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: April 30, 2011


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 EMPLOYEROF

INDENTIFICATION NO.)INCORPORATION OR ORGANIZATION)





SEC File Number: 000-49815





214 LaSalle LineSarnia, ON

N7T 7H5(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)





704 Mara Street, Suite 111Point Edward, ON, N7V 1X4





(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: 43,968,811 at April 30, 2011.








Megola, Inc.





TABLE OF CONTENTS





PART IItem 1.
Unaudited Interim Consolidated Financial Statements
3Item 2.
Management’s Discussion and Analysis or Plan of Operations
15Item 3.
Controls and Procedures
18PART IIItem 1.
Legal Proceedings
18Item 2.
Change in Securities
18Item 3.
Defaults upon Senior Securities
18Item 4.
Submission of Matters to a Vote of Security Holders
18Item 5.
Other Information
18Item 6.
Exhibits and Reports on S-8
18Item 7.
8KSignatures
19


2




PART I - FINANCIAL INFORMATION




Item 1. Megola, Inc. Interim Consolidated Financial Statements – Unaudited


Nine Months Ended April 30, 2011(Amounts expressed in US dollars)




April 30, 2011


July 31, 2010(unaudited)


(Audited)ASSETSCash

$
1,069


$
-Accounts receivable


704



7,855Inventory


139,988



209,334Prepaid expenses


-



13,595Loan Receivable


17,004



-Total Current Assets


158,765



230,784Property and equipment


5,364



7,389TOTAL ASSETS


164,129



238,173LIABILITIESBank overdraft

$
-


$
20,729Accrued expenses


148,358



168,992Accounts payable


42,983



64,231Loans payable


4,136



1,134Advances from stockholders - (note 10)


-



115,437Total Current Liabilities


195,477



370,523Convertible Debenture


83,500



20,000Total Liabilities


278,977



390,523Commitments and Contingencies


-



-STOCKHOLDERS' EQUITYCapital stock: (note 11)Common, $0.001 par value; 200,000,000 shares authorized, 43,968,811 issued and outstanding at April 30, 2011 and 33,570,455 July 31, 2010


43,968



33,570Preferred "A", $0.001 par value; 3,500,000 shares authorized, 1,059,465 and 1,092,225 issued and outstanding at April 30, 2011 and July 31, 2010 respectively


1,059



1,092Preferred "B", $0.001 par value; 1,500,000 shares authorized, 117,879 and 47,561 issued and outstanding at April 30, 2011 and July 31, 2010 respectively


117



47Treasury Stock


(1,080
)


-Additional paid in capital - (note 11)


7,968,817



7,761,917Deficit


(8,003,002
)


(7,830,207
)Accumulated other comprehensive income (loss):


-



-Foreign currency translation adjustment


(124,727
)


(118,769
)Total Stockholders' Equity


(114,848
)


(152,350
)TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
164,129


$
238,173





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 9 MONTHSENDEDApril 30,2011


April 30,2010


April 30,2011


April 30,2010Income - sales

$
605


$
13,929


$
359,119


$
329,201Cost of sales


0



3,828



151,388



96,289GROSS PROFIT (LOSS)


605



10,102



207,731



232,912General and administrative


48,335



145,102



296,672



501,885Depreciation


654



1,166



2,498



3,422Interest


1,940



983



6,357



2,401Stock issued for Commitment Fee


0







75,000Consulting fees


-



-



-



64,000TOTAL EXPENSES


50,929



147,251



380,527



571,708NET INCOME (LOSS)


(50,324
)


(137,149
)


(172,796
)


(338,796
)Other income (expenses):Foreign currency translation adjustment


(6,901
)


(11,629
)


(5,958
)


(29,011
)COMPREHENSIVE INCOME (LOSS)


(57,225
)


(148,778
)


(178,754
)


(367,807
)Weighted average common shares outstanding


740,750



680,595



740,750



680,595Loss per share - basic and diluted

$
(0.068
)

$
(0.202
)

$
(0.233
)

$
(0.498
)Comprehensive loss per share - basic and diluted

$
(0.077
)

$
(0.219
)

$
(0.241
)

$
(0.540
)





See accompanying notes to unaudited interim consolidated financial statements


4





MEGOLA, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


(Amounts expressed in US dollars)





