. Salpietra. The note bears interest at 5% per annum, is unsecured, and matures on September, 28, 2012 Accrued interest of $41 was owing as of June 30, 2012.

Effective May 1, 2012, we entered into a lease with J.M. Land Co. for office space for our headquarters. J.M. Land Co. is an entity owned by James Juliano, our Chairman. We pay monthly rent of $1,000, and the gas and electric utilities which have historically averaged approximately $1,000 per month.   See also Note 5—Commitments and Contingencies—Lease Agreements.

On January 2, 2012, we entered into a Sale and Leaseback Agreement with J.M. Land Co. where we raised cash by selling and leasing back our laboratory and computer equipment.  Our balance sheet reflected a liability of $6,592 as of June 30, 2012.

On June 12, 2012, we issued a note for $30,000 to Omega Development Corporation, an entity owned by James Juliano. The note bears interest at 5% per annum, is unsecured, and matures on September, 12, 2012. Accrued interest of $78 was owed as of June 30, 2012.

 
11

 
We paid $27,000 in director fees to our Chairman James Juliano for the nine months ended June 30, 2012.  We paid $8,000 in director fees to Mr. Juliano for the nine months ended June 30, 2011.

Note 4 — Notes Payable
 
We had the following notes:

   
 
June 30, 2012
 
September 30, 2011
               
               
Mitchell Shaheen Note:  Subordinated note payable, 25% per annum, unsecured, principal and interest was due July 18, 2008. Additionally, the Company issued a warrant to purchase 20,000 shares of the Company’s common stock at a price equal to $3.75 per share (the “Warrant”). The Warrant is exercisable immediately and carries a ten (10) year term. If applicable, the Company has agreed to include the Conversion Shares in its first registration statement filed with the Securities and Exchange Commission.  Accrued interest of $0 and $183,776 was outstanding as of March 31, 2012 and September 30, 2011, respectively.  Mr. Shaheen obtained a judgment on December 30, 2011 in the aggregate amount of $604,330 for this note and the note discussed below.
 
-
     
150,000
 
               
Mitchell Shaheen Note:  Subordinated note payable, 25% per annum, unsecured, principal and interest was due August 10, 2008. Additionally, the Company issued a warrant to purchase 20,000 shares of the Company’s common stock at a price equal to $2.50 per share (the “Warrant”). The Warrant is exercisable immediately and carries a ten (10) year term. If applicable, the Company has agreed to include the Conversion Shares in its first registration statement filed with the Securities and Exchange Commission. Accrued interest of $0 and $125,850 was outstanding as of March 31, 2012 and September 30, 2011, respectively. Mr. Shaheen obtained a judgment on December 30, 2011 in the aggregate amount of $604,330 for this note and the note discussed above.
 
-
     
100,000
 
               
   
$-
     
$250,000
 

Both of the notes payable in the foregoing table were in default as of September 30, 2011.  A judgment of $604,330 was entered against us on December 30, 2011 in a lawsuit brought by Mr. Shaheen which had the effect of converting the notes into the judgment. The judgment included amounts for principal, interest and attorney’s fees. Because the notes were converted into a judgment, they are no longer in default and the amount of the judgment is reflected on the June 30, 2012 balance sheet as “Judgment Payable”.  Accrued interest of $3,027 was owing on the judgment as of June 20, 2012. See Contingencies in Note 5 herein.

 
12

 
 Note 5 — Commitments and Contingencies
 
Employment Agreements.
 
We entered into a new employment agreement with Sally J.W. Ramsey, our Vice President – New Product Development effective January 1, 2012. Ms. Ramsey is the founder of our company. The agreement will expire on December 31, 2014. Ms. Ramsey will receive an annual base salary of $100,000. The Compensation Committee of the Board of Directors may review Ms. Ramsey’s salary to determine what, if any, increases shall be made thereto. The agreement may be terminated prior to the end of the term by us for cause. If Ms. Ramsey’s employment is terminated without cause or for “good reason,” as defined in the agreement, she is entitled to 50% of salary that would have been paid over the balance of the term of the agreement. A termination within one year after a change in control shall be deemed to be a termination without cause.
  
Our employment agreement with Daniel V. Iannotti, our Vice President, General Counsel & Secretary, expires on September 17, 2012. Mr. Iannotti receives an annual base salary of $100,000. On April 22, 2011, Mr. Iannotti forfeited previously issued stock options and received options to purchase 300,000 shares of our common stock at a price of $.20 per share.  The agreement may be terminated prior to the end of the term for cause. If Mr. Iannotti’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause.

Contingencies.

A judgment of $604,330 was entered against us on December 30, 2011 in a lawsuit brought by Mr. Shaheen, one of our note holders, which had the effect of converting the notes into a judgment. As of June 30, 2012, our balance sheet includes $3,027 in Interest Payable accruing from the date of this judgment.

Lease Commitments.
       
 
a.
 
We lease office and lab facilities in Akron, OH on a month-to-month basis for $1,200 per month.  Rent expense for the three months ended June 30, 2012 and 2011 was $3,600 and $3,600, respectively. Rent expense for the nine months ended June 30, 2012 and 2011 was $10,800 and $15,000, respectively.
       
 
b.
 
Effective May 1, 2012, we entered into a lease with J.M. Land Company for office space for our headquarters located in Warren, Michigan.  The lease was effective May 1, 2012 and expires on April 30, 2013.   Monthly rent is $1,000 and we pay the gas and electric utilities for our headquarters building which has historically averaged approximately $1,000 per month.  Rent and utilities expenses for the three months ended June 30, 2012 and 2011 totaled $5,674 and $5,431. Rent and utilities expenses for the nine months ended June 30, 2012 and 2011 were $19,574 and $12,438, respectively.

Note 6 — Equity

Warrants.  On December 16, 2006, we issued warrants to Trimax, LLC to purchase 100,000 shares of our stock at $10.00 per share.  On November 11, 2008, the exercise price of the warrants was changed to $4.50 per share.  The warrants vested on December 17, 2007. As of June 30, 2012, the remaining life of the warrants is 4.3 years.
 
On June 21, 2008, we issued warrants to Mitchell Shaheen to purchase 20,000 shares of our common stock at $3.75 per share.  The warrants vested upon issuance. As of June 30, 2012, the remaining life of the warrants is 5.6 years.
 
On July 14, 2008, we issued warrants to Mitchell Shaheen to purchase 20,000 shares of our common stock at $2.50 per share.  The warrants vested upon issuance.  As of June 30, 2012, the remaining life of the warrants is 5.6 years.
 
