BKTH 10-Q Quarterly Report Jan. 31, 2010 | Alphaminr
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BKTH 10-Q Quarter ended Jan. 31, 2010

Balance Sheet
Cash Flow
Income Statement
MEGOLA INC
10-Q 1 v177059_10q.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: January 31, 2010
Or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________

MEGOLA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Nevada
88-0492605
(STATE OR OTHER JURISDICTION
(IRS EMPLOYER
OF
INDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

SEC File Number: 000-49815

704 Mara Street, Suite 111
Point Edward, ON
N7V 1X4
(Address of Principal
(Zip Code)
Executive Offices)
Registrant's telephone number, including area code: Tel: (519) 336-0628
(Former Name or Former Address, if Changed Since Last Report)
(Address of Principal Executive Offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 704,080 at January 31, 2010.


Megola, Inc.

Table of Contents

PART I– FINANCIAL INFORMATION
Item 1.    Unaudited Interim Consolidated Financial Statements
3
Item 2.    Management's Discussion and Plan of Operation
13
Forward-Looking Statements
13
Item 3.    Controls and Procedures
15
PART II - OTHER INFORMATION
15
Item 1.    Legal Proceedings
15
Item 2.    Changes in Securities
15
Item 3.    Defaults upon Senior Securities.
15
Item 4.    Submission of Matters to a Vote of Security Holders.
15
Item 5.    Other Information.
15
Item 6.    Exhibits and Reports on S-8
15
2

PART I - FINANCIAL INFORMATION
Item 1 . Megola, Inc. Interim Consolidated Financial Statements – Unaudited
Six Months Ended January 31, 2010 (Amounts expressed in US dollars)
January 31, 2010
July 31, 2009
(unaudited)
(Audited)
ASSETS
Cash
$ 2,410 $ -
Accounts receivable
72,915 -
Inventory
195,719 241,023
Prepaid expenses
27,538 41,482
Total Current Assets
298,582 282,504
Long-term receivable - (note 6)
117,191 128,754
Intangible Asset (note 9)
1,350,000 1,350,000
Property and equipment, net of accumulated depreciation of $59,354
10,245 12,424
TOTAL ASSETS
1,776,018 1,773,682
LIABILITIES
Bank overdraft
$ - $ 74,737
Accrued expenses
91,240 76,393
Accounts payable
77,620 45,822
Accrued interest
25,821 25,821
Advances from stockholders - (note 10)
19,597 -
Total Liabilities
214,278 222,773
Commitments and Contingencies
- -
STOCKHOLDERS' EQUITY
Capital stock: (note 11)
Common, $0.001 par value; 200,000,000 shares authorized, 704,080 issued and outstanding at January 31, 2010 and 663,749 July 31, 2009
704 664
Preferred "A", $0.001 par value; 3,500,000 shares authorized, 1,959,340 and 1,911,940 issued and outstanding at January 31, 2010 and July 31, 2009 respectively
1,959 1,912
Preferred "B", $0.001 par value; 1,500,000 shares authorized, 154,446 and 137,885 issued and outstanding at January 31, 2010 and July 31, 2009 respectively
154 138
Additional paid in capital - (note 11)
7,743,810 7,514,297
Deficit
(6,075,178 ) (5,873,775 )
Accumulated other comprehensive income (loss):
- -
Foreign currency translation adjustment
(109,709 ) (92,327 )
Total Stockholders' Equity
1,561,740 1,550,909
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 1,776,018 $ 1,773,682
See accompanying notes to unaudited interim consolidated financial statements

