form10qafirstquarter2010.htm

Item 1. Financial Statements

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets

ASSETS

	December 31, 2009	September 30, 2009
	Unaudited

Current Assets
Cash and cash equivalents	$27,323	$ -
Accounts Receivable	5,457	-
Prepaid expenses	1,400	1,400

Total Current Assets	34,180	1,400

Property and Equipment
Computer equipment	30,111	30,111
Furniture and fixtures	21,027	21,027
Test equipment	9,696	9,696
Signs	213	213
Software	6,057	6,057
Video	48,177	48,177
Total property and equipment	115,281	115,281
Less: Accumulated depreciation	(55,178)	(48,609)

Property and Equipment, net	60,103	66,672

Other Assets
Patents-net	217,103	443,465
Trademarks-net	7,180	6,637

Total Other Assets	224,283	450,102

Total Assets	$318,566	$518,174

See the accompanying notes to the unaudited consolidated financial statements.

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets

LIABILITIES AND STOCKHOLDERS' DEFICIT
	December 31, 2009	September 30, 2009
	Unaudited
Current Liabilities
Bank overdraft	$ -	$ 200
Accounts payable	1,256,612	1,272,057
Credit card payable	114,622	114,622
Accrued liabilities	50,321	76,084
Interest payable	238,715	189,051
Convertible notes payable	582,301	582,301
Notes payable - related party	261,316	257,716
Preferred dividends payable	14,612	36,800
Total Current Liabilities	2,518,499	2,528,831

Total Liabilities	2,518,499	2,528,831

Commitments and Contingencies (Note 5)	-	-

Stockholders' Deficit
Preferred Stock - 10,000,000 $.001 par value shares	4	2
authorized; 3,513 and 3,002 shares issued and outstanding
as of December 31, 2009 and September 30, 2009, respectively
Common Stock - 90,000,000 $.001 par value shares
authorized; 32,910,684 and 32,835,684
outstanding as of December 31, 2009 and
September 30, 2009, respectively	32,934	32,859
Additional paid in capital	22,112,573	20,645,299
Accumulated Deficit	(24,345,444)	(22,688,817)

Total Stockholders' Deficit	(2,199,933)	(2,010,657)


Total Liabilities and Stockholders' Deficit	$ 318,566	$ 518,174

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
	December 31, 2009	December 31, 2008


Revenues	$ 5,457	$ -

Salaries and fringe benefits	316,258	482,570
Professional fees	184,143	2,048,747
Other general and administrative costs	288,184	98,312
Total General and Administrative Expenses	788,585	2,629,629

Operating Loss	(783,128)	(2,629,629)

Other Income (Expense)
Interest Income	-	142
Interest Expense	(52,788)	(124,622)
Total Other Expenses - net	(52,788)	(124,480)

Net Loss	$ (835,916)	$ (2,754,109)

Preferred Dividends—Beneficial Conversion
Feature	(768,544)	-
Preferred Dividends—Stock Dividends	(53,074)	(44,461)

Net Loss available to common shareholders	$ (1,657,534)	$ (2,798,570)

Basic and diluted net loss per share	$ (0.05)	$ (0.09)

Basic and diluted weighted average of
common shares outstanding	32,873,456	32,233,600

See the accompanying notes to the unaudited consolidated financial statements.

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)

	For the three months ended	For the three months ended
	December 31, 2009	December 31, 2008

OPERATING ACTIVITIES
Net loss	$ (835,916)	$ (2,754,109)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization	11,185	11,026
Option expense	165,044	1,997,949
Warrant expense	-	63,512
Shares issued in exchange for services	22,500	-
Patent Abandonment	222,112	-
Changes in Asset and Liabilities
Accounts Receivable	(5,457)	-
Prepaid expenses	-	16,268
Bank overdraft	(200)	4,528
Accounts payable	(15,445)	69,461
Accrued liabilities	(25,763)	7,549
Credit card payable	-	2,069
Franchise tax payable	-	(800)
Interest payable	49,663	(75,045)
Net Cash Used in Operating Activities	(412,277)	(657,593)

INVESTING ACTIVITIES
Purchase of fixed assets	-	(16,480)
Purchase of intangibles	-	(8,400)
Net Cash Used in Investing Activities	-	(24,880)

FINANCING ACTIVITIES
Repayment of debt	-	(311,803)
Proceeds from issuance of convertible preferred shares	436,000	-
Proceeds from debt	3,600	20,000
Net Cash From (Used) in Financing Activities	439,600	(291,803)

Net Increase (Decrease) in Cash and Cash Equivalents	27,323	(974,276)

CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD	-	974,276
CASH AND CASH EQUIVALENTS AT END
OF PERIOD	$ 27,323	$ -

See the accompanying notes to the unaudited consolidated financial statements.