We issued  immediately vested warrants to Equity 11 in conjunction with Equity 11’s purchases of our convertible preferred stock to purchase 235,700 shares of our common stock at $3.75 per share.
 
On November 11, 2008, we issued warrants to purchase 400,000 shares of our common stock at $2.50 per share to Trimax. The warrants vested upon issuance.  The remaining life of the warrants as of June 30, 20122 was 6.3 years.
 
 
13

 
Shares.  
 
On August 28, 2008, we entered into an agreement with Equity 11 to issue up to $5,000,000 in convertible preferred securities.  The securities accrue cumulative dividends at 5% per annum and the entire amount then outstanding is convertible at the option of the investor into shares of our common stock at $2.50 per share.  The preferred securities carry “as converted” voting rights.  As of December 1, 2010, we had issued 2,623 of these convertible preferred shares.  The shares were converted into 1,049,200 common shares on December 22, 2010. Each convertible preferred security sold under this agreement had warrants (100 warrants for each $1,000 convertible preferred share sold) attached to it.  The warrants are immediately exercisable, expire in five years, and entitle the investor to purchase one share of our common stock at $3.75 per share for each warrant issued.  On December 1, 2010, we issued 62 shares of convertible preferred stock in lieu of dividends. These shares were converted into 24,800 shares of common stock on December 22, 2010.
 
On May 15, 2009, we entered into an agreement with Equity 11 to issue convertible preferred securities at $1,000 per share. The securities accrue cumulative dividends at 5% per annum and the entire amount then outstanding is convertible at the option of the investor into shares of our common stock at a price equal to 20% of the average closing price of our common shares for the five trading days immediately preceding the date of issuance. The preferred securities carry “as converted” voting rights.  As of June 30, 2012, we had issued 872 of these convertible preferred securities. These shares were converted into 2,352,115 common shares on December 22, 2010.  Included in this converted shares figure were 200,000 common shares resulting from the issuance of 20 shares of convertible preferred stock on December 1, 2010 in lieu of cash dividends.  On June 1, 2011, we issued 10 shares of convertible preferred stock, Series B, in settlement of a partial dividend owing to Equity 11.  
 
On September 30, 2009, Ecology Coatings, Inc. and Stromback Acquisition Corporation  (SAC), entered into a Securities Purchase Agreement for the issuance and sale of our 5.0% Cumulative Convertible Preferred Shares, Series B at a purchase price of $1,000 per share.  SAC is owned by Richard Stromback, a former member of our Board of Directors.  Until April 1, 2010, SAC had the right to purchase up to 3,000 Convertible Preferred Shares.  The Convertible Preferred Shares have a liquidation preference of $1,000 per share.  SAC may convert the Convertible Preferred Shares into our common stock at a conversion price that is seventy seven percent (77%) of the average closing price of our common stock on the OTCQB marketplace for the five trading days prior to each investment.  The Convertible Preferred Shares will pay cumulative cash dividends at a rate of 5% per annum, subject to declaration by our Board of Directors, on December 1 and June 1 of each year.  We have agreed to provide piggyback registration rights for common stock converted by SAC under a Registration Rights Agreement.  One investment of $240,000 was made under this agreement, on October 1, 2009. Per the terms of the agreement and at Mr. Stromback’s direction, we paid $120,000 to him on that date in settlement of past payables owed to him directly or to RJS Ventures, LLC, a company controlled by him.  As of June 30, 2012, we had issued 271 of these Preferred Series B shares. These shares are convertible into 372,048 of our common shares.

In the event of a voluntary or involuntary dissolution, liquidation or winding up, SAC will be entitled to be paid a liquidation preference equal to the stated value of the convertible preferred shares ($1,000 per share), plus accrued and unpaid dividends and any other payments that may be due on such shares, before any distribution of assets may be made to holders of our common stock.

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

On March 1, 2011, we issued 650,000 shares of our common stock to Wilson Sonsini Goodrich & Rosati P.C., a law firm to whom we owed approximately $340,000. The firm accepted these shares, along with a cash payment, in full settlement of the amount owing.

On March 9, 2011 and March 11, 2011, respectively, we entered into agreements with Fairmount Five, LLC and John Bonner to sell a minimum of an aggregate of 2,520 of our 5.0% Cumulative Convertible Preferred Shares, Series C at a purchase price of $1,000 per share. The securities accrue cumulative dividends at 5% per annum and the entire amount then outstanding is convertible at the option of the investors into shares of our common stock at $.06 per share.  The preferred securities carry “as converted” voting rights. In the event of a voluntary or involuntary dissolution, liquidation or winding up, the holders of these shares will be entitled to be paid a liquidation preference equal to the stated value of the convertible preferred shares ($1,000 per share), plus accrued and unpaid dividends and any other payments that may be due on such shares, before any distribution of assets may be made to holders of our common stock. The initial closing of the sale of our Convertible Preferred Shares occurred on March 9, 2011. Fairmount Five acquired 1,045 Convertible Preferred Shares at an aggregate purchase price of $1,045,000. We retired promissory notes issued to members of Fairmount Five as part of this transaction – a promissory note in the amount of $100,000 and the accrued interest that we had previously issued on December 22, 2010 to James Juliano and a promissory note for $120,000 and the accrued interest that we had previously issued on February 14, 2011 to John M. (“Pete”) Salpietra.
 
 
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On April 12, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

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

On May 31, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.
 
On June 29, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On July 26, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On August 26, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On September 14, 2011, Fairmount Five converted 180 of our Convertible Preferred Shares, Series C, into 3,000,000 shares of our common stock.

On September 23, 2011, we sold 100 of our Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 of our common shares.

On September 28, 2011, Fairmount Five converted 30 of our Convertible Preferred Shares, Series C, into 500,000 shares of our common stock.

On October 6, 2011, John Bonner converted all of his shares of his Convertible Preferred Shares, Series C, into 2,024,284 shares of our common stock.

On October 24, 2011, we issued 100 Convertible Preferred Shares, Series C, to Fairmount Five for $100,000.  These shares are convertible into 1,666,667 shares of our common stock.

On November 3, 2011, we reached an agreement with Equity 11 and Nirta Enterprises to convert the outstanding principal and accrued interest of all notes owing to them into shares of our common stock at $.50 per share.  The principal totaled $56,832 and the accrued interest totaled $5,214.