3

MEGOLA, INC.
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts expressed in US dollars)
FOR THE 3 MONTHS ENDED
FOR THE 6 MONTHS ENDED
January 31,
2010
January 31,
2009
January 31,
2010
January 31,
2009
Income - sales
$ 176,784 $ 2,845 $ 315,271 $ 14,256
Cost of sales
59,312 1,330 92,461 6,679
GROSS PROFIT (LOSS)
117,472 1,515 222,810 7,577
Royalty income (note 4)
0 400,000 0 400,000
117,472 401,515 222,810 407,577
General and administrative
189,169 117,376 356,539 259,031
Depreciation
1,031 1,144 2,256 2,137
Interest
715 4,194 1,418 9,646
Consulting fees
- - 64,000 78,232
TOTAL EXPENSES
190,915 122,714 424,213 349,044
NET INCOME (LOSS)
(73,443 ) 278,801 (201,403 ) 58,533
Foreign currency translation adjustment
(5,115 ) (36,451 ) (17,382 ) 84,435
COMPREHENSIVE INCOME (LOSS)
(78,558 ) 242,350 (218,785 ) 142,968
Weighted average common shares outstanding
680,595 680,595 680,595 680,595
Loss per share - basic and diluted
$ (0.108 ) $ 0.410 $ (0.296 ) $ 0.086
Comprehensive loss per share - basic and diluted
$ (0.115 ) $ 0.356 $ (0.321 ) $ 0.210
See accompanying notes to unaudited interim consolidated financial statements

4

MEGOLA, INC.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED)
(Amounts expressed in US dollars)
FOR THE SIX MONTHS ENDED
January 31,
2010
January 31,
2009
CASH FLOWS FROM OPERATING ACTIVITES
Net income (loss) for the period
(201,403 ) 58,533
Adjustments to reconcile net income (loss) to net cash used in operating activites
110,728 (61,775 )
(90,675 ) (3,242 )
CASH FLOWS FROM FINANCING ACTIVITES
Advances from stockholders
185,204 318,336
Principal payments on notes payable
- (114,051 )
185,204 204,285
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment
- (9,793 )
- (9,793 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(17,383 ) (4,276 )
NET INCREASE (DECREASE) IN CASH
77,146 186,974
NET CASH, beginning of period
(74,736 ) (1,291 )
NET CASH, end of period
2,410 185,683
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid
- -
Income taxes paid
- -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of debt into preferred stock
165,617 -
Issuance of stock for services rendered
- 75,000
See accompanying notes to unaudited interim consolidated financial statements

5

Megola, Inc.
CONSOLIDATED INTERIM STATEMENTS OF STOCKHOLDERS' EQUITY - unaudited
(Amounts expressed in US dollars)
January 31, 2010

Common Stock
Preferred Stock Series "A"
Preferred Stock Series "B"
Shares
Amount
Shares
Amount
Shares
Amount
Balances, July 31, 2008
1,569,721 $ 1,570 - $ - - $ -
Stock for services
50,000 50 - - - -
Common  converted to Preferred "A"
(955,972 ) (956 ) 1,911,940 1,912
Debt converted to Preferred "B"
- - 137,885 138
Stock Warrants
Net Loss
- - - - - -
Foreign Currency
Translation Adjustment
- - - - - -
Balances, July 31, 2009
663,749 $ 664 1,911,940 $ 1,912 137,885 $ 138
Stock for services
64,000 64 - - - -
Common converted to Preferred "A"
(23,668 ) (24 ) 47,400 47
Debt converted to Preferred "B"
16,561 16
Net Loss
- - - - - -
Foreign Currency
Translation Adjustment
- - - - - -
Balances, January 31, 2010
704,080 $ 704 1,959,340 $ 1,959 154,446 $ 154
Accumulated Other
Additional
Comprehensive
Paid In
Accumulated
Income (Loss)
Capital
Deficit
Totals
Balances, July 31, 2008
475 $ 5,981,528 $ (5,615,600 ) 367,973
Stock for services
- 74,950 - 75,000
Common  converted to Preferred "A"
(956 ) -
Debt converted to Preferred "B"
1,378,712 1,378,850
Stock Warrants
80,063 80,063
Net Loss
- - (258,174 ) (258,174 )
Foreign Currency
Translation Adjustment
(92,802 ) - - (92,802 )
Balances, July 31, 2009
(92,327 ) $ 7,514,297 $ (5,873,774 ) $ 1,550,910
Stock for services
- 63,936 - 64,000
Common  converted to Preferred "A"
(24 ) (1 )
Debt converted to Preferred "B"
165,600 165,616
Net Loss
- - (201,403 ) (201,403 )
Foreign Currency
Translation Adjustment
(17,382 ) - - (17,382 )
Balances, January 31, 2010
(109,709 ) $ 7,743,810 $ (6,075,178 ) $ 1,561,740
See accompanying notes to unaudited interim consolidated financial statements

