.
.
.
ECOLOGY COATINGS, INC.
BALANCE SHEETS
MARCH 31, 2007 AND SEPTEMBER 30, 2006
ASSETS
March 31, September 30,
2007 2006
----------- -------------
(Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 56,221 $ 736,379
Prepaid expenses -- 31,357
-------- ----------
Total Current Assets 56,221 767,736
-------- ----------
Property and Equipment:
Computer equipment 3,588 1,733
Furniture and fixtures 1,565 1,062
Test equipment 6,862 6,862
Software 212 --
-------- ----------
Total property and equipment 12,227 9,657
Less: accumulated depreciation (2,437) (1,489)
-------- ----------
Property and Equipment, net 9,790 8,168
-------- ----------
Patents-net 288,915 230,978
Trademarks-net 3,545 --
Merger fee 127,635 --
-------- ----------
Total Assets $486,106 $1,006,882
======== ==========
The Accompanying Notes are an Integral Part
of the Financial Statements
-2-
ECOLOGY COATINGS, INC.
BALANCE SHEETS (CONTINUED)
MARCH 31, 2007 AND SEPTEMBER 30, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
March 31, September 30,
2007 2006
----------- -------------
(Unaudited) (Audited)
Current Liabilities:
Accounts payable $ 461,806 $ 285,666
Credit card payable 13,476 --
Deferred revenue 41,667 41,667
Miscellaneous payable 2,480 --
Accrued payroll taxes -- 8,577
Accrued wages -- 33,812
Franchise tax payable 400 800
Interest payable 138,891 78,744
Convertible notes payable 1,802,535 --
Notes payable - related party 243,500 --
----------- -----------
Total Current Liabilities 2,704,755 449,266
Deferred revenue - long term portion 4,051 24,885
Convertible notes payable -- 1,350,000
Notes payable - related party -- 297,030
----------- -----------
Total Liabilities 2,708,806 2,121,181
----------- -----------
Stockholders' Equity (Deficit):
Preferred stock - 10,000,000 no par shares authorized;
no shares issued or outstanding as of March 31, 2007 and
September 30, 2006 -- --
Common stock - 50,000,000 no par shares authorized;
28,200,000 shares issued and outstanding 301,010 142,000
Accumulated Deficit (2,523,710) (1,256,299)
----------- -----------
Total Stockholders' Equity (Deficit) (2,222,700) (1,114,299)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 486,106 $ 1,006,882
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
-3-
ECOLOGY COATINGS, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED MARCH 31, 2007 AND 2006
For the Six For the Six
Month Period Month Period
Ended Ended
March 31, March 31,
2007 2006
------------ ------------
(Unaudited) (Audited)
Revenues $ 20,834 $ 21,005
General and administrative costs 1,134,960 187,638
----------- -----------
Operating Loss (1,114,126) (166,633)
----------- -----------
Other Income (Expense):
Interest income 2,374 --
Interest expense (155,659) (9,394)
----------- -----------
Total Other Income (Expense) (153,285) (9,394)
----------- -----------
Net Loss $(1,267,411) $ (176,027)
=========== ===========
Basic and diluted net loss per share $ (0.04) $ (0.01)
=========== ===========
Basic and diluted weighted average of
common shares outstanding 28,200,000 21,560,440
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
-4-
ECOLOGY COATINGS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTH PERIODS ENDED MARCH 31, 2007 AND SEPTEMBER 30, 2006
Common Stock Total
--------------------- Accumulated Stockholders'
Shares Amount (Deficit) Equity (Deficit)
---------- -------- ----------- ----------------
Balance at September 30, 2006 28,200,000 $142,000 $(1,256,299) $(1,114,299)
Beneficial conversion feature on
convertible debt (unaudited) -- 116,820 -- 116,820
Stock based compensation (unaudited) -- 42,190 -- 42,190
Net loss for the six month period
ended March 31, 2007 (unaudited) -- -- (1,267,411) (1,267,411)
---------- -------- ----------- -----------
Balance at March 31, 2007 (unaudited) 28,200,000 $301,010 $(2,523,710) $(2,222,700)
========== ======== =========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
-5-
ECOLOGY COATINGS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED MARCH 31, 2007 AND MARCH 31, 2006
For the Six For the Six
Months Ended Months Ended
March 31, March 31,
2007 2006
------------ -------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss $(1,267,411) $(176,027)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,729 461
Stock based compensation 42,190 --
Amortization of beneficial conversion feature 69,355 --
Changes in Asset and Liabilities
Accounts receivable -- 132
Prepaid expenses 31,357 (6,000)
Employee advance -- (37,500)
Accounts payable 176,140 64,253
Accrued payroll taxes and wages (42,389) 13,500
Credit card payable 13,476 --
Miscellaneous payables 2,480 --
Interest payable 60,147 9,394
Franchise tax payable (400) (392)
Deferred revenue (20,834) (20,834)
----------- ---------
Net cash used by operating activities (932,160) (153,013)
----------- ---------
Cash flows from investing activities
Merger fee (127,635) --
Purchase of fixed assets (2,570) (3,891)
Purchase of intangibles (64,263) (38,252)
----------- ---------
Net cash used by investing activities (194,468) (42,143)
----------- ---------
Cash flows from financing activities
Proceeds (payments) of notes payable - related parties (53,530) 50,000
Proceeds from debt 500,000 350,000
----------- ---------
Net cash provided by financing activities 446,470 400,000
