Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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ANNUAL REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2009
COMMISSION FILE NO.: 0-32143
ECOSYSTEM CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 20-3148296
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(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Penn Plaza, Suite 1612, New York, NY 10119
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(Address of principal executive offices) (Zip Code)
(212) 994-5374
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(Registrant's telephone number including area code)
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 (ss.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 as of November 23, 2009 was
4,835,301,800.
ECOSYSTEM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
Page No
Part I Financial Information
Item 1. Financial Statements (unaudited)...............................................................3
Condensed Balance Sheets - September 30, 2009 (unaudited)
and December 31, 2008..........................................................................4
Condensed Statements of Operations - for the Three and Nine Month Periods
Ended September 30, 2009 (unaudited) and 2008 (unaudited)......................................5
Statement of Stockholders' Equity-Year Ended December 31, 2008
and Nine Months Ended September 30, 2009 (unaudited)...........................................6
Condensed Statements of Cash Flows - for the Nine Months Ended
September 30, 2009 (unaudited) and 2008 (unaudited)............................................7
Notes to Condensed Financial Statements........................................................8
Item 2. Management's Discussion and Analysis .........................................................18
Item 3. Quantitative and Qualitative Discussion of Market Risk........................................21
Item 4. Controls and Procedures.......................................................................21
Part II Other Information
Item 1. Legal Proceedings.............................................................................22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................22
Item 3. Defaults upon Senior Securities...............................................................22
Item 4. Submission of Matters to a Vote of Security Holders...........................................22
Item 5. Other Information.......................................................................22
Item 6. Exhibits......................................................................................22
Signatures 23
2
PART I - FINANCIAL STATEMENTS
ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)
3
ECOSYSTEM CORPORATION
CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008
9/30/09 12/31/08
------------ ------------
Current assets:
Cash ............................................................. $ 2,186 $ --
Prepaid expenses ................................................. 15,000 --
Project development costs ........................................ 20,482 --
------------ ------------
Total current assets .......................................... 37,668 --
------------ ------------
Other assets:
Notes receivable, noncurrent .................................. 469,923 --
------------ ------------
Total other assets ............................................ 469,923 --
------------ ------------
TOTAL ASSETS ........................................................ $ 507,591 $ --
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY/ (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ............................ 204,572 134,183
Accrued interest ................................................. 19,923 --
Accrued interest - related party ................................. 55,373 --
Convertible debentures ........................................... 716,529 --
Convertible debentures - related party ........................... 483,277 --
Due to related party ............................................. 13,561 3,612
------------ ------------
Total current liabilities ..................................... 1,493,235 137,795
------------ ------------
TOTAL LIABILITIES ................................................... 1,493,235 137,795
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value, 5,000,000 authorized
Series D, $0.001 par value, 949,598 and 0 issued and outstanding 949 --
Series E convertible, $0.001 par value, 766,190 authorized,
0 and 0 issued and outstanding (Note 9) ......................... -- --
Common stock, $0.001 par value, 5,000,000,000 authorized;
4,290,617,436 issued and outstanding as of 9/30/09 and
500,000,000 issued and outstanding as of 12/31/08 ................ 4,290,617 500,000
Preferred units subscribed .......................................... 76,619,000 --
Subscription receivable ............................................. (76,619,000) --
Additional paid-in capital .......................................... 3,641,574 6,574,119
Accumulated deficit ................................................. (8,918,782) (7,211,914)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ............................. (985,644) (137,795)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ................ $ 507,591 $ --
=========== ============
The notes to the condensed financial statements are an
integral part of these statements.