9 Months EndedApril 30,


April 30,2011


2010CASH FLOWS FROM OPERATING ACTIVITIESNet loss for the period


(172,796
)


(338,796
)Adjustments to reconcile net loss to net cash used in operating activities:


211,188



199,95538,392



(138,841
)Non-cash operationg transactionsDepreciation


2,498



3,422Shares issued for services


-



64,000Shares issued for debt


118,000Allowance for doubtful accounts


5,212



-Cash used by operating activitiesLoan receivable


17,004



2,970Inventory


51,823



49,212Prepaid expenses


(20,567
)


20,915Accounts payable


(14,501
)


59,436Accrued Interest


3,956



-Accrued expenses


23,763



-Cash flows used in operating activites


211,188



199,955CASH FLOWS FROM FINANCING ACTIVITESIncrease (decreased) in bank indebtedness


-



-Advances from stockholders


-



236,621Convertible debenture borrowing


83,500



-Cash flows used in financing activities


83,500



236,621CASH FLOWS FROM INVESTING ACTIVITESBuyback of common stock


-



-Cash flows from investing activities


-



-EFFECT OF EXCHANGE RATE CHANGES ON CASH


(5,958
)


(29,011
)NET INCREASE (DECREASE) IN CASH FOR THE YEAR


294,688



68,769NET CASH, beginning of period


-



(74,737
)NET CASH, end of period


1,069



(5,967
)SUPPLEMENTAL CASH FLOW INFORMATIONInterest paid


-



-Income taxes paid


-



-NONCASH INVESTING AND FINANCING ACTIVITIES:Conversion of debt into preferred stock


-



165,617





See accompanying notes to audited interim consolidated financial statements


5





Megola, Inc.


CONSOLIDATED  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)


(Amounts expressed in US dollars)





Common Stock


Preferred Stock Series "A"


Preferred Stock Series "B"Shares


Amount


Shares


Amount


Shares


AmountBalances, July 31, 2009


663,749


$
664



1,911,940


$
1,912



137,885


$
138Stock for services


64,000



64



-



-



5,000



5Common converted to Preferred "A"


(23,668
)


(24
)


47,400



48



-



-Debt converted to Preferred "B"


-



-



-



-



16,561



16Preferred "A" converted to common


21,677,874



21,678



(867,115
)


(867
)Preferred "B" converted to common


11,188,500



11,188



-



-



(111,885
)


(112
)Net Loss


-



-



-



-



-



-Foreign CurrencyTranslation Adjustment


-



-



-



-



-



-Balances, July 31, 2010


33,570,455


$
33,570



1,092,225


$
1,092



47,561


$
47Stock for services


937,500



938Stock for Debt


11,800,000



11,800Stock for Convertible Debenture


3,873,656



3,873Common converted to Preferred A


(1,000,000
)


(1,000
)


40,000



40



-



-Common converted to Preferred B


(7,031,800
)


(7,032
)


-



-



70,318



70Preferred "A" converted to Common


1,819,000



1,819



(72,760
)


(73
)


-



-Common stock buyback


-



-



-



-



-



-Net Loss


-



-



-



-



-



-Foreign CurrencyTranslation Adjustment


-



-



-



-



-



-Balances, April 30, 2011


43,968,811



43,968



1,059,465



1,059



117,879



118Treasury Stock


Comprehensive


Paid In


AccumulatedShares


Amount


Income (Loss)


Capital


Deficit


TotalsBalances, July 31, 2009


-



-



(92,327
)

$
7,514,297


$
(5,873,774
)

$
1,550,910Stock for services


-



-



-



113,931



-



114,000Common converted to Preferred "A"


-



-



-



(24
)


-



-Debt converted to Preferred "B"


-



-



-



165,600



-



165,616Preferred "A" converted to common


-



-



-



(20,811
)


-



-Preferred "B" converted to common


-



-



-



(11,076
)


-



-Net Loss


-



-



-



-



(1,956,432
)


(1,956,432
)Foreign CurrencyTranslation Adjustment


-



-



(26,442
)


-



-



(26,442
)Balances, July 31, 2010


-



-



(118,769
)

$
7,761,917


$
(7,830,206
)