----------- ---------
Net increase (decrease) in cash and cash equivalents (680,158) 204,844
Cash and cash equivalents at beginning of year 736,379 10,165
----------- ---------
Cash and cash equivalents at end of year $ 56,221 $ 215,009
=========== =========
The Accompanying Notes are an Integral Part
of the Financial Statements
-6-
ECOLOGY COATINGS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTH PERIODS ENDED MARCH 31, 2007 AND MARCH 31, 2006
For the Six For the Six
Months Ended Months Ended
March 31, March 31,
2007 2006
------------ -------------
(Unaudited) (Unaudited)
Supplemental Disclosure of Cash Flow Information
Interest paid $ 25,950 $ --
Income taxes paid $ -- $ --
Supplemental Disclosure of Non-Cash Financing Activities
Conversion of notes for common stock $ -- $66,000
Beneficial conversion feature $116,820 $ --
The Accompanying Notes are an Integral Part
of the Financial Statements
-7-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES
INTERIM REPORTING. While the information presented in the accompanying
interim six months 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 financial statements
follow the same accounting policies and methods of their application as the
September 30, 2006 audited annual financial statements of Ecology Coatings, Inc.
It is suggested that these interim financial statements be read in conjunction
with the Company's September 30, 2006 annual financial statements.
Operating results for the six months ending March 31, 2007 are not
necessarily indicative of the results that can be expected for the year ended
September 30, 2007.
GOING CONCERN. In connection with their audit report on the Company's
consolidated financial statements as of September 30, 2006, the Company's
independent registered certified public accountants expressed substantial doubt
about the Company's ability to continue as a going concern as such continuance
is dependent upon the Company's ability to raise sufficient capital. We believe
that funding through sales of common stock will be sufficient to enable us to
continue as a going concern through 2007. 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.
DESCRIPTION OF THE COMPANY. Ecology Coatings, Inc. (the "Company") was
organized under the laws of the State of California on March 15, 1990. The
Company is engaged in developing patented, nanotechnology-enhanced coatings that
are licensed to industries that need or sell protective coatings and/or will be
manufactured and sold to other industries through direct sales or distribution
partner(s). The length of licenses varies, but they typically last for one year.
The Company's market consists primarily of manufacturers of electrical, plastic
and metal products throughout the world.
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.
-8-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES (CONTINUED)
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. Potentially dilutive shares are excluded from the weighted average
number of shares if their effect is antidilutive. The Company had a net loss for
all periods presented herein; therefore, none of the stock options outstanding
during each of the periods presented were included in the computation of diluted
loss per share as they were antidilutive. For the periods ended March 31, 2007
and 2006, there were 2,883,446 and 0 potentially dilutive securities
outstanding. (See stock split in Note 6--Equity).
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. The Company 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 financial statements.
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. The Company considers all highly liquid
investments with original maturities of three months or less to be cash and cash
equivalents.
-9-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES (CONTINUED)
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 3-5 years
Furniture and fixtures 3-7 years
Test equipment 5-7 years
Software 3 years
Repairs and maintenance costs are charged to operations as incurred. Betterments
or renewals are capitalized as incurred.
The Company reviews 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 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 the Company's 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 of eight years. Three patents were issued as of March 31, 2007. For the six
months ended March 31, 2007 and 2006, the Company recorded $2,781 and $0 of
amortization expense, respectively.
RESEARCH AND DEVELOPMENT EXPENDITURES. Research and development
expenditures, which include the cost of materials consumed in research and
development activities, salaries, wages and other costs of personnel engaged in
research and development, costs of services performed by others for research and
development on behalf of the company and indirect costs are expensed as research
and development costs when incurred. No research and development costs were
incurred for the six months ending March 31, 2007 and 2006.
-10-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES (CONTINUED)
STOCK-BASED COMPENSATION. 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.
The Company accounts for stock options granted to non-employees under SFAS
Number 123 using EITF 98-16, 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.