4
ECOSYSTEM CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)
Three Months Ended Nine Months Ended
9/30/09 9/30/08 9/30/09 9/30/08
---------------------------------- ----------------------------------
Revenues ............................................... $ -- $ -- $ -- $ --
Cost of revenues ....................................... -- -- -- --
--------------- --------------- --------------- ----------------
Gross profit ...................................... -- -- -- --
Operating expenses
Stock based compensation .......................... 58,500 24,000 146,500 524,000
Selling expenses .................................. -- -- 3,138 --
Research and development .......................... 387,000 -- 475,551 --
General and administrative expenses ............... 68,597 4,476 176,064 37,236
--------------- --------------- --------------- ----------------
Total operating expenses .......................... 514,097 28,476 801,253 561,236
Operating loss ......................................... (514,097) (28,476) (801,253) (561,236)
Other income (expense)
Interest income ................................... 17,806 -- 44,581 --
Interest income - related party ................... 48,422 -- 98,422 --
Gain on extinguishment of debt .................... -- -- 67,901 --
Amortization of debt discount ..................... (8,333) -- (79,012) --
Costs related to conversion feature ............... 97,177 -- (451,580) --
Costs related to conversion feature - related party (9,406) -- (381,543) --
Interest expense .................................. (20,825) -- (49,434) --
Interest expense - related party .................. (56,682) -- (153,795) --
--------------- --------------- --------------- ----------------
Total other income (expense) .................. 68,159 -- (904,460) --
Loss before provision for income taxes ................. (445,938) (28,476) (1,705,713) (561,236)
Provision for income taxes ........................ -- (3,681) (1,155) (3,681)
Net loss ............................................... $ (445,938) $ (32,157) $ (1,706,868) $ (564,917)
--------------- --------------- --------------- ---------------
Weighted average shares of common stock
Outstanding, basic and diluted ......................... 2,082,962,034 18,543,208 977,680,818 18,543,208
Net loss per share, basic and diluted .................. $ -- $ -- $ -- $ (0.03)
============== =============== =============== ===============
The notes to the condensed financial statements are an
integral part of these statements.
5
ECOSYSTEM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2008
AND NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED)
Preferred Stock
Series D Preferred Stock Common Stock Units Subscription
Shares Amount Shares Amount Subscribed Receivable
------------------------ -------------------------- ------------------------
Balance, December 31, 2007 921,313 $ 921 8,354,328 $ 8,354 -- $ --
Cancellation of old debt -- -- (11,407) (11) -- --
Shares issued for services -- -- 91,211,326 91,211 -- --
Conversion of Series D Preferred (921,313) (921) 400,000,000 400,000 -- --
Forgiveness of related party debt, net -- -- -- -- -- --
Issuance of fractional shares from reverse split -- -- 445,753 446 -- --
Extinguishment of debt/beneficial conversion feature -- -- -- -- -- --
Net (loss) -- -- -- -- -- --
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Balance, December 31, 2008 -- $ -- 500,000,000 $ 500,000 -- $ --
==============================================================================
Shares issued for services -- -- 341,500,000 341,500 -- --
Cancellation of series D Preferred conversions 921,313 921 (400,000,000) (400,000) -- --
Shares issued for accounts payable -- -- 9,000,000 9,000 -- --
Beneficial conversion feature of convertible debt -- -- -- -- -- --
Conversion of debt 61,250 61 345,566,476 345,566 -- --
Extinguishment of debt/beneficial conversion feature -- -- -- -- -- --
Conversion of Series D Preferred (32,966) (33) 3,494,550,960 3,494,511 -- --
Preferred units subscribed -- -- -- -- 76,619,000 (76,619,000)
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------
Balance, September 30, 2009 (Unaudited) 949,598 $ 949 4,290,617,436 $4,290,617 76,619,000 $(76,619,000)
==============================================================================
Additional Accumulated Stockholders'
Paid-In-Capital Deficit Equity
--------------------------------------------------
Balance, December 31, 2007 $ 6,852,007 $ (6,424,596) $ 436,686
------------------------------------------------
Cancellation of debt 11 -- --
Shares issued for services 615,817 -- 707,028
Conversion of series D Preferred (399,079) -- --
Forgiveness of related party debt, net (927,123) -- (927,123)
Issuance of fractional shares from (446) -- --
reverse split
Extinguishment of debt/beneficial conversion feature 432,932 -- 432,932
Net (loss) -- (787,318) (787,318)
------------------------------------------------
Balance, December 31, 2008 $ 6,574,119 $ (7,211,914) $ (137,795)
================================================
Shares issued for services 280,400 -- 621,900
Cancellation of series D Preferred conversion 399,079 -- --
Shares issued for accounts payable 19,300 -- 28,300
Beneficial conversion feature of convertible debt 378,886 -- 378,886
Conversion of debt 49,964 -- 395,591
Extinguishment of debt/beneficial conversion feature (565,658) -- (565,658)
Conversion of Series D Preferred (3,494,518) -- --
Preferred units subscribed -- -- --
Net loss -- (1,706,868) (1,706,868)
------------------------------------------------
Balance, September 30, 2009 (Unaudited) $ 3,641,574 $ (8,918,782) $ (985,644)
================================================
The notes to the condensed financial statements are an
integral part of these statements.