$
(152,348
)Stock for services














74,062







75,000Stock for Debt














106,200







118,000Stock for Convertible Debenture














20,127







24,000Common converted to Preferred "A"


-



-



-



960



-



-Common converted to Preferred "B"


-



-



-



6,962



-



-Preferred "A" converted to Common


-



-



-



(1,746
)


-



-Common stock buyback


18,000



(1,080
)


-



335



-



(745
)Net Loss


-



-



-



-



(172,796
)


(172,796
)Foreign CurrencyTranslation Adjustment


-



-



(5,958
)


-



-



(5,958
)Balances, April 30, 2011


18,000



(1,080
)


(124,727
)


7,968,817



(8,003,002
)


(114,848
)





See accompanying notes to audited interim consolidated financial statements


6





MEGOLA, INC.


Notes to Unaudited Interim Consolidated Financial Statements for the Nine Months ended April 30, 2011


(Amounts expressed in US dollars)





1.
NATURE OF BUSINESS





Megola, Inc. ("Megola" or "the Company") was incorporated in Ontario, Canada on August 28, 2000. Megola was formed to sell physical water treatment devices to a wide range of end-users in the United States, Canada and internationally under a license granted by Megola GmbH in Germany.


The Company presently distributes the following product lines: physical water treatment; water filtration; air purification; microbiological control; waste water treatment and fire safety.


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 2010 as reported in the 10-K have been omitted.





2.
GOING CONCERN


These 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. As shown in the accompanying consolidated financial statements, Megola incurred recurring net losses of $172,796 and $338,796 in the 2011 and 2010 quarter ended respectively, and a deficit of $8,003,002 as at April 30, 2011. These conditions create an uncertainty as to Megola's ability to continue as a going concern. At present, the Company does not have sufficient resources to fund its current working capital requirements. The Company's financing plans include obtaining additional capital through various debt and/or equity financing arrangements to service its current working capital requirements; any additional or unforeseen obligations and to fund the implementation of 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 consolidated financial statements do not include any adjustments for this uncertainty.


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 the Company’s 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.
RECENT ACCOUNTING PRONOUNCEMENTS





In January 2010, the FASB has published ASU 2010-01 “Equity (Topic 505) - Accounting for Distributions to Shareholders with Components of Stock and Cash—a consensus of the FASB Emerging Issues Task Force,”as codified in ASC 505. ASU No. 2010-01 clarifies the treatment of certain distributions to shareholders that have both stock and cash components. The stock portion of such distributions is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. 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.  Early adoption is permitted.  The adoption of this standard did not have an impact on the Company’s consolidated financial position and results of operations.





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


7





MEGOLA, INC.


Notes to Unaudited Interim Consolidated Financial Statements for the Nine Months ended April 30, 2011


(Amounts expressed in US dollars)





3.
RECENT ACCOUNTING PRONOUNCEMENTS (continued)





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 consolidated financial position and results of operations.





In February 2010, the FASB issued ASU 2010-09 which requires that an SEC filer, as defined, evaluate subsequent events through the date that the financial statements are issued. The update also removed the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The adoption of this guidance on January 1, 2010 did not have a material effect on the Company’s consolidated financial statements.





In April 2010, the FASB issued Accounting Standard Update No. 2010-13 “Stock Compensation” (Topic 718). ASU No.2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The adoption of this guidance has not had and is not expected to have a material impact on the Company’s consolidated financial statements.


In August 2010, the FASB issued Accounting Standard Updates No. 2010-21 (ASU No. 2010-21) “Accounting for Technical Amendments to Various SEC Rules and Schedules” and No. 2010-22 (ASU No. 2010-22) “Accounting for Various Topics – Technical Corrections to SEC Paragraphs”.  ASU No 2010-21 amends various SEC paragraphs pursuant to the issuance of Release no. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies.  ASU No. 2010-22 amends various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics.  Both ASU No. 2010-21 and ASU No. 2010-22 are effective upon issuance.  The amendments in ASU No. 2010-21 and No. 2010-22 will not have a material impact on the Company’s financial statements.


Other ASUs not effective until after September 30, 2010, are not expected to have a significant effect on the Company’s consolidated financial position or results of operations.