RECENT ACCOUNTING PRONOUNCEMENTS. In February 2007, the FASB issued SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 allows
companies to choose to measure many financial instruments and certain other
items at fair value. This statement is effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007, although earlier
adoption is permitted. Management has not determined the effect that adopting
this statement would have on the Company's financial condition or results of
operation. SFAS 159 will become effective for the Company beginning in fiscal
2008. The Company is currently evaluating what effects the adoption of SFAS 159
will have on the Company's future results of operations and financial condition.
In March 2006, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 156, "Accounting for Servicing of Financial Assets," ("SFAS No.
156") which provides an approach to simplify efforts to obtain hedge-like
(offset) accounting. This new Statement amends SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
with respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS No. 156 is effective for all separately recognized
servicing assets and liabilities as of the beginning of an entity's fiscal year
that begins after September 15, 2006, with earlier adoption permitted in certain
circumstances. The adoption of SFAS No. 156 did not have a material effect on
the Company's financial statements.
-11-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND
USE OF ESTIMATES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which establishes how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under GAAP.
This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact of this Statement on its
financial statements, but the Company does not expect SFAS 157 to have a
material effect.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158") an
amendment of FASB Statement No. 87 "Employers' Accounting for Pensions", FASB
Statement No. 88 "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Terminated Benefits", FASB No. 106
"Employers' Accounting for Postretirement Benefits Other than Pensions", and
FASB Statement No. 132 (R) "Employers' Disclosures about Pensions and Other
Postretirement Benefits". This statement requires an employer to recognize the
over-funded or under-funded status of a defined benefit postretirement plan as
an asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets
of a not-for-profit organization. This statement also requires an employer to
measure the funded status of a plan as of the date of its year-end statement of
financial position with limited exceptions. Issuers of publicly traded equity
securities are required to initially recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the
end of the fiscal year ending after December 15, 2006. This requirement to
measure plan assets and benefit obligations as of the date of the employer's
fiscal year-end statement of financial position is effective for fiscal years
ending after December 15, 2008. Earlier application of this statement is
encouraged. The Company does not believe that the adoption of SFAS No. 158 will
have a material effect on its results of operations or financial position.
-12-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 - CONCENTRATIONS
For the six months ended March 31, 2007 and 2006, the Company had one (1)
major customer representing approximately ninety-nine percent (99%) of revenues.
At March 31, 2007 and September 30, 2006, there were no amounts due from this
customer.
The Company occasionally maintains bank account balances in excess of the
federal insurable amount of $100,000. The Company did not have cash deposits in
excess of this limit on March 31, 2007.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company borrows funds for its operations from certain major stockholders,
directors and officers as disclosed below:
- The Company has an unsecured note payable due to a majority
shareholder and director that bears interest at 4% per annum with
principal and interest due on December 31, 2007. As of March 31, 2007
and September 30, 2006, the note has an outstanding balance of
$110,500 and $135,530 respectively. The accrued interest on the note
is $1,488 and $7,690 as of March 31, 2007 and September 30, 2006,
respectively.
- The Company has an unsecured note payable due to a majority
shareholder and director that bears interest at 4% per annum with
principal and interest due on December 31, 2007. As of March 31, 2007
and September 30, 2006, the note has an outstanding balance of
$133,000 and $161,500, respectively. The accrued interest on the note
is $1,797 and $10,460 as of March 31, 2007 and September 30, 2006,
respectively.
- The Company has an unsecured note payable due to a majority
shareholder, officer and director that bears interest at 4% per annum
with principal and interest due on December 31, 2007. As of March 31,
2007 and September 30, 2006, the note has an outstanding balance of
$0. The accrued interest on the note is $2,584 as of March 31, 2007
and September 30, 2006.
Future maturities of related party long-term debt as of March 31, 2007 are as
follows:
Period Ending March 31,
2008 $243,500
--------
$243,500
========
-13-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 - NOTES PAYABLE
The Company has three Convertible Notes Payable as follows:
March 31, September 30,
2007 2006
---------- -------------
Convertible note payable, 20% per annum
interest rate $ 42,859 $ 50,000
Principal and interest payment due
December 31, 2007; unsecured, net of
unamortized discount of $7,141.
Convertible at Holder's option into
common shares of the Company if the
Company sells shares of its stock for
$5 million in aggregate gross
proceeds in the first private
offering. Conversion price is equal
to 80% of the price paid by other
investors in the first private
offering.
Convertible note payable, 15% per annum
interest rate 259,676 300,000
Principal and interest payment due
December 31, 2007; unsecured.
Convertible at Holder's option into
common shares of the Company if the
Company sells shares of its stock for
$5 million in aggregate gross
proceeds in the first private
offering. Conversion price is equal
to 80% of the price paid by other
investors in the first private
offering. Amount shown is net of
unamortized discount of $40,324.