6

MEGOLA, INC.
Notes to Unaudited Interim Consolidated Financial Statements for the Six Months ended January 31, 2010
(Amounts expressed in US dollars)

1.
NATURE OF BUSINESS

The accompanying unaudited interim consolidated financial statements of Megola, Inc. (the "Company" or “Megola”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Megola's Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal 2009 as reported in the 10-K have been omitted.

2.
GOING CONCERN

These unaudited interim consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the payment of liabilities in the ordinary course of business. At present, the Company does not have sufficient resources to fund its current working capital requirements. The Company has planned to obtain additional capital through various financing arrangements to service its current working capital requirements, any additional or unforeseen obligations or to implement any future opportunities. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due. These unaudited interim consolidated financial statements do not include any adjustments for this uncertainty.
Management’s Discussion and Analysis of Financial Condition and Results of Operation, management has undertaken the following initiatives that it believes will be instrumental in leading to better management of cash flows and more profitable operations:
· Outsourcing of much of the manufacturing activities has been established along with appropriate analysis ensuring cost competitiveness to minimize capital outlay and provide for rapid potential growth in production levels
· Establishment of policies and procedures for production processes to ensure timely delivery of product to distribution groups and customers
· Established relationships with Distribution groups that can provide the necessary expertise in commercialization of our entire product line to ensure maximum market penetration
· Signing of Definitive Sales and Agency Agreements, pertaining to the distribution rights, that have purchase/sale order requirements expected to generate substantial sales in the next five years
· Requirement for cash deposit with sales orders to minimize drain on working capital

3.
ACCOUNTING STANDARDS UPDATES

In January 2010, the FASB has published ASU 2010-06 “Fair Value Measurements and Disclosures (Topic 820): - Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 clarifies improve disclosure requirement related to fair value measurements and disclosures – Overall Subtopic (Subtopic 820-10) of the FASB Accounting Standards Codification. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure about purchase, sales, issuances, and settlement in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis.  The adoption of this standard is not expected to have a material impact on the Company’s financial position and results of operations.  The adoption of this standard did not have an impact on the Company’s financial position and results of operations.

7

MEGOLA, INC.
Notes to Unaudited Interim Consolidated Financial Statements for the Six Months ended January 31, 2010
(Amounts expressed in US dollars)

3.
ACCOUNTING STANDARDS UPDATES (con’t)
In August 2009, the FASB issued ASU 2009-05 which includes amendments to Subtopic 820-10, “Fair Value Measurements and Disclosures—Overall”. The update provides clarification that in circumstances, in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the techniques provided for in this update. The amendments in this ASU clarify that a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in this ASU is effective for the first reporting period, including interim periods, beginning after issuance.  The adoption of this standard did not have a material impact on the Company’s financial position and results of operations.

In June 2009, the Financial Accounting Standards Board issued Statement “FASB” issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 168”).  SFAS No. 168 will become the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature.  SFAS No. 168 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure.  Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections.  SFAS No. 168 will be effective for financial statements issued for reporting periods that end after September 15, 2009.  This statement will have an impact on the Company’s financial statements since all future references to authoritative accounting literature will be references in accordance with SFAS No. 168.

4.
ROYALTY INCOME

One of the Company's manufacturers also sells certain Megola products directly throughout Asia. By agreement, Megola is entitled to a royalty payment for each of these units. Megola recognizes royalty revenue upon fulfillment of its contractual obligations and upon sale by the manufacturer of royalty-bearing products. There was no royalty income received during the period due to the manufacturer moving its facilities to a new location in Southeast Asia, thereby not producing or selling any additional units.

