Washington, D.C. 20549
ECOLOGY COATINGS, INC.
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.
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).
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.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares of common stock of the issuer outstanding as of August 17, 2009 was 32,233,600.
ITEM 3A. 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 Rules 13a-15e promulgated under the Exchange Act as of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report to provide reasonable assurance that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Management is aware that there is a lack of segregation of certain duties at the Company due to the small number of employees with responsibility for general administrative and financial matters. This constitutes a deficiency in financial reporting. However, at this time, management has decided that considering the employees involved and the control procedures in place, the risks associated with such lack of segregation of duties are insignificant and the potential benefits of adding additional employees to clearly segregate duties do not justify the additional expenses associated with such increases. Management will periodically reevaluate this situation. If the volume of business increases and sufficient capital is secured, it is the Company’s intention to further increase staffing to mitigate the current lack of segregation of duties within the general, administrative and financial functions.
Management’s Report on Internal Control over Financial Reporting
Management assessed our internal control over financial reporting as of June30, 2009. Management based its assessment on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this assessment, management has concluded that as of June 30, 2009, our internal control over financial reporting was ineffective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. We noted that we failed to disclose the impact on earnings per common share of the beneficial conversion feature associated with the issuance of our convertible preferred shares, which are effectively a preferred dividend to preferred shareholders. We therefore conclude that our disclosure controls over financial reporting were ineffective as of and for the three months ended June 30, 2009. To address this weakness, we are considering forming a disclosure committee to be included as part of our internal controls over financial reporting.
Changes in Internal Controls
Management has evaluated the effectiveness of the disclosure controls and procedures as of June 30, 2008. Based on such evaluation, management has concluded that the disclosure controls and procedures were effective for their intended purpose described above. There were no changes to the internal controls during the quarter ended June 30, 2008 that have materially affected or that are reasonably likely to affect the internal controls.
Limitation on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Such limitations include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures, such as simple errors or mistakes or intentional circumvention of the established process.
Item 1. Financial Statements
| ECOLOGY COATINGS, INC. AND SUBSIDIARY |
| Consolidated Balance Sheets |
| |
| ASSETS |
| | | |
| | June 30, 2009 | September 30, 2008 |
| | (Unaudited) | |
| | | |
| Current Assets | | |
| Cash and cash equivalents | $4,257 | $974,276 |
| Prepaid expenses | 1,400 | 25,206 |
| | | |
| Total Current Assets | 5,657 | 999,482 |
| | | |
| Property and Equipment | | |
| Computer equipment | 30,111 | 22,933 |
| Furniture and fixtures | 21,027 | 18,833 |
| Test equipment | 9,696 | 7,313 |
| Signs | 213 | 213 |
| Software | 6,057 | 1,332 |
| Video | 48,177 | 48,177 |
| Total property and equipment | 115,281 | 98,801 |
| Less: Accumulated depreciation | (42,034) | (22,634) |
| | | |
| Property and Equipment, net | 73,247 | 76,167 |
| | | |
| Other Assets | | |
| Patents-net | 437,554 | 421,214 |
| Trademarks-net | 5,771 | 5,029 |
| | | |
| Total Other Assets | 443,325 | 426,243 |
| | | |
| Total Assets | $522,229 | $1,501,892 |
See the accompanying notes to the unaudited consolidated financial statements.
| ECOLOGY COATINGS, INC. AND SUBSIDIARY |
| Consolidated Balance Sheets |
| | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT |
| | June 30, 2009 | September 30, 2008 |
| | (Unaudited) | |
| Current Liabilities | | |
| Accounts payable | $1,398,823 | $1,359,328 |
| Credit card payable | 114,621 | 92,305 |
| Accrued Liabilities | 4,202 | 12,033 |
| Franchise tax payable | - | 800 |
| Interest payable | 142,380 | 133,332 |
| Convertible notes payable | 582,301 | 894,104 |
| Notes payable - related party | 243,500 | 243,500 |
| Preferred Dividends Payable | 12,258 | 6,300 |
| Total Current Liabilities | 2,498,085 | 2,741,702 |
| | | |
| Total Liabilities | 2,498,085 | 2,741,702 |
| | | |
| Commitments and Contingencies (Note 5) | - | - |
| | | |
| Stockholders' Deficit | | |
| Preferred Stock - 10,000,000 $.001 par value shares authorized | 2 | 2 |
| 2,800 and 2,010 shares issued and outstanding | | |
| as of June 30, 2009 and September 30, 2008, respectively | | |
| Common Stock - 90,000,000 $.001 par value shares | | |
| authorized; 32,233,600 | | |
| outstanding as of June 30, 2009 and | | |
| September 30, 2008 | 32,234 | 32,234 |
| Additional paid in capital | 19,035,348 | 13,637,160 |
| Accumulated Deficit | (21,043,440) | (14,909,206) |
| | | |
| Total Stockholders' Deficit | (1,975,856) | (1,239,810) |
| | | |
| | | |
| Total Liabilities and Stockholders' Deficit | $522,229 | $1,501,892 |
See the accompanying notes to the unaudited consolidated financial statements.
