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EX-10.4 - EXHIBIT 10.4 - ADARNA ENERGY Corpex10-4.htm
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EX-31.1 - EXHIBIT 31.1 - ADARNA ENERGY Corpesyr10ka3ex31-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________

FORM 10-K/A
(Amendment No. 3)
_________________________
 
ANNUAL REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 
COMMISSION FILE NO.: 0-32143
 
 
ECOSYSTEM CORPORATION
 (Exact name of registrant as specified in its charter)

Delaware
 
20-3148296
(State of other jurisdiction of
 
(IRS Employer
incorporation or organization
 
Identification No.)
     
One Penn Plaza, Suite 1612, New York, NY
10119
(Address of principal executive offices)
(Zip Code)
 
 (212) 994-5374
 
(Registrant’s telephone number)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 406 of the Securities Act. Yes __ No X
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes ___ No _____
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (Check One): Large accelerated filer ___ Accelerated filer ___ Non-accelerated filer___ Small reporting company X
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _ No X
 
 As of June 30, 2009 (the last business day of the most recently completed second fiscal quarter) the aggregate market value of the common stock held by non-affiliates was approximately $338,289.
 
As of April 15, 2010, there were 32,176,159 shares of common stock outstanding.
 
 

 
 

 


 
Amendment No. 3

This Amendment No.3 on Form 10-K/Ais being filed in order to include Exhibit 10.4 in the Filing:
 
None of the other disclosures in this Report have been amended or updated. For updated information about Ecosystem Corporation, please refer to the more recent filings made with the SEC.
 

 
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ECOSYSTEM CORPORATION
ANNUAL REPORT ON FORM 10K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 
TABLE OF CONTENTS
 

     
Page
 
Part I
       
Item 1
Business
    4  
Item 1A
Risk Factors
    5  
Item 2
Description of Properties
    10  
Item 3
Legal Proceedings
    10  
           
Part II
         
Item 4
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
       
        11  
Item 5
Selected Financial Data
       
Item 6
Management’s Discussion and Analysis
    12  
Item 7
Financial Statements and Supplementary Data
    16  
Item 9
Changes and Disagreements with Accountants on Accounting and Financial Disclosure
    38  
Item 8A
Controls and Procedures
    38  
Item 8B
Other Information
    39  
           
Part III
         
Item 9
Directors, Executive Officers and Corporate Governance
    40  
Item 10
Executive Compensation
    40  
Item 11
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    41  
           
Item 12
Certain Relationships and Related Transactions and Director Independence
    41  
Item 13
Principal Accountant Fees and Services
    42  
           
Part IV
         
Item 14
Exhibits and Financial Statement Schedules
    42  
           
Signatures
      43  

 
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PART I
 
Basis of Presentation
In this Annual Report on Form 10-K, the terms “we,” “our,” “us,” “EcoSystem,” or the “Company” refer to EcoSystem Corporation.
 
Forward Looking Statements
We make certain forward-looking statements in this Annual Report on Form 10-K and in the documents that are incorporated herein by reference. These forward-looking statements relate to our outlook or expectations for earnings, revenues, expenses, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business, results of operations or financial condition. Specifically, forward-looking statements may include statements preceded by, followed by or that include the words “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target” or similar expressions. These statements reflect our management’s judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause our actual results to differ include:
 
Ø
the volatility and uncertainty of commodity prices;
 
Ø
the costs and business risks associated with developing new products and entering new markets;
 
Ø
our ability to locate and integrate future acquisitions;
 
Ø
the impact of new, emerging and competing technologies on our business;
 
Ø
the possibility of one or more of the markets in which we compete being impacted by political, legal and regulatory changes or other external factors over which they have no control;
 
Ø
changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices;
 
Ø
our reliance on key management personnel;
 
Ø
limitations and restrictions contained in the instruments and agreements governing our indebtedness;
 
Ø
our ability to raise additional capital and secure additional financing;
 
Ø
our ability to implement additional financial and management controls, reporting systems and procedures and comply with Section 404 of the Sarbanes-Oxley Act, as amended; and
 
Ø
other risks referenced from time to time in our filings with the SEC and those factors listed in this Form 10k under Item 1A, Risks Factors.
 
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Form 10-K, or in the case of a document incorporated by reference, as of the date of that document. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.

 
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ITEM 1
BUSINESS
 
OVERVIEW
 
EcoSystem Corporation (“we,” “our,” “us,” “EcoSystem,” or the “Company”) is a technology development company with a focus on cleantech innovations designed to resolve compelling ecological challenges while producing value added carbon neutral and negative products.
 
Carbon dioxide is the most abundant waste produced by human activity. Continued accumulation in Earth’s atmosphere and oceans needs to be avoided in order to prevent severe climate change. The majority of our waste carbon emissions come from the combustion of fossil fuels to produce electricity, to power transportation, to heat our homes and to manufacture products. The scientific consensus is that these activities are directly responsible for increasing atmospheric carbon dioxide concentrations to the highest that they have been for more than 650,000 years. However, and despite the increased focus on renewable sources of energy, fossil fuels will continue to play a vital and dominant role in providing the majority of our energy needs over at least the next 50 years. Most scientists agree that, unabated, the combustion of fossil fuels to meet these needs will pump enough carbon dioxide into the global ecosystem to bring about severe climate change. Our collective challenge is to stem the tide of carbon emissions as rapidly and as cost-effectively as possible with little to no restriction on economic growth.
 
EcoSystem’s ambition is to contribute to the resolution of this challenge by developing new clean technologies that reduce and reuse carbon emissions. Our plan to do so while building shareholder value is to develop, license and support technologies and projects that reduce the carbon intensity of liquid fuels by reducing consumption of fossil fuels, increase use of sustainable raw materials and biofuels, and decrease production of wastes and emissions.
 
Our current technology portfolio includes several feedstock and product conditioning technologies, lipid and alcohol production and refining technologies, and carbon dioxide recycling and refining technologies. While these technologies have wide application potential in several industries and processes, we are initially focused on developing applications of these technologies for use in the existing first generation U.S. corn ethanol industry. We believe that the composition and extent of the installed ethanol complex, and the relatively uncomplicated nature of its inputs and outputs presents compelling opportunities to defray risk as we commercialize our technologies. Importantly, significant demand exists today for technologies that enhance the efficiency and sustainability of refining corn into liquid fuel. We believe that satisfying this demand can be expected to result in reduced reliance on petroleum products, more efficient use of natural resources, increased use of biomass-derived fuels and other products, and decreased greenhouse gas emissions on globally-meaningful scales.
 
INTELLECTUAL PROPERTIES
“ESYR,” EcoSystem, Cellulosic Corn™ and the “EcoSystem Logo” are the registered trademarks of EcoSystem Corporation.

 
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INDUSTRY OVERVIEW
 
The Ethanol Production Industry
Introduction
Ethanol is a clean-burning, high-octane fuel that is produced from the fermentation of carbohydrates such as grains, starches and sugars. Ethanol is produced primarily from corn in the U.S. It is used primarily as a gasoline additive to increase octane rating and to comply with air emissions regulations by reducing emissions of carbon monoxide and nitrogen oxide. According to the RFA, ethanol is blended into more than 50% of the gasoline sold in the U.S. Fuel blended with up to 10% ethanol, also referred to as E10 fuel, is approved for use by major motor vehicle manufacturers and is often recommended as a result of ethanol’s clean burning characteristics. Ethanol comprises up to 85% of E85 fuel, which currently represents a relatively small portion of the U.S. gasoline supply. Approximately six million vehicles out of more than 200 million vehicles in the United States today are Flexible Fuel Vehicles, or FFVs, capable of using E85 fuel.
 
Rapid Industry Expansion
The ethanol industry has grown significantly over the past several years, with production increasing from about 175 million gallons in 1980, to about 3.4 billion gallons in 2004, to about 10.8 billion gallons in 2009 according to the Renewable Fuels Association (“RFA”). Despite the impact of recent volatility in the relevant commodity markets, we believe that ethanol will continue to experience increased demand in the United States as there remains a focus on reducing reliance on petroleum-based transportation fuels due to high and volatile oil prices, heightened environmental concerns, and energy independence and national security concerns. Also, according to the U.S. Energy Information Administration, ethanol blends accounted for about 8% of the U.S. gasoline supply during 2009. We believe ethanol’s environmental benefits, ability to improve gasoline performance, fuel supply extender capabilities, attractive production economics and favorable government incentives could enable ethanol to comprise an increasingly larger portion of the U.S. liquid fuel supply as more fully described below:
 
Ø
 
Environmental Benefits. Ethanol, as an oxygenate, reduces tailpipe emissions when added to gasoline. The additional oxygen in the ethanol results in a more complete combustion of the fuel in the engine cylinder, resulting in reduced carbon monoxide and nitrogen oxide emissions. Prior federal programs that mandated the use of oxygenated gasoline in areas with high levels of air pollution spurred widespread use of ethanol in the United States. The use of ethanol as an oxygenate is driven, in part, by environmental regulations. The federal Clean Air Act requires the use of oxygenated gasoline during winter months in areas with unhealthy levels of carbon monoxide.
 
Ø
 
Blending Benefits. Ethanol has an octane rating of 113, and is added to gasoline to raise the octane level of gasoline. Unblended gasoline typically has a base octane level of approximately 84. Typical gasoline and ethanol blends (up to E10) have octane ratings ranging from 87 to 93. Higher octane gasoline has the benefit of reducing engine knocking. Gasoline with higher octane typically has been sold at a higher price per gallon than lower octane gasoline. In March 2009, Growth Energy, an ethanol industry trade association, and 54 ethanol producers requested that the U.S. Environmental Protection Agency (“EPA”) approve the use of up to 15% ethanol blended with gasoline. The EPA has not yet granted the requested waiver although it has indicated that increasing the allowable percentage of ethanol blended in the U.S. gasoline supply could be an important step towards the long-term introduction of more renewable fuels into the transportation sector. We believe that increasing the ethanol blended in the domestic gasoline supply could have a positive impact on the demand for ethanol. We further believe that the costs ethanol producers incur in producing a gallon of ethanol currently are lower than the costs refiners incur in producing a gallon of petroleum-based gasoline. Ethanol’s favorable production economics are further enhanced by the blender’s tax credit, which can be captured by refiners or passed on to consumers for a benefit of $0.45 per gallon of ethanol.
 
 
 
6
 

 
 

 


 

 
Ø
 
Expansion of Gasoline Supplies. By blending ethanol with gasoline, refiners can expand the volume of fuel available for sale. As a result, refiners can produce more fuel from a barrel of oil and expand their ability to meet consumer demand, especially when refinery capacity and octane sources are limited. According to the Energy Information Administration, between 1980 and 2005, petroleum refining capacity in the United States decreased approximately 5% while domestic demand increased approximately 21%. We believe that increased pressure on domestic fuel refining capacity will result in greater demand for ethanol.
 

Ø
 
Use Mandates. In addition to the blender’s tax credit, the growth in ethanol usage has also been supported by legislative requirements dictating the use of renewable fuels, including ethanol. The Energy Independence and Security Act of 2007, confirmed by the EPA regulations on the Renewable Fuel Standard, or RFS2, issued on February 3, 2010 mandated a minimum usage of corn-derived renewable fuels of 10.5 billion gallons in 2009 and 12.0 billion gallons in 2010. The upper mandate for corn-based ethanol is 15.0 billion gallons by 2015.
 
Ø
 
Federal Tariff on Imported Ethanol. In 1980, Congress imposed a tariff on foreign produced ethanol to encourage the development of a domestic, corn-derived ethanol supply. This tariff was designed to prevent the federal tax incentive from benefiting non-U.S. producers of ethanol. The $0.54 per gallon tariff is scheduled to expire on January 1, 2009. Ethanol imports from 24 countries in Central America and the Caribbean Islands are exempt from the tariff under the Caribbean Basin Initiative, which provides that specified nations may export an aggregate of 7.0% of U.S. ethanol production per year into the U.S., with additional exemptions from ethanol produced from feedstock in the Caribbean region over the 7.0% limit. As a result of new plants under development in the Caribbean region, we believe imports from there will continue, subject to the limited nature of the exemption.
 
Production Technology and Economics
Corn is the principal raw material used to produce ethanol and dry and wet distillers grains. As a result, changes in the price of corn can materially affect ethanol production economics. Rising corn prices result in higher cost of ethanol and distillers grains. Because ethanol competes with non-corn-based fuels, producers generally are unable to pass along increased corn costs to their customers. At certain levels, corn prices or supplies may make ethanol uneconomical to use in fuel markets.
 
The profitability of an ethanol producer depends principally on the spread between ethanol and corn prices. The price of corn is influenced by weather conditions and other factors affecting crop yields, farmer planting decisions and general economic, market and regulatory factors. These factors include government policies and subsidies with respect to agriculture and international trade, and global and local demand and supply. The significance and relative effect of these factors on the price of corn is difficult to predict. Any event that tends to negatively affect the supply of corn, such as adverse weather or crop disease, could increase corn prices. Increasing domestic ethanol capacity could boost the demand for corn and result in increased corn prices. In 2008, U.S. farmers produced 12.1 billion bushels of corn. Many analysts predict that the U.S. ethanol fleet will get approximately 3.3 billion bushels and produce about 9.1 billion gallons. While this amount is less than the 2009 RFS, the RFS can be expected to be satisfied through a mixture of 2009 production, imports and trading of residual 2007 and 2008 Renewable Identification Numbers (“RINs”).
 