6
ECOSYSTEM CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (UNAUDITED) AND 2008 (UNAUDITED)
Nine Months Ended Nine Months Ended
9/30/09 9/30/08
------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net cash used in operating activities .......................................... $ (67,865) $(108,309)
------------ ----------
Net cash used by operating activities ....................................... (67,865) (108,309)
------------ ----------
CASH FLOW FROM INVESTING ACTIVITIES
Note receivable repayment ...................................................... 50,000 --
------------ ----------
Net cash used in investing activities ....................................... 50,000 --
CASH FLOWS FROM FINANCING ACTIVITIES
Forgiveness of related party debt .............................................. -- (510,694)
Proceeds from issuance of convertible notes .................................... 29,750 --
Repayment on convertible notes ................................................. (19,648) --
Issuance of common stock ....................................................... -- 8,435
Loan proceeds from related parties ............................................. 9,949 610,568
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Net cash provided by financing activities ................................... 20,051 108,309
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Net increase (decrease) in cash ................................................ $ 2,186 $ --
Cash at beginning of period .................................................... -- 91
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Cash at end of period .......................................................... $ 2,186 $ 91
------------ ----------
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Stock issued for conversion of preferred stock, debt and accounts payable .... $ 670,023 $ --
Notes receivable exchanged for convertible debentures ........................ $ 500,000 $ --
Exchange of common shares for Series D preferred stock ....................... $ 400,000 $ --
Effect on additional paid-in capital from extinguishment of related party debt $ 497,755 $ --
The notes to the condensed financial statements are an
integral part of these statements.
7
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 statement of the results of
operations have been included. The results of operations for the nine months
ended September 30, 2009 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/A for
the year ended December 31, 2008.
THE COMPANY
The corn ethanol industry contributed over $65 billion to the Gross Domestic
Product by offsetting 7% of America's fossil fuel needs in 2008. EcoSystem
Corporation ("we," "our," "us," "EcoSystem," or the "Company") intends to prove
that corn has much more to add.
EcoSystem's view is that the established first generation U.S. corn ethanol
fleet is the only practical pathway in North America to cost-effectively
increase the production and use of carbon-neutral biofuels on
globally-meaningful scales. To accomplish this in a competitive and
environmentally superior way, the installed base of first generation corn
ethanol facilities will need to evolve to achieve significantly improved
production efficiencies. EcoSystem's ambition is to make a material contribution
to that evolution, and to become a leading low cost and low carbon producer of
renewable fuels by leveraging its patented and patent-pending portfolio of
Cellulosic Corn(TM) technologies to acquire and upgrade corn ethanol facilities
into increased financial and environmental sustainability while facilitating the
convergence of cellulosic and corn ethanol.
The Company's operating activities during the nine months ended September 30,
2009 included (a) testing with several of the Company's Cellulosic Corn(TM)
technologies, (b) performing due diligence on a number of distressed renewable
fuel production assets, (c) negotiating to acquire qualified renewable fuel
production assets, (d) negotiating to finance, build, own and operate qualified
existing and new renewable fuel production assets, and (e) the completion of the
equity financing the Company estimates will be required to acquire and operate
the Company's planned renewable fuel production facility(ies). In addition, 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 nine months ended
September 30, 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. The Company plans to use the proceeds of its recently completed
preferred equity financing to build a commercial scale prototype of this
technology at a qualified ethanol production facility.
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 $1,706,868 during the nine months ended September 30,
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
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.