| ECOLOGY COATINGS, INC. AND SUBSIDIARY |
Consolidated Statements of Operations (Unaudited) |
| | | | | |
| | For the three months ended | For the three months ended | For the nine months ended | For the nine months ended |
| | June 30, 2009 | June 30, 2008 | June 30, 2009 | June 30, 2008 |
| | | | | |
| | | | | |
| Revenues | $- | $4,050 | $- | $24,884 |
| | | | | |
| Salaries and Fringe Benefits | 301,700 | 444,920 | 1,105,546 | 1,519,705 |
| Professional Fees | 322,032 | 758,691 | 2,806,104 | 2,245,674 |
| Other general and administrative costs | 63,967 | 111,533 | 239,953 | 556,493 |
| Total General and Administrative Expenses | 687,699 | 1,315,144 | 4,151,603 | 4,321,872 |
| | | | | |
| Operating Loss | (687,699) | (1,311,094) | (4,151,603) | (4,296,988) |
| | | | | |
| Other Income (Expense) | | | | |
| Interest Income | - | 11 | 142 | 5,671 |
| Interest Expense | (49,435) | (966,248) | (222,115) | (1,261,115) |
| Total Other Expenses - net | (49,435) | (966,237) | (221,973) | (1,255,444) |
| | | | | |
| Net Loss | $(737,134) | $(2,227,331) | $(4,373,576) | $(5,552,432) |
| | | | | |
| Preferred Dividends—Beneficial Conversion | | | | |
| Feature | (1,518,068) | - | (1,675,792) | - |
| Preferred Dividends—Stock Dividends | - | - | (109,408) | (6,300) |
| | | | | |
| Net Loss available to common shareholders | $(2,255,202) | $(2,227,331) | $(6,158,776) | $(5,558,732) |
| | | | | |
| Basic and diluted net loss per share | $(0.07) | $(0.07) | $(0.19) | $(0.17) |
| | | | | |
| Basic and diluted weighted average | | | | |
| common shares outstanding | 32,233,600 | 32,210,684 | 32,233,600 | 32,182,874 |
See the accompanying notes to the unaudited consolidated financial statements.
ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
| | For the | For the |
| | nine months ended | nine months ended |
| | June 30, 2009 | June 30, 2008 |
| | | |
| OPERATING ACTIVITIES | | |
| Net loss | $(4,373,576) | $(5,552,432) |
| Adjustments to reconcile net loss | | |
| to net cash used in operating activities: | | |
| Depreciation and amortization | 33,725 | 25,971 |
| Option expense | 2,866,914 | 1,610,456 |
| Warrant expense | 63,512 | 841,887 |
| Beneficial conversion expense | 2,062 | 301,517 |
| Issuance of stock for extension fee | - | 162,000 |
| Changes in Asset and Liabilities | | |
| Miscellaneous receivable | - | 1,118 |
| Prepaid expenses | 23,806 | 41,688 |
| Accounts payable | 39,495 | 684,429 |
| Accrued payroll taxes and wages | - | (13,960) |
| Accrued liabilities | (7,832) | - |
| Credit card payable | 22,317 | 81,998 |
| Franchise tax payable | (800) | - |
| Interest payable | 9,048 | 93,107 |
| Deferred revenue | - | (24,884) |
| Net Cash Used In Operating Activities | (1,321,329) | (1,747,105) |
| | | |
| INVESTING ACTIVITIES | | |
| Purchase of fixed assets | (16,480) | (49,345) |
| Purchase of intangibles | (31,409) | (92,546) |
| Net Cash Used in Investing Activities | (47,889) | (141,891) |
| | | |
| FINANCING ACTIVITIES | | |
| Repayment of debt | (372,801) | (91,998) |
| Proceeds from debt | 61,000 | - |
| Proceeds from convertible preferred shares | 711,000 | 1,200,000 |
| Net Cash Provided By Financing Activities | 399,199 | 1,108,002 |
| | | |
| Net Change in Cash and Cash Equivalents | (970,019) | (780,994) |
| | | |
| CASH AND CASH EQUIVALENTS AT BEGINNING | | |
| OF PERIOD | 974,276 | 808,163 |
| CASH AND CASH EQUIVALENTS AT END | | |
| OF PERIOD | $4,257 | $27,169 |
See the accompanying notes to the unaudited consolidated financial statements.
ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
| | | |
| | For the | For the |
| | nine months ended | nine months ended |
| | June 30, 2009 | June 30, 2008 |
| | | |
| | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW | | |
| INFORMATION | | |
| Interest paid | $132,000 | $24,614 |
| | | |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH | | |
| FINANCING ACTIVITIES | | |
| Common stock for extension fee | $- | $162,000 |
See the accompanying notes to the unaudited consolidated financial statements.
ECOLOGY COATINGS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009 AND JUNE 30, 2008
Note 1 — Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates
Interim Reporting. While the information presented in the accompanying interim consolidated financial statements is unaudited, it includes all normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented in accordance with accounting principles generally accepted in the United States of America. These interim consolidated financial statements follow the same accounting policies and methods of their application as the September 30, 2008 audited annual consolidated financial statements of Ecology Coatings, Inc. (“we”, “us”, the “Company” or “Ecology”). It is suggested that these interim consolidated financial statements be read in conjunction with our September 30, 2008 annual consolidated financial statements included in the Form 10-KSB we filed with the Securities and Exchange Commission on December 23, 2008.
Our operating results for the three and nine months ended June 30, 2009 are not necessarily indicative of the results that can be expected for the year ending September 30, 2009 or for any other period.
Going Concern. In connection with their audit report on our consolidated financial statements as of September 30, 2008, the Company’s independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern. Continuance of our operations is dependent upon our ability to raise sufficient capital. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Description of the Company. We were originally incorporated on March 12, 1990 in California (“Ecology-CA”). Our current entity was incorporated in Nevada on February 6, 2002 as OCIS Corp. (“OCIS”). OCIS completed a merger with Ecology-CA on July 26, 2007 (the “Merger”). In the Merger, OCIS changed its name from OCIS Corporation to Ecology Coatings, Inc. We develop nanotechnology-enabled, ultra-violet curable coatings that are designed to drive efficiencies and clean processes in manufacturing. We create proprietary coatings with unique performance and environmental attributes by leveraging our platform of integrated nano-material technologies that reduce overall energy consumption and offer a marked decrease in drying time. Ecology’s markets consist of electronics, automotive and trucking, paper products and original equipment manufacturers (“OEMs”).