4.
INVENTORY





Inventory is valued at the lower of cost (determined on a first -in, first-out method) and net realizable value.   Megola records provisions to write down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between cost of the inventory and its estimated net realizable value based on assumptions about future market demand and market conditions. If future demand or market conditions are less favorable than currently expected, additional inventory provisions may be required. During the quarters ended April 30, 2011 and 2010 impairment expense was $nil and $nil, respectively related to inventory impairments. In the year ending July 31, 2007, included in the impairment reserve is $245,032 for slow moving products. These products are in good condition and are still expected to be sold.


8





MEGOLA, INC.


Notes to Unaudited Interim Consolidated Financial Statements for the Nine Months ended April 30, 2011


(Amounts expressed in US dollars)





5.
CONVERTIBLE NOTES PAYABLE





On July 16, 2010, a third party loaned the Company $20,000. The loan bears a rate of interest of 9% per annum and is payable on April 6, 2011 or such earlier date as this Debenture is required or permitted to be repaid as provided hereunder (the “Maturity Date”), and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture at the rate of 9% per annum, payable on the Maturity Date, unless the Debenture is converted to shares of common stock in accordance with the terms and conditions herein.. The holder of the note has the right to convert the note into common stock of the Company at a price of $0.01 per share of common stock or a price of seventy percent (70%) of the average of the two lowest volume weighted average prices (“VWAPs”), determined on the then current trading market for the Company’s common stock, for ten (10) trading days prior to conversion (the “Set Price”), at the option of the Holder, in whole at any time and from time to time.





On October 19, 2010, Megola was issued $25,000 as proceeds from a 9% Convertible Debenture issued to Tangiers Investors, LP (the “Holder) and designated as its 9% Convertible Debenture due July 19, 2011.


Megola promises to pay to the Holder the principal sum of $25,000 on July 19, 2011 or such earlier date as this Debenture is required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture at the rate of 9% per annum, payable on the Maturity Date, unless the Debenture is converted to shares of common stock in accordance with the terms and conditions herein.


This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange.


This Debenture may be transferred or exchanged only in compliance with applicable federal and state securities laws and regulations. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.





On August 31, 2010, Megola (“Company”) entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Buyer”).


The basic parameters of the Agreement with Asher Enterprises, Inc. will include, but not be limited to, the following:


(a) The Company and the Buyer is executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the rules and regulations as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”);





(b) Buyer desires to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement an 8% convertible note of the Company, in the form attached hereto as Exhibit A, in the aggregate principal amount of $45,000.00 (together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the “Note”), convertible into shares of common stock of the Company (the “Common Stock”), upon the terms and subject to the limitations and conditions set forth in such Note.





(c) The Buyer wishes to purchase, upon the terms and conditions stated in this Agreement, such principal amount of Note as is set forth immediately below its name on the signature pages hereto





On December 28, 2010, Megola (“Company”) paid the principal amount of $45,000 to Tangiers Investors LP, and issued 937,500 of the company’s restricted common stock at 0.08 per share, for a value of $75,000, for commitment fees that were set forth in the Note.





On December 8, 2010, Megola (“Company”) confirmed proceeds from a Securities Purchase Agreement entered into on November 29, 2010 with Asher Enterprises, Inc. (“Buyer”).





The basic parameters of the Agreement with Asher Enterprises, Inc. will include, but not be limited to, the following:


9





MEGOLA, INC.


Notes to Unaudited Interim Consolidated Financial Statements for the Nine Months ended April 30, 2011


(Amounts expressed in US dollars)





5.
CONVERTIBLE NOTES PAYABLE (con’t)





(a) The Company and the Buyer is executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the rules and regulations as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”);





(b) Buyer desires to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement an 8% convertible note of the Company, in the form attached hereto as Exhibit A, in the aggregate principal amount of $32,500.00 (together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the “Note”), convertible into shares of common stock of the Company (the “Common Stock”), upon the terms and subject to the limitations and conditions set forth in such Note.





(c) The Buyer wishes to purchase, upon the terms and conditions stated in this Agreement, such principal amount of Note as is set forth immediately below its name on the signature pages hereto





During the quarter ending April 30, 2011, Megola (“Company”) issued 3,873,656 shares of its Common Stock to Asher Enterprises, Inc in the amount of $24,000, to reduce the amount owing on the Company’s Convertible Debenture outstanding to Asher Enterprises, Inc.