Reduction in the spread between ethanol and corn prices, whether as a result of sustained high or increased corn prices or sustained low or decreased ethanol prices, would adversely affect the financial position of a corn ethanol producer. Further, it is possible that ethanol prices could decline below production costs, which could cause ethanol producers to suspend production.
 
 
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Entry of Cellulosic Ethanol Technologies
A number of companies are actively commercializing technologies that utilize new feedstocks in addition to corn and other grains. These cellulosic feedstocks include wood, grasses, corn stover and municipal solid waste, are found in abundance and present valuable opportunities to increase domestic ethanol production. While facilities based on fully commercialized cellulosic ethanol technologies would produce ethanol that would compete with corn ethanol, the RFS2 mandates use of 100 million gallons of cellulosic ethanol in 2010 in addition to 12 billion gallons of corn ethanol. This amount increases to 16 billion gallons of cellulosic ethanol per year by 2022, for a total of 31 billion gallons of ethanol when combined with the 15 billion gallon maximum corn ethanol production required by the RFS2. We believe that the path to cellulosic ethanol is through the corn ethanol industry; that integration of cellulosic ethanol technologies into the existing first generation corn ethanol fleet can be far more successful than building and scaling stand-alone cellulosic infrastructure. Accordingly, a number of our technologies are designed to facilitate the conversion of cellulose (from both corn and other forms of biomass) into additional value-added products.
 
Employees

EcoSystem Corporation currently has 3 employees.  In addition to its executive officers, EcoSystem subcontracts with and/or employs on a part-time or at-will basis technical staff on an as-needed basis.  There is no union representation for any of our employees.

ITEM 1A
RISK FACTORS
There are many important factors that have affected, and in the future could affect, EcoSystem Corporation’s business, including but not limited to the factors discussed below, which should be reviewed carefully together with other information contained in this report. Some of the factors are beyond our control and future trends are difficult to predict.
 
There is substantial doubt concerning our ability to continue as a going concern.
EcoSystem incurred a loss from continuing operations of $2,080,050 during the twelve months ended December 31, 2009, and we had $2,551 in cash at December 31, 2009. These matters raise substantial doubt about our ability to continue as a going concern. Management’s plans include raising additional proceeds from debt and equity transactions and completing strategic acquisitions.
 
We are implementing new business plans which make the results of our business uncertain.
Our limited operating history makes it difficult for potential investors to evaluate our business. Therefore, our proposed operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the formation of any new business, as well as those risks that are specific to the biodiesel, ethanol and culinary oils industry in general. Investors should evaluate an investment in our company in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products, services and technologies. Despite best efforts, we may never overcome these obstacles to achieve financial success. Our business is speculative and dependent upon the implementation of our business plan, as well as our ability to enter into agreements with third parties for necessary financing, the provision of necessary feedstock sources, engineering, procurement and construction services and the sale and distribution of our biodiesel fuel on terms that will be commercially viable for us. There can be no assurance that our efforts will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that our investors will not lose their entire investment.
 
The fiscal efficiencies of highly capitalized competitors in biotechnology could defeat our efforts to capture a viable market share.
The business of developing new biotechnologies is a capital-intense business, requiring substantial capital resources. The costs that we may incur in obtaining capital are substantially greater per dollar than the cost incurred by large scale enterprises in the industry. This situation could cause us to be unable to compete effectively.
 
The exercise of our outstanding warrants and options and EcoSystem Corporation’s various anti-dilution and price-protection agreements could cause the market price of our common stock to fall, and may have dilutive and other effects on our existing stockholders.
The exercise of our outstanding warrants and options could result in the issuance of up to 275,000 shares of common stock, assuming all outstanding warrants and options are currently exercisable. Such issuances would reduce the percentage of ownership of our existing common stockholders and could, among other things, depress the price of our common stock. This result could detrimentally affect our ability to raise additional equity capital. In addition, the sale of these additional shares of common stock may cause the market price of our stock to decrease.
  
8
 
We lack capital to fund our operations.
During the twelve months ended December 31, 2009 our operations used $56,417 in cash. In addition, during those twelve months we were required to make payments on some of our outstanding debts. Loans from some of our shareholders funded both the cash shortfall from operations and our debt service. Those individuals may not be able to continue to fund our operations or our debt service.
 
Our failure to attract qualified engineers and management personnel could hinder our success.
Our ability to attract and retain qualified engineers and other professional personnel when we need them will be a major factor in determining our future success. There is a very competitive market for individuals with advanced engineering training, and we are not assured of being able to retain the personnel we will need.
 
Key personnel are critical to our business and our future success depends on our ability to retain them.
Our success depends on the contributions of our key management, and engineering personnel. The loss of these officers could result in lost sales opportunities, lost business, difficulties operating our assets, difficulties raising additional funds and could therefore significantly impair our financial condition. Our future success depends on our ability to retain and expand our staff of qualified personnel, including environmental technicians, sales personnel and engineers. Without qualified personnel, we may incur delays in rendering our services or be unable to render certain services.
 
Viridis Capital can exert control over us and may not make decisions that further the best interests of all stockholders.
Viridis Capital, LLC owns the majority of our outstanding capital stock. As a result, Viridis exerts a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of us and might affect the market price of our common stock, even when a change in control may be in the best interest of all stockholders. Furthermore, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider.
 
EcoSystem Corporation is not likely to hold annual shareholder meetings in the next few years.
Delaware corporation law provides that members of the board of directors retain authority to act until they are removed or replaced at a meeting of the shareholders. A shareholder may petition the Delaware Court of Chancery to direct that a shareholders meeting be held. But absent such a legal action, the board has no obligation to call a shareholders’ meeting. Unless a shareholders’ meeting is held, the existing directors elect directors to fill any vacancy that occurs on the board of directors. The shareholders, therefore, have no control over the constitution of the board of directors, unless a shareholders’ meeting is held. Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved. The current board members were appointed to by the previous directors. If other directors are added to the Board in the future, it is likely that the current board will appoint them. As a result, the shareholders of EcoSystem Corporation will have no effective means of exercising control over the operations of EcoSystem Corporation.
 
Investing in our stock is highly speculative and you could lose some or all of your investment.
The value of our common stock may decline and may be affected by numerous market conditions, which could result in the loss of some or the entire amount invested in our stock. The securities markets frequently experience extreme price and volume fluctuations that affect market prices for securities of companies generally and very small capitalization companies such as us in particular.
 
The volatility of the market for EcoSystem Corporation common stock may prevent a shareholder from obtaining a fair price for his shares.
The common stock of EcoSystem Corporation is quoted on the OTC Bulletin Board. It is impossible to say that the market price on any given day reflects the fair value of EcoSystem Corporation, since the price sometimes moves up or down by 50% or more in a week’s time. A shareholder in EcoSystem Corporation who wants to sell his shares, therefore, runs the risk that at the time he wants to sell, the market price may be much less than the price he would consider to be fair.
 
 
9
 
 
Our common stock qualifies as a "penny stock" under SEC rules which may make it more difficult for our stockholders to resell their shares of our common stock.
Our common stock trades on the OTC Bulletin Board. As a result, the holders of our common stock may find it more difficult to obtain accurate quotations concerning the market value of the stock. Stockholders also may experience greater difficulties in attempting to sell the stock than if it were listed on a stock exchange or quoted on the NASDAQ Global Market or the NASDAQ Capital Market. Because our common stock does not trade on a stock exchange or on the NASDAQ Global Market or the NASDAQ Capital Market, and the market price of the common stock is less than $5.00 per share, the common stock qualifies as a "penny stock." SEC Rule 15g-9 under the Securities Exchange Act of 1934 imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an "established customer" or an "accredited investor." This includes the requirement that a broker-dealer must make a determination on the appropriateness of investments in penny stocks for the customer and must make special disclosures to the customer concerning the risks of penny stocks. Application of the penny stock rules to our common stock affects the market liquidity of the shares, which in turn may affect the ability of holders of our common stock to resell the stock.
 
Only a small portion of the investment community will purchase “penny stocks” such as our common stock.
EcoSystem Corporation common stock is defined by the SEC as a “penny stock” because it trades at a price less than $5.00 per share. EcoSystem Corporation common stock also meets most common definitions of a “penny stock,” since it trades for less than $1.00 per share. Many brokerage firms will discourage their customers from purchasing penny stocks, and even more brokerage firms will not recommend a penny stock to their customers. Most institutional investors will not invest in penny stocks. In addition, many individual investors will not consider a purchase of a penny stock due, among other things, to the negative reputation that attends the penny stock market. As a result of this widespread disdain for penny stocks, there will be a limited market for EcoSystem Corporation common stock as long as it remains a “penny stock.” This situation may limit the liquidity of your shares.
 
ITEM 2
DESCRIPTION OF PROPERTIES
 
EcoSystem Corporation currently maintains office space at One Penn Plaza, Suite 1612, New York, NY. The lease for this space expires in May of 2011. We paid no rent during 2009 for these offices. During 2010, EcoSystem does not expect to pay rent for these offices.
 
ITEM 3
LEGAL PROCEEDINGS
 
None.
 
 
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PART II
 
ITEM 4
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDERMATTERS
 
EcoSystem’s Common Stock trades on the OTC Bulletin Board under the symbol “ESYM.” The following table sets forth, for the periods indicated, the range of high and low closing bid prices for EcoSystem Common Stock as reported by the National Association of Securities Dealers composite. The reported bid quotations reflect inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
 
Period
 
High
 
Low
2009 First Quarter
   
0.0016
 
0.0013
2009 Second Quarter
   
0.0017
 
0.0015
2009 Third Quarter
   
0.0018
 
0.0016
2009 Fourth Quarter
   
0.0155
 
0.1003
2008 First Quarter
   
0.0552
 
0.0552
2008 Second Quarter
   
0.0100
 
0.0060
2008 Third Quarter
   
0.0010
 
0.0007
2008 Fourth Quarter
   
0.0028
 
0.0026
Title of Class
Approximate Number of Holders of Record as of April 15, 2010
Common Stock, 0.001 par
268
 
The number of holders does not give effect to beneficial ownership of shares held in the street name by stock brokerage houses or clearing agents.
 
REVERSE SPLIT
Effective November 30, 2009, the Company completed a 1 for 1,000 reverse stock split. All stock prices, share amounts, per share information, stock options and stock warrants in this Report reflect the reverse stock split.
 
DIVIDENDS
We have no present intention of paying dividends in the foreseeable future. Our policy for the time being is to retain earnings and utilize the funds for operations and growth. The Board of Directors based on our earnings, financial condition, capital requirements and other existing conditions will determine future dividend policies.
 
SALE OF UNREGISTERED SECURITIES
The Company did not sell any unregistered securities during the 4th quarter of 2009.
 
REPURCHASE OF EQUITY SECURITE
The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the 4th quarter of 2009.
 
ITEM 5
SELECTED FINANCIAL DATA
 
Not applicable.
 
 
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ITEM 6
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONSAND RESULTS OF OPERATION
 
 
 EcoSystem Corporation (“we,” “our,” “us,”  “EcoSystem,” or the “Company”) is a clean technology development company with a focus on developing innovations designed to resolve compelling ecological challenges while producing value added carbon neutral and negative products.

Carbon dioxide is the most abundant waste produced by human activity. Continued accumulation in Earth’s atmosphere and oceans needs to be avoided in order to prevent severe climate change. The majority of our waste carbon emissions come from the combustion of fossil fuels to produce electricity, to power transportation, to heat our homes and to manufacture products. The scientific consensus is that these activities are directly responsible for increasing atmospheric carbon dioxide concentrations to the highest that they have been for more than 650,000 years. However, and despite the increased focus on renewable sources of energy, fossil fuels will continue to play a vital and dominant role in providing the majority of our energy needs over at least the next 50 years. Most scientists agree that, unabated, the combustion of fossil fuels to meet these needs will pump enough carbon dioxide into the global ecosystem to bring about severe climate change. Our collective challenge is to stem the tide – to channel the flow of waste carbon emissions in ways that stimulate economic growth and preserve quality of life while preventing the continued accumulation of carbon dioxide in Earth’s atmosphere and oceans.

EcoSystem’s ambition is to contribute to the resolution of this challenge by developing new clean technologies that reduce and reuse carbon emissions. Our plan to do so while building shareholder value is to develop, license and support technologies and projects that beneficially reuse waste carbon emissions in ways that reduce consumption of fossil fuels, increase use of sustainable raw materials, and decrease production of wastes and emissions.