On November 30, 2011, we sold 70 Convertible Preferred Shares, Series C, to Fairmount 5 for $70,000. These shares are convertible into 1,166,667 shares of our common stock.

 
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On December 2, 2011, we issued 25,000 of our common shares to Wilson Sonsini Goodrich & Rosati P.C. in exchange for the elimination of payments to this firm of royalties we might receive under our BASF license agreement and a reduction in certain patent fees in the future.

On December 14, 2011, we sold 40 Convertible Preferred Shares, Series C, to Fairmount 5 for $40,000. These shares are convertible into 666,667 shares of our common stock.

On December 22, 2011, we sold 60 Convertible Preferred Shares, Series C, to Fairmount 5 for $60,000. These shares are convertible into 1,000,000 shares of our common stock.

On January 11, 2012, we sold 30 Convertible Preferred Shares, Series C, to Fairmount 5 for $30,000. These shares are convertible into 500,000 shares of our common stock.

On January 27, 2012, we sold 50 Convertible Preferred Shares, Series C, to Fairmount 5 for $50,000. These shares are convertible into 833,334 shares of our common stock.

On February7, 2012, we sold 10 Convertible Preferred Shares, Series C, to Fairmount 5 for $10,000. These shares are convertible into 166,667 shares of our common stock.

On February 13, 2012, we sold 40 Convertible Preferred Shares, Series C, to Fairmount 5 for $40,000. These shares are convertible into 666,667 shares of our common stock.
 
On February 24, 2012, we sold 40 Convertible Preferred Shares, Series C, to Fairmount 5 for $40,000. These shares are convertible into 666,667 shares of our common stock.

On March 16, 2012, we sold 25 Convertible Preferred Shares, Series C, to Fairmount 5 for $25,000. These shares are convertible into 416,667 shares of our common stock.

On March 21, 2012, we sold 30 Convertible Preferred Shares, Series C, to Fairmount 5 for $30,000. These shares are convertible into 500,000 shares of our common stock.

On March 28, 2012, we sold 20 Convertible Preferred Shares, Series C, to Fairmount 5 for $20,000. These shares are convertible into 333,334 shares of our common stock.

On April 10, 2012, we sold 30 Convertible Preferred Shares, Series C, to Fairmount 5 for $30,000. These shares are convertible into 500,000 shares of our common stock.

On April 26, 2012, we sold 60 Convertible Preferred Shares, Series C, to Fairmount 5 for $60,000. These shares are convertible into 1,000,000 shares of our common stock.

On May 4, 2012, we sold 30 Convertible Preferred Shares, Series C, to Fairmount 5 for $30,000. These shares are convertible into 500,000 shares of our common stock.

On May 29, 2012, we sold 20 Convertible Preferred Shares, Series C, to Fairmount 5 for $20,000. These shares are convertible into 333,334 shares of our common stock.

On June 1, 2012, Fairmount Five converted the balance of its Convertible Preferred Shares, Series C, into 38,207,932 shares of our common stock.

 
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Note 7 — Stock Options
 
Stock Option Plan.   On May 9, 2007, we adopted a stock option plan and reserved 900,000 shares for the issuance of stock options or for awards of restricted stock. On December 2, 2008, our Board of Directors authorized the addition of 200,000 shares of our common stock to the 2007 Plan.  On February 7, 2011, our shareholders voted to add 4,400,000 shares of our common stock to the stock option plan. All prior grants of options were included under this plan.  The plan provides for incentive stock options, nonqualified stock options, rights to restricted stock and stock appreciation rights.  Eligible recipients are employees, directors, and consultants.  Only employees are eligible for incentive stock options.
 
The vesting terms are set by the Board of Directors. All options expire 10 years after issuance.
 
Below is a table with shows information about outstanding options as of June 30, 2012:

 
Weighted Average Exercise Price Per Share
Number of Options
Weighted Average (Remaining) Contractual Term
Outstanding as of September 30, 2011
$.79
5,351,180
9.3
Exercisable
$1.40
2,588,180
9.0
Granted
-
-
 
Exercised
-
-
 
Forfeited
$.20
1,300,000
8.5
Outstanding as of
June 30, 2012
 
$.98
 
4,051,180
 
8.5
Exercisable
$1.09
3,479,514
8.4

Outstanding options are subject to various vesting periods between June 26, 2007 and April 22, 2014.   The options expire on various dates between March 1, 2017 and April 22, 2021. Additionally, the options had no intrinsic value as of March 31, 2012 and September 30, 2011.  Intrinsic value arises when the exercise price is lower than the trading price on the date of grant.
 
In calculating the compensation related to employee/consultants and directors stock option grants, the fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model.  No options have been issued thus far in fiscal year 2012.   The following assumptions were used for options issued in for 2011:
 
2011
Dividend
None
Expected volatility
260%
Risk free interest rate
1.03%
Expected life
3 years
 
For options issued prior to June 2010, the expected volatility was derived utilizing the price history of another publicly traded nanotechnology company.  This company was selected as it is widely traded and is in the same equity sector as us. Beginning with options granted after June 2010, we began to use our stock to calculate the expected volatility. We made this change because we believe that the options granted in September 2010 will be exercised within three years, thus our trading history should be used.
 
The risk free interest rate figures shown above contain the range of such figures used in the Black-Scholes calculation.  The specific rate used was dependent upon the date of the option grant.
 
Based upon the above assumptions and the weighted average $0.79 exercise price, the options outstanding at June 30, 2012 had a total unrecognized compensation cost of $47,020 which will be recognized over the remaining weighted average vesting period of 1 year. Option costs of $196,121 were recorded as an expense for the nine months ended June 30, 2012, all of which was recorded as compensation expense.  
 
Note 8 – Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  For the nine months ended June 30, 2012 and 2011, we incurred net losses of $878,976 and $756,617, respectively.  As of June 30, 2012 and September 30, 2011, we had accumulated deficits of $1,449,831 and $2,993,817, respectively, and negative cash flows. These factors, and negative cash flows, raise substantial doubt about our ability to continue as a going concern.
 
 
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Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to obtain additional financing or refinancing as may be required, to develop commercially viable products and processes, and ultimately to establish profitable operations.  We have financed operations primarily through the issuance of equity securities and debt and through some limited operating revenues.  Until we are able to generate positive operating cash flows, additional funds will be required to support our operations.  We will need to acquire immediate additional funding by September 2012 to continue our operations.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Note 9 — Subsequent Events

We evaluated subsequent events for potential recognition and/or disclosure subsequent to the date of the balance sheet and have nothing to report.
 