6.
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


TotalNine months ended April 30, 2011Revenues

$
359,119


$
-


$
359,119Net Income (Loss)

$
(172,796
)


-


$
(172,796
)Interest Expense

$
6,357


$
-


$
6,357Total Assets


164,129


$
-


$
164,129North America


Asia


TotalNine months ended April 30, 2010Revenues

$
329,201


$
-


$
329,201Net Income (Loss)

$
(338,796
)


-


$
(338,796
)Interest Expense

$
2,401


$
-


$
2,401Total Assets


1,697,591


$
-


$
1,697,591





7.
ADVANCES FROM STOCKHOLDERS





Included in the balance are advances in the amount of $nil.  Megola Inc. (“Company”) issued 11,800,000 shares of its Common Stock in the amount of $118,000 for debt conversion for Advances from Stockholders January 1, 2010 to July 31, 2010.





8.
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL





(a) Common stock





Common stock ($.001 par value per share): 200,000,000 shares are authorized, with 43,968,811 shares issued and outstanding at April 30, 2011 and 33,570,455 at July 31, 2010.


10





MEGOLA, INC.


Notes to Unaudited Interim Consolidated Financial Statements for the Nine Months ended April 30, 2011


(Amounts expressed in US dollars)





8.
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL (con’t)





On September 3, 2010, the corporation approved the conversion, thru RBC Dominion Securities, of 7,031,800 restricted common shares of Megola Inc. (MGON) to 70,318 shares of Megola Inc Series B Preferred Stock.





On September 8, 2010, Megola announced that the company had opened a brokerage account with Glendale Securities for the purpose of initiating a stock buyback plan.





On September 9, 2010, Megola received a request from TD AMERITRADE Clearing Inc. to reverse a conversion and transfer that was done per their request by the transfer agent.  As the conversion and transfer from Megola Series ‘A’ Preferred stock to Megola Common stock was done without the authorization of their client TD AMERITRADE Clearing Inc. asked for consent to reverse the transaction and revert the Common Shares back to Preferred Series A Shares. Megola has given consent for 1,000,000 Common Shares to be reverted back to the original 40,000 shares of Series ‘A’ Preferred stock into the name of their client.





On September 17, 2010, the Company purchased 18,000 shares at 0.04 per share of its common stock valued at $745 and will return to treasury. The stock on that day was trading at 0.06 per share.





On December 28, 2010, the Company issued 937,500 restricted common stock valued at $75,000 (0.08 per share) for a commitment fee based on conditions set forth on a Convertible Debenture. (see Note 5)





During the period of November 1, 2010 to January 31, 2011, 241,900 common shares of Megola Inc. (MGON) were converted into 9,676 shares of Megola Inc Series A Preferred Stock.  One share of Series A Convertible Preferred Stock was received for each 25 shares of common tendered.





On February 1, 2011, 40,000 common shares of Megola Inc. (MGON) were converted into 1,600 shares of Megola Inc. Series A Preferred Stock.  One share of Series A Convertible Preferred Stock was received for each 25 shares of common tendered.





On March 7, 2011, the Company issued 11,800,000 shares of its common stock valued at $118,000 (0.01 per share) for Debt Conversion for Advances from Stockholders January 1, 2010 to July 31, 2010.





On March 14, 2011, April 13, 2011 and April 26, 2011, the Company issued a total of 3,873,656 shares of its common stock valued for a total of $24,000, to reduce the amount owing on the Company’s Convertible Debenture outstanding to Asher Enterprises, Inc.





(b) Preferred “A”





Preferred A stock ($.001 par value per share): 3,500,000 shares are authorized, with 1,061,065 shares issued and outstanding at April 30, 2011 and 1,092,225 at July 31, 2010.





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.


11





MEGOLA, INC.