Convertible subordinated note payable,
7.5% per annum interest rate. 1,500,000 1,000,000
Principal and interest payment due
December 31, 2007; unsecured.
Convertible at Holder's option into
common shares of the Company at a
price per share equal to the offering
price per share of the common stock
in the Company's first private
offering.
---------- ----------
Total Convertible Debt $1,802,535 $1,350,000
========== ==========
-14-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 - NOTES PAYABLE (CONTINUED)
Future maturities of the notes payable as of March 31, 2007 are as follows:
Year Ending March 31,
2008 1,850,000
-----------
$ 1,850,000
===========
Expense associated with the beneficial conversion features of $69,355 was
reflected in the March 31, 2007 Statement of Operations as Interest Expense.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS.
REVERSE MERGER. An agreement was executed on November 6, 2006 by and
between OCIS Corporation ("OCIS") and Ecology Coatings, Inc. ("Ecology") for a
reverse merger to occur within 90 days. On November 6, 2006, the Company paid
$50,000 to OCIS for this right. The agreement was extended for 30 days with an
additional $25,000 payment. Under the terms of the agreement, the stockholders
of Ecology will acquire control of OCIS. Ecology will then become a wholly owned
subsidiary of OCIS. The agreement anticipates newly authorized shares of
Ecology, a 6,000 to 1 stock split (see Stock Split in Note 6) and the exercise
of stock options. OCIS shares shall be split such that they will hold 4.7% of
the total number of shares based on a fully diluted basis, but not less than 1.6
million shares. Non-vested options, if any, will not be considered for purposes
of this computation. On April 4, 2007, this agreement was extended. The
agreement was consummated on July 26, 2007.
The shareholders of Ecology acquired 95% of the voting stock of OCIS. OCIS
has 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 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 that a more traditional initial public
offering.
-15-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COMMITMENTS. (CONTINUED)
CONSULTING AGREEMENTS. On July 15, 2006, the Company entered into an
agreement for six months of international consulting services. The Company
agreed to compensate the consultant $15,000 per month payable in cash and an
additional $15,000 per month payable in shares of the Company's restricted stock
(to be valued based on the share price of the first private offering. The
Company agreed to pay the consultant a fee of 2% of any royalties received by
the Company pursuant to royalty agreements that are a direct result of the
consultant's material efforts under the consulting agreement. In addition, the
Company agreed to pay the consultant a fee of 2% of any net sales received by
the Company pursuant to joint venture agreements that are a direct result of the
consultant's material efforts under the consulting agreement. The aforementioned
fees will be paid by the Company to the consultant for the term of any royalty
or joint venture agreements, not to exceed a period of 48 months. In January
2007, the agreement was extended for an additional six months.
On February 1, 2006, the Company amended an agreement with a consultant.
The original agreement was dated June 1, 2006 and called for $12,500 in 18
monthly payments commencing February 1, 2007. The amendment called for
additional monthly payments of $9,250 on February 1, 2007, $9,375 on March 1,
2007, and $9,000 per month from April 1, 2007 and continuing through September
1, 2007.
EMPLOYMENT AGREEMENTS. On October 30, 2006, the Company entered into an
employment agreement with an officer that expires on October 30, 2008. Pursuant
to the agreement, the officer will receive an annual base salary of $160,000.
The officer will also receive options to purchase the Company's common stock
that will equal 1% of the issued and outstanding shares of common stock plus any
shares convertible or exercisable into common shares at the first private
placement price. The options will be 25% vested on October 30, 2007 and
remaining 75% will be vested on October 30, 2008. The options expire 10 years
from the date of first private placement.
On November 1, 2006, the Company entered into an employment agreement with
an officer that expires on November 1, 2008. Pursuant to the agreement, the
officer will receive an annual base salary of $100,000 and 150,000 options to
acquire stock at the first private placement price. The options will be 100%
vested on November 1, 2008. The options expire 10 years from the date of first
private placement.
-16-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
COMMITMENTS. (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED). On January 1, 2007, the Company entered into
an employment agreement with an officer 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 receive 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. In addition, 450,000 options were granted to acquire common
stock at $2 per share. 150,000 options will vest on the third anniversary date,
150,000 options will vest on the fourth anniversary date and the remaining
150,000 options will vest on the fifth anniversary date. The options expire on
January 1, 2017.
On February 1, 2007, the Company entered into an employment agreement with
an officer that expires on February 1, 2008. Pursuant to the agreement, the
officer will receive an annual base salary of $120,000 and 25,000 options to
acquire common stock at $2 per share. The options will vest on February 1, 2008.