ECOLOGY COATINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)


	For the three months ended	For the three months ended
	December 31, 2009	December 31, 2008


SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid	$ -	$ 132,000
Income taxes paid	$ -	$ -

See the accompanying notes to the unaudited consolidated financial statements.

ECOLOGY COATINGS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009 AND DECEMBER 31, 2008

Note 1 — Summary of Significant Accounting Policies

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, 2009 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, 2009 annual consolidated financial statements included in the Form 10-K/A we filed with the Securities and Exchange Commission on February 16, 2010.

Our operating results for the three months ended December 31, 2009 are not necessarily indicative of the results that can be expected for the year ending September 30, 2010 or for any other period.

Going Concern. In connection with their audit report on our consolidated financial statements as of September 30, 2009, 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 target 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 product sales are recognized on the date that the product is shipped. Revenues from licensing contracts are recorded ratably over the life of the contract. Contingency earnings such as royalty fees are recorded when the amount can reasonably be determined and collection is likely.

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 potential conversion of debt and Preferred Series A and Preferred Series B 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 potential conversion of debt or with Preferred Series A and Preferred Series B shares during each of the periods presented were included in the computation of diluted loss per share as they were anti-dilutive. As of December 31, 2009 and September 30, 2009, there were 24,183,419 and 20,323,996 potentially dilutive shares outstanding, respectively.

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.

As of December 31, 2009 and September 30, 2009, 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 September 30, 2009 and are being amortized over 8 years. During the three months ended December 31, 2009, we abandoned a number of patent applications and recognized an expense of $222,112 as a result of this.

Stock-Based Compensation. Employee and director stock-based compensation expense is measured utilizing the fair-value method.

We account for stock options granted to non-employees under the fair-value method with stock-based compensation expense being charged to earnings on the earlier of the date services are performed or a performance commitment exists.

Expense Categories. Salaries and Fringe Benefits of $316,258 and $482,570 for the three months ended December 31, 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 $181,143 and $2,048,747, for the three months ended December 31, 2009 and 2008, respectively, include amounts paid to attorneys, accountants, and consultants, as well as the stock based compensation expense for those services. Of the $2,048,747 in professional fees incurred in the three months ended December 31, 2008, $1,752,318 was for options expense. Of this amount, $1,368,450 arose from the issuance of warrants in November 2008 to Trimax to acquire 2,000,000 shares of our common stock.

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.

Note 2 — Concentrations

For the three months ended December 31, 2009 and 2008, we had revenues of $5,457 and $-0-, respectively. One customer accounted for all of our revenues for the three months ended December 31, 2009. As of December 31, 2009 $5,457 was due from this customer.

We occasionally maintain bank account balances in excess of the federally insurable amount of $250,000. We did not exceed this limit as of December 31, 2009 and September 30, 2009.

Note 3 — Related Party Transactions

We have borrowed funds for our operations from certain major stockholders, directors and officers as disclosed below:

We have an unsecured note payable due to Deanna Stromback, a principal shareholder and former director and sister of our former Chairman, Rich Stromback, that bears interest at 4% per annum with principal and interest due on December 31, 2009. As of December 31, 2009 and September 30, 2009, the note had an outstanding balance of $110,500. The accrued interest on the note was $14,486 and $13,235 as of December 31, 2009 and September 30, 2009, 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. The note is in default and is currently due and payable.

We have an unsecured note payable due to Doug Stromback, a principal shareholder and former director and brother of our former Chairman, Rich Stromback, that bears interest at 4% per annum with principal and interest due on December 31, 2009. As of December 31, 2009 and September 30, 2009, the note had an outstanding balance of $133,000. The accrued interest on the note was $17,442 and $15,936 as of December 31, 2009 and September 30, 2009, 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. The note is in default and is currently due and payable.

We had an unsecured note payable due to Rich Stromback, our former Chairman and a principal shareholder, that bore interest at 4% per annum with principal and interest due on December 31, 2009. As of December 31, 2009 and September 30, 2009, the note had an outstanding balance of $0. The unpaid accrued interest on the note was $2,584 as of December 31, 2009 and September 30, 2009, respectively. 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. The interest is in default and is currently due and payable.