Principles of Consolidation. The consolidated financial statements include all of our accounts and the accounts of our wholly owned subsidiary Ecology-CA. All significant intercompany transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. We consider all highly liquid investments with original maturities of three months or less to be cash and cash equivalents.
Revenue Recognition. Revenues from licensing contracts are recorded ratably over the life of the contract. Contingency earnings such as royalty fees are recorded when the amount can reasonably be determined and collection is likely.
Loss Per Share. Basic loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed by dividing the net loss by the weighted average number of shares of common stock and potentially dilutive securities outstanding during the period. Potentially dilutive shares consist of the incremental common shares issuable upon the exercise of stock options and warrants and the conversion of convertible debt and convertible preferred stock. Potentially dilutive shares are excluded from the weighted average number of shares if their effect is anti-dilutive. We had a net loss for all periods presented herein; therefore, none of the stock options and/or warrants outstanding or stock associated with the convertible debt or with the convertible preferred shares during each of the periods presented were included in the computation of diluted loss per share as they were anti-dilutive. As of June 30, 2009 and 2008, there were 19,109,588 and 5,333,441 potentially dilutive shares outstanding.
Income Taxes and Deferred Income Taxes. We use the asset and liability approach for financial accounting and reporting for income taxes. Deferred income taxes are provided for temporary differences in the bases of assets and liabilities as reported for financial statement purposes and income tax purposes and for the future use of net operating losses. We have recorded a valuation allowance against the net deferred income tax asset. The valuation allowance reduces deferred income tax assets to an amount that represents management’s best estimate of the amount of such deferred income tax assets that more likely than not will be realized. We cannot be assured of future income to realize the net deferred income tax asset; therefore, no deferred income tax asset has been recorded in the accompanying consolidated financial statements.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 was issued to clarify the requirements of SFAS109 relating to the recognition of income tax benefits. As of June 30, 3009, we had no unrecognized tax benefits due to uncertain tax positions.
Property and Equipment. Property and equipment is stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the following useful lives:
| | | | | |
| Computer equipment | | 3-10 years |
| Furniture and fixtures | | 3-7 years |
| Test equipment | | 5-7 years |
| Software Computer | | 3 years |
| Marketing and Promotional Video | | 3 years |
Repairs and maintenance costs are charged to operations as incurred. Betterments or renewals are capitalized as incurred.
We review long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Patents. It is our policy to capitalize costs associated with securing a patent. Costs consist of legal and filing fees. Once a patent is issued, it will be amortized on a straight-line basis over its estimated useful life. Seven patents were issued as of June 30, 2009 and are being amortized over 8 years.
Stock-Based Compensation. Our stock option plans are subject to the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment. Under the provisions of SFAS No. 123(R), employee and director stock-based compensation expense is measured utilizing the fair-value method.
We account for stock options granted to non-employees under SFAS No. 123(R) using EITF 96-18, requiring the measurement and recognition of stock-based compensation to consultants under the fair-value method with stock-based compensation expense being charged to earnings on the earlier of the date services are performed or a performance commitment exists.
Expense Categories. Salaries and Fringe Benefits of $301,700 and $444,920 for the three months ended June 30, 2009 and 2008, respectively, and $1,105,546 and $1,519,705 for the nine months ended June 30, 2009 and 2008, respectively, include wages paid to and insurance benefits for our officers and employees as well as stock based compensation expense for those individuals. Professional fees of $322,032 and $758,691 for the three months ended June 30, 2009 and 2008, and $2,806,104 and $2,245,674 for the nine months ended June 30, 2009 and 2008, respectively, include amounts paid to attorneys, accountants, and consultants, as well as the stock based compensation expense for those services.
Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, as amendment to SFAS No. 140 (SFAS166). SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. We will adopt SFAS 166 in fiscal 2010 as applicable. It would not have had any impact on any of the financial statements that we’ve issued to date.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” (SFAS 167). SFAS 167 amends FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities—an interpretation of ARB No. 51,” (FIN 46(R)) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. SFAS 167 becomes effective on January 1, 2010. We do not anticipate SFAS 167 will have a material impact on our consolidated financial statements upon adoption.
FASB Statement No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (“SFAS 168”). The FASB Accounting Standards CodificationTM (“Codification”) will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS 168 becomes effective for us for the period ending after September 15, 2009. We have determined that the adoption of SFAS 168 will not have an impact on our financial statements.
Note 2 — Concentrations
For the three months and nine months ended June 30, 2009, we had no revenues. For the three months and nine months ended June 30, 2008, we had one customer representing 100% of revenues. As of June 30, 2009 and 2008, there were no amounts due from this customer.
We occasionally maintain bank account balances in excess of the federally insurable amount of $250,000. The Company had cash deposits in excess of this limit on June 30, 2009 and September 30, 2008 of $0 and $724,276, respectively.
Note 3 — Related Party Transactions
We have borrowed funds for our operations from certain major stockholders, directors and officers as disclosed below:
We have an unsecured note payable due to Deanna Stromback, a principal shareholder and former director and sister of our Chairman, Rich Stromback, that bears interest at 4% per annum with principal and interest due on December 31, 2009. As of June 30, 2009 and September 30, 2008, the note had an outstanding balance of $110,500. The accrued interest on the note was $12,000 and $8,407 as of June 30, 2009 and September 30, 2008, respectively. The note carries certain conversion rights that allow the holder to convert all or part of the outstanding balance into shares of our common stock 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 Chairman, Rich Stromback, that bears interest at 4% per annum with principal and interest due on December 31, 2009. As of June 30, 2009 and September 30, 2008, the note had an outstanding balance of $133,000. The accrued interest on the note was $14,450 and $10,125 as of June 30, 2009 and September 30, 2008, respectively. The note carries certain conversion rights that allow the holder to convert all or part of the outstanding balance into shares of our common stock upon mutually agreeable terms and conversion price.