The options expire February 1, 2017.
We are currently not aware of any investigations, claims, or lawsuits that
we believe could have a material adverse effect on our financial position or on
our results of operations.
NOTE 6 - EQUITY
STOCK SPLIT. On January 3, 2007, the Company amended its Articles of
Incorporation to increase the authorized capital. The number of common shares of
no par stock authorized was increased to fifty million. Ten million shares of
preferred stock were authorized. The terms of the preferred shares have yet to
be determined by the Board of Directors. On January 9, 2007, the Company split
the number of common shares, issuing 6,000 common shares for each share
previously outstanding. The accompanying financial statements give retroactive
effect to the stock split for all periods presented.
WARRANTS. On December 16, 2006, Ecology issued warrants to purchase 500,000
shares of the Company's stock at $2 per share. The warrants were issued to the
holder of the $1,500,000 convertible note. The warrants vest on December 17,
2007. The weighted average remaining life of the warrants is 9.8 years.
-17-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 - EQUITY (CONTINUED)
REVERSE MERGER. An agreement was executed on November 6, 2006 by and
between OCIS Corporation ("OCIS") and Ecology Coatings, Inc. ("Ecology") for a
reverse merger to occur within 90 days. On November 6, 2006, the Company paid
$50,000 to OCIS for this right. The agreement was extended for 30 days with an
additional $25,000 payment. Under the terms of the agreement, the stockholders
of Ecology will acquire control of OCIS. Ecology will then become a wholly owned
subsidiary of OCIS. The agreement anticipates newly authorized shares of
Ecology, the 6,000 to 1 stock split (see Stock Split above) and the exercise of
stock options. OCIS shares shall be split such that they will hold 4.7% of the
total number of shares based on a fully diluted basis, but not less than 1.6
million shares. Non-vested options, if any, will not be considered for purposes
of this computation. On April 4, 2007, this agreement was extended.
-18-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7 - STOCK OPTIONS
STOCK OPTION PLAN. On January 10, 2007, the Company adopted a stock option
plan and has set aside 4,500,000 shares for the issuance of stock options or to
award restricted stock. The plan approved all prior grants of options. The plan
calls 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. Incentive stock options are limited to $100,000 per year per
employee based on the value of the common stock. 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 six months
ended March 31, 2007:
Weighted Weighted
Average Average
Exercise (Remaining) Aggregate
Price per Number Contractual Fair
Share of Options Term Value
--------- ---------- ----------- ---------
Outstanding as of September 30, 2006 $2.00 150,000 9 $ 177
Granted $2.00 1,190,000 10 $679,084
Exercised -- -- -- --
Forfeited -- -- -- --
Outstanding as of March 31, 2007 $2.00 1,340,000 10 $679,261
Exercisable $ -- -- -- $ --
None of the options were exercisable as of March 31, 2007. The options are
subject to various vesting periods between February 1, 2007 and January 1, 2012.
The options expire on various dates between June 1, 2016 and March 1, 2017.
Additionally, the options had no intrinsic value as of March 31, 2007. Intrinsic
value arises when the exercise price is lower than the trading price.
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.
-19-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - STOCK OPTIONS (CONTINUED)
The Company accounts for stock options granted to non-employees under SFAS
Number 123 using EITF 98-16 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 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 99.76%
Risk Free Interest Rate 4.53%-5.11
Expected Life 6 years
The expected volatility was derived utilizing the price history of another
publicly traded nanotechnology company. This company was selected due to the
fact that it is widely traded and is in the same equity sector as our Company.
The risk free interest rate figures shown above contain the range of such
figures used in the Black-Scholes calculation. The specific rate used was
dependent upon the date of option grant.
Based upon the above assumptions and the weighted average $2 exercise
price, the options outstanding at March 31, 2007 had a total unrecognized
compensation cost of $637,072 and will be recognized over the remaining weighted
average vesting period of 2.2 years. Compensation cost of $42,190 was recorded
as an expense for the six months ending March 31, 2007. $22,231 was recorded as
compensation expense and $19,959 was recorded as consulting expense.
-20-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. As shown in the financial
statements for the six months ended March 31, 2007 and the fiscal year ended
September 30, 2006 we incurred net losses of ($1,267,411) and ($659,626),
respectively. At March 31, 2007 and September 30, 2006, we had stockholders'
deficit of ($2,222,700) and ($1,114,299), 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 through operating revenues
and through the issuance of equity securities and debt. Until we are able to
generate positive operating cash flows, additional funds will be required to
support operations. We believe that current working capital, cash receipts from
anticipated sales, and funding through sales of common stock will be sufficient
to enable us to continue as a going concern through fiscal year 2007. 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
EQUITY OFFERING. The Company commenced a private equity offering on April
1, 2007. Under the terms of the offering, the Company was offering 3.6 million
shares at $2 each. Convertible debt holders could convert up to $1,850,000 in
debt for up to 968,750 shares. The offering closed on July 25, 2007. 1,241,750
shares were sold at $2 each. Additionally, $1,749,470 in debt and accrued
interest was converted into 902,684 shares.