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

Except for statements of historical fact, the information presented herein constitutes forward-looking statements. These forward-looking statements generally can be identified by phrases such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “foresees,” “intends,” “plans,” or other words of similar import.  Similarly, statements herein that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, but are not limited to, our ability to: successfully commercialize our technology; generate revenues and achieve profitability in an intensely competitive industry; compete in products and prices with substantially larger  and better capitalized competitors; secure, maintain and enforce a strong intellectual property portfolio; attract additional capital sufficient to finance our working capital requirements, as well as any investment of plant, property and equipment; develop a sales and marketing infrastructure; identify and maintain relationships with third party suppliers who can provide us a reliable source of raw materials; acquire, develop, or identify for our own use, a manufacturing capability; attract and retain talented individuals; continue operations during periods of uncertain general economic or market conditions, and; other events, factors and risks previously and from time to time disclosed in our filings with the Securities and Exchange Commission, including, specifically, the “Risk Factors” enumerated herein.
 
Although we believe the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on our forward-looking statements, which speak only as of the date of this report.  Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
 
“Ecology”, “we”, “us”, or “our” refer to Ecology Coatings, Inc. and its wholly-owned subsidiary, Ecology Coatings, Inc., a California corporation.
 
ITEM 1.   DESCRIPTION OF BUSINESS
 
Ecology Coatings, Inc. (“Ecology-CA”) was originally incorporated in California on March 12, 1990.  OCIS Corp. (“OCIS”) was incorporated in Nevada on February 6, 2002.  OCIS completed a merger with Ecology-CA on July 27, 2007 (the “Merger”).  In the Merger, OCIS issued approximately 6,106,137 shares of common stock to the Ecology-CA stockholders.  In this transaction, OCIS changed its name from OCIS Corporation to Ecology Coatings, Inc. and our ticker symbol on the OTC Bulletin Board association changed to “ECOC.”  As a result of the merger, we became a Nevada corporation and Ecology-CA became a wholly owned subsidiary.
 
Operating Results

Nine Months Ended June 30, 2012 and 2011
 
Revenues.  We generated $5,714 and $3,190 in revenues from product sales for the nine months ended June 30, 2012 and June 30, 2011, respectively. Revenues for the 2012 period came from three customers and revenues for the 2011 period came from one customer.
 
Salaries and Benefits.  The increase of approximately $4,000 in such expenses for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011 is the result of the increase in the salary of two officers effective May 15, 2011 and an increase in health care expense due to the addition of three new employees. This was partially offset by a reduction in the salaries of three officers effective January 1, 2012 and the resignation of our CEO in May 2012.
 
 
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Professional Fees.  The decrease of approximately $94,000 in these expenses for the nine months ended June 30, 2012 compared to the nine months ended nine 30, 2011 is due to a reduction in legal fees associated with the counsel provided to our Board of Directors regarding our recapitalization (in February 2011) as well as a reduction in accounting fees due to a change in independent auditors.
 
Other General and Administrative.  These expenses decreased by approximately $342,000 for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011. This was due primarily to the expensing of $445,000 in options granted to Sally Ramsey in the 2011 time period. This decrease was partially offset by salary and benefits paid to three employees who were hired in May 2011, one employee hired in October, 2011. One of these employees was terminated and another resigned in March 2012

Operating Losses.   The decreased operating loss of approximately $335,000 between the reporting periods is explained in the discussion above.

Income From Forgiveness of Payables and Debt. This income--$228,802-- for the nine months ended June 30, 2012 came from the conclusion of a settlement with one of our law firms with whom we have an ongoing working relationship as well as the settlement of a number of notes owed to related parties. The latter amounts were settled through the issuance of shares at a price of $.50 per share. Our stock was trading at $.06 per share at the time the shares were issued. This income for the nine months ended June 30, 2011 stems from settlements reached with certain debt holders and vendors during that time period as well as the write off of certain payables that will not be paid due to non-performance by the vendors. The amount - $872,861 - is the difference between what was owed prior to the settlement and the amounts of the settlements paid.

Interest Expense. The decrease of approximately $88,000 for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011 results from a decrease in average outstanding debt in the current period as well as the replacement of Mr. Shaheen’s notes payable by a judgment. Whereas the notes bore interest at 25% per annum, the judgment bears interest at approximately 1% per annum.
 
Income Tax Provision.  No provision for income tax benefit from net operating losses has been made for the nine months ended June 30, 2012 and 2011 as we have fully reserved the asset until realization is more likely than not.
 
Net Loss.   The increase in the net loss of approximately $132,000 for the nine months ended June 30, 2011 compared the nine months ended June 30, 2012 is explained in the foregoing discussions of the various expense categories as well as in the discussion of Income From Forgiveness of Payables and Debt.
 
Basic and Diluted Loss per Share. The change in basic and diluted net loss per share for the nine months ended June 30, 2012 reflects the change in net loss position discussed above as well as by the increase in weighted average shares outstanding during the six months ended June 30, 2012. The net loss was further increased by preferred dividend – beneficial conversion. This is because our newly issued convertible preferred shares can be converted to common shares at $0.06 per share. On June 30, 2012, the closing price of our common shares was $0.06 per share.

 Three Months Ended June 30, 2012 and 2011
 
Revenues.   We generated no revenue from product sales for the three months ended June 30, 2012 and June 30, 2011.
 
Salaries and Benefits.  The decrease of approximately $30,000 in such expenses for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 is the result of the decrease in the salary of three of our officers effective January, 1, 2012 and the resignation of our CEO on May 15, 2012. These savings were partially offset by an increase in health care expense due to the addition of three new employees in May of 2011.
 
Professional Fees.  The decrease of approximately $30,000 in these expenses for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 is due to reduced accounting fees and reduced investor relations fees.

 
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Other General and Administrative.  These expenses increased by approximately $469,000 for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 due primarily to the expensing of $445,000 in options granted to Sally Ramsey in the 2011 time period. This decrease was partially offset by salary and benefits paid to three employees who were hired in May 2011. One of these employees was terminated and another resigned in March 2012.

Operating Losses.   The reduction in operating loss of approximately $528,000 between the reporting periods is explained in the discussion above.

Interest Expense. The decrease of approximately $29,000 for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 results from a decrease in average outstanding debt in the current period as well as the replacement of certain notes payable by a judgment. Whereas the notes bore interest at 25% per annum, the judgment bears interest at approximately 1% per annum.
 