Notes to Unaudited Interim Consolidated Financial Statements for the Nine Months ended April 30, 2011


(Amounts expressed in US dollars)





8.
CAPITAL STOCK AND ADDITIONAL PAID IN CAPITAL (con’t)





On September 9, 2010, Megola received a request from TD AMERITRADE Clearing Inc. to reverse a conversion and transfer that was done per their request by the transfer agent.  As the conversion and transfer from Megola Series ‘A’ Preferred stock to Megola Common stock was done without the authorization of their client TD AMERITRADE Clearing Inc. asked for consent to reverse the transaction and revert the Common Shares back to Preferred Series A Shares. Megola has given consent for 1,000,000 Common Shares to be reverted back to the original 40,000 shares of Series ‘A’ Preferred stock into the name of their client.





On May 29, 2010, all Preferred series A stock were eligible for conversion back to common stock. During the period


Of August 1, 2010 to October 31, 2010, 61,484 shares of Preferred series A stock were converted into 1,537,100 shares of common stock. One share of Series A Convertible Preferred Stock was received for each 25 shares of common


tendered.





During the quarter ending January 31, 2010, an entry to Megola Inc. Series A Preferred Stock had occurred that was reflected in the prior quarter ended October 31, 2010, with 1,000 shares of Megola Inc. Series A Preferred Stock were converted into 25,000 common shares of Megola Inc. (MGON).  One share of Series A Convertible Preferred Stock was received for each 25 shares of common tendered.





During the period of November 1, 2010 to January 31, 2011, 9,676 shares of Megola Inc. Series A Preferred Stock were converted into 241,900 common shares of Megola Inc. (MGON).  One share of Series A Convertible Preferred Stock was received for each 25 shares of common tendered.





On February 1, 2011, 1,600 shares of Megola Inc. Series A Preferred Stock were converted into 40,000 common shares of Megola Inc. (MGON). One share of Series A Convertible Preferred Stock was received for each 25 shares of common tendered.





(c) Preferred “B”





Preferred B stock ($.001 par value per share): 1,500,000 shares are authorized, with 117,879 shares issued and outstanding at January 31, 2011 and 47,561 at July 31, 2010.





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 September 3, 2010, the corporation approved the conversion, thru RBC Dominion Securities, of 7,031,800 restricted common shares of Megola Inc. (MGON) to 70,318 shares of Megola Inc Series B Preferred Stock.





(d)Additional paid in capital





From the quarter ended April 30, 2011 additional paid in capital increased by $126,289 due to common stock being converted to Preferred “A”, common stock being converted to Preferred “B”, Preferred “A” being converted to common stock, common stock buy back , common stock being issued for services, common stock issued for Debt, and common stock issued for Convertible Debenture.





(e)  The Company has a Stock Incentive Plan for employees and consultants.  There were no shares issued under the


plan during the quarter ended April 30, 2011.


12





MEGOLA, INC.


Notes to Unaudited Interim Consolidated Financial Statements for the Nine Months ended April 30, 2010


(Amounts expressed in US dollars)





9.
LEASE COMMITMENTS





(i)
The Company leased office and warehouse space in Sarnia, Ontario, Canada that commenced March of 2011.  Required minimum lease payments are as follows:





Office/WarehouseYear Ended
July 31, 2011

$
9,986Year Ended
July 31, 2012

$
26,628Year Ended
July 31, 2013

$
26,628Year Ended
July 31, 2014

$
3,617Total


$
133,844





(ii)
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:





OfficeYear Ended
July 31, 2011

$
43,409Year Ended
July 31, 2012

$
43,409Year Ended
July 31, 2013

$
43,409Year Ended
July 31, 2014

$
3,617Total


$
133,844WarehouseYear Ended
July 31, 2011

$
17,680Year Ended
July 31, 2012

$
17,680Year Ended
July 31, 2013

$
17,680Year Ended
July 31, 2014

$
1,473Total


$
54,513





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




Year Ended
July 31, 2011

$
40,474Year Ended
July 31, 2012

$
6,746Total


$
47,220





As of April 30, 2011, the company does not lease any vehicles and is no longer in the office and warehouse lease commitment in Point Edward, Ontario, Canada.





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





Year Ended
July 31, 2011

$
9,481Year Ended
July 31, 2012

$
7,111Total


$
16,592





As of April 30, 2011, the company does not lease any vehicles, and is no longer in any lease commitment.


13





MEGOLA, INC.