On January 19, 2009 the Company entered into a Distributorship, Sales Agency and Royalty Agreement with Vulcan Technologies LLC.  Vulcan is granted exclusive distribution and sales rights for the Hartindo line of anti-fire products in Canada and Mexico as well as co-exclusive rights similarly in the United States for the Railroad Industry for a ten year term.  Megola receives payments as follows.  A payment of $400,000 within five days of the execution of the Agreement (funds have been received) and an additional $350,000 due 90 days following the date of this Agreement, provided that, under various existing contracts, Megola has purchased no less than 100,000 gallons of Hartindo AF21 in its fully diluted form. Vulcan will also pay a commission payment of 25% of Vulcan’s profits on products sold by any party in the Railroad Industry.  They also commit to generating no less than $3 million on or before the second anniversary of the Agreement.  They also commit to a 15% increase in gross sales for each year thereafter.

5.
INVENTORY

In the fiscal year ended July 31, 2007, the Company recorded a provision of $245,032, related to inventory impairment. Future product sales of these slow moving items will have no corresponding cost of sales due to the provision described above. These products are in good condition and are expected to be sold.

6.
LONG-TERM RECEIVABLE

The long-term receivable balance represents an amount owing by a supplier and will be offset against the Company’s future purchases of inventory. Since the amount will not be collected in the next 12 months, the balance has been classified as long-term loan receivable. The fair value of the long-term receivable has been estimated by discounting future cash flows using an estimated rate of 6%.  The fair value of long-term receivable is $110,558.

8

MEGOLA, INC.
Notes to Unaudited Interim Consolidated Financial Statements for the Six Months ended January 31, 2010
(Amounts expressed in US dollars)

7.
CASH FLOW INFORMATION

ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES

January 31,
January 31,
2010
2009
Depreciation
2,256 1,144
Stock-based compensation for services rendered
64,000 72,500
(Increase) decrease in loan receivable
(61,352 ) (319 )
(Increase) decrease in inventory
45,304 (201,204 )
(Increase) decrease in prepaid expenses
13,944 113
Increase (decrease) in accounts payable
31,729 33,926
Increase (decrease) in accrued expenses and other
14,847 (32,624 )
Increase (decrease) in accrued interest
- 5,215
(110,728 ) (61,775 )

8.
SEGMENT REPORTING

Megola sells in the U.S. and Asia as well as in Canada and has two reportable geographic segments, with summary information as follows:
North America
Asia
Total
Six months ended January 31, 2010
Revenues
$ 315,271 $ - $ 315,271
Net Income (Loss)
$ 201,403 - $ 201,403
Interest Expense
$ 1,418 $ - $ 1,418
Total Assets
1,776,018 $ - $ 1,776,018

North America
Asia
Total
Six months ended January 31, 2009
Revenues
$ 414,256 $ - $ 414,256
Net Income (Loss)
$ 58,533 $ - $ 58,533
Interest Expense
$ 9,646 $ - $ 9,646
Total Assets
$ 1,918,707 $ - $ 1,918,707
9.
INTANGIBLE ASSET
DISTRIBUTION RIGHTS

In January 2007, the Company acquired exclusive rights to establish a distribution network for the Hartindo line of fire safety products (“Hartindo”) from Pacific Channel Ltd. (“PCL”), an unrelated party.  These rights were acquired for $1,350,000 to be paid by the issuance of 30,000,000 common shares of the Company and are considered to have an indefinite life.

Per terms of the distribution agreement, for each contract the Company enters into, the following applies:

50% of all up-front fees received by the Company and 50% of all other forms of consideration received by the Company as a one-time payment for the grant of the distribution license shall be paid to PCL and 50% shall be retained by Megola

All payments are to be made quarterly within 30 days of the end each calendar quarter.