We have licensed a technology portfolio from GS CleanTech Corporation, a subsidiary of GreenShift Corporation, an entity whose majority owner is the same as our majority owner.  The technology portfolio includes several feedstock and product conditioning technologies, lipid and alcohol production and refining technologies, and carbon dioxide recycling and refining technologies. While these technologies have wide application potential in several industries and processes, we are initially focused on developing applications of these technologies for use in the existing first generation U.S. corn ethanol industry. We believe that the composition and extent of the installed ethanol complex and the relatively uncomplicated nature of its inputs and outputs presents compelling opportunities to defray risk as we commercialize our technologies. Importantly, significant demand exists today for technologies that enhance the efficiency and sustainability of refining corn into liquid fuel. We believe that satisfying this demand can be expected to result in reduced reliance on petroleum products, more efficient use of natural resources, increased use of biomass-derived fuels and other products, and decreased greenhouse gas emissions on globally-meaningful scales.

Our operating activities during the year ended December 31, 2009 included

(1)  
acquiring the rights to our technology portfolio;
 
(2)  
research and development with our technologies including commencement of pilot and bench testing activities;
 
(3)  
performing due diligence on a number of distressed renewable fuel production assets;
 
(4)  
negotiating to acquire qualified renewable fuel production assets;
 
(5)  
negotiating to finance, build, own and operate qualified existing renewable fuel production assets; and,
 
(6)  
the completion of the equity financing intended for use in the acquisition and operation of qualified renewable fuel production assets (the “2009 Preferred Equity Financing”).

Technology Development Activities

On May 15, 2009, EcoSystem and GS CleanTech Corporation, a wholly-owned subsidiary of GreenShift Corporation, entered into an Early Adopter License Agreement (the “EALA”) involving use of GreenShift’s portfolio of technologies designed to increase the yield and decrease the cost, carbon and risk associated with corn ethanol production. These patented and patent-pending technologies include GreenShift’s feedstock and product conditioning technologies, lipid and alcohol production and refining technologies, and carbon dioxide recycling and refining technologies.

During 2009, EcoSystem commenced pilot testing with its patented and patent-pending feedstock conditioning technologies. These technologies are designed to increase the availability of fermentable sugars natively available in whole corn in order to increase ethanol yields on reduced raw material and energy consumption cost. This is achieved in two stages: flash desiccation and inertial cavitation.

Flash desiccation uses super-heated steam to subject targeted feedstocks, corn in this case, to extreme temperature and/or pressure gradients in a series of enclosed cyclonic systems with no internal moving parts. These conditions almost instantly desiccate, shear and micronize cellulosic and other feedstocks. This process has been shown in prior experimentation with grain-based and cellulosic biomass to produce particle sizes in the low micron levels and, in some cases, to have catalyzed chemical reactions and altered molecular structures. The output of this process is a micronized powder that has been shown in prior experimentation with cellulosic feedstocks to have a substantially smaller particle size as compared to conventionally milled products. While super-heated steam is used as the prime mover of the desiccation in the preferred implementation of this technology, the process can also use compressed air, corrosive gases and other gases. The testing recently commenced was based on the use of compressed air, the least efficient and most energy intensive implementation of the technology. Initial data received from this testing at an ethanol facility during 2009 indicates that gross yield improvements in excess of 6% are achievable with flash desiccation technology before accounting for the energy input costs associated with using compressed air.

This testing was completed primarily by the Company’s staff.  The Company’s chairman, Kevin Kreisler, and chief executive officer, Dr. Paul Miller, collectively have several advanced engineering and technical degrees and many years of experience in technology development and commercialization. Mr. Kreisler holds a B.S. in civil and environmental engineering and has over thirteen years of experience developing technologies which facilitate the more efficient use of natural resources. Dr. Miller holds a B.S in chemistry as well as a Ph.D. in chemistry and has previously developed projects based on extraction and refining of biomass derived products. Dr. Miller managed the Company’s technology development and commercialization activities between August 19, 2010 and March 2011.  To conserve costs and to help defray risk, Management retains technical staff on a subcontract basis depending upon the subject matter or technical discipline implicated by the Company’s research. For example, testing involving the Company’s flash desiccation technology has been carried out in collaboration with GS CleanTech, including three experienced engineers. GS CleanTech was not paid for its efforts in this regard.  Instead, as its sole compensation for its assistance, GS CleanTech retains technology use rights involving the technologies licensed to the Company under the EALA outside of the Company’s field of use. In another example involving testing with the same technology, the Company’s staff additionally collaborated with technical staff of Global Ethanol. As with GS CleanTech, the sole compensation for Global’s assistance during such testing was to be comprised of technology use rights involving such technology if successfully demonstrated. In the case of GS CleanTech, such technology use rights consisted of the non-exclusive royalty-free right to use of any developments made by the Company to the GS CleanTech technologies licensed to the Company.  In the case of Global Ethanol, such rights consisted of the non-exclusive right to use technologies successfully developed by the Company in concert with Global Ethanol at Global Ethanol’s Riga, Michigan ethanol production facility.  No additional agreement or arrangement has been entered into in this respect and the technology which was tested has not been successfully demonstrated to date. The Company is not subject to any other material agreements or arrangements in this regard.

The Company plans to conduct additional testing with this technology during 2010 and 2011, which testing may or may not involve the subcontract technical consultants and project collaborators used for prior testing. All testing with this technology is performed under the license granted by the EALA, and no payment is required under the EALA until the technology has been successfully commercialized. The EALA provides for royalty payments equal to 10% of the Company’s pre-tax net income deriving from commercial use of licensed technology. Successful commercialization will require sequential progression from bench, to pilot and finally commercial-scale pilot testing. Management’s risk mitigation policies call for a subjective analysis of the results produced by testing at each of the above stages. The goals of this analysis include an assessment of overall feasibility, the establishment of design parameters for cost-efficient scaling to the next sequential stage, and confirmation of previously established design assumptions and stage-specific objectives that Management believes to be required for continuation of research and development activities for a specific technology. None of these determinations are defined in the EALA or are known prior to testing at each stage and, in fact, cannot, by definition, be known in advance of testing at each stage. The purpose of each stage of testing for each technology is to provide Management with sufficient information to determine whether or not additional investment into that technology is warranted. No payments have been made to date or are currently due under the EALA. Management does not anticipate completion of bench and pilot testing and commencing commercial operations with technologies licensed under the EALA during 2010 or 2011, but completion of testing and development of a reasonable assessment of the economic feasibility of large scale implementation  may be achieved within 36 months, depending upon the results of additional testing and the availability of capital for additional research and development activities.

We plan to finance the ongoing development of our technologies, as well as acquisitions of additional strategically compatible technologies, through issuance of new debt and equity.

Facility Development Activities

We evaluated several distressed ethanol and biodiesel production facilities during 2009, but we were unable to negotiate satisfactory terms to acquire plants with favorable debt and cost structures as compared to conventional renewable fuel production assets. The health of the ethanol industry improved materially (beyond our targeted parameters for distressed acquisitions) during the latter half of 2009 as compared to the conditions during the second half of 2008 and first half of 2009.

While the improved market is good for the renewable fuels industry, we are not interested in production for the sake of production; nor are we interested in acquiring production assets for anything but distressed values. Our mission is to develop and support new cleantech that materially improves the economics and sustainability of renewable fuel production. At the right price, and with the right financing, ownership of qualified production assets could greatly accelerate the development of commercial scale implementations of our technologies.

The 2009 Preferred Equity Financing was structured to acquire and sustainably operate distressed renewable fuel production assets. Our plan here was to use innovative equity financing and our technologies to increase fuel and co-product yields while decreasing production costs and debt service requirements in order to facilitate generation of sufficient cash flows to withstand market pressures and other risks that competing renewable fuel producers cannot absorb. The magnitude, pricing and other terms of the 2009 Preferred Equity Financing cease to be appropriate in the absence of qualified distressed plants. We have accordingly entered into discussions to cancel the 2009 Preferred Equity Financing.

We plan to replace the 2009 Preferred Equity Financing with a smaller, hopefully less expensive financing to support our technology development efforts and our revised investment plan. We intend to support integration of technologies that increase productivity of renewable fuel producers while decreasing production of wastes and emissions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial statements included herein have been prepared by the Company, in accordance with Generally Accepted Accounting Principles. This requires the Company’s management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. These estimates and assumptions will also affect the reported amounts of certain revenues and expenses during the reporting period. In the opinion of management, all adjustments which, except as described elsewhere herein, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Actual results could differ materially based on any changes in the estimates and assumptions that the Company uses in the preparation of its financial statements and any changes in the Company’s future operational plans.

RESULTS OF OPERATIONS

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenues

There were no revenues for the year ended December 31, 2009, or the for year ended December 31, 2008.

Cost of Revenues

There was no cost of revenues from continuing operations for the year ended December 31, 2009 or for the year ended December 31, 2008.

Operating Expenses

Operating expenses were $995,274 for the year ended December 31, 2009 and $768,787 for the year ended December 31, 2008. Included in the year ended December 31, 2009 was $146,500 in stock-based compensation and $585,982 in research and development costs associated with stock issuances to various consultants issued in connection with the Company’s technologies as compared to $707,028 in stock-based compensation and $0 in research and development costs for the year ended December 31, 2008.

The research and development costs incurred during 2008 pertained to the Company’s prior efforts with respect to the development of the Company’s bench-scale biological technologies, which were designed to recycle agricultural and food product wastes into feedstock for renewable fuel and aquaculture applications. These activities were conducted by the Company’s management in collaboration with a number of contract entomologists, nutritionists and process engineers, which parties were retained on a consulting and part-time employment basis to minimize the Company’s overhead and related development costs.

Work on the above-referenced biological technologies was terminated during 2009 given Management’s contemporaneous assessment that the financial and technology risks associated with scaling these technologies to a meaningful scale were prohibitive. The Company’s research and development efforts then shifted to early stage testing involving the Company’s patented and patent-pending feedstock conditioning technologies licensed under the EALA and, more specifically, the flash desiccation technology licensed to the Company under the EALA. The research and development costs incurred during 2009 predominantly related to a series of trials involving this technology. The Company’s Management collectively has several advanced engineering and technical degrees and many years of experience in technology development and commercialization. To conserve costs and to help defray risk, Management retains technical staff on a subcontract basis depending upon the subject matter or technical discipline implicated by the Company’s research. In the case of the above mentioned tests with the Company’s flash desiccation technology, these trials were completed by the Company’s staff and subcontracted technical consultants in collaboration with the operational and engineering staff of GreenShift Corporation and Global Ethanol, LLC, the owner of an ethanol facility at which a number of trials were conducted.

Additional Disclosures Involving the EALA

On May 15, 2009, EcoSystem and GS CleanTech Corporation entered into an Early Adopter License Agreement (the “EALA”) involving use of several of GS CleanTech’s technologies. The EALA calls for the payment of royalties to GS CleanTech equal to 10% of EcoSystem’s pre-tax net income deriving from the use of GS CleanTech’s technologies (excluding corn oil extraction). Since generation of pre-tax net income can only derive from commercialized implementations of the Company’s technologies, no payments are due under the EALA until the Company has successfully commercialized a technology licensed under the EALA.

The EALA grants EcoSystem “most favored licensee” status as an early adopter of the technologies licensed under the EALA, thus allowing EcoSystem to use the licensed technologies on terms that are more favorable than any terms which GS CleanTech may grant to third parties in the future (no such third party grants have occurred).  In the event that EcoSystem fails to achieve a targeted commercialization milestone, GS CleanTech has the right under the EALA to cancel EcoSystem’s “most favored licensee” status. The commercialization milestone contained in the EALA provides for the commencement of commercial sales on or before the fourth anniversary of the EALA, or May 15, 2013. While EcoSystem may lose its “most favored licensee” status if it fails to meet this milestone, EcoSystem will retain the licensee rights granted under the EALA.

EcoSystem shall provide all of the capital resources needed to build bench, pilot and commercial scale facilities based on the technologies licensed under the EALA. GS CleanTech is a wholly-owned subsidiary of GreenShift Corporation, which company is majority owned by our majority shareholder, Viridis Capital, LLC. The Company received a favorable response for grant funding sought for the Company’s feedstock conditioning technologies for during 2009, however, the Company elected not to proceed given the requirements of the relevant grant program. This particular technology was demonstrated during the year ended December 31, 2009 to result in more than 6% more biofuel yield by pre-conditioning corn prior to fermentation to increase the concentration of sugar available for fermentation into alcohol as well as oil available for extraction.

Other Income (Expense)

Interest expenses and financing costs for the year ended December 31, 2009 were $1,104,280 and $32,069 for the year ended December 31, 2008. Included in the year ended December 31, 2009 was $279,170 of interest expense, consisting of $121,525 in interest expense, $157,645 in interest expense due to a related party, as well as $915,064 in non-cash expenses associated with the conversion features embedded in the convertible debentures issued by the Company during the year ended December 31, 2009. Amortization of note discount was $89,974 and $0, respectively for year ended December 31, 2009 and 2008.

Net Income and Net Loss

Our net loss was $2,080,050 for the year ended December 31, 2009 and $787,318 for the year ended December 31, 2008.

Liquidity and Capital Resources

The Company’s capital requirements consist of general working capital needs, planned research and development expenditures involving our ongoing commercialization efforts with our technologies, and capital for investments in qualified renewable fuel production facilities.
 
The Company’s capital resources consist primarily of cash generated from the issuance of debt and stock. The Company relied on the issuance of convertible debt during the year ended December 31, 2009 to cover its capital needs. A summary of these planned development activities is provided above in the overview section of this discussion and analysis.