We had an unsecured note payable due to Rich Stromback, our Chairman and a principal shareholder, that bore interest at 4% per annum with principal and interest due on June 30, 2009. As of both June 30, 2009 and September 30, 2008, the note had an outstanding balance of $0. The unpaid accrued interest on the note was $2,584 as of June 30, 2009 and September 30, 2008. The note carries certain conversion rights which allow the holder to convert all or part of the outstanding balance into shares of our common stock upon mutually agreeable terms and conversion price.
Future maturities of related party long-term debt as of June 30, 2009 are as follows:
| | | | | |
| 12 Months Ending June 30, 2009, | | | | |
| 2010 | | $ | 243,500 | |
| | | | |
We have a payable to a related party totaling $49,191 and $63,775 as of June 30, 2009 and September 30, 2008, respectively, included in accounts payable on the consolidated balance sheets.
Note 4 — Notes Payable
We have the following convertible notes:
| | | | June 30, 2009 | September 30, 2008 |
| Chris Marquez Note: Convertible note payable, 15% per annum interest rate, principal and interest payment was due May 31, 2008; unsecured, convertible at holder’s option into common shares of the Company at $1.60 per share. Accrued interest of $15,367 was outstanding at September 30, 2008. | | | $ --- | | | | $94,104 | |
| | | | | | | | | |
| George Resta Note: Convertible subordinated note payable, 25% per annum, unsecured, principal and interest was due June 30, 2008; the Company extended the maturity for 30 days, to July 30, 2008 in exchange for warrants to purchase 15,000 shares of the Company’s common stock at $1.75 per share. Additionally, the Company granted the note holder warrants to purchase 12,500 shares of the Company’s common stock at $1.75 per share. All outstanding principal and interest is convertible, at the note holder’s option, into the Company’s common shares at the lower of the closing price of the shares on the last trading date prior to conversion or at the average share price at which the Company sells its debt or equity securities in its next public offering or other private offering made pursuant to Section 4(2) of the Securities Act of 1933, as amended. Demand for repayment was made on September 8, 2008. On November 14, 2008, we agreed to pay the note holder $10,000 per month until the principal and accrued interest is paid off. We made such payments in October and November of 2008, but did not make payments thereafter. Accrued interest of $6,388 and $7,329 was outstanding as of June 30, 2009 and September 30, 2008, respectively. | | $ | 38,744 | | | | 50,000 | |
| | | | | | | | | |
| Investment Hunter, LLC Note: Convertible subordinated note payable, 25% per annum, unsecured, principal and interest was due June 30, 2008; the Company extended the maturity for 30 days, to July 30, 2008 in exchange for warrants to purchase 15,000 shares of the Company’s common stock at $1.75 per share. Additionally, the Company granted the note holder warrants to purchase 125,000 shares of the Company’s common stock at $1.75 per share. All outstanding principal and interest is convertible, at the note holder’s option, into the Company’s common shares at the lower of the closing price of the shares on the last trading date prior to conversion or at the average share price at which the Company sells its debt or equity securities in its next public offering or other private offering made pursuant to Section 4(2) of the Securities Act of 1933, as amended. Demand for repayment was made on September 5, 2008. On November 13, 2008, we agreed to pay the note holder $100,000 per month until the principal and accrued interest is paid off. The payments for October, November, and December were made, but none have been made since. Accrued interest of $43,416 and $73,288 was outstanding as of June 30, 2009 and September 30, 2008, respectively. | | $ | 293,557 | | | | 500,000 | |
| | | | | | | | | |
| Mitchell Shaheen Note: Convertible subordinated note payable, 25% per annum, unsecured, principal and interest was due July 18, 2008. Additionally, the Company issued a warrant to purchase 100,000 shares of the Company’s common stock at a price equal to $.75 per share (the “Warrant”). The Warrant is exercisable immediately and carries a ten (10) year term. The Holder may convert all or part of the then-outstanding Note balance into shares at $.50 per share. If applicable, the Company has agreed to include the Conversion Shares in its first registration statement filed with the Securities and Exchange Commission. Demand for repayment was made on August 27, 2008. Accrued interest of $37,003 and $10,685 was outstanding as of June 30, 2009 and September 30, 2008, respectively. | | | 150,000 | | | | 150,000 | |
| | | | | | | | | |
| Mitchell Shaheen Note: Convertible subordinated note payable, 25% per annum, unsecured, principal and interest was due August 10, 2008. Additionally, the Company issued a warrant to purchase 100,000 shares of the Company’s common stock at a price equal to $.50 per share (the “Warrant”). The Warrant is exercisable immediately and carries a ten (10) year term. The Holder may convert all or part of the then-outstanding Note balance into shares at $.50 per share. If applicable, the Company has agreed to include the Conversion Shares in its first registration statement filed with the Securities and Exchange Commission. Demand for repayment was made on August 27, 2008. Accrued interest of $26,540 and $5,548 was outstanding as of June 30, 2009 and September 30, 2008, respectively. | | | 100,000 | | | | 100,000 | |
| | | | | | | | | |
| | | | $582,301 | | | | $894,104 | |
All of the notes shown in the table above are in default and are currently due and payable.
Future maturities of the notes payable as of June 30, 2009 are as follows:
| | | | | |
| 12 Months Ending June 30, | | | | |
| 2010 | | $ | 582,301 | |
| | | | |
The above notes payable have conversion rights and detachable warrants. These Notes may be converted for the principal balance and any unpaid accrued interest to Common Stock. In accordance with guidance issued by the FASB and the Emerging Issue Task Force (“EITF”) regarding the Accounting for Convertible Securities with a Beneficial Conversion Feature (EITF No. 98-5), the Company recognized an embedded beneficial conversion feature present in these Notes. The Company allocated the proceeds based on the fair value of $340,043 to the warrants. The warrants are exercisable through March 31, 2018 and the fair value was amortized to interest expense over the term of the Notes.