9

MEGOLA, INC.
Notes to Unaudited Interim Consolidated Financial Statements for the Six Months ended January 31, 2010 (Amounts expressed in US dollars)

9.
INTANGIBLE ASSET
DISTRIBUTION RIGHTS (con’t)

This agreement shall remain in full force and effect so long as the Company and its Hartindo dealers, sub-agents and/or sales representatives (the “Megola Group”) purchase Hartindo products in the aggregate amounts specified below, namely:

(a)
If in the period up to January 2010, the Megola Group purchases, in the aggregate, a minimum of US $200,000 Hartindo Products, the distribution agreement shall be extended until January 31, 2011; and

(b)
If in the period up to January 31, 2011, the Megola Group purchases, in the aggregate, a minimum of US $300,000 Hartindo products, the distribution agreement shall be extended until January 31, 2012; and

(c)
If in the period up to January 31, 2012, the Megola Group purchases, in the aggregate, a minimum of US $400,000 Hartindo products, the distribution agreement shall be extended until January 31, 2013; and

(d)
If in the period up to January 31, 2013, the Megola Group purchases, in the aggregate, a minimum of US $500,000 Hartindo products, the distribution agreement shall be extended until January 31, 2014; and

(e)
If in the period up to January 31, 2014, the Megola Group purchases, in the aggregate, a minimum of US $750,000 Hartindo products, the distribution agreement shall be extended for 25 years from January 31, 2014, or for such longer period as the Company retains the Hartindo product marketing rights for Canada, without any further performance conditions to be met.

The Company shall deliver to PCL on or before the end of February in each and every year, a statement showing the aggregate Hartindo purchases made by the Megola Group in the 12 month period ended January 31 in the prior year.

Failure to meet any of the above conditions shall give PCL the right to terminate the distribution agreement by a written notice to the Company with the agreement remaining in force until all payments owing by one party to another have been made. In December 2008, the sales/performance quota in the agreement with PCL has been moved forward starting January 31, 2010.

On January 28, 2010, the sales/performance quota in the agreement with PCL has been completely removed.

10.
ADVANCES FROM STOCKHOLDERS

Included in the balance are advances in the amount of $19,597 unsecured, bearing interest at 6% and are due on demand.

11.
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL
(a) Common stock
Common stock ($.001 par value per share): 200,000,000 shares are authorized, with 704,080 shares issued and outstanding at January 31, 2010 and 663,749 at July 31, 2009.

On August 5, 2009, Megola issued 3,200,000 shares of its common stock, for consulting services, under an agreement, valued at $64,000.  These shares were affected by the 1:50 reverse split that took place on November 25, 2009 and were converted into 64,000 shares.

On September 28, 2009, Megola’s common stock decreased by 41,500 shares, due to a tender offer to the company’s Series A Convertible Preferred stock.  These shares were submitted for tender prior to the deadline of June 15, 2009; however, an error was made in the transmittal of the request and subsequently was not processed until this time. These shares were affected by the 1:50 reverse split that took place on November 25, 2009 and were converted into 830 shares.

10

MEGOLA, INC.
Notes to Unaudited Interim Consolidated Financial Statements for the Six Months ended January 31, 2010 (Amounts expressed in US dollars)

11.
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL
(a) Common Stock (con’t)
On November 25, 2009 Megola approved a corporate action of a reverse 1:50 stock split.  The Management and Board of Directors of Megola Inc. have reviewed the recent activity and events of the company and feel that the company's common stock is vastly undervalued. Megola has therefore initiated a comprehensive plan to increase the share value of the common stock.

On January 21, 2010, Megola’s common stock decreased by 1,143,500 shares, due to a tender offer to the company’s Series A Convertible Preferred stock.  These shares were submitted late due to a late conversion instruction provided to the transfer agent.  These shares were affected by the 1:50 reverse split that took place on November 25, 2009 and were converted into 22,838 shares.

(b) Preferred “A”
On April 24, 2009, the company offered all common shareholders of record the opportunity to tender their shares in exchange for the company’s Series A Convertible Preferred stock.  As of the offer expiration date, June 15, 2009, 47,798,610 common shares had been tendered.  One share of Series A Convertible Preferred Stock was received for each 25 shares of common tendered.  There is a mandatory holding period for the Series A Convertible that expires May 29, 2010, before shareholders can then convert back to common shares.  The stated value of the Series A Convertible is $5. per share or $.20 per common share.  On May 29, 2010 Preferred A shareholders may convert their shares back to common at $.20 per common share or market, whichever is less .  Each Preferred Series A still represents 25 shares of common.  The holders of Series A Convertible Preferred Stock have 100 votes for each full share Series A Convertible Preferred Stock.
Each Series A Preferred also has a warrant attached which allows the owner to purchase 10 common shares at $.45 per share.  The warrant applies only to shareholders that have not yet converted their Preferred A shares back to common on the date they exercise their warrants.  These warrants expire on May 29, 2011.