Cash Flows

For the year ended December 31, 2009, net cash provided by financing was $8,968. The Company had a working capital deficit of $1,559,570 at December 31, 2009, which includes $216,616 in liabilities associated with the conversion features embedded in the convertible debentures issued by the Company, as well as $551,018 in convertible debt due to third parties and $167,594 in convertible debt due to related parties.

Cash Flows

For the twelve months ending December 31, 2009, net cash provided by financing was $8,968. The Company had a working capital deficit of $1,559,570 at December 31, 2009. In reviewing our financial statements as of December 31, 2009, our auditor concluded that there was substantial doubt as to our ability to continue as a going concern.

Off Balance Sheet Arrangements

None.


15

 
 

 

 
ITEM 7
FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULES

   
 
Page No
FINANCIAL STATEMENTS
 
   
Report of Independent Registered Public Accounting Firm
15
   
Balance Sheets (As Restated)
16
   
Statements of Operations
17
   
Statements of Stockholders’ Equity(As Restated)
18
   
Statements of Cash Flows
19
   
Notes to Financial Statements
20

 
16
 
 

 
 

 


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
EcoSystem Corporation:
 
We have audited the accompanying balance sheet of EcoSystem Corporation as of December 31, 2009 and 2008 and the related statements of operations, stockholders' equity (deficit) and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of EcoSystem Corporation and Subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the two years ended December 31, 2009  in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company has suffered losses from operations and has a working capital deficiency as of December 31, 2009. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
As described in Note 11 to the financial statements, the Company has restated the financial statements and notes for the correction of certain errors and omissions in the financial statements.
 
 
 
/s/ Rosenberg Rich Baker Berman & Company
Somerset, New Jersey
April 15, 2010, except for Note 11, as to which date is May 21, 2010

 
17
 
 

 
 

 


 
ECOSYSTEM CORPORATION
BALANCE SHEETS

ASSETS
 
12/31/09
   
Restated
12/31/08
Current assets:
         
Cash
 
$
2,551
   
$
--
 
Total current assets
   
2,551
     
--
 
Other Assets:
               
Notes receivable
   
484,264
     
--
 
Project development costs
   
379,355
     
--
 
Total other assets
   
863,619
     
--
 
TOTAL ASSETS
 
$
866,170
   
$
--
 
                 
LIABILITIES AND STOCKHOLDER’S EQUITY
               
 
Current liabilities:
               
Due to related party
 
$
397,835
   
$
3,612
 
Accounts payable and accrued expenses
   
219,072
     
152,517
 
Accrued interest
   
37,654
     
--
 
Accrued interest – affiliate
   
50,259
         
Convertible debenture, net of discounts
   
674,296
         
Convertible debenture, net of discounts - affiliate
   
183,005
     
--
 
Total current liabilities
   
1,562,121
     
156,129
 
                 
TOTAL LIABILITIES
   
1,562,121
     
156,129
 
                 
STOCKHOLDERS’ EQUITY (DEFICIT)
               
Convertible preferred stock, $0.001 par value, 5,000,000 authorized
               
Series D: 1,000,000 authorized, 912,137 and 0, issued and outstanding
           
--
 
Series E: 909,312 authorized, 20,000 and 0 issued and none outstanding
   
--
     
--
 
Common stock, $0.001 par value, 5,000,000,000 authorized;
   
912 
         
23,013,457 and 500,000 issued and outstanding, respectively
   
23,013
     
500
 
Preferred units subscribed
   
81,011,667
     
--
 
Subscription receivable
   
(81,011,667
)
   
--
 
Additional paid-in capital
   
8,590,422
     
7,073,619
 
Accumulated deficit
   
(9,310,298
)
   
(7,230,248
)
                 
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
   
(695,951
     
(156,129
)
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
$
866,170
   
$
--
 

The notes to the financial statements are an integral part of these statements.

 
18
 
 

 
 

 


 
ECOSYSTEM CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND DECEMBER 31, 2008

         
Restated
 
   
12/31/09
   
12/31/08
 
             
Revenues
 
$
--
   
$
--
 
Cost of revenues
   
--
     
--
 
Gross profit
   
--
     
--
 
                 
Operating expenses
               
Stock based compensation
   
146,500
     
707,028
 
Selling expenses
   
3,138
         
Research and development
   
585,982
         
General and administrative expenses
   
259,654
     
61,759
 
Total operating expenses
   
995,274
     
768,787
 
                 
Operating income (loss)
   
(995,274
)
   
(768,787
)
                 
Other income (expenses)
               
Interest income
   
34,264
         
Interest income – related party
   
98,422
         
Gain on extinguishment of debt
   
67,901
         
Amortization of debt discount
   
(89,974
)
       
Costs related to conversion feature
   
(518,110
)
       
Costs related to conversion feature – related party
   
(396,954
)
       
Interest expense
   
(121,525
)
       
Interest expense – related party
   
(157,645
)
   
(32,069
)
Total other income (expense)
   
(1,083,621
)
   
(32,069
)
                 
Loss before provision for income taxes
   
(2,078,895
)
   
(800,856
)
                 
Provision for income taxes
   
(1,155
)
   
(4,796
)
                 
Net loss
 
$
(2,080,050
)
 
$
(805,652
)
                 
Weighted average of shares of common stock
               
outstanding, basic and diluted
   
2,524,370
     
53,548
 
                 
Net income (loss) per share, basic and diluted
 
$
(0.82
)
 
$
(15.05
)
                 

The notes to the financial statements are an integral part of these statements.

 
19
 
 

 
 

 

ECOSYSTEM CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
Series D
Preferred Stock
   
 
Common Stock
   
Preferred Units Subscribed
   
Stock Subscription Receivable
 
 
Shares
   
Amount
   
Shares
   
Amount
             
                                   
Balance at 12/31/07 (Restated)
   
921,313
   
$
921
     
8,354
   
$
8
     
--
     
--
 
Cancellation of old debt
   
--
     
--
     
(11
     
--
     
--
     
--
 
Shares issued for services
   
(921,313
     
(921
)
   
91,211
     
91
     
--
     
--
 
Conversion of Series D Preferred
   
--
     
--
     
400,000
     
400
     
--
     
--
 
Forgiveness of related party debt, net
   
--
     
--
     
--
     
--
     
--
     
--
 
Issuance of fractional shares from reverse split
   
--
     
--
     
446
     
1
     
--
     
--
 
Extinguishment of debt/beneficial conversion feature
   
--
     
--
     
--
     
--
     
--
     
--
 
Net loss
   
--
     
--
     
--
     
--
     
--
     
--
 
Balance at 12/31/08 (Restated)
   
--
   
$
--
     
500,000
   
$
500
     
--
     
--
 
Shares issued for services
   
--
     
--
     
341,500
     
341
     
--
     
--
 
Cancellation of Series D Preferred conversions
   
6,023,813
     
6,024
     
(3,440,000
     
(3,440
     
--
     
--
 
Shares issued for accounts payable
   
--
     
--
     
9,000
     
9
     
--
     
--
 
Effect of conversions on feature of convertible debt
   
--
     
--
     
--
     
--
     
--
     
--
 
Conversion of debt
   
61,250
     
61
     
534,559
     
535
     
--
     
--
 
Extinguishment of debt/beneficial conversion feature
   
--
     
--
     
--
     
--
     
--
     
--
 
Series E Preferred stock conversions
   
(86,091
   
(86
)
   
24,690,006
     
24,690
     
--
     
--
 
Issuance to Junior investors
   
--
     
--
     
373,500
     
374
     
(8,785,333 
)
   
8,785,333 
 
Issuance of fractional shares from reverse split
   
--
     
--
     
4,892
     
5
     
--
     
--
 
Forgiveness of debt
   
--
     
--
     
--
     
--
     
--
     
--
 
Preferred units subscribed
           
--
     
--
     
--
     
89,797,000
     
(89,797,000
)
Net loss
   
--
     
--
     
--
     
--
     
--
     
--
 
Balance at 12/31/09 (Restated)
   
5,998,972
   
$
5,999
     
23,013,457
   
$
23,013
     
81,011,667
     
(81,011,667
)

   
Additional Paid-in Capital
   
Accumulated Deficit
   
Total Stockholders’ Equity (Deficit)
 
                   
Balance at 12/31/07 (Restated)
 
$
6,860,353
   
$
(6,424,596
)
 
$
436,686
 
Cancellation of old debt
   
--
     
--
     
--
 
Shares issued for services
   
706,937
     
--
     
707,028
 
Conversion of Series D Preferred
   
521
     
--
     
--
 
Forgiveness of related party debt, net
   
(927,123
)
   
--
     
(927,123
)
Issuance of fractional shares from reverse split
   
(1
)
   
--
     
--
 
Extinguishment of debt/beneficial conversion feature
   
432,932
     
--
     
432.932
 
Net loss
   
--
     
(805,652
)
   
(805,652
)
Balance at 12/31/08 (Restated)
 
$
7,073,619
   
$
(7,230,248
)
 
$
(156,129
)
 
Shares issued for services
   
621,559
     
--
     
621,900
 
Cancellation of Series D Preferred conversions
   
2,503
     
--
     
--
 
Shares issued for accounts payable
   
28,291
     
--
     
28,300
 
Effect of conversions on conversion feature of convertible debt
   
698,448
     
--
     
698,448
 
Conversion of debt
   
574,154
     
--
     
574,750
 
Extinguishment of debt/beneficial conversion feature
   
(432,932
)
   
--
     
(432,932
)
Conversion of Series D Preferred
   
(24,604
)
   
--
     
--
 
Series E Preferred stock conversions
   
(373
)
   
--
     
--
 
Issuance of fractional shares from reverse split
   
(5
)
   
--
     
--
 
Forgiveness of debt
   
49,762
     
--
     
49,762
 
Net Loss
   
--
     
(2,080,050
)
   
(2,080,050
)
Balance at 12/31/09 (Restated)
 
$
8,590,422
   
$
(9,310,298
)
 
$
(695,951
)

The notes to the financial statements are an integral part of these statements.
 
 
 
20
 
 
ECOSYSTEM CORPORATION
STATEMENTS OF CASH FLOWS
 
   
For the Years Ended
 
   
12/31/09
   
12/31/08
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 
$
(2,080,050
)
 
$
(787,381
)
 Adjustment to reconcile net loss to net cash used in operating activities:
               
 Costs related to conversion features
   
915,064 
     
-- 
 
 Stock based compensation  
   
621,900 
     
707,028 
 
 Interest accretion on notes receivable
   
(34,264) 
     
-- 
 
 Gain on extinguishment of debt
   
(67,901) 
     
-- 
 
 Amortization of beneficial conversion feature of debt
   
132,724 
     
-- 
 
 Expenses incurred by issuance of convertible debenture
   
136,366 
     
-- 
 
 Changes in liabilities:
               
 Accounts payable and accrued interest  
   
150,517 
     
(49,909) 
 
 Accrued interest
   
169,227 
     
-- 
 
 Net cash used in operating activities  
 
 $
(56,417) 
   
 $
130,199
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Project development costs
   
--
     
--
 
Note receivable repayment
   
50,000
     
--
 
Net cash provided by investing activities
   
50,000
     
50,000
 
                 
CASH FLOW FROM FINANCING ACTIVITIES
               
Forgiveness of related party debt
   
--
     
432,932
 
Repayment on convertible notes
   
--
     
(302,824
)
Loan proceeds from related parties
   
8,968
     
--
 
Net cash provided by financing activities
   
8,968
     
130,108
 
                 
Net increase (decrease) in cash
   
2,551
     
(91)
 
Cash at beginning of period
   
--
     
91
 
Cash at end of period
 
$
2,551
   
$
--
 
                 
Supplemental Schedule of Non-Cash Investing and Financing Activities:
               
Stock issued for conversion of preferred stock, debt and accounts payable
 
$
4,758,954
   
$
--
 
Notes receivable exchanged for convertible debentures
 
$
500,000
   
$
--
 
Cancellation of common stock conversions of preferred stock
 
$
2,434,977
   
$
--
 
Effect on additional paid-in capital from extinguishment of related party debt
 
$
497,755
   
$
--
 
Conversion of convertible liabilities 
 
$
698,448
   
$
--
 
Project development from affiliate
 
$
379,355
   
$
--
 
Miscellaneous issuances/cancellations of preferred stock
 
$
2,021,000
   
$
--
 
Recognition of conversion feature on new convertible notes
 
$
132,724
   
$
--
 
                 
Recognition of common stock reverse split
 
 $
3,430,127
   
 $
--
 
                 
 Debt forgiveness- related parties
 
 $
49,762
     
-- 
 
 Conversion of debt into preferred stock
 
 $
50,701
   
 $
-- 
 

The notes to the financial statements are an integral part of these statements.

 
21
 
 

 
 

 
 
 
ECOSYSTEM CORPORATION
NOTES TO FINANCIAL STATEMENTS
 
NOTE 1
BASIS OF PRESENTATION
EcoSystem Corporation (“we,” “our,” “us,” “EcoSystem,” or the “Company”) is a technology development company with a focus on cleantech innovations designed to resolve compelling ecological challenges while producing value added carbon neutral and negative products.
 