8
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share represents 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 antidilutive 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 September
30, 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 nine months ended
September 30, 2009, the Company recorded amortization of the note discount in
the amount of $79,012.
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.
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.
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 921,0000 Series D Shares in return for the issuance of
10,000,000,000 Company common shares (on a pre-split basis) 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. Since the Company
is currently authorized to issue 5,000,000,000 common shares, only 3,000,000,000
of the common shares due to Viridis under the exchange agreement were issued on
August 17, 2009 for surrender of the equivalent value of 19,360 Series D Shares.
9
The common shares issuable to Viridis and Corn 2.0 under the Exchange Agreement
correspond 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. 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 870,930 as of September 30, 2009.
As disclosed in detail in the section titled "Senior Investment" in Note 4,
Stockholders' Equity, below, the common shares and Series D Shares issued to
Viridis and Corn 2.0 are subject to certain ownership restrictions and
performance requirements. Neither Viridis nor the Company's management shall
sell or otherwise transfer shares of Company common stock in an amount that
would cause Viridis and the Company's management to together beneficially own
less than 51% of the outstanding Company common stock until the date that the
full Senior Investment proceeds have been released to the Company. In addition,
all shares of Company stock held by Viridis and the Company's 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 date that the full
Senior Investment proceeds have been released to the Company.
During the nine months ended September 30, 2009, the Company issued 454,550,960
common shares to Minority Interest Fund (II), LLC upon the conversion of 13,580
shares of Series D Shares, and 90,000,000 common shares to Sunny Isle Ventures,
LLC upon the conversion of 26 shares of Series D Shares plus conversion of debt
totaling $51,115.
COMMON STOCK
In addition to the common shares issued in conversion of debt noted above, the
Company issued 295,564,476 shares of common stock upon the conversion of an
aggregate of $293,774 in debt during the nine months ended September 30, 2009
consisting of: 53,620,356 common shares issued to RAKJ Holdings, Inc., upon the
conversion of $50,532 in debt; 131,000,000 common shares issued to JMJ Financial
Corporation upon the conversion of $131,000 in debt; and, 110,944,120 common
shares issued to Mammoth Corporation upon the conversion of $112,242 in debt.
The Company also issued 9,000,000 shares at $0.0043 for a total of $28,300 to
payoff various accounts payable during the nine months ended September 30, 2009.
During the three months ended September 30, 2009, the Company issued 207,500,000
common shares to various consultants in connection with the Company's ongoing
technology development efforts. These shares were issued at $0.0018 for a total
of $373,500 in research and development expenses during the quarter ended
September 30, 2009. The Company also issued 40,000,000 shares for a total of
$72,000 in stock-based compensation
During the three months ended June 30, 2009, the Company issued 10,000,000
common shares to various consultants in connection with the Company's ongoing
technology development efforts. These shares were issued at $0.0018 for a total
of $18,000 in research and development expenses during the quarter ended June
30, 2009. The Company also issued 10,000,000 shares for a total of $18,000 in
stock-based compensation during the quarter ended June 30, 2009.
During the quarter ended March 31, 2009, the Company issued 60,000,000 common
shares to various consultants in connection with the Company's ongoing
technology development efforts. These shares were issued at $0.0016 for a total
of $96,000 in research and development expenses. Of these shares, 4,000,000
shares were cancelled in the quarter ending June 30, 2009 for a total of $6,400.
The Company issued 25,000,000 shares for a total of $62,000 in stock-based
compensation during the quarter ended March 31, 2009. Of these shares, 7,000,000
shares were cancelled in the quarter ending June 30, 2009 for a total of
$11,200.
PREFERRED EQUITY INVESTMENT
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").
10
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 (see "Junior Investment" in
Note 9, Subsequent Events, below). 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 "$89MM Investment" shall refer collectively to the Senior
Investment and the Junior Investment.
Use of Proceeds
Under the terms of the USA, the Company is permitted to use the proceeds from
the $89MM 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 Cellulosic Corn(TM) technologies into the Company's
acquired corn ethanol plants.
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.