EMPLOYMENT AGREEMENT. On May 21, 2007, the Company entered into an
employment agreement with an officer that expires on May 21, 2009. Pursuant to
the agreement, the officer will receive an annual base salary of $160,000 and
300,000 options to acquire common stock at $2 per share. 75,000 of the options
vest on May 21, 2008 and 225,000 of the options vest on May 21, 2009. The
options expire on May 21, 2017.
RENTAL AGREEMENT. On April 1, 2007, the Company agreed to an $800 per month
increase to the rent on its premises located in Bloomfield Hills, MI. Monthly
rent under this month-to-month lease is $3,200.
-21-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9 - SUBSEQUENT EVENTS (CONTINUED)
CONSULTING AGREEMENT. On May 1, 2007, the Company entered into an agreement
with a consultant to provide information system consulting services. The
agreement calls for six monthly payments of $5,000 plus reimbursement for any
out of pocket costs. Additionally, options to purchase 1000 shares of common
stock at $2 per share were issued to the consultant, with additional options to
purchase 500 shares upon the achievement of certain performance measures. The
options are restricted for 12 months and expire 10 years from date of issuance.
EMPLOYMENT AGREEMENT. On June 18, 2007, the Company entered into an
employment agreement with a sales representative. The agreement calls for a
monthly salary of $11,250 and a $15,000 signing bonus. The signing bonus is
payable in $5,000 increments after 60, 120, and 180 days of employment. As part
of the agreement, the employee was granted an option to purchase 10,000 shares
of the Company's common stock at $2 per share. 50% of these options vest on June
1, 2008, with the remaining options vesting on June 1, 2009. The options expire
on June 14, 2017.
AMENDMENT TO EMPLOYMENT AGREEMENT. On July 1, 2007, the Company amended a
prior employment agreement dated November 1, 2006. The new agreement will expire
on November 1, 2009, and calls for an increase in annual salary from $100,000 to
$140,000, a one time bonus of $12,500 and the issuance of 87,500 options to
purchase Company stock at $2 per share. 25,000 of the options vest immediately,
37,500 vest on July 1, 2008, and 25,000 options vest on July 1, 2009. All of the
options expire on July 1, 2017.
REVERSE MERGER. The reverse merger with OCIS Corporation was consummated on
July 26, 2007. The shareholders of Ecology 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 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.
STOCK ISSUANCE. On July 6, 2007, the Company issued 180,000 shares to two
consultants to fulfill obligations owing under agreements with them.
-22-
ECOLOGY COATINGS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9 - SUBSEQUENT EVENTS (CONTINUED)
CONSULTING AGREEMENT. At closing of the reverse merger, the Company entered
into a consulting agreement with a company owned by two former officers and
directors of OCIS Corporation. The terms of the agreement call for designation
of the $100,000 standstill deposit paid to OCIS as a part of the total payment
of $200,000 at closing and the balance 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
program and initiatives; facilitate conferences between Ecology and members of
the business and financial community; review and analyze the public securities
market for Ecology's securities; and introduce Ecology to broker-dealers and
institutions, as appropriate.
EQUITY ISSUANCE. As a condition of attending a conference in April, 2007,
the Company issued 6,250 shares of its common stock to the conference vendor.
CONSULTING AGREEMENT. On June 1, 2007, the Company entered into a
consulting agreement with an individual in which the individual will serve as
the chairman of Ecology's business advisory board. The agreement expires June 1,
2009. Ecology will pay the consultant $11,000 per month. Additionally, Ecology
issued 200,000 options to purchase shares of the Company's common stock for $2
per share. 50,000 options vest on December 1, 2007, 50,000 options vest on June
1, 2008, 50,000 options vest on December 1, 2008, and the remaining 50,000
options vest on June 1, 2009. Additionally, the Company will reimburse the
consultant for all reasonable expenses incurred by the consultant in conduct of
Ecology business.
OPTIONS ISSUED. Including the options discussed in the other captions in
this footnote, the Company issued 1,678,650 options subsequent to March 31,
2007. 300,000 of the options vested on the date of grant. The remainder have
vesting periods ranging from December 1, 2007 until June 26, 2009. All of the
options expire ten years after vesting.