Carbon dioxide is the most abundant waste produced by human activity. Continued accumulation in Earth’s atmosphere and oceans needs to be avoided in order to prevent severe climate change. The majority of our waste carbon emissions come from the combustion of fossil fuels to produce electricity, to power transportation, to heat our homes and to manufacture products. The scientific consensus is that these activities are directly responsible for increasing atmospheric carbon dioxide concentrations to the highest that they have been for more than 650,000 years. However, and despite the increased focus on renewable sources of energy, fossil fuels will continue to play a vital and dominant role in providing the majority of our energy needs over at least the next 50 years. Most scientists agree that, unabated, the combustion of fossil fuels to meet these needs will pump enough carbon dioxide into the global ecosystem to bring about severe climate change. Our collective challenge is to stem the tide of carbon emissions as rapidly and as cost-effectively as possible with little to no restriction on economic growth.
 
EcoSystem’s ambition is to contribute to the resolution of this challenge by developing new clean technologies that reduce and reuse carbon emissions. Our plan to do so while building shareholder value is to develop, license and support technologies and projects that reduce the carbon intensity of liquid fuels by reducing consumption of fossil fuels, increase use of sustainable raw materials and biofuels, and decrease production of wastes and emissions.
 
Our current technology portfolio includes several feedstock and product conditioning technologies, lipid and alcohol production and refining technologies, and carbon dioxide recycling and refining technologies. While these technologies have wide application potential in several industries and processes, we are initially focused on developing applications of these technologies for use in the existing first generation U.S. corn ethanol industry. We believe that the composition and extent of the installed ethanol complex, and the relatively uncomplicated nature of its inputs and outputs presents compelling opportunities to defray risk as we commercialize our technologies. Importantly, significant demand exists today for technologies that enhance the efficiency and sustainability of refining corn into liquid fuel. We believe that satisfying this demand can be expected to result in reduced reliance on petroleum products, more efficient use of natural resources, increased use of biomass-derived fuels and other products, and decreased greenhouse gas emissions on globally-meaningful scales.
 
NOTE 2
GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a loss in continuing operations of $2,080,050 during the year ended December 31, 2009, and had an accumulated deficit and negative cash flow from continuing operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans include raising additional proceeds from debt and equity transactions and completing strategic acquisitions.
 
NOTE 3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company follows the percentage-of-completion method of accounting for contracts for which the outcomes can be reliably estimated. Costs include all direct material and labor costs, and indirect costs, such as supplies, tools, repairs and depreciation. Revenue on such contracts is determined by reference to stage of completion. Revenue on long-term contracts is for which the outcomes cannot be estimated reliably at the outset is recognized to the extent that costs incurred are deemed recoverable.
 
 
22
 
 

 
 

 


 
ACCOUNTS RECEIVABLE
Accounts receivable are customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. No interest is charged on any past due accounts. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amount that will not be collected. Management reviews balances that are 90 days from the invoice date and based on assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected.
 
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated depreciation. For financial reporting purposes, the costs of plant and equipment are depreciated over the estimated useful lives of the assets, which range from three to five years for equipment, and 40 years for real estate, using the straight-line method.
 
INCOME TAXES
Income taxes are accounted for under the asset and liability method, whereby deferred income taxes are recorded for temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities reflect the tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax asset will not be realized.
 
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
 
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist of cash and cash equivalents. The Company places its cash and cash equivalents with various high quality financial institutions; these deposits may exceed federally insured limits at various times throughout the year. The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet as of December 31, 2009 for cash equivalents and accounts payable and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of notes payable, notes receivable, and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect recent market conditions.
 
FAIR VALUE MEASUREMENTS
Effective July 1 2009, the Company adopted ASC 820, Fair Value Measurements and Disclosures. This topic defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance supersedes all other accounting pronouncements that require or permit fair value measurements.
 
The Company accounted for the convertible debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the convertible debentures could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares.
 
 
23
 
 

 
 

 


 
Under ASC 820, a framework was established for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Company measured the fair value of the preferred equity interest outstanding at March 31, 2009 since the number of common shares issuable under the Company’s Series E convertible preferred stock was indeterminable during the three months then ended. The value at September 30, 2009 was determined to be $9,000,000, measured using significant unobservable inputs (Level 3) using the present value of the shares based on the average fair market value of the Company’s stock for the three days before and after the acquisition date.
 
Effective July 1 2009, the Company adopted ASC 820-10-55-23A, Scope Application to Certain Non-Financial Assets and Certain Non-Financial Liabilities, delaying application for non-financial assets and non-financial liabilities as permitted. ASC 820 establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
 
Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded securities and exchange-based derivatives.
Level 2 — inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.
Level 3 — unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded, non-exchange-based derivatives and commingled investment funds, and are measured using present value pricing models.
   
Fair Value
 
As of December 31, 2009
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 Embedded conversion liabilities
 
$
-
 
$
--
 
$
216,616
 
$
216,616
 
The following table reconciles, for the period ended December 31, 2009, the beginning and ending balances for financial instruments that are recognized at fair value in the consolidated financial statements:
Balance of Embedded Conversion Liability at December 31, 2008
 
0
Present Value of beneficial conversion features of new debentures
 
512,639
Reductions in fair value due to principal conversions
 
(316,905)
Accretion adjustments to fair value - beneficial conversion features
 
2,882
Balance at December 31, 2009
$
216,616
 
The fair value of the conversion features are calculated at the time of issuance and the Company records a conversion liability for the calculated value. The Company recognizes interest expense for the conversion liability which is added to the principal of the debenture. The Company also recognizes interest expense for accretion of the conversion liability to fair value over the term of the note.
 
The Company has adopted ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the note principal being converted to a variable number of the Company’s common shares.
 
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 
CASH AND CASH EQUIVALENTS
For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
 
 
24
 
 

 
 

 


 
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share represent the amount of earnings (loss) for the period available to each share of common stock outstanding during the reporting period. Diluted earnings (loss) per share reflects the amount of earnings (loss) for the period available to each share of common stock outstanding during the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period, such as common shares that could result from the potential exercise or conversion of securities into common stock. The computation of diluted earnings (loss) per share does not assume conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings (loss) per share. Potential future dilutive securities include common shares issuable under the Company’s outstanding options, convertible debentures and preferred stock as of December 31, 2009 as described more fully in these Notes to the Company’s Condensed Financial Statements.
 
STOCK BASED COMPENSATION
The Company accounts for stock based compensation in accordance with Financial Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation.” Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period.
 
The Company accounts for stock issued for services to non-employees by reference to the fair market value of the Company's stock on the date of issuance as it is the more readily determinable value.
 
DEFERRED FINANCING CHARGES AND DEBT DISCOUNTS
Deferred finance costs represent costs which may include direct costs incurred to third parties in order to obtain long-term financing and have been reflected as other assets. Costs incurred with parties who are providing the actual long-term financing, which generally include the value of warrants, or the intrinsic value of beneficial conversion features associated with the underlying debt, are reflected as a debt discount. These costs and discounts are generally amortized over the life of the related debt. During the year ended December 31, 2009, the Company recorded amortization of the note discount in the amount of $89,974.
 
NOTE 4
STOCKHOLDERS’ EQUITY
SERIES D PREFERRED STOCK
Shares of the Series D Preferred Stock (the "Series D Shares") may be converted by the holder into Company common stock at a rate representing 80% of the fully diluted outstanding common shares outstanding after the conversion (which includes all common shares outstanding plus all common shares potentially issuable upon the conversion of all derivative securities not held by the holder). The holder of Series D Shares may cast the number of votes at a shareholders meeting or by written consent that equals the number of common shares into which the Series D Shares are convertible on the record date for the shareholder action. In the event the Board of Directors declares a dividend payable to Company common shareholders, the holders of Series D Shares will receive the dividend that would be payable if the Series D Shares were converted into Company common shares prior to the dividend. In the event of a liquidation of the Company, the holders of Series D Shares will receive a preferential distribution of $0.001 per share, and will share in the distribution as if the Series D Shares had been converted into common shares.
 
Effective July 24, 2009, and in conjunction with the Company’s completion of the Senior Investment, Viridis Capital, LLC, the Company’s majority shareholder and the Company entered into an Exchange Agreement, pursuant to which Viridis agreed to exchange 921,000 Series D Shares in return for the issuance of 10,000,000,000 Company common shares (on a pre-split basis-see COMMON STOCK below) and 318,750 Series D Shares to Viridis, and the issuance of an additional 10,000,000,000 Company common shares (on a pre-split basis) and 318,750 Series D Shares to Corn 2.0, LLC. In addition, Viridis will retain 233,430 Series D Shares. The common shares issuable to Viridis and Corn 2.0 under the Exchange Agreement corresponded to the conversion of 129,070 Series D Shares into 20,000,000 common shares on a post-split basis after taking into account the Company’s planned 1 for 1,000 reverse stock split (effected in November 2009). Corn 2.0 was formed by the Company’s chairman to hold Company stock in reserve for the Company’s management. The total Series D Shares beneficially owned by Viridis were 867,618 as of December 31, 2009
 
 
25
 
 
As disclosed in detail in the section titled "SERIES E PREFERRED," below, the Senior Investment was cancelled on April 15, 2010.
 
During the year ended December 31, 2009, the Company converted $50,701 of debentures if Minority Interest Fund (II), LLC (MIF") into 61,250 Series D Shares (see Note 6).  In addition,  the Company issued 1,690,006 common shares to MIF upon the conversion of 16,730 of those Series D Shares.
 
SERIES E PREFERRED
A total 909,312 Series E preferred shares were authorized as of December 31, 2009.
 
During the year ended December 31, 2009, the Company issued 373,500 common shares to the Junior Investors though the conversion of Series E shares.
 
The terms of the Company’s 2009 Preferred Equity Investment are presented below for disclosure purposes. Note, however, that this transaction was contingent upon several factors that were not fulfilled as required during the first quarter of 2010. Consequently, on April 15, 2010, the Company entered into an agreement to cancel the 2009 Preferred Equity Investment and all related agreements.
 
On July 24, 2009, EcoSystem entered into a Unit Subscription Agreement (the “Senior USA”) with Copperbottom Investments, Ltd. (“Lead Senior Investor”), Absentia Holdings, Ltd., On Time Investments, Ltd., Agri-Technologies, Ltd., and Britannia Securities International, Ltd. (collectively, the “Senior Investors”), pursuant to which the Senior Investors agreed to purchase 766,190 shares of the Company’s newly designated Series E Preferred Stock (the “Series E Shares”), and 24,705,000 warrants to purchase additional Company common shares (the “Senior Warrants”) (the Series E Shares and the Senior Warrants shall be collectively referred to herein as the “Senior Units”) for $76,619,000 (the “Senior Purchase Price”), subject to certain conditions discussed below (the “Senior Investment”).
 
 
26
 
 

 
 

 


 
The Senior Investment was supplemented on October 30, 2009, by $13,178,000 in additional investment proceeds arising from the sale by EcoSystem of additional Series E Shares and warrants to the Junior Investors. As used herein, the term “USA” shall refer collectively to the Senior USA and the Junior USA; the term “AMA” shall refer collectively to the Senior AMA and the Junior AMA; the term “Purchase Price” shall refer collectively to the Senior Purchase Price and the Junior Purchase Price; and, the term “2009 Preferred Equity Investment” shall refer collectively to the Senior Investment and the Junior Investment.
 
The terms of the 2009 Preferred Equity Investment are provided below as relevant to the Company’s accounting of this transaction during 2009 despite the fact that the investment was cancelled in April 2010 (See Note 12, Subsequent Events, below).
 
During the year ended December 31, 2009, the Company issued 373,500 common shares to the Junior Investors through the conversion of 20,000 Series E preferred shares.
 
On April 12, 2010, the Company entered into an agreement with all of the holders of Series E stock to surrender and cancel all of the Series E preferred shares in connnection with the cancellation of the 2009 Preferred Equity Financing.
 
Use of Proceeds
Under the terms of the USA, the Company is permitted to use the proceeds from the 2009 Preferred Equity Investment to facilitate (1) the acquisition by the Company of renewable fuel production facilities, (2) the acquisition and/or construction by the Company of existing corn oil extraction facilities and/or other strategically compatible cash flow producing assets, and (3) the development and integration of the Company’s technologies into the Company’s targeted production facilities.
 
Release Schedule
The USA provides that the Purchase Price shall be deposited into a restricted account opened in the name of the Company (the “Restricted Account”) at Elco Securities, Ltd. (the “Escrow Agent”), a licensed broker dealer. The conditions of the release of the Purchase Price to the Company from the Restricted Account are set forth in an Account Management Agreement dated July 24, 2009 (the “Senior AMA”) by and between the Escrow Agent, the Senior Investors, the Company, and Viridis Capital, LLC (“Viridis”), the Company’s majority shareholder, and an Account Management Agreement dated October 30, 2009 (the “Junior AMA”) by and between the Escrow Agent, the Junior Investors, the Company, and Viridis, (the Senior USA, the Junior USA, the Senior AMA and the Junior AMA shall be collectively referred to herein as the “Agreements”).
 