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 three months ended September 30, 2009, 100,000,000 shares of the
Company's common stock were issued into escrow in connection with the Company's
closing of the $89MM 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 $89MM Investment are satisfied.
11
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):
Table 1 - Release Schedule
Scheduled Release of
Month Purchase Price Series E Shares 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
12
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
Table 3 - Pro Forma Share Structure
Pro Forma Common Shares Pro Forma Common Shares
at Completion of Reverse Split 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
13
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.
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 GS CleanTech's
Cellulosic Corn(TM) technology platform. 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 feedstock conditioning technologies,
lipid production and refining technologies, and carbon dioxide reformation
technologies. The EALA additionally calls for EcoSystem to sell all fats and/or
oils that it produces but does not directly refine into biofuel to GS CleanTech
at 60% of the price of diesel fuel at the time of shipment. EcoSystem is
entitled to use Cellulosic Corn(TM) technology on a royalty-free basis in its
first 100 million gallons per year of corn ethanol production facility (if
successfully acquired). The EALA is non-exclusive but EcoSystem has been granted
most favored licensee status in the EALA. This status shall be subject to
cancellation in the event that EcoSystem fails to commercialize the licensed
technologies on the following schedule: bench testing shall be completed on or
before May 15, 2010; pilot testing shall be completed on or before May 15, 2011;
a commercial-scale pilot facility shall be built on or before May 15, 2012; and,
commercial sales shall have been initiated on or before May 15, 2013. 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.
During the nine months ended September 30, 2009, the Company paid $50,000 to
GreenShift for management services and incurred $13,561 in accounts payable due
to GreenShift for certain expenses paid on behalf of the Company.
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 April 1, 2009, the Company had convertible debentures payable to Minority
Interest Fund (II), LLC ("MIF") in an aggregate amount of $1,588,195 (the "MIF
Debentures"). The MIF Debentures include an additional debenture issued on April
1, 2009 in the amount of $1,000,000 in return for a promissory note issued by
MIF to the Company in the amount of $1,000,000 (the "MIF Note"). The MIF Note
bears interest at the rate of 20% per year and matures on December 31, 2010.
MIF was initially entitled to convert the accrued interest and principal of
$588,195 of the MIF Debentures into common stock of the Company at a conversion
price of $0.0001 per share, and the remaining $1,000,000 of the MIF Debentures
at a rate equal to 60% of the lowest closing market 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
$588,195 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;
14
therefore the modification was treated as a debt extinguishment. The MIF Note
has been recorded net of the MIF Debenture as of September 30, 2009 given the
presumed right of offset accorded to related parties. The interest receivable
due under the MIF Note has also been presented net of the interest payable due
under the MIF Debenture. The balance of the MIF Note was reduced by $59,539
during the nine months ended September 30, 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 nine months ended September 30, 2009: $50,000 to RAKJ
Holdings, Inc.; $125,000 to JMJ Financial Corporation $50,000 to Sunny Isle
Ventures; and $100,000 to Mammoth Corporation (see below).
The Company determined the value of the MIF Debentures at April 1, 2009 to be
$1,795,664, which represented the face value of the debentures plus the present
value of the conversion feature. For the nine months ended September 30, 2009,
an expense of $18,811 has been recorded as interest expense for the accretion of
the present value of the conversion liability. When taken with the assignments
of principal by MIF during the nine months ended September 30, 2009, the
accretion noted above brought the carrying value of the MIF Debenture to
$1,423,738 at September 30, 2009. The conversion liability shall increase from
its present value of $381,543 at September 30, 2009 to its estimated settlement
amount of $428,571 at December 31, 2010. For the nine months ended September 30,
2009, interest income of $98,422 and interest expense of $153,794 for the MIF
Note and MIF Debentures, respectively, were incurred. The managing member of MIF
is a relative of the Company's chairman.
On April 1, 2009, the Company issued Blackfield, LLC ("Blackfield") a
convertible debenture in the amount of $500,000 (the "Blackfield Debenture") in
return for a promissory note issued by Blackfield to the Company in the amount
of $500,000 (the "Blackfield Note"). During the quarter ended September 30,
2009, the Blackfield Debenture and promissory note were cancelled and all
related interest accruals from the prior quarter were reversed effective July 1,
2009.