Income Tax Provision.  No provision for income tax benefit from net operating losses has been made for the three months ended June 30, 2012 and 2011 as we have fully reserved the asset until realization is more likely than not.
 
Net Loss.   The reduction in net loss of approximately $557,000 for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 is explained in the foregoing discussions of the various expense categories.
 
Basic and Diluted Loss per Share. The change in basic and diluted net loss per share for the three months ended June 30, 2012 reflects the change in net loss position discussed above as well as by the increase in weighted average shares outstanding during the three months ended June 30, 2012. The net loss was further increased by preferred dividend – beneficial conversion. This is because our newly issued convertible preferred shares can be converted to common shares at $0.06 per share. On June 30, 2012, the closing price of our common shares was $0.06 per share.
 
Liquidity and Capital Resources

Cash as of June 30, 2012 and September 30, 2011 totaled $62,875 and $71,784, respectively.  The decrease reflects cash used in operations of $820,956 and cash used to purchase fixed and intangible assets of $19,546.  This usage was offset by the issuance of $665,000 in convertible preferred stock and the issuance of $176,593 in debt.  

We are a company that has failed to generate significant revenues as yet and have incurred an accumulated deficit of $30,119,862.  Approximately $18,380,000 of this amount is due to non-cash items, including options expense, the issuance of warrants, preferred stock dividends paid with preferred stock, beneficial conversion provisions associated with issuances of preferred stock and certain debt, and stock issued to pay for services, payables, and debt extensions.  We have incurred losses primarily as a result of general and administrative expenses, salaries and benefits, professional fees, and interest expense.  Since our inception, we have generated very little revenue.  We have received an unqualified audit report from our independent auditors that includes an explanatory paragraph describing their substantial doubt about our ability to continue as a going concern.

We expect to continue using substantial amounts of cash to: (i) develop and protect our intellectual property, (ii) further develop and commercialize our products, and (iii) fund ongoing salaries, professional fees, and general administrative expenses.  Our cash requirements may vary materially from those now planned depending on numerous factors, including the status of our marketing efforts, our business development activities, the results of future research and development, competition and our ability to generate revenue.
  
As of June 30, 2012, we were in default on approximately $243,500 in principal of short term debt, plus $60,728 in accrued interest.  In addition, on December 30, 2011, Mr. Shaheen’s motion for summary judgment was granted and a judgment in the amount of $604,330 was entered against us in the Shaheen v. Ecology Coatings, Inc. litigation.

 
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Historically, we have financed our operations primarily through the issuance of debt and the sale of equity securities.  On February 28, 2011, we entered into agreements with Fairmount Five ($2,400,000) and John Bonner ($120,000) to sell them our Convertible Preferred Shares, Series C.  As of June 1, 2012, we have sold $2,520,000 of such Series C shares.  As of August 1, 2012, we had not secured any commitments for additional financing.

Our past capital raising activities have not been sufficient to fund our working capital, operational and debt requirements and we will need to raise immediate additional funds by September 2012 through private or public financings to continue our operations. Such financing could include equity financing, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to make acquisitions and borrow from other sources.  If we are unable to raise additional capital by that date, we may be forced to curtail our operations or seek bankruptcy protection.

Off-Balance Sheet Arrangements
 
See Note 5 – Commitments and Contingencies - to the Consolidated Financial Statements in this Form 10-Q.
  
Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles. Preparation of the statements in accordance with these principles requires that we make estimates, using available data and our judgment, for such things as valuing assets, accruing liabilities and estimating expenses. The following is a discussion of what we feel are the most critical estimates that we must make when preparing our financial statements.  
 
Revenue Recognition.  Revenues from product sales are recognized on the date that the product is shipped. Revenues from licensing contracts are recorded ratably over the life of the contract. Contingency earnings such as royalty fees are recorded when the amount can reasonably be determined and collection is likely.
 
Income from forgiveness of payables and debt.   Income from the forgiveness of payables and debt is recognized when all of the conditions associated with the forgiveness have been met.

Income Taxes and Deferred Income Taxes.   We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income taxes are provided for temporary differences in the bases of assets and liabilities as reported for financial statement purposes and income tax purposes and for the future use of net operating losses. We have recorded a valuation allowance against our net deferred income tax asset. The valuation allowance reduces deferred income tax assets to an amount that represents management’s best estimate of the amount of such deferred income tax assets that more likely than not will be realized.
 
Property and Equipment.   Property and equipment is stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the following useful lives:

Computer equipment
3-10 years
Furniture and fixtures
3-7 years
Test equipment
5-7 years
Signs
7 years
Software
3 years
Marketing and promotional video
3 years
 
Repairs and maintenance costs are charged to operations as incurred. Betterments or renewals are capitalized as incurred.
 
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset with future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
 
 
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Patents.  It is our policy to capitalize costs associated with securing a patent. Costs consist of legal and filing fees. Once a patent is issued, it is amortized on a straight-line basis over its estimated useful life. For purposes of the preparation of the audited, consolidated financial statements, we have recorded amortization expense associated with the patents based on an eight-year useful life.
 
Stock-Based Compensation.  We have a stock incentive plan that provides for the issuance of stock options, restricted stock and other awards to employees and service providers.   Employee and director stock-based compensation expense is measured utilizing the fair-value method with stock-based compensation expense being charged to earnings on the earlier of the date services are performed or a performance commitment exists. Our valuation method uses a Black-Scholes option pricing model. In so doing, we estimate certain key assumptions used in the model.
  
Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) or Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act:”) as of the end of the period covered by this report.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.  Our Chief Executive Officer and Chief Financial Officer have reached this conclusion due to the lack of segregation of duties in financial reporting as a result of the small size of our financial staff.
 
Changes in Internal Control Over Financial Reporting

During the three months ended June 30, 2012, we did not make any changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On September 2, 2010, Mitchell Shaheen filed suit against us in the U.S. District Court for the Eastern District of Michigan for amounts owed under promissory notes issued to him in the principal amount of $250,000 and interest at the rate of 25%.  On December 30, 2011, Mr. Shaheen’s motion for summary judgment was granted and a judgment in the amount of $604,330 was entered against us.  We have not appealed the judgment and are engaging in discussions with Mr. Shaheen to satisfy the judgment.
 