The Agreements provide that the Purchase Price shall be released to the Company after either (1) the Company shall have filed and made effective a registration statement pertaining to that portion of the Company common shares issuable upon the conversion of the Series E Shares, or (2) such Company common shares shall have become eligible for public resale pursuant to applicable SEC rules. Thereafter, the Purchase Price shall be released from the Restricted Account to the Company in monthly installments at a rate equal to the lesser of (1) the scheduled monthly rate stated in Table 1 below, or (2) an amount equal to 20% of the average 30 day closing bid price for the Company’s common stock (the “Market Price”), multiplied by the total number of shares of Company common stock traded during the 30 calendar days prior to each monthly release (the “Trailing Volume”).
 
The AMA also provides that Series E Shares shall be deposited at the Closing in restricted accounts at the Escrow Agent in the name of each Senior Investor and Junior Investor (collectively, the “Series E Investors”). The Series E Shares shall be converted into Company common shares and released to each Series E Investor, on a pro rated basis, at a rate equal to the rate at which the Purchase Price proceeds are released from the Restricted Account to the Company divided by the Fixed Price per common share stated in Table 1 below; provided, however, that if the Market Price is less than the Target Price per common share stated in Table 1 below at the time of conversion, then the amount of common shares issuable upon conversion of the Series E Shares shall be equal to the amount of Purchase Price proceeds released from the Restricted Account to the Company divided by 60% of the Market Price.
 
Warrants
The Senior Warrants and Junior Warrants (collectively, the “Warrants”) shall be exercisable for a period of three years from the Closing in the amounts and at the exercise prices set forth in Table 2 below. The Company is required to use its best efforts to file a registration of the common shares underlying the Warrants.
 
 
27
 
 
Transaction Costs
The Company is required to pay to Catwalk Capital, LLC fees equal to 10% of the gross Purchase Price and Warrant exercise proceeds (collectively, the “Gross Proceeds”) received from the Series E Investors, plus an additional 1.6% of the Gross Proceeds to the Lead Senior Investor and the Lead Junior Investor (collectively, the “Fees”). All Fees shall be payable on a pro rated basis at the time that the Purchase Price or Warrant exercise proceeds are released to the Company. This corresponds to a total of $10,416,452 in Fees upon full payment of the Purchase Price, and $10,418,042 in additional Fees upon full exercise of the Warrants. After accounting for the Fees, the net Purchase Price proceeds to be released to the Company are $79,392,667 (less account management fees paid to the Escrow Agent of $9,000 per year), and the net proceeds to be paid to the Company upon exercise of the Warrants are $69,354,578.
 
During the year ended December 31, 2009, 100,000,000 shares of the Company’s common stock were issued into escrow in connection with the Company’s closing of the 2009 Preferred Equity Investment (the “Breakup Shares”). The Breakup Shares are being held by an escrow agent for the further benefit of Catwalk until such time as all the conditions for funding under the 2009 Preferred Equity Investment are satisfied.
 
Restrictions Applicable to Senior Investors
The Agreements provide that the Escrow Agent shall not release Company common shares to the Senior Investors upon conversion of the Series E Shares, either individually or in the aggregate, at a rate greater than 20% of the Trailing Volume; and that no Senior Investor shall convert Series E Shares or exercise the Senior Warrants or receive shares of Company common stock to the extent that after giving effect to such conversion or exercise, any Senior Investor, together with any affiliate thereof, would beneficially own (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended and the rules promulgated thereunder) in excess of 9.99% of the number of shares of common stock outstanding immediately after giving effect to such conversion or exercise.
 
Restrictions Applicable to Management
Minimum Ownership and Lock-Up
The Agreements provide that Viridis and the Company’s management (collectively, “Management”) shall beneficially own in the aggregate no less than 51% of the outstanding Company common stock (the “Minimum Ownership”) until such time as the Purchase Price has been fully released to the Company (the “Full Release Date”). Neither Viridis nor the Company’s management shall sell or otherwise transfer shares of Company common stock in an amount that would cause Management to beneficially own less than 51% of the outstanding Company common stock until the Full Release Date.
 
Forfeiture of Management Shares
Effective July 24, 2009, the Company and Management entered into an agreement pursuant to which the parties agreed that all shares of Company stock held by Management in excess of 30% of the Company’s outstanding common stock shall be surrendered to the Company on a pro rated basis for cancellation in the event that the Company shall have failed to achieve an annualized renewable fuel production rate of 500,000,000 gallons per year prior to one year after the Full Release Date (the “Performance Hurdle”).
 
Pro Forma Share Structure
The Agreements require the Company to file and make effective an amendment to its certificate of incorporation to give effect to a 1-for-1,000 reverse stock split prior to the initial release of the Purchase Price proceeds. The Company completed the necessary filings for the reverse stock split during the quarter ended September 30, 2009, and the Company expects that the reverse stock split will become effective during the fourth quarter 2009 or the first quarter of 2010. Immediately thereafter, the Company shall have about 25,000,000 shares of common stock outstanding on a post-split basis prior to conversion of the Series E Shares and/or exercise of the Warrants.
 
The following Table 3 is to provide the Company’s pro forma share structure on the assumptions (1) that the 1-for-1,000 reverse stock split has been implemented, (2) that no Warrants have been exercised, (3) that all shares of common stock issued upon conversion of the Series E Shares are issued at the Fixed Price (meaning that the Company’s Target Prices have been achieved as stated in Table 1), and (4) that Management’s ownership remains at 51% at the Full Release Date (meaning that the Performance Hurdle has been achieved):
 
 
28
 
 
Table 1 – Release Schedule
                 
Month
 
Series E Shares
Scheduled Release of
Purchase Price
Fixed Price
   
Target Price
 
1
   
$
588,400
     
5,884
   
$
2.00
   
$
3.33
 
 
2
   
$
588,400
     
5,884
   
$
2.06
   
$
3.43
 
 
3
   
$
588,400
     
5,884
   
$
2.12
   
$
3.54
 
 
4
   
$
689,601
     
6,114
   
$
2.19
   
$
3.65
 
 
5
   
$
689,601
     
6,114
   
$
2.26
   
$
3.76
 
 
6
   
$
689,601
     
6,114
   
$
2.33
   
$
3.89
 
 
7
   
$
2,257,601
     
21,794
   
$
2.41
   
$
4.01
 
 
8
   
$
2,481,601
     
24,034
   
$
2.49
   
$
4.15
 
 
9
   
$
2,705,601
     
26,274
   
$
2.57
   
$
4.29
 
 
10
   
$
3,199,288
     
29,128
   
$
2.66
   
$
4.44
 
 
11
   
$
3,461,814
     
31,455
   
$
2.75
   
$
4.59
 
 
12
   
$
3,724,341
     
33,783
   
$
2.85
   
$
4.75
 
 
13
   
$
3,986,968
     
36,112
   
$
2.96
   
$
4.93
 
 
14
   
$
4,249,494
     
38,439
   
$
3.06
   
$
5.10
 
 
15
   
$
4,512,021
     
40,767
   
$
3.18
   
$
5.29
 
 
16
   
$
4,774,565
     
43,095
   
$
3.29
   
$
5.49
 
 
17
   
$
5,037,091
     
45,422
   
$
3.42
   
$
5.70
 
 
18
   
$
5,299,618
     
47,750
   
$
3.55
   
$
5.92
 
 
19
   
$
5,562,145
     
50,078
   
$
3.69
   
$
6.15
 
 
20
   
$
5,824,671
     
52,405
   
$
3.83
   
$
6.39
 
 
21
   
$
6,087,198
     
54,733
   
$
3.98
   
$
6.64
 
 
22
   
$
6,349,724
     
57,060
   
$
4.14
   
$
6.91
 
 
23
   
$
6,612,351
     
59,389
   
$
4.31
   
$
7.18
 
 
24
   
$
6,874,878
     
61,717
   
$
4.49
   
$
7.48
 
 
25
   
$
948,804
     
2,158
   
$
4.49
   
$
7.48
 
 
26
   
$
987,348
     
2,257
   
$
4.49
   
$
7.48
 
 
27
   
$
1,025,875
     
2,346
   
$
4.49
   
$
7.48
 
Total
   
$
89,797,000
     
796,190
                 
 
Table 2 – Warrant Exercise Price Schedule
 
Senior Warrant
 
Amount
   
Exercise Price
   
Proceeds
 
Warrant A
   
813,863
   
$
2.40
   
$
1,953,271
 
Warrant B
   
790,159
   
$
2.47
   
$
1,953,273
 
Warrant C
   
766,711
   
$
2.55
   
$
1,953,273
 
Warrant D
   
743,543
   
$
2.63
   
$
1,953,287
 
Warrant E
   
720,677
   
$
2.71
   
$
1,953,250
 
Warrant F
   
698,135
   
$
2.80
   
$
1,953,241
 

Warrant G
   
2,477,258
   
$
2.89
   
$
7,158,532
 
Warrant H
   
2,646,234
   
$
2.99
   
$
7,902,183
 
Warrant I
   
2,800,249
   
$
3.09
   
$
8,645,769
 
Warrant J
   
2,939,805
   
$
3.19
   
$
9,389,444
 
Warrant K
   
3,065,430
   
$
3.31
   
$
10,133,085
 
Warrant L
   
3,177,647
   
$
3.42
   
$
10,876,770
 
Warrant M
   
3,277,121
   
$
3.55
   
$
11,620,670
 
Warrant N
   
3,363,922
   
$
3.68
   
$
12,364,661
 
Total
   
28,280,754
           
$
89,810,710
 
 
 
29
 

 
 

 


 
 
Table 3 – Pro Forma Share Structure
         
Pro Forma Common Shares
at Completion of Reverse Split
   
Pro Forma Common Shares
at the Full Release Date
 
Month
       
Common Shares
   
Percentage
   
Common Shares
   
Percentage
 
Public Float
         
5,000,000
     
20.00
%
   
5,000,000
     
6.67
%
Management
   
(1
)
   
20,000,000
     
80.00
%
   
33,957,207
     
51.00
%
Copperbottom Investments, Ltd.
   
(2
)
   
-
     
0.00
%
   
4,655,479
     
6.99
%
Absentia Holdings, Ltd.
   
(2
)
   
-
     
0.00
%
   
4,655,479
     
6. 99
%
Britannia Securities International, Ltd.
   
(2
)
   
-
     
0.00
%
   
4,655,479
     
6. 99
%
Agri-Technologies International, Ltd.
   
(2
)
   
-
     
0.00
%
   
4,655,479
     
6. 99
%
On Time Investments, Ltd.
   
(2
)
   
-
     
0.00
%
   
4,655,479
     
6. 99
%
RND Company, Ltd.
   
(2
)
   
-
     
0.00
%
   
1,449,385
     
2.18
%
Sequence Investments, Ltd.
   
(2
)
   
-
     
0.00
%
   
1,449,385
     
2.18
%
Rooftop Holdings, Ltd.
   
(2
)
   
-
     
0.00
%
   
1,449,385
     
2.18
%
Total
           
25,000,000
     
100.00
%
   
66,582,759
     
100.00
%
 
(1)
The shares of Common Stock initially held by Management are subject to the conditions noted above, and are subject to upward modification to maintain the 51% Minimum Ownership requirement, and downward modification to 30% in the event that the Performance Hurdle is not met. Viridis and Corn 2.0, LLC collectively hold 637,500 shares of Company Series D Preferred Stock, which shares are convertible at all times into 51% of the outstanding Common Stock (when taken with each holder's then-current Common Stock holdings) until the Full Release Date. An additional 302,103 shares of Series D Preferred Stock are beneficially owned by Viridis and are subject to the Restrictions Applicable to Management noted above.
 
(2)
The shares of common stock shown for the Junior Investors are estimated based on the assumed conversion of the Series E Shares at the Fixed Prices shown in Table 1 above, which prices were established based on the assumption that the Company successfully achieves a weighted average Target Price of $5.49 (the “WA Price”) between the initial payment of the Junior Purchase Price and the Full Release Date. This WA Price corresponds to a Company market capitalization of about $365,539,000 at the Performance Hurdle. The shares of Common Stock issuable to the Junior Investors (and the five Senior Investors) upon Conversion of the Series E Shares shall be subject to upward modification in the event that the Company fails to achieve the Target Prices set forth in Table 1 above. Any such increase would be offset by downward modification given the operation of the 51% Management Minimum Ownership requirement if the Performance Hurdle is not met
   
The relevant Agreement required the Senior Purchase Price to be deposited into a restricted account opened in the name of the Company (the “Restricted Account”) at Elco Securities, Ltd. (the “Escrow Agent”), a licensed broker dealer. The conditions for release of the Senior Purchase Price to the Company and Series E Shares to the Senior Investors from escrow, which are set forth more fully in the section titled “Preferred Equity Investment” in Note 4, Shareholders’ Equity, above, are satisfied by the passage of time. That is, Senior Purchase Price proceeds shall be released to the Company under the Agreements commencing on or about 210 days after the execution of the Agreements. If in any given month thereafter, the Company fails to achieve the prices set forth in Table 1 in Note 4, Shareholders’ Equity, above, then less Senior Purchase Price
proceeds and less Series E Shares would be released from the Escrow Agent in that month, but in no event would no Senior Purchase Price proceeds or Series E Shares be released from the Escrow Agent unless the Company’s common stock ceases to trade on any securities exchange. While the Company has received confirmation from the Escrow Agent that the Senior Purchase Price proceeds are in the Restricted Account for the benefit of the Company, and certain conditions required to account for the Senior Purchase Price as restricted cash under ASC 210-10-S99, SEC Materials, caption 1 have likely been satisfied, the Company has determined that the more appropriate treatment is to book the dollar amount of the shares subscribed under the Senior Investment in Stockholders’ Equity with the corresponding deduction for the subscriptions receivable pursuant to ASC 210-10-S99, SEC Materials, caption 29 until such time as the cash proceeds from the Senior Investment have been released to the Company from the Escrow Agent. Likewise, the Company will account for and charge against the related paid-in capital the transaction costs incurred in relation to the Senior Investment at the time of each release of cash proceeds to the Company from the Escrow Agent. The Senior Investment accordingly appears on the Company’s balance sheet as a Subscription Receivable of $(76,619,000) and it is offset by Preferred Stock Subscribed of $76,619,000.
 