Note 5 — Commitments and Contingencies
Consulting Agreements.
On June 1, 2007, we entered into a consulting agreement with The Rationale Group, LLC (“Rationale Group”). The managing member of Rationale Group is Dr. William Coyro, Jr., who serves as the chairman of Ecology’s business advisory board. The agreement expired June 1, 2009. Ecology pays Rationale Group $11,000 per month under the Agreement. Additionally, Ecology granted Rationale Group 200,000 options to purchase shares of our common stock for $2.00 per share. Of these options, 50,000 options vested on December 1, 2007, 50,000 options vested on June 1, 2008, 50,000 options vested on December 1, 2008, and the remaining 50,000 options vested on June 1, 2009. Additionally, we agreed to reimburse Rationale Group for all reasonable expenses incurred by Rationale Group in the conduct of our business. On February 11, 2009, we amended the agreement upon the following terms:
| · | Six monthly payments to Rationale Group of $5,000, with payments ending on July 1, 2009. |
| · | Re-pricing of the 50,000 options that vested on December 1, 2007 by our Board to an exercise price of $.50 per share |
| · | Rationale Group forgave $121,000 owed by us to them. |
| · | Rationale Group transferred options to purchase 50,000 shares of common stock that vest on June 1, 2009 to Equity 11, our largest shareholder. J.B. Smith, a director of our Board, is the managing partner and majority owner of Equity 11. |
On July 26, 2007, we entered into a consulting agreement with DMG Advisors, LLC, owned by two former officers and directors of OCIS Corporation. The terms of the agreement call for the transfer of the $100,000 standstill deposit paid to OCIS as a part of a total payment of $200,000. The balance will be paid in equal installments on the first day of each succeeding calendar month until paid in full. The agreement calls for the principals to provide services for 18 months in the area of investor relations programs and initiatives; facilitate conferences between Ecology and members of the business and financial community; review and analyze the public securities market for our securities; and introduce Ecology to broker-dealers and institutions, as appropriate. The agreement expired on February 28, 2009. We have reached a settlement with DMG Advisors for amounts owed under the consulting agreement. See also Note 9- Subsequent Events.
On April 2, 2008, we entered into a letter agreement with Dr. Robert Matheson to become chairman of our Scientific Advisory Board. The letter agreement provides that we will grant Dr. Matheson options to purchase 100,000 shares of our common stock. Each option is exercisable at a price of $2.05 per share. The options vest as follows: 25,000 immediately upon grant; 25,000 on October 3, 2008; 25,000 on April 3, 2009, and the remaining 25,000 on October 3, 2009. The options will all expire on April 3, 2018.
On September 17, 2008, we entered into an agreement with Sales Attack LLC, an entity owned by J.B. Smith, a director of the Company and managing partner of Equity 11 who is our largest shareholder. This agreement is for business and marketing consulting services. This agreement expires on September 17, 2010 and calls for monthly payments of $20,000, commissions on licensing revenues equal to 15% of the revenues due to Sales Attack’s efforts, commissions on product sales equal to 3% of the revenue due to Sales Attack’s efforts, and a grant of options to purchase 531,000 shares of our common stock for $1.05 per share. 177,000 of the options became exercisable on March 17, 2009, 177,000 of the options become exercisable on September 17, 2009, and 177,000 of the options become exercisable on March 17, 2010. The options expire on December 31, 2020. We paid $60,000 to Sales Attack LLC during the nine months ending June 30, 2009. On May 15, 2009, we issued 100 Series B Convertible Preferred Securities in full settlement of all amounts then outstanding and terminated the agreement.
On September 17, 2008, we entered into an agreement with RJS Consulting LLC (“RJS”), an entity owned by our chairman of the board of directors, Richard Stromback, under which RJS will provide advice and consultation to us regarding strategic planning, business and financial matters, and revenue generation. The agreement expires on September 17, 2011 and calls for monthly payments of $16,000, commissions on licensing revenues equal to 15% of the revenues due to RJS’s efforts, commissions on product sales equal to 3% of the revenue due to RJS’s efforts, $1,000 per month to pay for office rent reimbursement, expenses associated with RJS’s participation in certain conferences, information technology expenses incurred by the consultant in the performance of duties relating to the Company, and certain legal fees incurred by Richard Stromback during his tenure as our Chief Executive Officer.
On September 17, 2008, we entered into an agreement with DAS Ventures LLC (“DAS”) under which DAS will act as a consultant to us. DAS Ventures, LLC is wholly owned by Doug Stromback, a principal shareholder and former director and brother of our Chairman, Rich Stromback, Under this agreement, DAS will provide business development services for which he will receive commissions on licensing revenues equal to 15% of the revenues due to DAS’s efforts and commissions on product sales equal to 3% of the revenue due to DAS’s efforts and reimbursement for information technology expenses incurred by the consultant in the performance of duties relating to the Company. This agreement expires on September 17, 2011.
On November 11, 2008, we settled the lawsuit we filed against Trimax, LLC (“Trimax”) on September 11, 2008 for breach of contract. Under the terms of the settlement, we will pay Trimax $7,500 per month for twelve months under a new consulting agreement and will pay $15,000 in 12 equal monthly payments of $1,250 to Trimax’s attorney. Additionally, we will pay Trimax a commission of 15% for licensing revenues and 3% for product sales that Trimax generates for the Company. On June 12, 2009, we terminated the agreement and replaced it with a new one in which the sole compensation paid to Trimax will be a commission of 15% for licensing revenues and 3% for product sales to Daewoo. This new agreement expires June 12, 2010 and can be terminated on 90 days written notice by either party.