PATENT ISSUED. Patent #7238731 was issued to Ecology on July 3, 2007. The
patent covers environmentally friendly coating compositions for coating metal
objects, coated objects therefrom, and methods, processes and assemblages for
coating thereof.
-23-
ECOLOGY COATINGS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NOTE 10 - UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The pro forma unaudited financial statements reflect the Closing of the
exchange transaction as of March 31, 2007, for Balance Sheet purposes as if the
Closing had occurred as of such date, and for the twelve months ended September
30, 2006, and for the six months ended March 31, 2007 for Statements of
Operations purposes, as if the Closing had occurred the first day of the period.
The unaudited pro forma financial data and the notes thereto should be read in
conjunction with Ecology and OCIS' historical assumptions and estimates of
management that are subject to change. The unaudited pro forma financial data is
presented for illustrative purposes only and is not necessarily indicative of
any future results of operations or the results that might have occurred if the
exchange transaction had actually occurred on the indicated dates.
The reverse merger with OCIS Corporation was consummated on July 26, 2007.
The shareholders of Ecology acquired 95% of the voting stock of OCIS. OCIS had
no significant operating history. The consideration to the shareholders of OCIS
was 5% of the stock, at closing, of the successor company.
-24-
ECOLOGY COATINGS, INC.
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
Ecology Coatings, Inc. OCIS Corporation Pro Forma Pro Forma
March 31, 2007 March 31, 2007 Adjustments Consolidated
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------------- ---------------- ----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 56,221 $ 130,950 $ 2,483,500 A $ 2,470,671
(200,000)B
Prepaid expenses -- -- 500,000 B 500,000
----------- ---------- -----------
Total Current Assets 56,221 130,950 2,970,671
----------- ---------- -----------
Property and Equipment, net 9,790 -- 9,790
Patents and trademarks-- net 292,460 -- 292,460
Merger fee 127,635 -- (100,000)C --
(27,635)E
----------- ---------- -----------
Total Assets $ 486,106 $ 130,950 $ 3,272,921
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities $ 478,162 $ 7,030 $ 485,192
Consulting agreement payable -- -- 300,000 B 300,000
Deferred revenue 41,667 -- 41,667
Interest payable 138,891 -- (49,470)A 89,421
Standstill deposit -- 100,000 (100,000)C --
Convertible notes payable 1,802,535 -- (1,700,000)A 129,840
27,305 H
Notes payable - related party 243,500 -- 243,500
----------- ---------- -----------
Total Current Liabilities 2,704,755 107,030 1,289,620
Deferred revenue - long-term portion 4,051 -- 4,051
----------- ---------- -----------
Total Liabilities $ 2,708,806 $ 107,030 $ 1,293,671
----------- ---------- -----------
Stockholders' Equity:
Preferred stock $ -- $ -- $ --
Common stock 301,010 1,017 32,153 A 32,131
(1,017)D
(301,010)G
Capital in Excess of Par Value -- 131,324 4,236,283 A 4,498,134
1,017 D
(27,635)E
(108,421)F
301,010 G
108,421 F
Accumulated Deficit (2,523,710) (108,421) (27,305)H (2,551,015)
----------- ---------- -----------
Total Stockholders' Equity (Deficit) (2,222,700) 23,920 1,979,250
----------- ---------- -----------
Total Liabilities and Stockholders'
Equity (Deficit) $ 486,106 $ 130,950 $ 3,272,921
=========== ========== ===========
-25-
ECOLOGY COATINGS, INC.
NOTES TO UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
Note: The executed reverse merger agreement calls for the issuance of 1.6
million shares of the merged entity to OCIS shareholders at the time of the
merger. As a condition of the reverse merger, Ecology Coatings must raise a
minimum of $4,000,000 in cash and debt conversions.
Note 1: The number of shares outstanding at March 31, 2007 reflects 28,200,000
shares outstanding at that date, 186,250 shares issued to three different
consultants, 1,600,000 issued to shareholders of OCIS at the time of the reverse
merger and 2,144,434 issued to investors in the private placement discussed in A
below.
A. Reflects cash raised of $2,483,500 and the conversion of $1,749,470 in notes
payable and accrued interest. See Note on this page. The amount is allocated
between Common Stock at 32,130,684 shares at $.001 par value and Capital in
Excess of Par Value.
B. Reflects conditions of a consulting agreement with two principals of OCIS.
Agreement calls for payment of $200,000 at closing of reverse merger and
$300,000 paid in 18 equal monthly increments beginning in first month after
reverse merger. Consulting agreement will continue for 18 months.
C. Elimination of these offsetting asset and liability accounts. The amount
reflects consideration paid by Ecology Coatings, Inc. to OCIS Corporation in
exchange for OCIS' forbearance from entering into any other reverse merger
agreements.