23

 
ITEM 1A. RISK FACTORS

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

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

We are a company that has failed to generate significant revenue.  We had an accumulated deficit of $30,119,862 as of June 30, 2012. Approximately $18,380,000 of this amount was due to non-cash items, including options expense, the issuance of warrants, beneficial conversion provisions associated with issuance of preferred stock and certain debt, preferred stock dividends, and stock issued to pay for services, payables, and debt extensions.  We have a limited operating history upon which investors may rely to evaluate our prospects.  Such prospects must be considered in light of the problems, expenses, delays and complications associated with a business that seeks to generate more significant revenue.  We have generated nominal revenue to date and have incurred significant operating losses.  Our operating losses have resulted principally from costs incurred in connection with our capital raising efforts and becoming a public company through a merger, promotion of our products, and from salaries and general and administrative costs.  We have maintained minimal cash reserves since October 2008 and have relied primarily on additional investment from Fairmount Five, LLC (“Fairmount Five”), Equity 11, Ltd. (“Equity 11”), Stromback Acquisition Corporation (“SAC”) and John Bonner as well as small amounts of debt.  The Equity 11 and SAC investment agreements are no longer effective. We had an agreement in place with Fairmount Five, LLC (“Fairmount Five”) for investment of $2,400,000 which Fairmount Five has fulfilled. We will need to raise immediate additional capital by September 2012 to continue to fund our operations.  If we are unable to raise additional capital by September 2012, we will be forced to curtail our operations or seek bankruptcy protection.
 
We have entered the emerging business of cleantech coatings, which carries significant developmental and commercial risk
 
We have expended in excess of $1,500,000 to develop our EcoBloc™ enabled and other products.  Assuming we can raise additional funds, we expect to continue expending significant sums in pursuit of further development of our technology. Such research and development involves a high degree of risk as to whether a commercially viable product will result.

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

Our auditors have expressed a going concern opinion

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

 
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We need immediate additional financing by September 2012 to continue our operations.

As of June 30, 2012, we were in default on approximately $243,500 in principal of short term debt, plus $60,728 in accrued interest.  In addition, on December 30, 2011, Mr. Shaheen’s motion for summary judgment was granted and a judgment in the amount of $604,330 was entered against us in the Shaheen v. Ecology Coatings, Inc. litigation.  Our past capital raising activities have not been sufficient to fund our working capital, operational and debt requirements and we will need to raise additional funds by September 2012 through private or public financings to continue our operations. Such financing could include equity financing, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to make acquisitions and borrow from other sources.

During our last fiscal year ended September 30, 2011, we relied on the sale of convertible preferred securities and the issuance of debt to fund our operations.  We raised $140,000 from the sale of Convertible Preferred Series C shares and $170,000 through the issuance of notes to two of our shareholder during the quarter ended June 30, 2012.   Fairmount Five has fulfilled its funding commitment to us and we have not yet secured additional funding commitments.  If we are unable to raise additional capital by September 2012, we will be forced to curtail our operations or seek bankruptcy protection.

We are dependent on key personnel

Our success will be largely dependent upon the efforts of our executive officers.  The loss of the services of our executive officers could have a material adverse effect on our business and prospects.  We cannot be certain that we will be able to retain the services of such individuals in the future.  Our research and development efforts are dependent upon a single executive, Sally Ramsey, with whom we have entered into an employment agreement which will expire on December 31, 2014.   Our success will be dependent upon our ability to hire and retain qualified technical, research, management, sales, marketing, operations, and financial personnel.  We compete with other companies with greater financial and other resources for such personnel.  Although we have not to date experienced difficulty in attracting qualified personnel, we cannot be certain that we will be able to retain our present personnel or acquire additional qualified personnel as and when needed.  

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

We rely on computer systems to support our financial reporting capabilities and other operations. As with any computer systems, unforeseen issues may arise that could affect our ability to receive adequate, accurate and timely financial information, which in turn could inhibit effective and timely decisions. Furthermore, it is possible that our information systems could experience a complete or partial shutdown. If such a shutdown occurred, it could impact our ability to report our financial results in a timely manner or to otherwise operate our business. 

We are operating in both mature and developing markets and there is a risk that we may not achieve acceptance of our technology and products in these markets
 
We researched the markets for our products using our own personnel rather than third parties.  We have conducted limited test marketing and, thus, have relatively little information on which to estimate our levels of sales, the amount of revenue our planned operations will generate and our operating and other expenses.  We cannot be certain that we will be successful in our efforts to market our products or to develop our markets in the manner we contemplate.
 
Certain markets, such as electronics and specialty packaging, are developing and rapidly evolving and are characterized by an increasing number of market entrants who have developed or are developing a wide variety of products and technologies, a number of which offer certain of the features that our products offer.  Because of these factors, demand and market acceptance for new products may be difficult.  In mature markets, such as automotive or general industrial, we may encounter resistance by our potential customers in changing to our technology because of the capital investments they have made in their present production or manufacturing facilities.  Thus, we cannot be certain that our technology and products will become widely accepted. We do not know our future growth rate, if any, and size of these markets. If a substantial market fails to develop, develops more slowly than expected, becomes saturated with competitors or if our products do not achieve market acceptance, our business, operating results and financial condition will be materially adversely affected.
 
 
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Our technology is also intended to be marketed and licensed to component or device manufacturers for inclusion in the products they market and sell as an embedded solution.  As with other new products and technologies designed to enhance or replace existing products or technologies or change product designs, these potential partners may be reluctant to adopt our coating solution into their production or manufacturing facilities unless our technology and products are proven to be both reliable and available at a competitive price and the cost-benefit analysis is favorable to the particular industry.  Even assuming acceptance of our technology, our potential customers may be required to redesign their production or manufacturing facilities to effectively use our  coatings.  The time and costs necessary for such redesign could delay or prevent market acceptance of our technology and products.  A lack of, or delay in, market acceptance of our products would adversely affect our operations.  We do not know if we will be able to market our technology and products successfully or that any of our technology or products will be accepted in the marketplace.
 
We expect that our products will have a long sales cycle
 
The sale of our coatings and the license of our technology will be subject to budget constraints and resistance to change with respect to long-established production techniques and processes, which could result in a significant reduction or delay in our anticipated revenues.  We cannot assure investors that such customers will have the necessary funds to purchase our technology and products even though they may want to do so.  Further, even if such customers have the necessary funds, we may experience delays and relatively long sales cycles due to their internal-decision making policies and procedures and resistance to change.
 
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.  Subject to our obtaining additional funding, we intend to devote significant resources toward the development of our solutions.  We are not certain that we will successfully complete the development of these technologies and related products in a timely fashion or that our current or future products will satisfy the needs of the coatings market.   We do not know if technologies developed by others will adversely affect our competitive position or render our products or technologies non-competitive or obsolete.
 