Notes to Unaudited Interim Consolidated Financial Statements for the Nine Months ended April 30, 2011


(Amounts expressed in US dollars)





10.
CONTINGENCIES





On March 30, 2010, the Company entered in a Master Distributor agreement with CY Holding Company. Through this agreement the Company acquired exclusive rights to sell the equipment of CY Holding Company in North America.  This agreement is contingent on the minimum annual sales of 10,000 – 20,000 units during any calendar twelve month period. As of April 30, 2011, the Company had not sold any units related to CY Holding’s equipment.


Megola is still in discussion with CY Holding Company and working on further details.





11.
ALLOWANCE FOR DOUBTFUL ACCOUNTS





For the period ending April 30, 2011, the Company has recorded an allowance for doubtful account in the amount of $5,212.





12.
SUBSEQUENT EVENTS





On May 6, 2011 we entered into a Purchase Agreement for the acquisition of certain Intellectual Property Rights (IP), Patents, and Patents Pending with 1771601 Ontario Inc. The basic terms and conditions proposed by MGON into the agreement will include, but not be limited to, the following:




At the closing, as hereinafter described, Megola Inc. will acquire and own the following; any patents, patents pending and IP Rights developed and owned by the Sellers as it pertains to:





·
IP /Manufacturing for the Anti-Fire Inhibitor recipe





Immediately following the Closing, MGON may change the name of the recipe to a MGON brand name.





Consideration





Upon Closing Megola Inc. will pay a consideration of MGON restricted common stock (“Stock Consideration”) of 1,000,000 shares as per Rule 144 and Megola Inc. shall issue such stock in the name of the Seller and or its assigns.





Megola will also pay a consideration of 250,000 restricted Series B Preferred shares which each Series B Preferred share having a stated value of $10.00 (ten dollars) per share. Series B Preferred shares, after the restricted holding period, can be converted at $0.10 (ten cents) to MGON common shares. Megola also retains the option to buy back any Series B Preferred shares for cash consideration of the same stated value of the Series B Preferred shares. Megola Inc. shall issue such stock in the name of the Seller and or its assigns.





Megola Inc interim agency with NewStar Chemical ended December 31, 2010 for related products consisting of Hartindo AF11E, Hartindo AF31, Dectan and Permanent AF21 additive.





On May 11, 2011, June 10, 2011 , the Company issued a total of 2,526,596 shares of its common stock valued for a total of $11,000, to reduce the amount owing on the Company’s Convertible Debenture outstanding to Asher Enterprises, Inc. Remaining  balance on note as of June 20,2011 is $10,000.





May 06, 2011 - EcoBlu Press Release Announces That Newstar Chemical Sues Megola Over Misrepresentations and Fraudulent Conduct.




May 20, 2011 - Order to Show Cause for Preliminary Injunction and Temporary Restraining Order filed by NewStar Chemicals.




May 26, 2011 - NewStar Injunction Order — DENIED




June 6, 2011- Newstar files Notice of Voluntary Dismissal Pursuant to FRCP 41(a)(1)(A)(i)





Megola Inc is in the process of collecting the minimum quotas due from EcoBlu Products Inc.as per their 2010 sales agreement.  Megola Inc believes it is entitledto $1,531,269.60 and will further deliver 348 totes of AF21. As of filing date, Megola hasn’t had any correspondence from EcoBlu Products Inc as to payment for arrear quotas. EcoBlu Products Inc contractually has no obligation; however should they require any future product from Megola these arrears will need to be ordered upfront with full payment.


14




Item 2. Management's Discussion and Plan of Operation


Management’s Discussion and Analysis of Financial Condition and Operating Results


For the Quarter Ended April 30, 2011




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.





15





GOING CONCERN





Megola's net loss for the nine months ended April 30, 2011 vs. nine months ended April 30, 2010 was $172,796. The Company has an accumulated deficit of $8,003,002 as of April 30, 2011.




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





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.





Fire Inhibitor Coating (FIC)


Unlike many current fire retardant solutions, which only delay the start of fires, FIC is a total fire inhibitor, rendering all water absorbent and many synthetic materials non-flammable..Megola also offers a fire inhibitor powder (FIP) which allows Megola to add fire protection into many manufacturing processes that require fire protection.