On September 28, 2009, the company’s Series A Convertible Preferred stock increased by 1,660 shares and common stock decreased by 41,500 shares, due to a tender offer for the company’s Series A Convertible Preferred stock.  These shares were submitted for tender prior to the deadline of June 15, 2009; however, an error was made in the transmittal of the request and subsequently was not processed until this time.

On January 21, 2010, the company’s Series A Convertible Preferred stock increased by 45,740 shares and common stock decreased by 22,838 shares, due to a tender offer to the company’s Series A Convertible Preferred stock.  These shares were submitted late due to a late conversion instruction provided to the transfer agent.

(c) Preferred “B”
On April 30, 2009, Megola issued 1,378,850 shares of its Preferred B stock.  The stock was issued in return for various existing loans, advances and future lease payments on one of its existing building leases.

On April 24 2009, Megola offered to exchange selected Debt for shares of a newly created Series B Convertible Preferred Stock, priced at $10.00 per share. The holders of Series B Convertible Preferred Stock shall have the right to convert the Series B Convertible Preferred Stock into Debt at a later time subject to certain conditions.  No conversion of Series B Convertible Preferred Stock to Debt can occur until after a holding period of twelve (12) months from date of conversion.  Thereafter, at your option, you may convert the Series B Convertible Preferred Stock into common stock.  For purposes of conversion, the value of each share of Series B Convertible Preferred Stock will be deemed to be $10.00.  The number of shares of common shares to be received upon a conversion will be based on a value of $0.10 per share or the value of the market bid price at the time of conversion, whichever is less . That value will be based on the average closing bid price of the common stock for each of the ten (10) consecutive trading days immediately prior to the date of conversion.

On January 29, 2010, Megola issued 16,561 shares of its Preferred B stock.  The stock was issued in return for a stockholder loan.

11

MEGOLA, INC.
Notes to Unaudited Interim Consolidated Financial Statements for the Six Months ended January 31, 2010 (Amounts expressed in US dollars)

11.
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL (con’t)

(d) Additional paid in capital
From the year ended July 31, 2009 to the end of the quarter ended January 31, 2010, additional paid in capital increased by $229,512 due to the company issuing common stock for services, common stock being converted to Preferred “A”, debt converted to Preferred “B”, and common stock being decreased due to the reverse 1:50 stock split.

(e) The Company has a Stock Incentive Plan for employees and consultants.  There were no shares issued under the plan during the three months ended January 31, 2010.

12.
LEASE COMMITMENTS

(i) The Company leased warehouse space and additional office space in Point Edward, Ontario, and Canada that commenced September of 2008.  Required minimum lease payments are as follows:

Office
Year Ended
July 31, 2010
$
41,332
Year Ended
July 31, 2011
$
41,332
Year Ended
July 31, 2012
$
41,332
Year Ended
July 31, 2013
$
41,332
Year Ended
July 31, 2014
$
3,444
Total
$
168,772
Warehouse
Year Ended
July 31, 2010
$
16,834
Year Ended
July 31, 2011
$
16,834
Year Ended
July 31, 2012
$
16,834
Year Ended
July 31, 2013
$
16,834
Year Ended
July 31, 2014
$
1,403
Total
$
68,739

(ii) The Company has also leased 4 vehicles that commenced in August of 2008.  Required minimum lease payments are as follows:

Year Ended
July 31, 2010
$
38,538
Year Ended
July 31, 2011
$
38,538
Year Ended
July 31, 2012
$
6,423
Total
$
83,499

(iii)An additional vehicle was leased in April of 2009. Required minimum lease payments are as follows:

Year Ended
July 31, 2010
$
9,027
Year Ended
July 31, 2011
$
9,027
Year Ended
July 31, 2012
$
6,771
Total
$
24,825

12

Item 2. Management's Discussion and Plan of Operation
Management’s Discussion and Analysis of Financial Condition and Operating Results
For the Quarter Ended January 31, 2010

MANAGEMENT'S DISCUSSION AND PLAN OF OPERATION FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements about Megola, Inc.'s (the Company” or “Megola”) business, financial condition and prospects that reflect management's assumptions and beliefs based on information currently available. We can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of our management's assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, Megola's actual results may differ materially from those indicated by the forward-looking statements.