On January 1, 2009, we entered into a new agreement with McCloud Communication to provide investor relations services to us. The new agreement calls for monthly payments of $5,500 for 12 months. In addition, the consultant forgave $51,603 in past due amounts owed by the Company in exchange for a reset of the exercise price on options to purchase 25,000 shares of our common stock that we issued to the consultant on April 8, 2008. The exercise price at the time of issuance was $4.75 per share. This price was re-set by our Board to $.88 per share on February 6, 2009.
On January 5, 2009, we entered into an agreement with James Juliano to provide debt consulting services to us. Mr. Juliano is a principal in Equity 11. The agreement calls for twelve monthly payments of $7,500 and expires on December 31, 2009. No monthly payments were made to Mr. Juliano for the nine months ending on June 30, 2009. On May 15, 2009, we issued 37.5 Convertible Preferred Securities in full settlement of all amounts then outstanding and terminated the agreement.
Employment Agreements.
On January 1, 2007, we entered into an employment agreement with Sally J.W. Ramsey, Vice President New Product Development, that expires on January 1, 2012. Upon expiration, the agreement calls for automatic one-year renewals until terminated by either party with thirty days written notice. Pursuant to the agreement, the officer will be paid an annual base salary of $180,000 in 2007; an annual base salary of $200,000 for the years 2008 through 2011; and an annual base salary of $220,000 for 2012. On December 15, 2008, we amended the agreement to reduce Ms. Ramsey’s annual base salary to $60,000. In addition, 450,000 options were granted to the officer to acquire our common stock at $2.00 per share. 150,000 options will vest on January 1, 2010, 150,000 options will vest on January 1, 2011 and the remaining 150,000 options will vest January 1, 2012. The options expire on January 1, 2022.
On February 1, 2007, we entered into an employment agreement with Kevin Stolz, Chief Financial Officer, Controller and Chief Accounting Officer, that expired on February 1, 2008. Pursuant to the agreement, the officer was paid an annual base salary of $120,000 and was granted 25,000 options to acquire our common stock at $2.00 per share. These options were re-priced to $1.05 per share on September 15, 2008. All of the options vested on February 1, 2008. The options expire on February 1, 2017. On February 1, 2008, we entered into a new agreement with this officer. This new agreement expires on February 1, 2010 and calls for an annual salary of $140,000. Further, Mr. Stolz was granted 50,000 options to purchase shares of our common stock at $3.00 per share. These options were re-priced to $1.05 per share on September 15, 2008. 25,000 options vest on February 1, 2009 and the remaining 25,000 options vest on February 1, 2010. This agreement was modified effective October 1, 2008. Under the modified agreement, Mr. Stolz receives an annual base salary of $70,000, subject to increase to $140,000 upon the achievement by the Company of revenues of at least $100,000. Additionally, we granted Mr. Stolz options to purchase 10,000 shares of our common stock at $1.05 per share. The options become exercisable on September 17, 2009 and expire on September 17, 2018. Mr. Stolz assumed the additional title of Chief Financial Officer on March 26, 2009. Mr. Stolz’s employment agreement has been terminated. See Note 9-Subsequent Events.
On May 21, 2007, we entered into an employment agreement with David W. Morgan, Chief Financial Officer, that will expire on May 21, 2009. Pursuant to the agreement, Mr. Morgan will be paid an annual base salary of $160,000 and was granted 300,000 options to acquire our common stock at $2.00 per share. These options were re-priced to $1.05 per share on September 15, 2008. 75,000 of the options vested on May 21, 2008, and 225,000 of the options vested on May 21, 2009. The options expire on May 21, 2017. On October 1, 2007, the Company modified the employment agreement to increase the salary from $160,000 to $210,000. This agreement was terminated on December 3, 2008 and Mr. Morgan continued to serve as our Chief Financial Officer and was being paid $60,000 per annum. Mr. Morgan resigned on March 26, 2009 and his employment agreement was terminated. We will pay medical insurance premiums of $1,128 per month through September of 2009 for him.
On December 28, 2007, we entered into an employment agreement with Richard Stromback, our Chairman of the Board of Directors and Chief Executive Officer. Under this agreement, Mr. Stromback was to be paid at a rate of $320,000 per year through August 8, 2010. This agreement was terminated by consent of both parties on September 17, 2008. See also the discussion of Mr. Stomback’s consulting agreement above.
Contingencies. On September 11, 2008, we filed a lawsuit against a consultant in the Circuit Court of Oakland County, Michigan for breach of the consulting agreement.
A lawsuit was filed against us on September 16, 2008 in the Circuit Court of Oakland County, Michigan for breach of contract by a consultant previously contracted by the Company to provide information technology services. On November 6, 2008, we settled the lawsuit. We paid $26,500 in full settlement of all claims. This amount was included in Accounts Payable at September 30, 2008.
Lease Commitments.
| | a. | | On August 1, 2005, we leased our office facilities in Akron, Ohio for a rent of $1,800 per month. The lease expired July 1, 2006 and was renewed under the same terms through August 31, 2007. The Company now leases that property on a month-to-month basis for the same rent. Rent expense for the nine months ended June 30, 2009 and 2008 was $16,200 and $16,200, respectively. Rent expense for the three months ended June 30, 2009 and 2008 was $5,400 and $5,400, respectively |
| | | | |
| | b. | | On September 1, 2008, we executed a lease for our office space in Auburn Hills, Michigan. The lease calls for average monthly rent of $2,997 and expires on September 30, 2010. The landlord is a company owned by a shareholder and director of Ecology. Rent expense for the nine months ended June 30, 2009 was $25,843. Rent expense for the three months ended June 30, 2009 was $8,855. |
Note 6 — Equity
Reverse Merger. A reverse merger with OCIS Corporation was consummated on July 26, 2007. The shareholders of Ecology-CA acquired 95% of the voting stock of OCIS. OCIS had no significant operating history. The purpose of the acquisition was to provide Ecology with access to the public equity markets in order to more rapidly expand its business operations. The consideration to the shareholders of OCIS was approximately 5% of the stock, at closing, of the successor company. The final purchase price was agreed to as it reflects the value to Ecology of a more rapid access to the public equity markets than a more traditional initial public offering.