There is a significant amount of competition in our market
 
The industrial coatings market is extremely competitive.  Our competitors include Akzo Nobel, PPG, Sherwin-Williams and Valspar, BASF, Allied Photochemical, Rad-Cure (Altana Chemie), Red Spot (Fujikura), R&D Coatings, Northwest (Ashland), DSM Desotech, and Prime.  Competitive factors our products face include ease of use, quality, portability, versatility, reliability, accuracy, cost, switching costs and other factors.  Our primary competitors include companies with substantially greater financial, technological, marketing, personnel and research and development resources than we currently have.  There are direct competitors who have competitive technology and products for many of our products.  New companies will likely enter our markets in the future.  Although we believe that our products are distinguishable from those of our competitors on the basis of their technological features and functionality at an attractive value proposition, we may not be able to penetrate any of our anticipated competitors’ portions of the market.  Many of our anticipated competitors have existing relationships with manufacturers that may impede our ability to market our technology to potential customers and build market share.  We do not know that we will be able to compete successfully against currently anticipated or future competitors or that competitive pressures will not have a material adverse effect on our business, operating results and financial condition.
 
We have very limited marketing capability
 
We have very limited marketing capabilities and resources.   We will have to undertake significant efforts and expenditures to create awareness of, and demand for, our technology and products.  Our ability to penetrate the market and build our customer base will be substantially dependent on our marketing efforts, including our ability to establish strategic marketing arrangements with OEMs and suppliers.  We cannot be certain that we will be able to enter into any such arrangements or if entered into that they will be successful.  Our failure to successfully develop our marketing capabilities, both internally and through third-party alliances, would have a material adverse effect on our business, operating results and financial condition.  Even if developed, such marketing capabilities may not lead to sales of our technologies and products.
 
 
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We have limited manufacturing capacity
 
We have limited manufacturing capacity for our products.  In order to execute our contemplated direct sales strategy, we will need to either: (i) acquire existing manufacturing capacity; (ii) develop a manufacturing capacity “in-house”; and/or (iii) identify suitable third parties with whom we can contract for the manufacture of our products.  To either acquire existing manufacturing capacity or to develop such capacity, significant capital or outsourcing will be required.   We may not be able to raise the necessary capital to acquire existing manufacturing capacity or to develop such capacity.  We cannot be certain that such arrangements, if consummated, would be suitable to meet our needs.
 
We are dependent on manufacturers and suppliers
 
We purchase, and intend to continue to purchase, all of the raw materials for our products from a limited number of manufacturers and suppliers.
 
We do not intend to directly manufacture any of the chemicals or other raw materials used in our products.  Our reliance on outside manufacturers and suppliers is expected to continue and involves several risks, including limited control over the availability of raw materials, delivery schedules, pricing and product quality.  We may experience delays, additional expenses and lost sales if we are required to locate and qualify alternative manufacturers and suppliers.
 
A few of the raw materials for our products are produced by a small number of specialized manufacturers.  While we believe that there are alternative sources of supply, if, for any reason, we are precluded from obtaining such materials from such manufacturers, we may experience long delays in product delivery due to the difficulty and complexity involved in producing the required materials and we may also be required to pay higher costs for our materials.
 
We are uncertain of our ability to protect our technology through patents
 
Our ability to compete effectively will depend on our success in protecting our proprietary coatings, both in the United States and abroad.  We have filed for patent protection in the United States and certain other countries to cover a number of aspects of our coatings.  The U.S. Patent Office (“USPTO”) has issued seven patents to us.  
 
We do not know if any additional patents relating to our existing technology will be issued from the United States or any foreign patent offices, that we will receive any additional patents in the future based on our continued development of our technology, or that our patent protection within and/or outside of the United States will be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing our technologies.
 
We do not know if any of our current or future patents will be enforceable to prevent others from developing and marketing competitive products or methods.  If we bring an infringement action relating to any of our patents, it may require the diversion of substantial funds from our operations and may require management to expend efforts that might otherwise be devoted to our operations.  Furthermore, we may not be successful in enforcing our patent rights.
 
Further, patent infringement claims in the United States or in other countries will likely be asserted against us by competitors or others, and if asserted, we may not be successful in defending against such claims.  If one of our products is adjudged to infringe patents of others with the likely consequence of a damage award, we may be enjoined from using and selling such product or be required to obtain a royalty-bearing license, if available on acceptable terms.  Alternatively, in the event a license is not offered, we might be required, if possible, to redesign those aspects of the product held to infringe so as to avoid infringement liability.  Any redesign efforts undertaken by us might be expensive, could delay the introduction or the re-introduction of our products into certain markets, or may be so significant as to be impractical.
 
 
27

 
We are uncertain of our ability to protect our proprietary technology and information
 
In addition to seeking patent protection, we rely on trade secrets, know-how and continuing technological advancement in special formulations to achieve and thereafter maintain a competitive advantage.  Although we have entered into confidentiality and employment agreements with employees, consultants, certain potential customers and advisors, we cannot be certain that such agreements will be honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how.  Moreover, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.
 
Risks related to our license arrangements
 
We have licensing agreements with three competitors - BASF, DuPont and Red Spot - regarding their use of our technology for specific formulations for designated applications.  The DuPont license, signed in 2004, and the Red Spot license, signed in 2005, have not generated any ongoing royalty payments thus far and are unlikely to do so in the future.  The BASF license, signed in 2011, is dependent on BASF marketing products with our coatings and has not yet generated any royalties.
 
We may be precluded from registering our trademark registrations in other countries
 
We have received approval of “EcoQuick”, “EZ Recoat™”, “Liquid Nanotechnology™”, “Ecology Coatings™” as trademarks in connection with our proposed business and marketing activities in the United States.  Although we intend to pursue the registration of our marks in the United States and other countries, prior registrations and/or uses of one or more of such marks, or a confusingly similar mark, may exist in one or more of such countries, in which case we might be precluded from registering and/or using such mark in certain countries.
 
There are economic and general risks relating to our business
 
The success of our activities is subject to risks inherent in business generally, including demand for products and services; general economic conditions; changes in taxes and tax laws; and changes in governmental regulations and policies.  For example, difficulties in obtaining credit and financing and the slowdown in the U.S. automotive industry have made it more difficult to market our technology to that industry.
  
