Breakthrough Chemistry, Inc.

What they do

Megola sells physical water treatment devices to residential, commercial, industrial and agricultural end-users under a license from the German manufacturer Megola GmbH. Its principal product, ScaleGuard, uses electromagnetic coils wrapped around pipes to suspend scale in water and remove existing buildup without chemicals. The company also markets AirGuardian ultraviolet air purification units and a Fire Inhibitor Coating, and it outsources much of its manufacturing.

Revenue drivers

• ScaleGuard water treatment systems — The principal product line; in fiscal year ended July 31, 2010, 2% of revenues came from ScaleGuard sales under the Megola GmbH agreement.
• AirGuardian air purification — Duct-mounted and portable ultraviolet light units for indoor air quality in homes and businesses; no revenue breakdown is disclosed in the excerpts.
• Fire Inhibitor Coating (FIC) — A fire inhibitor coating described as rendering water-absorbent materials fire resistant; no revenue figure is provided in the excerpts.

Recent performance

For the nine months ended April 30, 2011, Megola reported a net loss of $172,796 compared to the same period in 2010, with an accumulated deficit of $8,003,002 as of April 30, 2011. Revenue for fiscal year 2010 declined to $336,822 from $516,968 in 2009. The company had a net loss of $1,956,432 in fiscal year 2010 and an accumulated deficit of $7,830,207 at July 31, 2010. Auditors raised substantial doubt about the company's ability to continue as a going concern over the next twelve months.

Strategy

Management has outsourced much of manufacturing to minimize capital outlay and allow rapid production growth, and established policies for timely delivery to customers. The company says it has relationships with distribution groups to commercialize its entire product line and has signed definitive sales and agency agreements with purchase/sale order requirements expected to generate substantial sales in the next five years. It requires cash deposits with sales orders to reduce working capital drain and plans to obtain additional capital through various financing arrangements, though no specific amounts or terms are disclosed in these excerpts.

Risks

• Going concern uncertainty — The company has an accumulated deficit of $8,003,002 as of April 30, 2011, does not have sufficient resources to fund current working capital, and its auditors have raised substantial doubt about its ability to continue as a going concern.
• Dependence on Megola GmbH license — ScaleGuard products are sold under a license from Megola GmbH, which sets prices, can change them at its discretion, and can terminate the agreement for cause, though Megola has separately acquired certain additional patents.
• Revenue decline and liquidity — Revenue fell from $516,968 in fiscal 2009 to $336,822 in fiscal 2010, and the company plans to obtain additional capital through financing arrangements but no terms are disclosed.
• Penny stock and forward-looking statement limitations — Because shares are considered penny stock (issued below $5.00 per share), the safe harbors for forward-looking statements under Section 21E of the Exchange Act are unavailable to the company.

Outlook

Management states that it has undertaken initiatives to improve cash flow and move toward profitable operations, including outsourcing manufacturing and signing distribution agreements expected to generate substantial sales over the next five years. The company acknowledges it does not have sufficient resources to fund current working capital requirements and plans to obtain additional capital through financing arrangements. No assurance can be given that these expectations will be realized, and actual results may differ materially.