D. Reflects the elimination of the OCIS shares.
E. Reflects legal fees paid related to the merger which are absorbed into
Capital in Excess of Par Value.
F. Reflects the elimination of the Accumulated Deficit from OCIS.
G. Reflects the re-allocation of Ecology Common Stock into Capital in Excess of
Par Value.
H. Reflects the additional amortization of the beneficial conversion associated
with the converted notes.
-26-
ECOLOGY COATINGS, INC.
UNAUDITED CONDENSED PRO FORMA INCOME STATEMENT
Ecology Coatings, OCIS
Inc. Corporation
For the Six For the Six
Months Ended Months Ended Pro Forma Pro Forma
March 31, 2007 March 31, 2007 Adjustments Consolidated
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------------- ---------------- ----------- ------------
Revenues $ 20,834 $ -- $ 20,834
General and administrative costs 1,134,960 21,806 1,156,766
----------- ---------- -----------
Operating Loss (1,114,126) (21,806) (1,135,932)
Other Income (Expense)
Interest income 2,374 1,218 3,592
137,654 A
Interest expense (155,659) -- (27,305)B $ (45,310)
----------- ---------- -----------
Total Other Income (Expense) (153,285) 1,218 (41,718)
----------- ---------- -----------
Net Loss $(1,267,411) $ (20,588) $(1,177,650)
=========== ========== ===========
Basic and diluted net loss per share $ (0.04) $ (0.02) $ (0.04)
=========== ========== ===========
Basic and diluted weighted average of
common shares outstanding 28,200,000 1,017,000 32,130,684
=========== ========== ===========
Note: The executed reverse merger agreement calls for the issuance of 1.6
million shares of the merged entity to OCIS shareholders at the time of the
merger. As a condition of the reverse merger, Ecology Coatings must raise a
minimum of $4,000,000 in cash and debt conversions.
Note 1: The number of shares outstanding at March 31, 2007 reflects 28,200,000
shares outstanding at that date, 186,250 shares issued to three different
consultants, 1,600,000 issued to shareholders of OCIS at the time of the reverse
merger and 2,144,434 issued to investors in the private placement.
A. Reflects the adjustment to interest expense if the transaction had taken
place on October 1, 2006 and the convertible notes were converted to equity on
that date.
B. Reflects the amortization of the beneficial conversion that is associated
with the converted notes.
-27-
ECOLOGY COATINGS, INC.
UNAUDITED CONDENSED PRO FORMA INCOME STATEMENT
Ecology Coatings, Inc. OCIS Corporation
For the Fiscal For the Twelve
Year Ended Months Ended Pro Forma Pro Forma
September 30, 2006 September 30, 2006 Adjustments Consolidated
(Audited) (Unaudited) (Unaudited) (Unaudited)
---------------------- ------------------ ----------- ------------
Revenues $ 41,838 $ -- $ 41,838
General and administrative costs 636,230 16,679 652,909
----------- ---------- -----------
Operating Loss (594,392) (16,679) (611,071)
Other Income (Expense)
Interest income -- 1,318 1,318
38,640 A
Interest expense (65,234) -- (27,305)B (53,899)
----------- ---------- -----------
Total Other Income (Expense) (65,234) 1,318 (52,581)
----------- ---------- -----------
Net Loss from Continuing Operations (659,626) (15,361) (663,652)
Net Profit from Discontinued Operations -- 8,845 8,845
----------- ---------- -----------
Net Loss from Continuing and
Discontinued Operations $ (659,626) $ (6,876) $ (654,807)
=========== ========== ===========
Basic and diluted net loss per share:
Continuing operations $ (0.03) $ (0.02) $ (0.02)
Discontinued operations -- 0.01 --
----------- ---------- -----------
Total basic and diluted net loss per
share $ (0.03) $ (0.01) $ (0.02)
=========== ========== ===========
Basic and diluted weighted average of
common shares outstanding 24,662,466 1,017,000 32,130,684
=========== ========== ===========
Note: The executed reverse merger agreement calls for the issuance of 1.6
million shares of the merged entity to OCIS shareholders at the time of the
merger. As a condition of the reverse merger, Ecology Coatings must raise a
minimum of $4,000,000 in cash and debt conversions.
Note 1: The number of shares outstanding at March 31, 2007 reflects 28,200,000
shares outstanding at that date, 186,250 shares issued to three different
consultants, 1,600,000 issued to shareholders of OCIS at the time of the reverse
merger and 2,144,434 issued to investors in the private placement.
A. Reflects the adjustment to interest expense if the transaction had taken
place on October 1, 2005 and the convertible notes were converted to equity on
that date.
B. Reflects the amortization of the beneficial conversion that is associated
with the converted notes.
-28-