RESULTS OF OPERATIONS


Our revenues are difficult to forecast and may vary significantly from quarter to quarter and year to year. In addition, our expense levels for each quarter are, to a significant extent, fixed in advance based upon our expectation as to the net revenues to be generated during that quarter. We therefore are generally unable to adjust spending in a timely manner to compensate for any unexpected shortfall in net revenues. Further, as a result of these factors, any delay in product introductions, whether due to internal delays or delays caused by third party difficulties, or any significant shortfall in demand in relation to our expectations, would have an almost immediate adverse impact on our operating results and on ability to maintain profitability in a quarter.




16




Three months ended April 30, 2011 vs. three months ended April 30, 2010.





Our revenues for the three months ended April 30, 2011 vs. three months ended April 30, 2010 decreased 95.66% from $13,929 to $605 due to Megola losing one of its distributors. Megola had intended to have increased projected sales as per promised sales agency agreement quotas coming to fruition. Megola Inc is in the process of collecting the minimum quotas due from EcoBlu Products Inc. as per their 2010 sales agency agreement.  Megola Inc believes it is entitledto $1,531,269.60 and will further deliver 348 totes of AF21. As of filing date, Megola hasn’t had any correspondence from EcoBlu Products Inc as to payment for arrear quotas. EcoBlu Products Inc contractually has no obligation; however should they require any future product from Megola these arrears will need to be ordered upfront with full payment.


. .





Our cost of sales for the three months ended April 30, 2011 vs. three months ended April 30, 2010 decreased 100.00% from $3,828 to $-nil. The overall decrease in the cost of sales during this period is directly attributable to the sale of a physical water treatment system that incurs not cost of goods sold.





Our general and administrative expenses for the three months ended April 30, 2011 vs. three months ended April 30, 2010 decreased 66.69% from $145,102 to $48,335 due to a decrease in purchases of raw materials for fire inhibitor coating (FIC) and fire inhibitor powder (FIP) products and payroll expenses.





Our interest expense for the three months ended April 30, 2011 vs. three months ended April 30, 2010 increased 97.36% from $983 to $1,940 due to the Company's increased interest owing towards payroll liabilities.





Accordingly, our net loss for the three months ended April 30, 2011 vs. three months ended April 30, 2010 was $50,324.




Nine months ended April 30, 2011 vs. Nine months ended April 30, 2010.





Our revenues for the nine months ended April 30, 2011 vs. nine months ended April 30, 2010 increased 9.09% from $329,201 to $359,119 due to an increase in sales of Megola’s fire inhibiting coating product (FIC).





Our cost of sales for the nine months ended April 30, 2011 vs. nine months ended April 30, 2010 increased 57.22% from $96,289 to $151,388. The overall increase in the cost of sales during this period is directly attributable sales of FIC product.





Our general and administrative expenses for the nine months ended April 30, 2011 vs. nine months ended April 30, 2010 decreased 40.89% from $501,885 to $296,672 due to a decrease in purchases of raw materials, insurance premiums, payroll expenses and lease commitments.





Our interest expense for the nine months ended April 30, 2011 vs. nine months ended April 30, 2010 increased 164.76% from $2,401 to $6,357 due to the Company's increased interest owing towards payroll liabilities.





Accordingly, our net loss for the nine months ended April 30, 2011 vs. nine months ended April 30, 2010 was $172,796.





LIQUIDITY AND CAPITAL RESOURCES





The financial statements as of and for the period ending April 30, 2011 have been prepared assuming we continue as a going concern.





At April 30, 2011, we had an accumulated deficit of $8,003,002.





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.




17




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




Megola incurred no expense to dispute legal proceedings




May 06, 2011 - EcoBlu Press Release




EcoBlu Announces That Newstar Chemical Sues Megola Over Misrepresentations and Fraudulent Conduct.




May 20, 2011 - Order to Show Cause for Preliminary Injunction and Temporary Restraining Order filed by NewStar Chemicals.




May 26, 2011 - Case Summary of NewStar Injunction Order — DENIED




June 6, 2011- Notice of Voluntary Dismissal Pursuant to FRCP 41(a)(1)(A)(i)




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





8K filed with Q


8K filed with Q





18





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 GardnerJoel GardnerPresident, CEO, Principal FinancialOfficer and Principal Accounting Officer





Date: June 20, 2011




19