The key factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to, acceptance of our services, our ability to expand our customer base, management’s ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.

There may be other risks and circumstances that management may be unable to predict. When used in this Quarterly Report, words such as, "believes," "expects," "intends," "plans," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements, as defined in Section 21E of the Securities Exchange Act of 1934, although there may be certain forward-looking statements not accompanied by such expressions.

The safe harbors of forward-looking statements provided by Section 21E of the Exchange Act are unavailable to issuers of penny stock. As we issued securities at a price below $5.00 per share, our shares are considered penny stock and such safe harbors set forth under the Reform Act are unavailable to us.

GOING CONCERN

Megola's net loss for the six months ended January 31, 2010 vs. six months ended January 31, 2009 was $201,403. The Company has an accumulated deficit of $6,075,178 as of January 31, 2010. These conditions create an uncertainty as to Megola's ability to continue as a going concern. Management is trying to raise additional capital through various funding arrangements. It is not certain as to whether Megola will raise this additional capital. The financial statements did not include any adjustment that might be necessary if Megola is unable to continue as a going concern.

GENERAL

Megola, Inc. was incorporated in Ontario, Canada on August 28, 2000 as Corporation No. 1375595. It was renamed Megola, Inc. on December 21, 2001. Megola was formed to sell physical water treatment devices to commercial end-users in the United States, Canada and other international locations under a license granted by the German manufacturer, Megola GmbH. Initial operations and sales began in October 2000.

Megola Inc. provides environmentally conscious solutions in the areas of physical water treatment, air purification and fire protection.

Megola’s ScaleGuard product units are a cost-effective and environmentally friendly alternative to salt softeners and chemical water treatments.  ScaleGuard utilizes electromagnetic technology rather than chemicals or other methods to condition water, both preventing the ongoing build-up of scale and eliminating historical scale build-up in water delivery systems and machinery. ScaleGuard prolongs the life of equipment, appliances, hot water tanks, and distribution systems in residential, commercial, agricultural and industrial applications.

Megola’s AirGuardian indoor air quality product units are uniquely engineered, integrated ultraviolet light systems designed to dramatically reduce and control airborne allergens and toxic compounds such as mold, fungus, formaldehyde, xylene gases and tobacco smoke along with infectious agents such as bacteria, influenza, hemolytic streptococci and many others in an indoor environment.  The duct-mounted units are ideal for improving indoor air quality in homes, cottages and business areas while the portable units are effective in deodorizing automobiles, change rooms and sporting equipment.

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Megola’s Hartindo anti-fire product line represents a one of a kind environmentally friendly fire inhibitor and suppression technology.  These water-based, non-toxic and non-corrosive products include AF21, an inhibitor that renders all water absorbent and many synthetic materials non-flammable; AF31, a suppression agent that stops fire and prevents fire spread and is able to extinguish A, B, C, D and F/K class fires; AF11E, the world’s only proven 1:1 direct replacement for both Halon 1301 and 1211; and Dectan, a water-based rust inhibitor and converter that exhibits the heat refraction properties of AF21.

Megola was dependent on two customers, New Fire Solutions LLC for sales accounting for approximately 40% and EcoBlu Products Inc. for sales accounting for approximately 39% of our revenues in the first 6 months of fiscal year 2010. Megola was dependant on two vendors, Silver Best SDN BHD for purchases accounting for 59% of costs of good sold and Holly Oak Chemical, Inc. for purchases accounting for 41% of cost of goods for the first 6 months of fiscal year 2010. Sales of the ScaleGuard devices accounted for 1%, and Hartindo products accounted for 99% of our total gross revenues in the first 6 months of fiscal year 2010.