We have an unsecured note payable to an entity controlled by J.B. Smith, a director of the company. This note bears interest at 5% per annum and is convertible under certain conditions. It is due within 15 days of demand by the holder. As of December 31, 2009 and September 30, 2009, the note had an outstanding balance of $7,716. Accrued interest of $195 and $96 was outstanding of December 31, 2009, September 30, 2009.

We have an unsecured note payable to an entity controlled by J.B. Smith, a director of the company. This note bears interest at 5% per annum and is convertible under certain conditions. It is due within 15 days of demand by the holder. As of December 31, 2009 and September 30, 2009, the note had an outstanding balance of $6,500 Accrued interest of $100 and $18 was outstanding of December 31, 2009 and September 30, 2009.

We have an unsecured note payable to an entity controlled by J.B. Smith, a director of the company. This note bears interest at 5% per annum and is convertible under certain conditions. It is due within 15 days of demand by the holder. As of December 31, 2009 and September 30, 2009, the note had an outstanding balance of $3,600 and $0, respectively. Accrued interest of $15 and $0 was outstanding of December 31, 2009 and September 30, 2009.

Future maturities of related party long-term debt as of September 30, 2009 are as follows:


12 Months Ended December 31,
2010	$	261,316

We have a payable to Richard Stromback and an entity controlled by him totaling $98,730 and $145,191 as of December 31, 2009 and September 30, 2009, respectively, included in accounts payable on the consolidated balance sheets.

Note 4 — Notes Payable

We have the following notes:

	December 31, 2009	September 30, 2009
George Resta Note: 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. 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 $12,264 and $9,232 was outstanding as of December 31, 2009 and September 30, 2009, respectively.	$38,744		$38,744

Investment Hunter, LLC Note: 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. 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 2008 were made, but none have been made since. Accrued interest of $87,284 and $64,650 was outstanding as of December 31, 2009 and September 30, 2009, respectively.	293,557		293,557

Mitchell Shaheen Note: Subordinated note payable, 25% per annum, unsecured, principal and interest was due July 18, 2008. Additionally, the Company issued a warrant to purchase 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 $61,348 and $48,787 was outstanding as of December 31, 2009 and September 30, 2009, respectively.	150,000		150,000

Mitchell Shaheen Note: Subordinated note payable, 25% per annum, unsecured, principal and interest was due August 10, 2008. Additionally, the Company issued a warrant to purchase 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 $43,013 and $34,513was outstanding as of December 31, 2009 and September 30, 2009, respectively.	100,000		100,000

	$582,301		$582,301

All of the notes shown in the table above are in default and are currently due and payable.

The notes held by Investment Hunter, LLC, George Resta and Mitchell Shaheen had convertibility features when they were issued. As of December 31, 2009, the convertibility features had expired.

All of the notes payable in the table above initially had conversion rights and warrants. These Notes may be converted for the principal balance and any unpaid accrued interest to Common Stock. We recognized an embedded beneficial conversion feature present in these Notes. We 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 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.

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. We agreed to issue 500,000 shares of our common stock as payment for services owed under the Former Consulting Agreement.

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

On September 17, 2008, we entered into an agreement with DAS Ventures LLC (“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 revenues and commissions on product sales equal to 3% of said sales and reimbursement for information technology expenses incurred by the consultant in the performance of duties relating to the Company. This agreement expires on September 17, 2011.

On November 11, 2008, we settled the lawsuit we filed against Trimax, LLC (“Trimax”) on September 11, 2008 for breach of contract. Under the terms of the settlement, we will pay Trimax $7,500 per month for twelve months under a new consulting agreement and will pay $15,000 in 12 equal monthly payments of $1,250 to Trimax’s attorney. Additionally, we will pay Trimax a commission of 15% for licensing revenues and 3% for product sales that Trimax generates for the Company. 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.

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 September 21, 2009, we entered into a second amendment to the employment agreement with Ms. Ramsey that amends her employment agreement with us dated January 1, 2007 to provide for an annual salary of $75,000 effective November 1, 2009. From December 15, 2008 until September 21, 2009, Ms. Ramsey's annual salary was $60,000.