Warrants. On December 16, 2006, we issued warrants to Trimax, LLC to purchase 500,000 shares of our stock at $2.00 per share. On November 11, 2008, the exercise price of the warrants was reset to $.90 per share. The warrants vested on December 17, 2007. The weighted average remaining life of the warrants is 7.6 years.
On February 6, 2008, we issued warrants to Hayden Capital to purchase 262,500 shares of our common stock at the lower of $2.00 per share or at the average price per share at which the Company sells its debt or and/or equity in its next private or public offering. The warrants vested upon issuance. The weighted average remaining life of the warrants is 8.6 years.
On March 1, 2008, we issued warrants to George Resta to purchase 12,500 shares of our common stock at the lower of $2.00 per share or at the average price per share at which the Company sells its debt or and/or equity in its next private or public offering. The warrants vested upon issuance. The weighted average remaining life of the warrants is 8.6 years.
On March 1, 2008, we issued warrants to Investment Hunter, LLC to purchase 125,000 shares of our common stock at the lower of $2.00 per share or at the average price per share at which the Company sells its debt or and/or equity in its next private or public offering. The warrants vested upon issuance. The weighted average remaining life of the warrants is 8.6 years.
On June 9, 2008, we issued warrants to Hayden Capital to purchase 210,000 shares of our common stock at the lower of $2.00 per share or at the average price per share at which the Company sells its debt or and/or equity in its next private or public offering. The warrants vested upon issuance. The weighted average remaining life of the warrants is 8.9 years.
On June 21, 2008, we issued warrants to Mitchell Shaheen to purchase 100,000 shares of our common stock at $.75 per share. The warrants vested upon issuance. The weighted average remaining life of the warrants is 8.9 years.
On July 14, 2008, we issued warrants to Mitchell Shaheen to purchase 100,000 shares of our common stock at $.50 per share. The warrants vested upon issuance. The weighted average remaining life of the warrants is 8.9 years.
On July 14, 2008, we issued warrants to George Resta to purchase 15,000 shares of our common stock at $1.75 per share. The warrants vested upon issuance. The weighted average remaining life of the warrants is 8.9 years.
On July 14, 2008, we issued warrants to Investment Hunter, LLC to purchase 15,000 shares of our common stock at $1.75 per share. The warrants vested upon issuance. The weighted average remaining life of the warrants is 8.9 years.
We issued the following immediately vested warrants to Equity 11 in conjunction with Equity 11’s purchases of our 5% convertible preferred stock:
| | | Strike | | Date | | Expiration |
| Number | | Price | | Issued | | Date |
| 100,000 | | $0.75 | | July 28, 2008 | | July 28, 2018 |
| 5,000 | | $0.75 | | August 20, 2008 | | August 20, 2018 |
| 25,000 | | $0.75 | | August 27, 2008 | | August 27, 2018 |
| 500,000 | | $0.75 | | August 29, 2008 | | August 29, 2018 |
| 375,000 | | $0.75 | | September 26, 2008 | | September 26, 2018 |
| 47,000 | | $ 0.75 | | January 23, 2009 | | January 23, 2014 |
| 15,000 | | $ 0.75 | | February 10, 2009 | | February 10, 2014 |
| 12,500 | | $ 0.75 | | February 18, 2009 | | February 18, 2014 |
| 20,000 | | $ 0.75 | | February 26, 2009 | | February 26, 2014 |
| 11,500 | | $ 0.75 | | March 10, 2009 | | March 10, 2014 |
| 40,000 | | $ 0.75 | | March 26, 2009 | | March 26, 2014 |
| 10,750 | | $0.75 | | April 14, 2009 | | April 14, 2014 |
| 16,750 | | $0.75 | | April 29, 2009 | | April 29, 2014 |
On November 11, 2008, we issued warrants to purchase 2,000,000 shares of our common stock at $.50 per share to Trimax. The warrants vested upon issuance. The weighted average remaining life of the warrants is 9.3 years.
Shares. On February 6, 2008, we entered into an allonge to the promissory note made to Christopher Marquez on February 28, 2006. The amount owed, including principal and accrued interest, totaled $142,415 and the note matured on December 31, 2007 (See Note 4). The maturity date of the note was extended to May 31, 2008, with interest continuing at 15% per annum. In consideration of this extension, we issued 60,000 shares of our common stock to the note holder and granted the holder certain priority payment rights. This note has been paid in full.
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 $.50 per share. The preferred securities carry “as converted” voting rights. As of June 30, 2009, we had issued 2,436 of these convertible preferred shares. As we sell additional convertible preferred securities under this agreement, we will issue attached warrants (500 warrants for each $1,000 convertible preferred share sold). The warrants will be immediately exercisable, expire in five years, and entitle the investor to purchase one share of our common stock at $.75 per share for each warrant issued. The table above identifies warrants issued in conjunction with Equity 11’s additional purchases of our 5% convertible preferred stock through June 30, 2009.
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, 2009, we have issued 364 of these convertible preferred securities. These shares are convertible into 4,427,778 of our common shares at the sole discretion of Equity 11.
In the event of a voluntary or involuntary dissolution, liquidation or winding up, Equity 11 will be entitled to be paid a liquidation preference equal to the stated value of the convertible preferred shares, plus accrued and unpaid dividends and any other payments that may be due on such shares, before any distribution of assets may be made to holders of capital stock ranking junior to the preferred shares.