 
30
 
 

 
 

 


 
Effective October 30, 2009, EcoSystem Corporation (the “Company”) entered into a Unit Subscription Agreement (the “Junior USA”) with RND Company, Ltd. (“Lead Junior Investor”), Rooftop Holdings, Ltd., and Sequence Investments, Ltd. (collectively, the “Junior Investors”), pursuant to which the Junior Investors agreed to purchase 30,000 shares of the Company’s Series E Preferred Stock (the “Series E Shares”), and 3,575,754 warrants to purchase additional Company common shares (the “Junior Warrants”) (the Series E Shares and the Junior Warrants shall be collectively referred to herein as the “Junior Units”) for $13,178,000 (the “Junior Purchase Price”), subject to certain conditions discussed below.
 
RELEASE SCHEDULE
The USA provides that the Junior Purchase Price shall be deposited at the closing of the USA (which occurred on November 9, 2009) into a restricted account opened in the name of the Company (the “Restricted Account”) at Elco Securities, Ltd. (the “Escrow Agent”). The conditions of the release of the Junior Purchase Price to the Company from the Restricted Account are set forth in an Account Management Agreement dated October 30, 2009 (the “Junior AMA”) by and between the Escrow Agent, the Junior Investors, the Company, and Viridis Capital, LLC (“Viridis”), the Company’s majority shareholder (the USA and the Junior AMA shall be collectively referred to herein as the “Agreements”).
 
The Junior AMA provides that the Junior Purchase Price shall be released to the Company after either (1) the Company shall have filed and made effective a registration statement pertaining to that portion of the Company common shares issuable upon the conversion of the Series E Shares, or (2) such Company common shares shall have become eligible for public resale pursuant to applicable SEC rules. Thereafter, the Junior Purchase Price shall be released from the Restricted Account to the Company in monthly installments at a rate equal to the greater of (1) the scheduled monthly rate stated in Table 1 below, or (2) an amount equal to 20% of the average 30 day closing bid price for the Company’s common stock (the “Market Price”), multiplied by the total number of shares of Company common stock traded during the 30 calendar days prior to each monthly release (the “Trailing Volume”).
 
The Junior AMA also provides that Series E Shares shall be deposited at the Closing in restricted accounts at the Escrow Agent in the name of each Junior Investor. The Series E Shares shall be converted into Company common shares and released to each Junior Investor, on a pro rated basis, at a rate equal to the rate at which the Junior Purchase Price proceeds are released from the Restricted Account to the Company divided by the Fixed Price per common share stated in Table 1 below; provided, however, that if the Market Price is less than the Target Price per common share stated in Table 1 below at the time of conversion, then the amount of common shares issuable upon conversion of the Series E Shares shall be equal to the amount of Junior Purchase Price proceeds released from the Restricted Account to the Company divided by 60% of the Market Price.
 
JUNIOR WARRANTS
The Junior Warrants shall be exercisable for a period of three years from the Closing in the amounts and at the exercise prices set forth in Table 2 below. The Company is required to use its best efforts to file a registration of the common shares underlying the Junior Warrants within three months of the Closing.
 
TRANSACTION COSTS
The Company is required to pay to Catwalk Capital, LLC fees equal to 10% of the gross Junior Purchase Price and Junior Warrant exercise proceeds (collectively, the “Gross Proceeds”) received from the Junior Investors, plus an additional 1.6% of the Gross Proceeds to the Lead Junior Investor (collectively, the “Fees”). All Fees shall be payable on a pro rated basis at the time that the Junior Purchase Price or Junior Warrant exercise proceeds are released to the Company. This corresponds to a total of $1,528,648 in Fees upon full payment of the Junior Purchase Price, and $1,317,215 in additional Fees upon full exercise of the Junior Warrants. After accounting for the Fees, the net Junior Purchase Price proceeds to be released to the Company are $11,649,352 (less account management fees paid to the Escrow Agent of $9,000 per year), and the net proceeds to be paid to the Company upon exercise of the Junior Warrants are $10,038,090.
 
 
31
 
 

 
 

 


 
RESTRICTIONS APPLICABLE TO JUNIOR INVESTORS
The Agreements provide that the Escrow Agent shall not release Company common shares to the Junior Investors upon conversion of the Series E Shares, either individually or in the aggregate, at a rate greater than 20% of the Trailing Volume; and that no Junior Investor shall convert Series E Shares or exercise the Junior Warrants or receive shares of Company common stock to the extent that after giving effect to such conversion or exercise, any Junior Investor, together with any affiliate thereof, would beneficially own (as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended and the rules promulgated thereunder) in excess of 9.99% of the number of shares of common stock outstanding immediately after giving effect to such conversion or exercise.
 
RESTRICTIONS APPLICABLE TO MANAGEMENT
 
Minimum Ownership and Lock-Up
The Agreements provide that Viridis and the Company’s management (collectively, “Management”) shall beneficially own in the aggregate no less than 51% of the outstanding Company common stock (the “Minimum Ownership”) until such time as the Junior Purchase Price has been fully released to the Company (the “Full Release Date”). Neither Viridis nor the Company’s management shall sell or otherwise transfer shares of Company common stock in an amount that would cause Management to beneficially own less than 51% of the outstanding Company common stock until the Full Release Date.
 
Forfeiture of Management Shares
Effective July 24, 2009, the Company and Management entered into an agreement pursuant to which the parties agreed that all shares of Company stock held by Management in excess of 30% of the Company’s outstanding common stock shall be surrendered to the Company on a pro rated basis for cancellation in the event that the Company shall have failed to achieve an annualized renewable fuel production rate of 500,000,000 gallons per year prior to one year after the Full Release Date (the “Performance Hurdle”).
 
PRO FORMA SHARE STRUCTURE
The Agreements require the Company to file and make effective an amendment to its certificate of incorporation to give effect to a 1-for-1,000 reverse stock split prior to the initial release of the Junior Purchase Price proceeds. Immediately thereafter, the Company shall have no less than about 25,000,000 shares of common stock outstanding on a post-split basis prior to conversion of the Series E Shares and/or exercise of the Junior Warrants.
 
The following Table 3 is to provide the Company’s pro forma share structure on the assumptions (1) that the 1-for-1,000 reverse stock split has been implemented, (2) that no Junior Warrants have been exercised, (3) that all shares of common stock issued upon conversion of the Series E Shares are issued at the Fixed Price (meaning that the Company’s Target Prices have been achieved as stated in Table 1), and (4) that Management’s ownership remains at 51% at the Full Release Date (meaning that the Performance Hurdle has been achieved):
 
Table 1 – Release Schedule
 
Scheduled Release of
Junior Purchase Price
         
Month
Series E Shares
Fixed Price
Target Price
1
$
101,201
230
$
2.00
$
3.33
2
$
 101,201
 230
$
 2.06
$
 3.43
3
$
 101,201
 230
$
 2.12
$
 3.54
4
$
 101,201
 230
$
2.19
$
 3.65
5
$
 101,201
 230
$
 2.26
$
 3.76
6
$
 101,201
 230
$
 2.33
$
 3.89
7
$
 370,888
844
$
 2.41
$
 4.01
8
$
 409,414
931
$
 2.49
$
 4.15
9
$
 447,941
 1,019
$
 2.57
$
4.29
10
$
486,468
1,107
$
2.66
$
4.44
11
$
524,994
1,194
$
2.75
$
 4.59
12
$
 563,521
1,282
$
2.85
$
 4.75
 
 
32
 

 
 

 


 
 
13
$
 602,065
1,370
$
2.96
$
4.93
14
$
640,591
1,457
$
3.06
$
5.10
15
$
679,118
1,545
$
3.18
$
 5.29
16
$
717,645
 1,633
$
 3.29
$
 5.49
17
$
756,171
 1,720
$
 3.42
$
 5.70
18
$
794,698
 1,808
$
 3.55
$
 5.92
19
$
 833,224
 1,895
$
 3.69
$
 6.15
20
$
 871,751
 1,983
$
 3.83
$
 6.39
21
$
 910,278
 2,071
$
 3.98
$
 6.64
22
$
 948,804
 2,158
$
 4.14
$
 6.91
23
$
 987,348
 2,257
$
 4.31
$
 7.18
24
$
 1,025,875
 2,346
$
 4.49
$
 7.48
Total
$
13,178,000
30,000
       
 
Table 2 – Junior Warrant Exercise Price Schedule
Junior Warrant
Amount
Exercise Price
 
Proceeds
Warrant A
102,903
$
2.40
$
246,967
Warrant B
99,906
$
 2.47
$
 246,967
Warrant C
96,941
$
 2.55
$
 246,967
Warrant D
 94,012
$
 2.63
$
 246,969
Warrant E
 91,121
$
 2.71
$
 246,964
Warrant F
 88,271
$
 2.80
$
 246,963
Warrant G
 313,219
$
 2.89
$
 905,108
Warrant H
 334,584
$
 2.99
$
 999,134
Warrant I
 354,057
$
 3.09
$
 1,093,151
Warrant J
 371,702
$
 3.19
$
 1,187,180
Warrant K
 387,586
$
 3.31
$
 1,281,204
Warrant L
 401,774
$
 3.42
$
 1,375,234
Warrant M
 414,352
$
 3.55
$
 1,469,291
Warrant N
 425,327
$
 3.68
$
 1,563,203
Total
3,575,754
   
$
11,355,305
 
Table 3 – Pro Forma Share Structure
   
Pro Forma Common Shares
at Completion of Reverse Split
Pro Forma Common Shares
at the Full Release Date
   
Month
 
Common Shares
Percentage
Common Shares
Percentage
Public Float
 
 5,000,000
20.00%
 5,000,000
6.67%
Management
(1)
 20,000,000
80.00%
33,957,207
51.00%
Copperbottom Investments, Ltd.
(2)
 -
0.00%
 4,655,479
6.99%
Absentia Holdings, Ltd.
(2)
 -
0.00%
 4,655,479
6. 99%
Britannia Securities International, Ltd.
(2)
 -
0.00%
 4,655,479
6. 99%
Agri-Technologies International, Ltd.
(2)
 -
0.00%
 4,655,479
6. 99%
On Time Investments, Ltd.
(2)
 -
0.00%
 4,655,479
6. 99%
RND Company, Ltd.
(2)
-
0.00%
1,449,385
2.18%
Sequence Investments, Ltd.
(2)
-
0.00%
1,449,385
2.18%
Rooftop Holdings, Ltd.
(2)
-
0.00%
1,449,385
2.18%
Total
 
25,000,000
100.00%
66,582,759
100.00%
           
(1)
The shares of Common Stock initially held by Management are subject to the conditions noted above, and are subject to upward modification to maintain the 51% Minimum Ownership requirement, and downward modification to 30% in the event that the Performance Hurdle is not met. Viridis and Corn 2.0, LLC collectively hold 637,500 shares of Company Series D Preferred Stock, which shares are convertible at all times into 51% of the outstanding Common Stock (when taken with each holder's then-current Common Stock holdings) until the Full Release Date. An additional 302,103 shares of Series D Preferred Stock are beneficially owned by Viridis and are subject to the Restrictions Applicable to Management noted above.
 
(2)
The shares of common stock shown for the Junior Investors are estimated based on the assumed conversion of the Series E Shares at the Fixed Prices shown in Table 1 above, which prices were established based on the assumption that the Company successfully achieves a weighted average Target Price of $5.49 (the “WA Price”) between the initial payment of the Junior Purchase Price and the Full Release Date. This WA Price corresponds to a Company market capitalization of about $365,539,000 at the Performance Hurdle. The shares of Common Stock issuable to the Junior Investors (and the five Senior Investors) upon Conversion of the Series E Shares shall be subject to upward modification in the event that the Company fails to achieve the Target Prices set forth in Table 1 above. Any such increase would be offset by downward modification given the operation of the 51% Management Minimum Ownership requirement if the Performance Hurdle is not met.

COMMON STOCK
The Company completed a 1-for-1,000 reverse stock split on November 30, 2009. All share amounts reported herein are reported on a post-split basis except where stated to be on a pre-split basis.
 