Our stock price has been volatile and the future market price for our common stock is likely to continue to be volatile. Further, the limited market for our shares may make it difficult for our investors to sell our common stock for a positive return on investment
 
The public market for our common stock has historically been very volatile. During the quarter ended June 30, 2012, our low and high market prices of the closing prices of our common stock were $0.06 per share (June 29, 2012) and $.15 per share (May 1, 2012).  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 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.
 
 
28

 
Control by key stockholders
 
As of June 30, 2012, Fairmount Five, Richard D. Stromback, Douglas Stromback, Deanna Stromback, Sally J.W. Ramsey, Fairmount Five and Equity 11 held shares representing approximately 89% of our outstanding shares.  In addition, pursuant to the investment agreement we entered into with Fairmount Five, Fairmount Five has the right to appoint two of the seven members of our Board of Directors.  Additionally, Fairmount Five has the right to appoint our Chief Executive Officer.  The stock ownership and governance rights of such parties constitute effective voting control over all matters requiring stockholder approval.  These voting and other control rights mean that our other stockholders will have only limited rights to participate in our management.  The rights of our controlling stockholders may also have the effect of delaying or preventing a change in our control and may otherwise decrease the value of the shares and voting securities owned by other stockholders.

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

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

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

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

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

To date, we have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future.  We intend to retain future earnings, if any, to provide funds for the operation of our business.  Our investment agreement with Fairmount Five prevents the payment of any dividends to our common stockholders without the prior approval of Fairmount Five.  Dividends for the Preferred Series A, Preferred Series B and Preferred Series C shares held by Equity 11, SAC, Fairmount Five and John Bonner have not been paid in cash.  Thus far, the dividends have been paid through the issuance of additional preferred shares.

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

As of June 30, 2012, we had outstanding options to purchase 4,051,180 shares of our common stock under our 2007 Stock Option and Restricted Stock Plan (the “2007 Plan).  As of June 30, 2012, we had outstanding warrants to purchase 820,580 shares of our common stock. As of June 30, 2012, SAC purchased Preferred Series B shares and has been issued additional Preferred Series B shares as dividends that are convertible into 372,048 common shares.  On June 1, 2012, Fairmount Five notified us that it has elected to convert the balance of its Preferred Series C shares into 38,207,932 of our common shares.  
 
 
29

 
In addition, at our 2011 annual shareholder meeting, our shareholders approved a 1-for-5 reverse stock split which reduced by a factor of five the number of shares held by each of our shareholders.  The reverse stock split was a condition of our obtaining additional investment from Fairmount Five.  Any future investment we obtain will likely dilute the ownership interests of our existing shareholders.

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

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

Our Articles of Incorporation authorize the issuance of 90,000,000 shares of common stock and 10,000,000 shares of preferred stock.  The issuance of common stock and preferred stock can be authorized by our Board of Directors without stockholder approval which will dilute the ownership interests of our stockholders.  Such dilution is likely since we need to secure additional funds by September 2012 to continue operations.

Indemnification of officers and directors

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

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

Short Selling may drive the price of our stock down

Our common stock is “thinly” traded as it has very low daily trading volume.  On some trading days during the quarter ended June 30, 2012, no shares of our stock were sold.  

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

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

We did not repurchase any of our securities during the three months ended June 30, 2012.  Sales of unregistered securities have been previously reported on Form 8-Ks filed with the Commission.  See also Note 6 – Equity – to our financial statements for a discussion of unregistered securities sold to Fairmount Five.

 
30

 
Item 3. Defaults Upon Senior Securities

As of June 30, 2012, we were in default in the payment of principal and interest on the following promissory notes:

Note Holder
Issue Date(s)
Amount Owing on June 30, 2012
     
Richard Stromback
December 31, 2003
$2,584
     
Douglas Stromback
August 10, 2004
$166,173
     
Deanna Stromback
December 15, 2003
$138,055
     
     

Item 4. Mine Safety Disclosures

None.
 
Item 5. Other Information

None.
  
Item 6. Exhibits

Exhibit
Number
Description
2.1
Agreement and Plan of Merger entered into effective as of April 30, 2007, by and among OCIS Corp., a Nevada corporation, OCIS-EC, INC., a Nevada corporation and a wholly-owned subsidiary of OCIS, Jeff W. Holmes, R. Kirk Blosch and Brent W. Schlesinger and ECOLOGY COATINGS, INC., a California corporation, and Richard D. Stromback, Deanna Stromback and Douglas Stromback. (2)
   
3.1
Amended and Restated Articles of Incorporation of Ecology Coatings, Inc., a Nevada corporation.(2)
   
3.2
By-laws. (1)
   
4.1
Form of Common Stock Certificate. (2)
   
31.1
Certification of Principal Executive Officer of Ecology Coatings, Inc. Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a).
   
31.2
Certification of Principal Financial Officer of Ecology Coatings, Inc. Pursuant to Securities and Exchange Commission Rule 13a-14(a) / 15d-14(a).
   
32.1
Joint Certification of Principal Executive Officer and Principal Financial Officer of Ecology Coatings, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101*
The following financial information from the Ecology Coatings, Inc. Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) CONSOLIDATED BALANCE SHEETS – ASSETS; (ii) CONSOLIDATED BALANCE SHEETS – LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT); (iii) CONSOLIDATED STATEMENTS OF OPERATIONS; (iv) STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT); (v) CONSOLIDATED STATEMENTS OF CASH FLOWS; and (vi) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
 
*            Filed herewith.
**  Management contract or compensatory plan or arrangement.

 (1) Incorporated by reference from OCIS’ registration statement on Form SB-2 originally filed with the SEC on September 28, 2002 and amended on September 20, 2002, November 7, 2002 and March 27, 2003.
 
(2) Incorporated by reference from our Form 8-K filed with the SEC on July 30, 2007.
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date:
 August 14, 2012
 
ECOLOGY COATINGS, INC.
     
(Registrant)
       
     
By: /s/ James Juliano
     
James Juliano
     
Its:  Chief Executive Officer
     
 (Authorized Officer)
       
     
By: /s/ Kevin Stolz
     
Kevin Stolz
     
Its:  Chief Financial Officer
     
(Principal Financial Officer and Principal Accounting Officer)


 
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PINX:ECOC Quarterly Report 10-Q Filling

PINX:ECOC Stock - Get Quarterly Report SEC Filing of PINX:ECOC stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

PINX:ECOC Quarterly Report 10-Q Filing - 8/13/2012
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