Note 7 — Stock Options
Stock Option Plan. On May 9, 2007, we adopted a stock option plan and reserved 4,500,000 shares for the issuance of stock options or for awards of restricted stock. On December 2, 2008, our Board of Directors authorized the addition of 1,000,000 shares of our common stock to the 2007 Plan. All prior grants of options were included under this plan. The plan provides for incentive stock options, nonqualified stock options, rights to restricted stock and stock appreciation rights. Eligible recipients are employees, directors, and consultants. Only employees are eligible for incentive stock options.
The vesting terms are set by the Board of Directors. All options expire 10 years after issuance.
The Company granted non-statutory options as follows during the nine months ended June 30, 2009:
| | Weighted Average Exercise Price Per Share | Number of Options | Weighted Average (Remaining) Contractual Term | Aggregate Fair Value |
| Outstanding as of September 30, 2008 | $1.83 | 4,642,119 | 9.2 | $5,011,500 |
| Granted | $.77 | 490,000 | 9.4 | $311,035 |
| Exercised | --- | --- | --- | --- |
| Forfeited | $2.14 | 850,000 | 7.8 | $928,806 |
| Outstanding as of June 30, 2009 | $1.26 | 4,282,119 | 8.4 | $4,393,729 |
| Exercisable | $1.26 | 2,408,119 | 7.8 | $2,875,310 |
2,408,119 of the options were exercisable as of June 30, 2009. The options are subject to various vesting periods between June 26, 2007 and January 1, 2012. The options expire on various dates between June 1, 2016 and January 1, 2022. Additionally, the options had no intrinsic value as of June 30, 2009. Intrinsic value arises when the exercise price is lower than the trading price on the date of grant.
Our stock option plans are subject to the provisions of Statement of Financial Accounting Standards (“SFAS”) Number 123(R), Accounting for Stock-Based Compensation. Under the provisions of SFAS Number 123(R), employee and director stock-based compensation expense is measured utilizing the fair-value method.
We account for stock options granted to non-employees under SFAS Number 123(R) using EITF 96-18 requiring the measurement and recognition of stock-based compensation to consultants under the fair-value method with stock-based compensation expense being charged to earnings on the earlier of the date services are performed or a performance commitment exists.
In calculating the compensation related to employee/consultants and directors stock option grants, the fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions:
| | |
| Dividend | None |
| Expected volatility | 86.04%-101.73% |
| Risk free interest rate | .10%-5.11% |
| Expected life | 5 years |
The expected volatility was derived utilizing the price history of another publicly traded nanotechnology company. This company was selected due to the fact that it is widely traded and is in the same equity sector as our Company.
The risk free interest rate figures shown above contain the range of such figures used in the Black-Scholes calculation. The specific rate used was dependent upon the date of the option grant.
Based upon the above assumptions and the weighted average $1.26 exercise price, the options outstanding at June 30, 2009 had a total unrecognized compensation cost of $579,542 which will be recognized over the remaining weighted average vesting period of .5 years. Options cost of $2,866,915 was recorded as an expense for the nine months ended June 30, 2009 of which $561,555 was recorded as compensation expense and $2,305,360 was recorded as consulting expense.
Note 8 — Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the nine months ended June 30, 2009 and 2008, we incurred net losses of ($4,373,576) and ($5,552,432), respectively. As of June 30, 2009 and September 30, 2008, we had stockholders’ deficits of ($1,975,856) and ($1,239,810), respectively.
Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to obtain additional financing or refinancing as may be required, to develop commercially viable products and processes, and ultimately to establish profitable operations. We have financed operations primarily through the issuance of equity securities and debt and through some limited operating revenues. Until we are able to generate positive operating cash flows, additional funds will be required to support our operations. We will need to acquire additional immediate funding in September 2009 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
The Company evaluated subsequent events for potential recognition and/or disclosure through August 19, 2009, the date the consolidated financial statements were issued.
On July 1, 2009, we issued a note to JB Smith LC, an entity controlled by J.B. Smith, a director of the company. This note is in the amount of $7,716, bears interest at 5% and is convertible under certain conditions.
On July 21, 2009, we entered into a Settlement and Release Agreement with DMG Advisors, LLC, Kirk Blosch and Jeff Holmes which terminated the parties’ July 26, 2007 Consulting Agreement (“Former Consulting Agreement”). We agreed to issue 500,000 shares of our common stock as payment for services owed under the Former Consulting Agreement.
Only July 21, 2009, we entered into a new Consulting Agreement with DMG Advisors. DMG Advisors will provide investor, business and financial services to us under the New Consulting Agreement and will be paid $5,000 per month for services by the issuance of 25,000 shares of the our common stock per month. The Agreement has a term of six months and terminates on January 15, 2010.
On July 24, 2009, Equity 11 purchased an additional 75 shares of 5% Convertible Preferred Shares, Series B at a purchase price of $1,000 per share pursuant to Convertible Preferred Securities Purchase Agreement entered into between the Company and Equity 11on May 15, 2009. The Convertible Preferred Shares will pay cumulative cash distributions initially at a rate of 5% per annum, subject to declaration by the Board.
On July 24, 2009, we terminated our agreement with Kevin Stolz, Chief Financial Officer, Controller and Chief Accounting Officer. In consideration, we issued 40,000 options exercisable at $1.00 share and vesting according to the following schedule:
| 10,000 shares on: | September 1, 2009 |
| 10,000 shares on: | October 15, 2009 |
| 10,000 shares on: | December 1, 2009 |
| 10,000 shares on: | January 15, 2010 |
Mr. Stolz will serve on an at-will basis and will be paid a salary of $5,917 through August 2009 and will be paid a salary of $3,500 per month thereafter.
On August 12, 2009, Equity 11 purchased an additional of 5% Convertible Preferred Shares, Series B at a purchase price of $1,000 per share pursuant to Convertible Preferred Securities Purchase Agreement entered into between the Company and Equity 11 on May 15, 2009. The Convertible Preferred Shares will pay cumulative cash distributions initially at a rate of 5% per annum, subject to declaration by the Board.