Commencing in our fiscal year 2006, we entered into an agreement with H2O3 Solutions, one of the Company's manufacturers, to allow them to sell a residential and small commercial ScaleGuard system directly throughout Asia. By agreement, Megola is entitled to a royalty payment from the sales of these two products. There was no royalty income received during the period due to the manufacturer moving its facilities to a new location in Southeast Asia, thereby not producing or selling any additional units.

RESULTS OF OPERATIONS

Three months ended January 31, 2010 vs. three months ended January 31, 2009.

Our revenues for the three months ended January 31, 2010 vs. three months ended January 31, 2009 decreased 56.12% from $402,845 to $176,784 due to a one-time royalty purchase payment from Vulcan Technologies that took place last year.

Our cost of sales for the three months ended January 31, 2010 vs. three months ended January 31, 2009 increased 4,359.55% from $1,330 to $59,312. The overall increase in the cost of sales during this period is directly attributable to the sales of Hartindo product.

Our general and administrative expenses for the three months ended January 31, 2010 vs. three months ended January 31, 2009 increased 61.17% from $117,376 to $189,169 due to an increase in purchases of Hartindo products, insurance premiums and transfer agent fees.

Our interest expense for the three months ended January 31, 2010 vs. three months ended January 31, 2009 decreased 82.95% from $4,194 to $715 due to the Company's decreased interest owing towards stockholder loans.

Accordingly, our net loss for the three months ended January 31, 2010 vs. three months ended January 31, 2009 was $73,443.

Six months ended January 31, 2010 vs. Six months ended January 31, 2009.

Our revenues for the six months ended January 31, 2010 vs. six months ended January 31, 2009 decreased 23.90% from $414,256 to $315,271 due to a one-time royalty purchase payment from Vulcan Technologies that took place last year.

Our cost of sales for the six months ended January 31, 2010 vs. six months ended January 31, 2009 increased 1,284.35% from $6,679 to $92,461. The overall increase in the cost of sales during this period is directly attributable to the sales of Hartindo product.

Our general and administrative expenses for the six months ended January 31, 2010 vs. six months ended January 31, 2009 increased 37.64% from $259,031 to $356,539 due to an increase in purchases of Hartindo products, shipping and receiving costs, insurance premiums and transfer agent fees.

Our interest expense for the six months ended January 31, 2010 vs. six months ended January 31, 2009 decreased 85.30% from $9,646 to $1,418 due to the Company's decreased interest owing towards stockholder loans.

Accordingly, our net loss for the six months ended January 31, 2010 vs. six months ended January 31, 2009 was $201,403.

LIQUIDITY AND CAPITAL RESOURCES

The financial statements as of and for the period ending January 31, 2010 have been prepared assuming we continue as a going concern.

At January 31, 2010, we had an accumulated deficit of $6,075,178.

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In order to become profitable, we will still need to secure additional debt or equity funding. We hope to be able to raise additional funds from an offering of our stock in the future. However, this offering may not occur, or if it occurs, may not raise the required funding. There are no preliminary or definitive agreements or understandings with any party for such financing. We cannot predict when, if ever, that will happen.

Item 3 . CONTROLS AND PROCEDURES

Based on our management's evaluation (with the participation of our chief executive officer and chief financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the "Exchange Act")) are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and are also designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Based on the evaluation, which disclosed deficiencies with respect to the Company's internal control procedures over financial reporting, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are ineffective as of the end of the period covered by this report due to limited resources and personnel. With additional funding the Company intends to hire additional resources to assist with financial reporting disclosures controls and procedures.

There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS AND REPORTS ON S-8

Form: 8-K Filing Date November 24, 2009

Form: 8-K Filing Date November 25, 2009

Form: 8-K Filing Date December 15, 2009

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Exhibit Name and/or Identification of Exhibit Number

31 Certification
32 Certification

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

MEGOLA, INC.
(Registrant)
By: /s/ Joel Gardner
Joel Gardner
President, CEO, Principal Financial
Officer and Principal Accounting Officer

Date: March 11, 2010

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