The Company issued 131,000,000 shares of common stock to JMJ upon the conversion
of $131,000 in debt acquired from MIF during the nine months ended September 30,
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 September 30, 2009 and accrued interest receivable under the JMJ Note was
$19,923. The principal and accrued interest for the JMJ Note and JMJ Debenture
have been presented as of September 30, 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 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 $793,193 at April 1, 2009 to its estimated settlement
amount of $857,143 at December 31, 2010. As of September 30, 2009, an expense of
$934 has been recorded as interest expense for the accretion of the discount on
the convertible note payable. The carrying value of the $600,000 JMJ Debenture
was $801,129 at September 30, 2009. The Company determined the value of the
accrued interest due under the $600,000 JMJ Debenture at June 30, 2009 to be
$2,348 which represented the accrued interest of $1,775 plus the present value
of the conversion feature for this element of the debt. The accrued interest
conversion feature shall increase from its carrying value of $573 at June 30,
2009 to its settlement amount of $761 at July 9, 2012. The accrued interest
conversion feature was increased during the three months ended September 30,
2009 by $6,427 to increase the settlement amount to $7,188 at July 9, 2012. 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 $11,111 for the nine months ended September 30,
2009 at a rate of $2,778 per month. The principal balance of the JMJ Debentures
when taken with the convertible debt acquired from MIF and the conversions was
$801,129 as of September 30, 2009, interest expenses of $22,480 were accrued and
incurred during the nine months ended September 30, 2009 The Company determined
the value of the portion of the debenture acquired by JMJ from MIF at April 1,
2009 to be $139,700 which represented the face value of the debenture plus the
present value of the conversion feature. As of August 5, 2009 the carrying value
of this debenture was increased by $50,000 due to a subsequent assignment
discussed above, resulting in an additional conversion liability at a present
value of $43,133. The carrying value of this debenture was reduced by $113,009,
the present value of the beneficial conversion feature for the conversions
totaling $131,000 that occurred during the nine months ended September 30, 2009.
15
For the nine months ended September 30, 2009, an expense of $5,176 was recorded
as interest expense for the accretion of the present value of the conversion
liability. Due to the full conversion of this portion of the amount due to JMJ
during the nine months ended September 30, 2009, the carrying value of this
debenture was $0 at September 30, 2009. The Company accounted for the JMJ
Debenture 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.
The Company issued 53,580,366 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 nine months ended September 30, 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. For the nine months ended September 30, 2009, interest
expense of $532 was incurred. The balance due under the RAKJ Note at September
30, 2009 was $0.
On July 7, 2009, MIF assigned $50,000 of the MIF Debentures to Sunny Isle
Ventures ("SIV). The Company issued 47,500,000 shares of common stock to SIV,
upon the conversion of $50,000 in debt as well as $1,115 in accrued interest
during the quarter ended September 30, 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. For the nine months ended September 30, 2009,
interest expense of $1,115 was paid. The balance due under the SIV Note at
September 30, 2009 was $0.
During the three months ended September 30, 2009, MIF assigned $100,000 of the
MIF Debentures to Mammoth Corporation ("Mammoth"). The Company issued
110,944,120 shares of common stock to Mammoth upon the conversion of $100,000 in
debt plus accrued interest of $649 during the quarter ended September 30, 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. For the nine months ended September 30, 2009, interest
expense of $649 was paid. The balance due under the Mammoth Debenture at
September 30, 2009 was $0.
NOTE 7 STOCK BASED COMPENSATION
During the three months ended September 30, 2009, the Company issued 50,000,000
shares for a total of $90,000 in stock based compensation. The Company also
issued 10,000,000 shares for a total of $18,000 in stock based compensation
during the quarter ended June 30, 2009, and 41,000,000 shares for a total of
$88,000 in stock based compensation during the quarter ended March 31, 2009
(7,000,000 of which shares were cancelled in the quarter ending June 30, 2009
for a total of $11,200).
NOTE 8 SUBSEQUENT EVENTS
COMMON STOCK ISSUANCES
Between October 1, 2009 and November 23, 2009, the Company issued a total of
2,414,643,653 common shares upon the conversion of $3,370,875 in debt.
SERIES E PREFERRED
766,190 Series E preferred shares were authorized as of September 30, 2009. The
Company increased the authorized Series E shares during the fourth quarter 2009.
REVERSE SPLIT
The Company completed the necessary filings for its planned 1-for-1,000 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.
JUNIOR INVESTMENT
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
16
shall be collectively referred to herein as the "Junior Units") for $13,178,000
(the "Junior Purchase Price"), subject to certain conditions discussed below.
Additional disclosure pertaining to the Junior Investment is provided above in
the section titled "Preferred Equity Financing" in Note 4, Shareholder's Equity.
17
ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The corn ethanol industry contributed over $65 billion to the Gross Domestic
Product by offsetting 7% of America's fossil fuel needs in 2008. EcoSystem
Corporation ("we," "our," "us," "EcoSystem," or the "Company") intends to prove
that corn has much more to add.
EcoSystem's view is that the established first generation U.S. corn ethanol
fleet is the only practical pathway in North America to cost-effectively
increase the production and use of carbon-neutral biofuels on
globally-meaningful scales. To accomplish this in a competitive and
environmentally superior way, the installed base of first generation corn
ethanol facilities will need to evolve to achieve significantly improved
production efficiencies.
EcoSystem's ambition is to make a material contribution to that evolution, and
to become a leading low cost and low carbon producer of renewable fuels by
leveraging its patented and patent-pending portfolio of Cellulosic Corn(TM)
technologies to acquire and upgrade corn ethanol facilities into increased
financial and environmental sustainability while facilitating the convergence of
cellulosic and corn ethanol.
Our operating activities during the nine months ended September 30, 2009
included
(1) acquiring the rights to our portfolio of Cellulosic Corn(TM) technologies;
(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 and new
renewable fuel production assets; and
(6) the completion of the equity financing the Company estimates will be
required to acquire and operate our planned renewable fuel production
facility(ies) and to commercialize our portfolio of Cellulosic Corn(TM)
technologies.
Technology Development Activities
On May 15, 2009, EcoSystem and 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 conditioning technologies, lipid production and refining technologies,
and carbon dioxide recycling technologies, and collectively form EcoSystem's
Cellulosic Corn(TM) technology platform.
During the nine months ended September 30, 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
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.
In addition, 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. The Company plans to use the proceeds of its recently completed
preferred equity financing to build a commercial scale prototype of its
feedstock conditioning technologies at a qualified ethanol production facility.
The Company plans to continue development of its feedstock conditioning
technologies and to commence testing in the immediate term with its lipid
production and carbon dioxide recycling technologies.
18
Facility Development Activities
The essential element of our immediate term plan is to acquire at least one
renewable fuel production facility. While we are currently in discussions with
several candidate facilities and are hopeful that these discussions will
culminate in at least one such acquisition in the near term, we do not plan to
acquire any distressed production assets that cannot be acquired and operated in
a manner that is both sustainable and more favorable than conventional renewable
fuel production assets.
The primary purpose of our recently completed preferred equity financing is to
subsidize value creation by facilitating the acquisition and/or construction and
sustainable operation of qualified renewable fuel production assets. We intend
to insulate our any production facilities that we may successfully acquire
and/or build from conventional commodity risks by using innovative equity
financing and our technologies to increase fuel and co-product yields and to
decrease production costs to facilitate generation of sufficient cash flows to
withstand market pressures and other risks that competing renewable fuel
producers cannot absorb.
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 September 30, 2009 Compared to Three Months Ended September
30, 2008
Revenues
There were no revenues for the three months ended September 30, 2009 or for the
three months ended September 30, 2008.
Cost of Revenues
There was no cost of revenues for the three months ended September 30, 2009 or
for the three months ended September 30, 2008.
Operating Expenses
Operating expenses were $514,097 for the three months ended September 30, 2009
and $28,476 for the three months ended September 30, 2008. Included in the three
months ended September 30, 2009 was $58,500 in stock-based compensation as
compared to $24,000 for the three months ended September 30, 2008 as well as
$387,000 in research and development costs associated with stock issuances to
various consultants issued in connection with the Company's Cellulosic Corn(TM)
technologies.
Other Income (Expense)
Interest expenses and financing costs for the three months ended September 30,
2009 were $1,931 and $0 for the three months ended September 30, 2008. Included
in the three months ended September 30, 2009 was $77,507 of interest expense,
consisting of $20,825 in interest expense, $56,682 in interest expense due to a
related party, as well as $(87,771) in non-cash expenses associated with the
conversion features embedded in the convertible debentures issued by the Company
during the three months ended September 30, 2009. Amortization of note discount
was $8,333 and $0, respectively for the three months ended September 30, 2009
and 2008.
Net Loss
Our net loss for the three months ending September 30, 2009 and 2008 were
$445,938 and $32,157 respectively.
19
Nine months Ended September 30, 2009 Compared to Nine months Ended September 30,
2008
Revenues
There were no revenues for the nine months ended September 30, 2009 or for the
nine months ended September 30, 2008.
Cost of Revenues
There was no cost of revenues for the nine months ended September 30, 2009 or
for the nine months ended September 30, 2008.
Operating Expenses
Operating expenses were $801,253 for the nine months ended September 30, 2009
and $561,236 for the nine months ended September 30, 2008. Included in the nine
months ended September 30, 2009 was $146,500 in stock-based compensation as
compared to $524,000 for the nine months ended September 30, 2008 as well as
$475,551 in research and development costs associated with stock issuances to
various consultants issued in connection with the Company's Cellulosic Corn(TM)
technologies.
Other Income (Expense)
Other income (expense) for the nine months ended September 30, 2009 was
$1,115,364 and $0 for the nine months ended September 30, 2008. Included in the
three months ended September 30, 2009 was $203,228 of interest expense,
consisting of $49,434 in interest expense, $153,795 in interest expense due to a
related party, as well as $833,123 in non-cash expenses associated with the
conversion features embedded in the convertible debentures issued by the Company
during the three months ended September 30, 2009. Amortization of note discount
was $79,012 and $0, respectively for the nine months ended September 30, 2009
and 2008.
Net Loss
Our net loss for the nine months ending September 30, 2009 and 2008 were
$1,706,868 and $564,917 respectively.
RESULTS OF OPERATIONS
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 patented and patent-pending Cellulosic
Corn(TM) technologies, and the acquisition and construction capital for our
planned 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 nine months ended September 30, 2009 to cover its capital needs.
Importantly, the Company recently closed on an equity investment of $76 million
(see Note 4 to Condensed Financial Statements, Shareholders' Equity, above), and
anticipates that this equity financing will be sufficient to meet the Company's
planned development activities for the foreseeable future. A summary of these
planned development activities is provided above in the overview section of this
discussion and analysis.
Cash Flows
For the nine months ending September 30, 2009, net cash provided by financing
was $20,051. The Company had a working capital deficit of $1,455,567 at
September 30, 2009, which includes $582,672 in liabilities associated with the
conversion features embedded in the convertible debentures issued by the
Company, as well as $600,000 in convertible debt due to third parties and
$1,042,195 in convertible debt due to related parties.
Off Balance Sheet Arrangements
None.
20
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. The
Company's chief executive officer and chief financial officer determined that,
as of the end of the period covered by this report, these controls and
procedures are not adequate and effective in alerting them in a timely manner to
material information relating to the Company required to be included in the
Company's periodic SEC filings.
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.
21
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None.
ITEM 1A RISK FACTORS
Not applicable
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 OTHER INFORMATION
None.
ITEM 6 EXHIBITS
Index to Exhibits
Exhibit Number Description
--------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer and 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.
22
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
/S/ KEVIN KREISLER
--------------------------------------
By: KEVIN KREISLER
Chief Executive Officer
Date: November 23, 2009
/S/ JACQUELINE FLYNN
--------------------------------------
JACQUELINE FLYNN
Chief Financial Officer
Date: November 23 , 2009
23