ADARNA ENERGY Corp - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - ADARNA ENERGY Corp	esyrq111ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - ADARNA ENERGY Corp	esyrq111ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - ADARNA ENERGY Corp	esryq111ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

_________________________

ANNUAL REPORT UNDER SECTION 13 OR 15 (D)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL QUARTER ENDED MARCH 31, 2011

COMMISSION FILE NO.: 0-32143

ECOSYSTEM CORPORATION

(Exact name of registrant as specified in its charter)

Delaware			20-3148296
(State of incorporation)			(IRS employer identification number)

5950 Shiloh Road East, Suite N, Alpharetta, GA		30005
(Address of principal executive offices)			(Zip code)
	(212) 994-5374
(Registrant’s telephone number)
Check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant as 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One): Large accelerated filer ___ Accelerated filer ___ Non-accelerated filer ___ Smaller 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

The number of outstanding shares of common stock May 19, 2011 was 4,945,112,585.

ECOSYSTEM CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED MARCH 31, 2011

TABLE OF CONTENTS

Part I – Financial Information
Item 1	Financial Statements	3
	Condensed Balance Sheets as of March 31, 2011 (unaudited) and
	December 31, 2010	4
	Condensed Statements of Operations for the Three Month Periods
	Ended March 31, 2011(unaudited) and 2010 (unaudited)	5
	Condensed Statements of Cash Flows for the Three Months Ended
	March 31, 2011 (unaudited) and 2010 (unaudited)	6
	Notes to Condensed Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3	Quantitative and Qualitative Disclosures about Market Risk	17
Item 4T	Controls and Procedures	17
Part II – Other Information
Item 1	Legal Proceedings	18
Item 1A	Risk Factors	18
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3	Defaults upon Senior Securities	18
Item 4	Reserved	18
Item 5	Other Information	18
Item 6	Exhibits	18
Signatures		19

PART I – FINANCIAL STATEMENTS

ITEM 1 FINANCIAL STATEMENTS

ECOSYSTEM CORPORATION

CONDENSED BALANCE SHEETS

AS OF MARCH 31, 2011 (UNAUDITED) AND DECEMBER 31, 2010

ASSETS	3/31/2011			12/31/2010
Current assets:
Cash	$	526		$	526
Due from affiliate		11,947			20,219
Total current assets		12,473			20,745
Other assets:
Notes receivable		565,220			549,242
Total other assets		565,220			549,242

TOTAL ASSETS	$	577,693		$	569,987

LIABILITIES AND STOCKHOLDERS’ EQUITY/ (DEFICIT)

Current liabilities:
Accounts payable and accrued expenses	$	647,246		$	651,328
Accrued interest		127,623			107,882
Accrued interest – related party		106,897			77,907
Convertible debentures, net of discounts		920,984			887,401
Convertible debentures, net of discounts – related party		642,870			650,419
Liability to be settled in stock		179,007			179,007
Total current liabilities		2,624,627			2,553,944

TOTAL LIABILITIES		2,624,627			2,553,944

STOCKHOLDERS’ EQUITY (DEFICIT)
Convertible preferred stock, $0.001 par value, 500,000,000 authorized
Series D: 1,000,000 authorized, 825,066 and 840,281 issued and outstanding, respectively		825			840
Series E: 909,312 authorized with none outstanding
Common stock, $0.001 par value, 5,000,000,000 authorized;
4,938,312,585 and 4,399,652,153 issued and outstanding, respectively		4,938,311			4,399,650
Additional paid-in capital		5,456,594			5,793,490
Accumulated deficit		(12,442,664	)		(12,177,937	)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)		(2,046,934	)		(1,983,957	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	577,693		$	569,987

The notes to the Condensed Financial Statements are an integral part of these statements.

ECOSYSTEM CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2011 (UNAUDITED) AND 2010 (UNAUDITED)

	Three Months Ended
	3/31/2011			3/31/2010

Revenues	$	--		$	--
Cost of revenues		--			--
Gross profit		--			--

Operating expenses
Research and development		10,000			19,423
General and administrative expenses		11,281			98,258
Total operating expenses		21,281			117,681

Operating loss		(21,281	)		(117,681	)

Other income (expense)
Interest income		15,978			16,156
Amortization of debt discount		(7,353	)		(10,941	)
Change in convertible liabilities		(14,730	)		(10,088	)
Change in convertible liabilities – related party		(360	)		(4,793	)
Interest expense		(207,992	)		(51,420	)
Interest expense – related party		(28,990	)		(10,033	)
Total other income (expense)		(243,446	)		(71,119	)

Loss before provision for income taxes		(264,727	)		(188,800	)

Provision for income taxes		--			--

Net loss	$	(264,727	)	$	(188,800	)

Weighted average shares of common stock
outstanding, basic and diluted		4,715,822,575			27,466,216

Net loss per share, basic and diluted	$	(0.00	)	$	(0.01	)

The notes to the Condensed Financial Statements are an integral part of these statements.

ECOSYSTEM CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2011 (UNAUDITED) AND 2010 (UNAUDITED)

	Three months Ended		Three months Ended
	3/31/2011		3/31/2010

CASH FLOW FROM OPERATING ACTIVITIES
Net cash used in operating activities	$	--	$	(45,240	)

CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable repayment		--		--
Net cash provided by investing activities		--		--
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible notes		--		44,250
Repayment on convertible notes		--		--
Loan proceeds from related parties		--		--
Net cash provided by financing activities		--		44,250
Net increase (decrease) in cash	$	--	$	(990	)
Cash at beginning of period		526		2,551
Cash at end of period	$	526	$	1,561
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Stock issued for conversion of debt	$	1,750	$	54,252
Conversion of preferred stock into common	$	348,660	$	4,671
Conversion of convertible liabilities	$	17,500	$	5,796
Affiliate debentures issued for payment of accounts payable	$	--	$	2,865

The notes to the Condensed Financial Statements are an integral part of these statements.

ECOSYSTEM CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE 1

BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation of the results of operations have been included. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results of operations for the full year. When reading the financial information contained in this Quarterly Report, reference should be made to the financial statements, schedules and notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

NOTE 2

NATURE OF OPERATIONS

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 $264,727 during the three months ended March 31, 2011, and had an accumulated deficit and negative cash flow from 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

RECENT ACCOUNTING PRONOUNCEMENTS

Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

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.

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 convertible debentures and shares of Series D preferred stock as of March 31, 2011 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 three months ended March 31, 2011 and 2010, the Company recorded amortization of the note discount in the amount of $7,353 and $10,941, respectively.

FINANCIAL INSTRUMENTS

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.

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.

Under ASC 820, a framework was established for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. 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. In January 2010, the FASB issued an update to ASC 820, which requires additional disclosures about inputs into valuation techniques, disclosures about significant transfers into or out of Levels 1 and 2, and disaggregation of purchases, sales, issuances, and settlements in the Level 3 rollforward disclosure. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. 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 March 31, 2011	Level 1		Level 2		Level 3		Total
Embedded conversion liabilities	$	-	$	--	$	356,349	$	356,349

The following table reconciles, for the period ended March 31, 2011, the beginning and ending balances for financial instruments that are recognized at fair value in the condensed financial statements:
Balance of Embedded Conversion Liability at December 31, 2010	$	353,009
Present Value of beneficial conversion features of new debentures		7,642
Reductions in fair value due to principal conversions		(11,750	)
Accretion adjustments to fair value - beneficial conversion features		7,448
Balance at March 31, 2011	$	356,349

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 the present value for the conversion liability which is added to the principal of the debenture. The Company also recognizes expense for the 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.

NOTE 4

STOCKHOLDERS’ EQUITY

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.

During the three months ended March 31, 2011, Minority Interest Fund (I), LLC (“MIF”) converted 15,069 shares of Series D preferred stock into 331,560,432 common shares. An additional 145 shares of Series D preferred stock beneficially owned by Viridis Capital, LLC (“Viridis”) were converted during the three months ended March 31, 2011 into 17,100,000 common shares (see Note 5, Related Party Transactions, below).

The Company’s Series E Preferred Stock was authorized during 2009 in connection with the Preferred Equity Financing. The Company entered into an agreement to cancel all Series E shares previously issued in April 2010, which agreement called for the issuance of a total of 5,000,000 Company common shares and the retention of another 1,869,000 common shares previously issued to the relevant investors in anticipation of converting Series E shares. All Series E shares are consequently pending cancelation. The 5,000,000 common shares to be issued to the relevant investors (and 100,000 shares due to the escrow agent) have been recorded as liabilities due to be settled in stock and were valued as of the April 15, 2010 commitment date.

On April 15, 2010, the Company entered into cancellation agreements with the Senior Investors and the Junior Investors with respect to the cancellation of the 2009 Preferred Equity Financing. Under the terms of the cancellation agreements, the Company agreed to issue the Senior Investors and the Junior Investors an aggregate of 5,000,000 restricted common shares in consideration for the surrender and cancellation of all shares of Series E preferred stock and warrants issued to the investors in connection with the closing of the 2009 Preferred Equity Financing. The cancellation of the 2009 Preferred Equity Financing was effective as of March 31, 2010.

In addition to the common shares issued noted above, the Company issued 190,000,000 shares to E-LionHeart Associates upon the conversion of $1,750 in debt incurring $188,250 in interest expense in order to effect the conversion at par.

NOTE 5

RELATED PARTY TRANSACTIONS

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.

Viridis Capital, LLC (“Viridis”), is the majority shareholder of the Company (see Note 4, Stockholder’s Equity, above), The sole member of Viridis is Kevin Kreisler, the Company’s Chief Executive Officer

NOTE 6

CONVERTIBLE DEBENTURES

As of December 31, 2010, the Company had a convertible debenture payable to Minority Interest Fund (II), LLC (“MIF”) in the amount of $167,594 (the “MIF Debenture”). The convertible debt issued to MIF bears interest at a rate of 20% and matures on December 31, 2011. The MIF Debenture is 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. The Company accounted for the MIF Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the MIF Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined

the value of the MIF Debenture at December 31, 2010 to be $650,419 which represented the face value of the debenture of $601,446 plus the present value of the conversion feature. The MIF Debenture was also increased by $17,091 in additional advances during the three months ended March 31, 2011. During the three months ended March 31, 2011, MIF sold a portion of the MIF Debenture in the amounts of $25,000 to Sonata Ventures, LLC. During the three months ended March 31, 2011, the Company recognized reduction in conversion liabilities at present value of $798 due to the net reduction from additional funding received less principal sold and recorded an expense of $1,158 for the accretion to fair value of the conversion liability for the three months. The carrying value of the MIF Debenture was $642,871 at March 31, 2011, and included principal of $593,538 and the value of the conversion liability. The liability for the conversion feature shall increase from its present value of $49,333 at March 31, 2011 to its estimated settlement value of $52,807 at December 31, 2011. Interest expense of $28,990 for these obligations was accrued for the three months ended March 31, 2011.

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 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 $7,353 and $10,941 for the three months ended March 31, 2011 and 2010, respectively. The principal balance receivable under the JMJ Note was $450,000 as of March 31, 2011 and accrued interest receivable under the JMJ Note was $115,220. The principal and accrued interest for the JMJ Note and JMJ Debenture has been presented as of March 31, 2011, 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 dated June 9, 2009 in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the JMJ Debenture could result in the note principal being converted to a variable number of the Company’s common shares.

The Company determined the value of the JMJ Debenture at December 31, 2010 to be $820,462 which represented the face value of the debenture and accrued interest plus the present value of the conversion feature minus the unamortized debt discount of $42,891. For the three months ended March 31, 2011, an expense of $11,496 has been recorded to recognize the present value of the conversion features for additional accrued interest and for the accretion to fair value of the conversion liability. The carrying value of the $600,000 JMJ Debenture was $854,883 at March 31, 2011 which represented the face value of the debenture and accrued interest plus the present value of the conversion feature minus the unamortized debt discount of $35,538. The liability for the conversion feature shall increase from its present value of $247,879 at March 31, 2011 to its estimated settlement amount of $275,375 at June 11, 2012. For the three months ended March 31, 2011, interest expense of $15,572 for these obligations was incurred.

MIF sold a portion of its MIF Debenture to Sunny Isle Ventures (“SIV”) in the amount of $50,000 on April 15, 2010 (the “SIV Debenture”). The convertible debt sold to SIV bears interest at a rate of 5% and matures on December 31, 2011. The SIV Debentures are convertible into Company common stock at a rate equal to 50% of the average closing market price for the Company’s common stock for the five trading days preceding conversion. SIV will not be permitted, however, to convert into a number of shares that would cause it to own more than 4.99% of the outstanding the Company’s common shares. The Company accounted for the SIV Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the SIV Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the SIV Debentures at December 31, 2010 to be $49,567 which represented the face value of the debenture of $45,000 plus the present value of the conversion feature. During the three months ended March 31, 2011, the Company recorded an expense of $108 for the accretion to fair value of the conversion liability for the three months. The carrying value of the SIV Debentures was $49,675 at March 31, 2011, and included principal of $45,000 and the value of the conversion liability. The liability for the conversion feature shall increase from its present value of $4,675 at March 31, 2011 to its estimated settlement value of $5,000 at December 31, 2011. Interest expense of $555 for these obligations was accrued for the three months ended March 31, 2011.

MIF sold a portion of its MIF Debenture to Long Side Ventures (“LSV”), the successor to Sunny Isle Ventures, in the amount of $32,500 on July 14, 2010 (the “LSV Debenture”). The convertible debt sold to LSV bears interest at a rate of 20% and matures on December 31, 2010. The LSV Debentures are convertible into Company common stock at a rate equal to 50% of the average closing market price for the Company’s common stock for the five trading days preceding conversion. LSV will not be permitted, however, to convert into a number of shares that would cause it to own more than 4.99% of the Company’s outstanding common shares. The Company accounted for the LSV Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded

in the LSV Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the LSV Debentures at July 14, 2010 to be $63,611 which represented the face value of the debenture of $25,500 plus the present value of the conversion feature. The carrying value of the LSV Debentures was $51,000 at March 31, 2011, and included principal of $25,500 and the value of the conversion liability. The liability for the conversion feature of $25,500 at March 31, 2011 is equal to its estimated settlement value. Interest expense of $1,258 for these obligations was accrued for the three months ended March 31, 2011.

MIF sold a portion of its MIF Debenture to E-LionHeart Associates (“E-Lion”) in the amount of $35,000 on September 22, 2010 (the “E-Lion Debenture”). The convertible debt sold to E-Lion bears interest at a rate of 20% and matures on December 31, 2011.The E-Lion Debenture is convertible into Company common stock at a rate equal to 50% of the average of the three lowest reported closing market price for the Company’s common stock for the twenty trading days preceding conversion. The Company accounted for the E-Lion Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the E-Lion Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the E-Lion Debentures at December 31, 2010 to be $13,417 which represented the face value of the debenture of $1,750 plus the present value of the conversion feature. During the three months ended March 31, 2011, the Company recognized a reduction in conversion liability at present value of $11,750 for conversions during the period. During the three months ended March 31, 2011, the Company recorded an expense of $83 for the accretion to fair value of the conversion liability for the period. The debenture has been converted and paid in full as of the three months ended March 31, 2011. Interest expense of $31 for these obligations was accrued for the three months ended March 31, 2011.

MIF sold a portion of its MIF Debenture to Mammoth Corporation (“Mammoth”) in the amount of $57,688 on March 31, 2011 (the “Mammoth Debenture”). The convertible debt sold to Mammoth bears interest at a rate of 20% and matures on December 31, 2011. The Mammoth Debenture is convertible into Company common stock at a rate equal to 50% of the lowest reported closing market price for the Company’s common stock for the five trading days preceding conversion. The Company accounted for the Mammoth Debentures in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Mammoth Debentures could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Mammoth Debentures at December 31, 2010 to be $53,657 which represented the face value of the debenture of $27,738 plus the present value of the conversion feature. During the three months ended March 31, 2011, the Company recorded an expense of $455 for the accretion to fair value of the conversion liability for the period. The carrying value of the Mammoth Debentures was $54,112 at March 31, 2011, and included principal of $27,738 and the value of the conversion liability. The liability for the conversion feature shall increase from its present value of $26,374 at March 31, 2011 to its estimated settlement value of $27,738 at December 31, 2011. Interest expense of $1,368 for these obligations was accrued for the three months ended March 31, 2011.

MIF sold a portion of its MIF Debenture to Sonata Ventures, LLC. (“Sonata”) in the amount of $40,000 on January 20, 2011 (the “Sonata Debenture”). The convertible debt sold to Sonata bears interest at a rate of 20% and matures on December 31, 2011. The Sonata Debenture is 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 five trading days preceding conversion. The Company accounted for the Sonata Debenture in accordance with ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in the Sonata Debenture could result in the note principal being converted to a variable number of the Company’s common shares. The Company determined the value of the Sonata Debenture at January 20, 2011 to be $27,525 which represented the face value of the debenture of $25,000 plus the present value of the conversion feature. During the three months ended March 31, 2011, the Company recorded an expense of $63for the accretion to fair value of the conversion liability for the three months. The carrying value of the Sonata Debenture was $27,588 at March 31, 2011, and included principal of $25,000 and the value of the conversion liability. The liability for the conversion feature shall increase from its present value of $2,588 at March 31, 2011 to its estimated settlement value of $2,778 at December 31, 2011. Interest expense of $959 for these obligations was accrued for the three months ended March 31, 2011.

NOTE 7

SUBSEQUENT EVENTS

Between April 1, 2011 and May 20, 2011, the Company issued a total of 6,300,000 shares of common stock upon conversion of 51 shares of Series D Preferred Stock held by Viridis Capital, LLC, the Company’s majority shareholder.

On May 3, 2011, the Company filed to amend its articles of incorporation to reduce the par value of the Company’s common stock from $0.001 per share to $0.0001 per share and to effect a reverse stock split of the Company’s common stock in a ratio of 1-for-100. The Company also plans to change the name of the Company to “Adarna Energy Corporation”. The Company expects that the reverse stock split, change in par and change in the name of the Company will become effective during the second quarter 2011.

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. 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 three months ended March 31, 2011 exclusively involved research and development with our technologies and performing due diligence on a number of additional strategically compatible technologies that we have targeted for licensing.

INDUSTRY OVERVIEW

Worldwide energy consumption is projected to increase by 50% from 2005 to 2030, corresponding to an increase in crude oil consumption to over 112 million barrels of crude oil per day from the current 90 million barrels per day. The EIA projected that annual CO2 emissions will increase during this time from about 28 billion metric tons to over 42 billion metric tons in 2030.

The largest and most concentrated source of carbon dioxide (“CO2”) emissions is the growing use of coal-powered electricity generation, especially in developing countries where coal is abundant and inexpensive. Liquid fuels, such as gasoline, are expected to remain the world's most dominant fuel because of their importance in the transportation and industrial sector since there are few alternatives. The transportation sector alone accounts for 74% of the total projected increase from 2005 to 2030, with the industrial sector accounting for the remainder. We believe that this increasing demand is likely to sustain high world oil prices for a long period of time.

The continued use of fossil fuels creates important challenges. Fossil fuel derived CO2 emissions are believed to be the cause of global warming and climate change. Management believes that at some point in the future, there will not be enough supply and production capacity to meet worldwide fossil fuel demands. Based on historic growth trends, crude oil production is projected to peak in 2037 at a volume of 53 billion barrels per year.

We believe that these challenges can be meaningfully addressed by developing technologies 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.

Technology Development Activities

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. GS CleanTech is a subsidiary of GreenShift Corporation, which company is majority owned by Viridis Capital, LLC, our majority shareholder.

During 2010, EcoSystem conducted laboratory research involving patent-pending technologies designed to recycle waste carbon emissions into value-added products. These activities were completed at the direction of our management and in connection with license rights obtained from affiliates of Viridis Capital, LLC, our majority shareholder, pursuant to which we have agreed to provide all of the capital resources needed to complete research and development in exchange for use rights involving the technologies. To defray cost and risk, this research was completed at our cost at a university laboratory, by the university’s research staff.

During 2009, EcoSystem conducted 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 former 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 during 2011 and 2012, which testing may or may not involve the subcontract technical consultants and project collaborators used for prior testing. All testing 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 2011 or 2012, 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.

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

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

Revenues

There were no revenues for the three months ended March 31, 2011 or for the three months ended March 31, 2010. There was no cost of revenues for the three months ended March 31, 2011 or for the three months ended March 31, 2010.

Operating Expenses

Operating expenses were $21,281 for the three months ended March 31, 2011 and $117,681 for the three months ended March 31, 2010. Included in the three months ended March 31, 2011 was $10,000 in research and development costs, and $11,281 in general and administrative expenses as compared to $19,423 in research and development costs and $98,258 in general and administrative expenses for the three months ended March 31, 2010. The decrease in operating costs as compared to prior periods is due to decreased development costs during the period and a decrease in salaries and legal fees.

Other Income (Expense)

Total other (expense) for the three months ended March 31, 2011 was ($243,446) and other income for the same period last year was $71,119 respectively. Included in the three months ended March 31, 2011 was $236,982 of interest expense (consisting of $207,992 in interest expense and $28,990 in interest expense - related party and included $188,250 in interest expense incurred to effect conversions at par) as well as $15,090 in non-cash expenses associated with the changes in the conversion features embedded in the convertible debentures issued by the Company during the three months ended March 31, 2011. Included in the three months ended March 31, 2010 was $61,453 of interest expense (consisting of $51,420 in interest expense, $10,033 in interest expense - related party), as well as $14,881 in non-cash expenses associated with the changes in the conversion features embedded in the convertible debentures issued by the Company during the three months ended March 31, 2010. Amortization of note discount was $7,353 and $10,941, respectively for the three months ended March 31, 2011 and 2010.

Expenses Associated with Change in Convertible Liabilities

The Company accounts for convertible debt in accordance with FASB Accounting Standards Codification, Topic 815, as the conversion feature embedded in the convertible debenture could result in the note principal and related accrued interest being converted to a variable number of the Company’s common shares. We calculate the fair value of the conversion feature at the time of issuance and record a conversion liability for the calculated value, which is added to the carrying value of the debenture. We also recognize changes in value for accretion of the conversion liability from present value to fair value over the term of the note. The additional cost for the conversion features of $15,090 for the three months ended March 31, 2011 has been recognized within other income (expense) as changes in conversion liabilities in the accompanying financial statements and includes $360 of costs for related party debt.

Net Loss

Our net loss for the three months ended March 31, 2011 and 2010 was $264,727 and $188,800 respectively.

Liquidity and Capital Resources

The Company’s capital requirements consist of general working capital needs as well as planned research and development expenditures involving our ongoing commercialization efforts with our technologies. 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 three months ended March 31, 2011 to cover its capital needs. Our plan moving forward involves continued investment in the research and development of our technologies as well as evaluation of additional early stage clean technologies for license or acquisition. We also plan to raise and invest additional capital in pilot-scale deployments of those of our technologies that demonstrate their qualification for scaling beyond the bench stage, with a goal of producing cash flow from the license or sublicense of developed technologies and through operating activities.

Cash Flows

For the three months ended March 31, 2011, net cash provided by financing activities was $0. The Company had a working capital deficit of $2,612,154 at March 31, 2011, which includes $356,349 in liabilities associated with the conversion features embedded in the convertible debentures issued by the Company, as well as $649,506 in convertible debt due to third parties and $593,538 in convertible debt due to related parties. The working capital deficit net of these amounts would be $1,012,761.

Off Balance Sheet Arrangements

None.

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4

CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our principal executive officer and principal financial officer participated in and supervised the evaluation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports that we file is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our management, including our principal executive officer or officers and principal financial officer, to allow timely decisions regarding required disclosure.

In the course of making our assessment of the effectiveness of our disclosure controls and procedures, we identified a material weakness. This material weakness consisted of inadequate staffing and supervision within the bookkeeping and accounting operations of our company. The lack of employees prevents us from segregating disclosure duties. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews. Based on the results of this assessment, our Chief Executive Officer and our Chief Financial Officer concluded that because of the above condition, our disclosure controls and procedures were not effective as of the end of the period covered by this report.

There have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1

LEGAL PROCEEDINGS

None.

ITEM 1A

RISK FACTORS

There has been no material change in the risk factors set forth in Item 1A (“Risk Factors”) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4

RESERVED

None.

ITEM 5

OTHER INFORMATION

None.

ITEM 6

EXHIBITS

The following are exhibits filed as part of Ecosystem’s Form 10Q for the quarter ended March 31, 2011:

INDEX TO EXHIBITS

Exhibit

Number		Description

	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the date indicated.

ECOSYSTEM CORPORATION

By:	/s/KEVIN KREISLER KEVIN KREISLER Chief Executive Officer
Date:	May 19, 2011

By:	/s/JACQUELINE FLYNN JACQUELINE FLYNN Chief Financial Officer
Date:	May 20, 2011

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