On September 21, 2009, we entered into an employment agreement with Robert G. Crockett , our CEO. Mr. Crockett has served as our CEO since September 15, 2008. The agreement expires on September 21, 2012. Mr. Crockett will receive an annual base salary of $200,000. The Compensation Committee of the Board of Directors may review Mr. Crockett’s salary to determine what, if any, increases shall be made thereto. In addition, the vesting for Mr. Crockett’s previously awarded stock options was adjusted so that 110,000 stock options will vest 12 months, 18 months and 24 months, respectively, from Mr. Crockett’s initial date of employment (September 15, 2008). Mr. Crockett was also granted stock options to purchase 670,000 shares of our common stock, one-quarter of which shall vest at 30, 36, 42 and 48 months from Mr. Crockett’s initial date of employment with us (September 15, 2008) with an exercise price of $.51 per share. The agreement may be terminated prior to the end of the term for cause. If Mr. Crockett’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause.

On September 21, 2009, we entered into an employment agreement with Daniel V. Iannotti, our Vice President, General Counsel & Secretary. Mr. Iannotti has served as our Vice President, General Counsel since August 11, 2008. The agreement expires on September 21, 2012. Effective November 1, 2009, Mr. Iannotti will receive an annual base salary of $150,000. The Compensation Committee of the Board of Directors may review Mr. Iannotti’s salary to determine what, if any, increases shall be made thereto. In addition, the vesting for Mr. Iannotti’s previously awarded stock options was adjusted so that 110,000 stock options will vest 12 months, 18 months and 24 months, respectively, from Mr. Iannotti’s initial date of employment (August 11, 2008). Mr. Iannotti was also granted stock options to purchase 70,000 shares of our common stock, one-quarter of which shall vest at 30, 36, 42 and 48 months from Mr. Iannotti’s’s initial date of employment with us (August 11, 2008) with an exercise price of $.51 per share. The agreement may be terminated prior to the end of the term for cause. If Mr. Iannotti’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year after a change in control shall be deemed to be a termination without cause.

On September 21, 2009, we entered into an employment agreement with F. Thomas Krotine, our COO. The agreement expires on September 21, 2010. Effective November 1, 2009, Mr. Krotine will receive an annual base salary of $65,000. The Compensation Committee of the Board of Directors may review Mr. Krotine’s salary to determine what, if any, increases shall be made thereto. Mr. Krotine was also granted stock options to purchase 169,000 shares of our common stock, one-quarter of which shall vest at 6, 12, 18 and 24 months from September 21, 2009 with an exercise price of $.51 per share. The agreement may be terminated prior to the end of the term for cause. If Mr. Krotine’s employment is terminated without cause or for “good reason,” as defined in the agreement, he is entitled to 50% of the salary that would have been paid over the balance of the term of the agreement. Further, a termination within one year of a change in control shall be deemed to be a termination without cause.

Contingencies.

On November 18, 2009, Investment Hunter, LLC, one of our note holders, filed suit in the Supreme Court of New York for repayment of $360,920 plus interest, attorneys fees and costs. We have previously made payments totaling $300,000 to Investment Hunter. We have engaged counsel in New York and filed a response to Investment Hunter’s pleadings.

On December 15, 2009, McLarty Associates LLC, one of our prior consultants, filed suit in the Superior Court in Washington, D.C. against us seeking an additional $150,000 from us under our consulting agreement. We have previously paid McLarty Associates $210,000 and issued 90,000 shares of common stock yet we have not received anything tangible from McLarty Associates. We are in the process of filing a response to the complaint.

On January 11, 2010, John Henke, the attorney who represented Trimax, LLC, filed suit in the 52nd District Court in Rochester Hills, MI to recover $13,750 owed to him as attorneys fees under the Settlement Agreement we reached with Trimax on November 11, 2008. We are in the process of filing a response to the complaint.

Lease Commitments.

	a.		The Company leases office and lab facilities in Akron, OH on a month-to-month basis for $1,800. Rent expense for the three months ended December 31, 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 expenses for the three months ended December 31, 2009 and 2008 were $9,023 and $8,133, respectively.

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 7.0 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 8.0 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 8.0 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 8.0 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 8.3 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 8.3 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 8.3 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 8.3 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 8.3 years.

We issued the following immediately vested warrants to Equity 11 in conjunction with Equity 11’s purchases of our Preferred Series A 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 9.0 years.

Shares. On August 28, 2008, we entered into an agreement with Equity 11 to issue up to $5,000,000 in convertible preferred securities “Preferred Series A”). 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 Series A shares carry “as converted” voting rights. As of December 31, 2009, we had issued 2,497 of these Preferred Series A shares. As we sold additional Preferred Series A shares under this agreement, we issued attached warrants (500 warrants for each $1,000 Preferred Series A 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 Preferred Series A stock through December 31, 2009.

On May 15, 2009, we entered into an agreement with Equity 11 to issue convertible preferred securities at $1,000 per share (“Preferred Series B”). 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 December 31, 2009, we have issued 776 of these Preferred Series B shares. These shares are convertible into 8,954,371 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 Preferred Series B 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.

On September 30, 2009, Ecology Coatings, Inc. we and Stromback Acquisition Corporation, entered into a Securities Purchase for the issuance and sale of our 5.0% Cumulative Convertible Preferred Shares, Series B at a purchase price of $1,000 per share (“Preferred Series B”). Stromback Acquisition Corporation is owned by Richard Stromback a former member of our Board of Directors. Until April 1, 2010, Purchaser has the right to purchase up to 3,000 Preferred Series B shares. The Preferred Series B shares have a liquidation preference of $1,000 per share. Purchaser may convert the Preferred Series B shares into common stock of the Company at a conversion price that is seventy seven percent (77%) of the average closing price of Company’s common stock on the Over-The-Counter Bulletin Board for the five trading days prior to each investment. The Preferred Series B shares will pay cumulative cash dividends at a rate of 5% per annum, subject to declaration by our Board of Directors, on December 1 and June 1 of each year. We have agreed to provide piggyback registration rights for common stock converted by Purchaser under a Registration Rights Agreement. As of December 31, 2009, we had issued 240 of these Preferred Series B shares. Those shares are convertible into 571,429 shares of our common stock. Fifty percent (50%) of each investment, up to a maximum of $500,000, will be placed in a fund and disbursed as directed by Purchaser to satisfy our outstanding debts, accounts payable and/or investor relations programs (“Discretionary Fund”).

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.

We granted non-statutory options as follows during the three months ended December 31, 2009:

	Weighted Average Exercise Price Per Share	Number of Options	Weighted Average (Remaining) Contractual Term
Outstanding as of September 30, 2009	$1.13	5,131,119	8.5
Granted	$-	-	-
Exercised	$-	-	-
Forfeited	$-	-	-
Outstanding as of December 31, 2009	$1.13	5,131,119	8.5
Exercisable	$1.01	3,070,119	6.2

3,070,119 of the options were exercisable as of December 31, 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 December 31, 2009. Intrinsic value arises when the exercise price is lower than the trading price on the date of grant.

Employee and director stock-based compensation expense is measured utilizing the fair-value method.

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 Ecology.

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 $1.13 per share exercise price, the options outstanding at December 31, 2009 had a total unrecognized compensation cost of $483,287 which will be recognized over the remaining weighted average vesting period of .5 years. Options cost of $165,044 was recorded as an expense for the three months ended December 31, 2009 of which $162,212 was recorded as compensation expense and $2,832 was recorded as consulting expense.

Note 8 — Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the three months ended December 31, 2009 and 2008, we incurred net losses of ($835,916) and ($2,754,109), respectively. As of December 31, 2009 and September 30, 2009, we had stockholders’ deficits of ($2,199,933) and ($2,010,657), 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 fiscal year 2010 to continue our operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Note 9 — Subsequent Events

We evaluated subsequent events for potential recognition and/or disclosure through February 16, 2010, the date the consolidated financial statements were issued.

On January 13, 2010, we issued 55 Preferred Series B, at an aggregate price of $55,000 to Equity 11. These shares can be converted into 1,100,000 shares of our common stock.

On February 3, 2010, we entered into a Commercialization Agreement with WS Packaging Group, Inc. (“WSP”). The Agreement provides the terms and conditions for WSP’s purchase of our coatings for use on labels and packaging manufactured by WSP.


Nevada		26-0014658
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Large Accelerated Filer o	Accelerated Filer o
Non-accelerated filer o	Smaller Reporting Company x

Note Holder	Issue Date(s)	Amount Owing on December 31, 2009

Investment Hunter, LLC	March 1, 2008	$380,841

Mitchell Shaheen I	September 21, 2008	$211,348

Mitchell Shaheen II	July 14, 2008	$143,013

George Resta	March 1, 2008	$51,008

Rich Stromback	November 13, 2003	$2,584

Deanna Stromback	December 15, 2003	$124,986

Douglas Stromback	August 10, 2004	$150,442


þ		QUARTERLY REPORT PURUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934