In addition to the common shares issued as noted above, the Company issued 512,059 shares of common stock upon the conversion of an aggregate of $524,049 in debt during the year ended December 31, 2009 consisting of: 53,622 common shares issued to RAKJ Holdings, Inc., upon the conversion of $50,532 in debt; 179,982 common shares issued to JMJ Financial Corporation upon the conversion of $179,982 in debt; 50,000 common shares issued to MIF upon the conversion of $51,115 in debt; and 250,995 common shares issued to Mammoth Corporation upon the conversion of $242,421 in debt. The Company also issued 9,000 shares for a total of $28,300 to payoff various accounts payable during year ended December 31, 2009.
 
During the year ended December 31, 2009, the Company issued 241,500 common shares to various consultants in connection with the Company’s ongoing technology development efforts. These shares were issued for a total of $425,900 in research and development expenses. The Company also issued 100,000 shares for a total of $196,000 in stock-based compensation during the year.
 
The terms of the Company’s 2009 Preferred Equity Investment are presented below for disclosure purposes. Note, however, that this transaction was contingent upon several factors that were not fulfilled as required during the first quarter of 2010. Consequently, on April 15, 2010, the Company entered into an agreement to cancel the 2009 Preferred Equity Investment and all related agreements.
 
On July 24, 2009, EcoSystem entered into a Unit Subscription Agreement (the “Senior USA”) with Copperbottom Investments, Ltd. (“Lead Senior Investor”), Absentia Holdings, Ltd., On Time Investments, Ltd., Agri-Technologies, Ltd., and Britannia Securities International, Ltd. (collectively, the “Senior Investors”), pursuant to which the Senior Investors agreed to purchase 766,190 shares of the Company’s newly designated Series E Preferred Stock (the “Series E Shares”), and 24,705,000 warrants to purchase additional Company common shares (the “Senior Warrants”) (the Series E Shares and the Senior Warrants shall be collectively referred to herein as the “Senior Units”) for $76,619,000 (the “Senior Purchase Price”), subject to certain conditions discussed below (the “Senior Investment”).
 
 
33
 

 
 

 


 
 
NOTE 5
RELATED PARTY TRANSACTIONS
On May 15, 2009, EcoSystem and GS CleanTech Corporation entered into an Early Adopter License Agreement (the “EALA”) involving use of several of GS CleanTech’s technologies. The EALA calls for the payment of royalties to GS CleanTech equal to 10% of EcoSystem’s pre-tax net income deriving from the use of GS CleanTech’s technologies (excluding corn oil extraction). EcoSystem shall provide all of the capital resources needed to build bench, pilot and commercial scale facilities based on these technologies under the EALA. GS CleanTech is a wholly-owned subsidiary of GreenShift Corporation, which company is majority owned by our majority shareholder, Viridis Capital, LLC. The Company received a favorable response for grant funding sought for the Company’s feedstock conditioning technologies for during 2009, however, the Company elected not to proceed given the requirements of the relevant grant program. This particular technology was demonstrated during the year ended December 31, 2009 to result in more than 6% more biofuel yield by pre-conditioning corn prior to fermentation to increase the concentration of sugar available for fermentation into alcohol as well as oil available for extraction.
 
During the year ended December 31, 2009, the Company paid $50,000 to GreenShift for management services and incurred $14,630 in accounts payable due to GreenShift for certain expenses paid on behalf of the Company. During the year ended December 31, 2009, the Company wrote-off $49,762 in accounts payable owed to GreenShift and a subsidiary of GreenShift. During the year ended December 31, 2009, GreenShift transferred $379,355 in costs related to the bioreactor project to the Company increasing the balance the Company owes to GreenShift to $397,835.
Minority Interest Fund (II), LLC (“MIF”) is party to certain convertible debentures issued by the Company (see Note 6, Convertible Debentures, below). The managing member of MIF is a relative of the Company’s chairman.
 
NOTE 6
CONVERTIBLE DEBENTURES
As of December 31, 2009, the Company had convertible debentures payable to Minority Interest Fund (II), LLC (“MIF”) in an aggregate amount of $167,594 (the “MIF Debentures”) which are due December 31, 2010 and carry interest at 20%. The MIF Debentures are convertible into Company common stock at a rate equal to 90% of the lowest volume weighted average price for the Company’s common stock for the twenty trading days preceding conversion.
 
Effective April 1, 2009, the Company converted $50,701 of the MIF Debentures into 61,250 Series D Shares in connection with the Company’s increase of the conversion price for $565,656 of the balance due under the MIF Debentures from $0.0001 to $0.001 per share.
 
The Company analyzed this debt modification under the provisions of ASC 470-50, Modifications and Extinguishments, as further interpreted by ASC 470-50-40 (Derecognition), to determine if this modification constituted a debt extinguishment. Since there was no change to cash flows outside of the change in the conversion feature and related consideration, the Company then analyzed the change in the value of the conversion feature for significance. Based on the analysis, the change in fair value of the previously recognized beneficial conversion feature was greater than 10% of the carrying value of the debt; therefore the modification was treated as a debt extinguishment, resulting in a gain on extinguishment of $67,901 and offset to paid-in capital of $432,932 for the extinguishment of the underlying beneficial conversion feature. The balance of the MIF Note was increased by $167,594 during the year ended December 31, 2009 from cash payments MIF paid to or on behalf of the Company.
 
The MIF Debentures included $116,724 in accounts payable due to various third parties that was assumed by MIF on April 1, 2009, but this transaction was cancelled during the quarter ended September 30, 2009. The Company remains exclusively liable for these vendor obligations. In addition, the following principal amounts due under the MIF Debentures were assigned to unaffiliated third parties during the year ended December 31, 2009: $50,000 to RAKJ Holdings, Inc.; $125,000 to JMJ Financial Corporation $50,000 to Sunny Isle Ventures; and $157,231 (including $6,071 accrued interest) to Mammoth Corporation (see below).
 
 
34
 

 
 

 


 
 
The Company determined the value of the MIF Debentures at December 31, 2009 to be $1183,005, which represented the face value of the debentures plus the present value of the conversion feature. For the year ended December 31, 2009, an expense of $15,411 has been recorded for the accretion to the present value of the conversion liability at year end. The conversion liability shall increase from its present value of $15,411 at September 30, 2009 to its estimated settlement amount of $18,622 at December 31, 2010. The managing member of MIF is a relative of the Company’s chairman.
 
The Company issued 179,982 shares of common stock to JMJ upon the conversion of $179,982 in debt acquired from MIF and accrued interest during the year ended December 31, 2009. In addition, on June 9, 2009, JMJ Financial Corporation (“JMJ”) issued the Company a 14.4% secured promissory note in the amount of $500,000 (the “JMJ Note”) in return for $600,000 in 12% convertible debt (the “JMJ Debenture”) issued by the Company. The principal balance due under the JMJ Note was $450,000 as of December 31, 2009 and accrued interest receivable under the JMJ Note was $28,553. The principal and accrued interest for the JMJ Note and JMJ Debenture has been presented as of December 31, 2009, at their face value, without offset. The JMJ Debenture is convertible into Company common stock at a rate equal to 70% of the lowest closing market price for the Company’s common stock for the twenty trading days preceding conversion. The Company accounted for the JMJ Debenture and debentures assigned to MIF in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result the note principal being converted to a variable number of the Company's common shares.
 
The Company determined the value of the $600,000 JMJ Debenture at April 1, 2009 to be $793,195 which represented the face value of the debenture plus the present value of the conversion feature. The liability for the conversion feature shall increase from its carrying value of $193,193 at April 1, 2009 to its estimated settlement amount of $257,143 at December 31, 2010. For the year ended December 31, 2009, an expense of $23,782 has been recorded for adjustments to fair value of the conversion features on the convertible notes payable and related accrued interest. The value of the conversion liability was also reduced by $15,772 during the year for the effect of conversions of the underlying debenture noted above. The carrying value of the $600,000 JMJ Debenture was $801,205 at December 31, 2009. The Company recognized a $100,000 debt discount in relation to the difference between the $600,000 JMJ Debenture and the $500,000 JMJ Note. This discount is being amortized over the term of the debenture. The Company recognized amortization of debt discount of $22,073 for the year ended December 31, 2009
 
The principal balance of the JMJ Debentures when taken with the convertible debt acquired from MIF and the conversions was $551,018 as of December 31, 2009, and interest expenses of $40,211 were accrued and incurred during the year ended December 31, 2009. 
 
The Company issued 53,622 shares of common stock to RAKJ Holdings, Inc. (“RAKJ”), upon the conversion of $50,000 in debt and $532 in interest (the “RAKJ Debenture”) during the year ended December 31, 2009. The RAKJ Debenture was convertible into Company common stock at a rate equal to 50% of the lowest closing market price for the Company’s common stock for the twenty trading days preceding conversion. The Company accounted for the RAKJ Debenture assigned from MIF in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the note principal being converted to a variable number of the Company's common shares. For the year ended December 31, 2009, an expense of $43,794 was recorded for adjustments to fair value of the conversion features on the RAKJ debenture. The full value of the conversion liability was reduced during the year for the effect of the full conversion of the underlying debenture noted above. For the year ended December 31, 2009, interest expense of $532 was incurred. The balance due under the RAKJ Note at December 31, 2009 was $0.
 
 
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On July 7, 2009, MIF assigned $50,000 of the MIF Debentures to Sunny Isle Ventures (“SIV). The Company issued 47,500 shares of common stock to SIV, upon the conversion of $50,000 in debt as well as $1,115 in accrued interest during the year ended December 31, 2009 paying the debenture in full. The SIV Debenture was convertible into Company common stock at a rate equal to 50% of the lowest closing market price for the Company’s common stock for the twenty trading days preceding conversion. The Company accounted for the SIV Debenture assigned from MIF in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the note principal being converted to a variable number of the Company's common shares. For the year ended December 31, 2009, an expense of $44,445 was recorded for adjustments to fair value of the conversion features on the SIV debenture. The full value of the conversion liability was reduced during the year for the effect of the full conversion of the underlying debenture noted above. For the year ended December 31, 2009, interest expense of $1,115 was incurred and converted. The balance due under the SIV Note at December 31, 2009 was $0. 
 
During the year ended December 31, 2009, MIF assigned $157,231 of the MIF Debentures (including accrued interest) to Mammoth Corporation (“Mammoth”). The Company issued 250,955 shares of common stock to Mammoth upon the conversion of $242,421 in debt plus accrued interest during the year ended December 31, 2009, which amounts paid off the debenture in full. The Mammoth Debenture was convertible into Company common stock at a rate equal to 50% of the lowest closing market price for the Company’s common stock for the twenty trading days preceding conversion. The Company accounted for the Mammoth debenture assigned from MIF in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the note principal being converted to a variable number of the Company's common shares. For the year ended December 31, 2009, an expense of $98,818 was recorded for adjustments to fair value of the conversion features on the Mammoth debenture. The full value of the conversion liability was reduced during the year for the effect of the full conversion of the underlying debenture noted above. For the year ended December 31, 2009, interest expense of $649 was paid. The balance due under the Mammoth Debenture at December 31, 2009 was $0.
 
NOTE 7
STOCK BASED COMPENSATION
During the year ended December 31, 2009, the Company issued a total of 341,500 shares for a total of $196,000 in stock based compensation., including 241,500 shares for consulting services rendered pertaining to the Company's development stage activities. During the year ended December 31, 2009, the Company issued 91,211 shares of common stock for a total of $707,028 stock based compensation, including 75,211 shares for the consulting services rendered pertaining to the Company's development stage activities.
 
NOTE 8
INCOME TAXES
EcoSystem Corporation has incurred losses, which have generated net operating loss carry forwards for EcoSystem Corporation as of December 31, 2009. These loss carry forwards are subject to limitation in future years should certain ownership changes occur. For the years ended December 31, 2009 and 2008, EcoSystem Corporation’s effective tax rate differs from the federal statutory rate principally due to net operating losses and other temporary differences for which no benefit was recorded. The provision for income taxes for the years ended December 31, 2009 and 2008 consisted of state income tax provisions. Deferred tax assets are as follows:
 
   
12/31/2009
   
12/31/2008
 
Deferred Tax Asset:
           
Total deferred tax assets
   
1,475,892
     
1,130,000
 
Less: Valuation allowance
   
(1,475,892
)
   
(1,130,000
)
Net deferred tax asset
 
$
--
   
$
--
 
 
EcoSystem Corporation has federal net operating loss carry-forwards of approximately $3,300,000 which expire through December 31, 2025.
 
 
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NOTE 9
OPTIONS AND WARRANTS
The following is a table of stock options and warrants outstanding as of December 31, 2009 and December 31, 2008. The number of shares and price has been adjusted to reflect the 1-for-1,000 reverse stock split which occurred on November 30, 2009.
   
Number of Shares
   
Weighted Average Exercise Price
 
Outstanding at December 31, 2008
   
475
   
$
0.46
 
Issued
   
--
   
$
--
 
Exercised
   
(200
)
 
$
0.25
 
  Cancelled
   
--
   
$
--
 
Outstanding at December 31, 2009
   
275
   
$
0.46
 
Summarized information about EcoSystem Corporation’s stock options outstanding at December 31, 2009 is as follows: