Summary Of Significant Accounting Policies

3 Months Ended

Jun. 30, 2011

Summary Of Significant Accounting Policies

Summary Of Significant Accounting Policies

Note 1 — Summary of Significant Accounting Policies

Description of the Company.   We were originally incorporated on March 12, 1990 in California (“Ecology-CA”).  Our current entity was incorporated in Nevada on February 6, 2002 as OCIS Corp. (“OCIS”).  OCIS completed a merger with Ecology-CA on July 26, 2007 (the “Merger”). In the Merger, OCIS changed its name from OCIS Corporation to Ecology Coatings, Inc.  We develop EcoBloc™ 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”).

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, 2010 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, 2010 annual consolidated financial statements included in the Form 10-K we filed with the Securities and Exchange Commission on January 13, 2011.

Our operating results for the nine months ended June 30, 2011 are not necessarily indicative of the results that can be expected for the year ending September 30, 2011 or for any other period.

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

Basis of Presentation. On February 7, 2011, our shareholders approved a one for five reverse stock split. In accordance with U.S. Generally Accepted Accounting Principles, we have restated all share and per share related information to conform to this reverse split for all periods presented. This includes information related to stock options, warrants, and convertible preferred shares. See Note 6.

Principles of Consolidation.   The consolidated financial statements include all of our accounts and the accounts of our wholly owned subsidiary Ecology-CA.  All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates.   The preparation of 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.

Revenue Recognition.   Revenues from licensing contracts are recorded ratable over the life of the contract.  Contingency earnings such as royalty fees are recorded when the amount can reasonably be determined and collection is likely.

Income from forgiveness of payables and Debt.   Income from the forgiveness of payables and/or debt is recognized when all of the conditions associated with the forgiveness have been met. During the three and nine months ended June 30, 2011, we recognized  $0 and $872,861 in  income from forgiveness of payables and debt. We also reached a settlement with a law firm to whom we owed approximately $340,000.  In exchange for a cash  payment and the issuance of 650,000 shares of our common stock, the firm released its claim subject to two conditions. The first condition involves an additional payment of the first $100,000 in revenue we receive from a potential future patent licensing agreement plus 25% of revenue in excess of $100,000, or, if we fail to consummate a licensing agreement by December 29, 2011, the issuance of an additional 25,000 shares of our common stock. The second condition requires that if we file bankruptcy on or before December 29, 2011, the entire amount of the payable not yet settled—approximately $178,000 – could be filed as a bankruptcy claim. The amount of the payable not yet settled - $178,000 - is reflected in the accrued liabilities figure on our balance sheet dated June 30, 2011.

Loss Per Share. Basic loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of shares of common stock outstanding during the period.  Diluted loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of shares of common stock and potentially dilutive securities outstanding during the period.  Potentially dilutive shares consist of the incremental common shares issuable upon the exercise of stock options and warrants and the conversion of convertible debt and convertible preferred stock. Potentially dilutive shares are excluded from the weighted average number of shares if their effect is anti-dilutive.  None of the stock options or warrants outstanding or stock associated with the convertible debt or with the convertible preferred shares during each of the periods presented were included in the computation of diluted loss per share as they were anti-dilutive.  As of June 30, 2011 and June 30, 2010, there were 33,274,578 and 5,246,820 potentially dilutive shares outstanding, respectively.  

Property and Equipment.   Property and equipment is stated at cost less accumulated depreciation.  Depreciation is recorded using the straight-line method over the following useful lives:

Computer equipment	3-10 years
Furniture and fixtures	3-7 years
Test equipment	5-7 years
Signs	7 years
Software	3 years
Marketing and Promotional Video	3 years

Repairs and maintenance costs are charged to operations as incurred. Betterments or renewals are capitalized as incurred.

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.  Five patents were issued as of June 30, 2011 and are being amortized over 8 years.

        Long-Lived Assets. We review long lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Stock-Based Compensation.   Employee and director stock-based compensation expense is measured utilizing the fair-value method with expense charged to earnings over the vesting period on a straight-line basis.

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

Expense Categories.   Salaries and Fringe Benefits of $144,897 and $112,439 for the three months ended June 30 , 2011 and 2010, respectively, include wages paid to and insurance benefits for our officers.  Professional fees of $49,438 and $84,204 for the three months ended June 30, 2011 and  2010, respectively, include amounts paid to attorneys, accountants, and consultants, as well as the stock based compensation expense for those services.   Salaries and Fringe Benefits of $409,216 and $423,616 for the nine months ended June 30, 2011 and 2010, respectively, include wages paid to and insurance benefits for our officers.  Professional fees of $192,462 and  $355,985  for the nine months ended June  30, 2011 and  2010, respectively, include amounts paid to attorneys, accountants, and consultants, as well as the stock based compensation expense for those services.  

Recent Accounting Pronouncements

We have reviewed all Accounting Standards Updates issued by the Financial Accounting Standards Board since we last issued financial statements as part of our Form 10-Q filed on May 12, 2011 and have determined none of them would have a material effect on the consolidated financial statements upon adoption.