-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fz+l+NIjtbTFxNMPr2vm6dJ9whfa6JsX2X8xjT1bitLnSgQlqa3e1AMnq5ug9j/R XKGJScQGlXoOt7KfJ2MFtg== 0001269127-08-000110.txt : 20080415 0001269127-08-000110.hdr.sgml : 20080415 20080415155256 ACCESSION NUMBER: 0001269127-08-000110 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080415 DATE AS OF CHANGE: 20080415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECOSYSTEM CORP CENTRAL INDEX KEY: 0001127242 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 203148296 FISCAL YEAR END: 1208 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-32143 FILM NUMBER: 08757185 BUSINESS ADDRESS: STREET 1: ONE PENN PLAZA STREET 2: SUITE 1612 CITY: NEW YORK STATE: NY ZIP: 10119 BUSINESS PHONE: 212-994-5374 MAIL ADDRESS: STREET 1: ONE PENN PLAZA STREET 2: SUITE 1612 CITY: NEW YORK STATE: NY ZIP: 10119 FORMER COMPANY: FORMER CONFORMED NAME: GS Energy CORP DATE OF NAME CHANGE: 20060719 FORMER COMPANY: FORMER CONFORMED NAME: INSEQ CORP DATE OF NAME CHANGE: 20050715 FORMER COMPANY: FORMER CONFORMED NAME: INCODE TECHNOLOGIES CORP. DATE OF NAME CHANGE: 20050209 10KSB 1 eysm10k07.txt ECOSYSTEM 10KSB 2007 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-KSB ------------------------- ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 COMMISSION FILE NO.: 0-32143 ECOSYSTEM CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 20-3148296 - -------------------------------------------------------------------------------- (State of other jurisdiction of (IRS Employer incorporation or organization Identification No.) One Penn Plaza, Suite 1612, New York, NY 10119 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 994-5374 - -------------------------------------------------------------------------------- (Registrant's telephone number including area code) Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act__. Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value. 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 __. Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form. (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. State issuer's revenues for its most recent fiscal year: $0. The number of outstanding shares of common stock and value of the voting stock held by non-affiliates of the Registrant as of April 14, 2008 were 8,354,328 and $291,679, respectively. ECOSYSTEM CORPORATION ANNUAL REPORT ON FORM 10KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 TABLE OF CONTENTS
Page No Part I Item 1 Description of Business .........................................................................4 Item 1A Risk Factors.....................................................................................5 Item 2 Description of Properties........................................................................7 Item 3 Legal Proceedings................................................................................7 Item 4 Submission of Matters to a Vote of Security Holders .............................................7 Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ...........................8 Item 6 Management's Discussion and Analysis.............................................................9 Item 7 Financial Statements ...........................................................................11 Item 8 Changes and Disagreements with Accountants on Accounting and Financial Disclosure ..............23 Item 8A Controls and Procedures ........................................................................23 Item 8B Other Information...............................................................................25 Part III Item 9 Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act ........................................................25 Item 10 Executive Compensation ..........................................................................25 Item 11 Security Ownership of Certain Beneficial Owners and Related Stockholder Matters .................26 Item 12 Certain Relationships and Related Transactions and Director Independence ........................26 Part IV Item 13 Exhibits .......................................................................................27 Item 14 Principal Accountant Fees and Services .........................................................28 Signatures
2 PART I Basis of Presentation In this Annual Report on Form 10-KSB, the terms "we," "our," "us," "EcoSystem," or the "Company" refer to EcoSystem Corporation (f/k/a GS Energy Corporation). Forward Looking Statements We make certain forward-looking statements in this Annual Report on Form 10-KSB and in the documents that are incorporated herein by reference. These forward-looking statements relate to our outlook or expectations for earnings, revenues, expenses, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business, results of operations or financial condition. Specifically, forward-looking statements may include statements preceded by, followed by or that include the words "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target" or similar expressions. These statements reflect our management's judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause our actual results to differ include: >> the volatility and uncertainty of commodity prices; >> the costs and business risks associated with developing new products and entering new markets; >> our ability to locate and integrate future acquisitions; >> the impact of new, emerging and competing technologies on our business; >> the possibility of one or more of the markets in which we compete being impacted by political, legal and regulatory changes or other external factors over which they have no control; >> changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices; >> our reliance on key management personnel; >> limitations and restrictions contained in the instruments and agreements governing our indebtedness; >> our ability to raise additional capital and secure additional financing; >> our ability to implement additional financial and management controls, reporting systems and procedures and comply with Section 404 of the Sarbanes-Oxley Act, as amended; and >> other risks referenced from time to time in our filings with the SEC and those factors listed in this Form 10KSB under Item 1A, Risks Factors, beginning on page 5. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Form 10-KSB, or in the case of a document incorporated by reference, as of the date of that document. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this Form 10-KSB or to reflect the occurrence of unanticipated events. 3 ITEM 1 DESCRIPTION OF BUSINESS OVERVIEW We focus on the development of ecotech projects involving the balanced application of chemical, biological and mechanical processes to produce value-added resources in unconventional but sustainable ways. During our fiscal year ended December 31, 2007, our focus was limited to specialty metal manufacturing services including machine design, machine building, control system electronics and programming, and maintenance support services for third-party clients in the biofuels, automotive, electronics, lighting, plastics, rubber and food products industries. In December 2007, we liquidated our manufacturing operation and executed a license agreement for the exclusive use of GreenShift Corporation's patented and patent-pending bioreactor technology in applications involving certain commercial products not including fuels and energy. We are currently working with GreenShift in testing its recently completed bioreactor pilot facility in Ohio. In addition, we are actively exploring acquisition opportunities involving distressed or other assets that are compatible with our bioreactor technology and business model. BACKGROUND Every year, 3,000 gigatons of carbon dioxide are released by natural processes into the atmosphere. Humans are responsible for an additional 25 gigatons. Although this seems comparatively low, it nonetheless puts the sensitive carbon dioxide balance out of sync and it is precisely this balance that is so crucial for the earth's climate. Alternative sources of energy and energy efficiencies alone will not be sufficient to reduce our carbon dioxide emissions by at least one third over the next two decades and keep global warming in check. Given that fossil- and biomass-derived fuels can be expected to be our main sources of energy for many decades to come, we need innovative technologies to minimize the carbon dioxide emitted when these fuels are burnt or to capture the carbon dioxide and store it safely. EcoSystem's view is that storage of carbon is not the answer. Carbon is a valuable natural resource that is prevalent in nearly every corner of our natural ecosystem. We believe that the answer to the global challenges presented by carbon is reutilization at the base of our food and fuel chains. EXCLUSIVE LICENSE We hold the exclusive rights to GreenShift's carbon dioxide bioreactor technology for applications involving certain commercial products not including fuels and energy. This patented and patent-pending process uses algae to consume carbon dioxide emissions. The algae use the available carbon dioxide in the exhaust and water to grow new algae, and give off pure oxygen and water vapor in the process. The organisms also absorb nitrogen oxide and sulfur dioxide. Once the algae grow to maturity, they are harvested for conversion into ethanol and biodiesel fuels. This technology was originally developed at Ohio University's Ohio Coal Research Center with funding from the U.S. Department of Energy. GreenShift holds the worldwide exclusive rights to Ohio University's technology and has subsequently filed for patent protection on significant targeted improvements to the technology. GreenShift has constructed a pilot plant that will be used for extended testing. This pilot plant will act as a demonstration platform to quantify existing benchtop testing results and to refine design parameters for future evolutions of the technology. Under the terms of EcoSystem's license with GreenShift, EcoSystem has the right to use GreenShift's pilot facility to develop test data for EcoSystem's targeted food products applications. INTELLECTUAL PROPERTIES EcoSystem, EcoSystem Corporation, and the "EcoSystem Logo" are the registered trademarks of EcoSystem Corporation. 4 ITEM 1A BUSINESS RISK FACTORS There are many important factors that have affected, and in the future could affect, EcoSystem Corporation's business, including but not limited to the factors discussed below, which should be reviewed carefully together with other information contained in this report. Some of the factors are beyond our control and future trends are difficult to predict. There is substantial doubt concerning our ability to continue as a going concern. EcoSystem incurred a loss from continuing operations of $367,474 during the twelve months ended December 31, 2007, and we had approximately $91 in cash at December 31, 2007. These matters raise substantial doubt about our ability to continue as a going concern. Management's plans include raising additional proceeds from debt and equity transactions and completing strategic acquisitions. We are implementing new business plans which make the results of our business uncertain. Our limited operating history makes it difficult for potential investors to evaluate our business. Therefore, our proposed operations are subject to all of the risks inherent in the initial expenses, challenges, complications and delays frequently encountered in connection with the formation of any new business, as well as those risks that are specific to the biodiesel, ethanol and culinary oils industry in general. Investors should evaluate an investment in our company in light of the problems and uncertainties frequently encountered by companies attempting to develop markets for new products, services and technologies. Despite best efforts, we may never overcome these obstacles to achieve financial success. Our business is speculative and dependent upon the implementation of our business plan, as well as our ability to enter into agreements with third parties for necessary financing, the provision of necessary feedstock sources, engineering, procurement and construction services and the sale and distribution of our biodiesel fuel on terms that will be commercially viable for us. There can be no assurance that our efforts will be successful or result in revenue or profit. There is no assurance that we will earn significant revenues or that our investors will not lose their entire investment. The fiscal efficiencies of highly capitalized competitors in biotechnology could defeat our efforts to capture a viable market share. The business of developing new biotechnologies is a capital-intense business, requiring substantial capital resources. The costs that we may incur in obtaining capital are substantially greater per dollar than the cost incurred by large scale enterprises in the industry. This situation could cause us to be unable to compete effectively. The exercise of our outstanding warrants and options and EcoSystem Corporation's various anti-dilution and price-protection agreements could cause the market price of our common stock to fall, and may have dilutive and other effects on our existing stockholders. The exercise of our outstanding warrants and options could result in the issuance of up to 275,000 shares of common stock, assuming all outstanding warrants and options are currently exercisable. Such issuances would reduce the percentage of ownership of our existing common stockholders and could, among other things, depress the price of our common stock. This result could detrimentally affect our ability to raise additional equity capital. In addition, the sale of these additional shares of common stock may cause the market price of our stock to decrease. We lack capital to fund our operations. During the twelve months ended December 31, 2007 our operations provided by $160,231 in cash. In addition, during those twelve months we were required to make payments on some of our outstanding debts. Loans from some of our shareholders funded both the cash shortfall from operations and our debt service. Those individuals may not be able to continue to fund our operations or our debt service. Our operations will suffer if we are unable to manage our rapid growth. We are currently experiencing a period of rapid growth through internal expansion and strategic acquisitions. This growth has placed, and could continue to place, a significant strain on our management, personnel and other resources. Our ability to grow will require us to effectively manage our collaborative arrangements and to continue to improve our operational, management, and financial systems and controls, and to successfully train, motivate and manage our employees. If we are unable to effectively manage our growth, we may not realize the expected benefits of such growth, and such failure could result in lost sales opportunities, lost business, difficulties operating our assets and could therefore significantly impair our financial condition. 5 Our failure to attract qualified engineers and management personnel could hinder our success. Our ability to attract and retain qualified engineers and other professional personnel when we need them will be a major factor in determining our future success. There is a very competitive market for individuals with advanced engineering training, and we are not assured of being able to retain the personnel we will need. Key personnel are critical to our business and our future success depends on our ability to retain them. Our success depends on the contributions of our key management, and engineering personnel. The loss of these officers could result in lost sales opportunities, lost business, difficulties operating our assets, difficulties raising additional funds and could therefore significantly impair our financial condition. Our future success depends on our ability to retain and expand our staff of qualified personnel, including environmental technicians, sales personnel and engineers. Without qualified personnel, we may incur delays in rendering our services or be unable to render certain services. Viridis Capital can exert control over us and may not make decisions that further the best interests of all stockholders. Viridis Capital, LLC controls 100% of our outstanding Series C preferred stock. The preferred shares are convertible into 73.68% of our Common Stock. As a result, Viridis exerts a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of us and might affect the market price of our common stock, even when a change in control may be in the best interest of all stockholders. Furthermore, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider. EcoSystem Corporation is not likely to hold annual shareholder meetings in the next few years. Delaware corporation law provides that members of the board of directors retain authority to act until they are removed or replaced at a meeting of the shareholders. A shareholder may petition the Delaware Court of Chancery to direct that a shareholders meeting be held. But absent such a legal action, the board has no obligation to call a shareholders' meeting. Unless a shareholders' meeting is held, the existing directors elect directors to fill any vacancy that occurs on the board of directors. The shareholders, therefore, have no control over the constitution of the board of directors, unless a shareholders' meeting is held. Management does not expect to hold annual meetings of shareholders in the next few years, due to the expense involved. Kevin Kreisler, who is currently the sole director of EcoSystem Corporation, was appointed to that position by the previous directors. If other directors are added to the Board in the future, it is likely that Mr. Kreisler will appoint them. As a result, the shareholders of EcoSystem Corporation will have no effective means of exercising control over the operations of EcoSystem Corporation. Investing in our stock is highly speculative and you could lose some or all of your investment. The value of our common stock may decline and may be affected by numerous market conditions, which could result in the loss of some or the entire amount invested in our stock. The securities markets frequently experience extreme price and volume fluctuations that affect market prices for securities of companies generally and very small capitalization companies such as us in particular. The volatility of the market for EcoSystem Corporation common stock may prevent a shareholder from obtaining a fair price for his shares. The common stock of EcoSystem Corporation is quoted on the OTC Bulletin Board. It is impossible to say that the market price on any given day reflects the fair value of EcoSystem Corporation, since the price sometimes moves up or down by 50% or more in a week's time. A shareholder in EcoSystem Corporation who wants to sell his shares, therefore, runs the risk that at the time he wants to sell, the market price may be much less than the price he would consider to be fair. 6 Our common stock qualifies as a "penny stock" under SEC rules which may make it more difficult for our stockholders to resell their shares of our common stock. Our common stock trades on the OTC Bulletin Board. As a result, the holders of our common stock may find it more difficult to obtain accurate quotations concerning the market value of the stock. Stockholders also may experience greater difficulties in attempting to sell the stock than if it were listed on a stock exchange or quoted on the NASDAQ Global Market or the NASDAQ Capital Market. Because our common stock does not trade on a stock exchange or on the NASDAQ Global Market or the NASDAQ Capital Market, and the market price of the common stock is less than $5.00 per share, the common stock qualifies as a "penny stock." SEC Rule 15g-9 under the Securities Exchange Act of 1934 imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an "established customer" or an "accredited investor." This includes the requirement that a broker-dealer must make a determination on the appropriateness of investments in penny stocks for the customer and must make special disclosures to the customer concerning the risks of penny stocks. Application of the penny stock rules to our common stock affects the market liquidity of the shares, which in turn may affect the ability of holders of our common stock to resell the stock. Only a small portion of the investment community will purchase "penny stocks" such as our common stock. EcoSystem Corporation common stock is defined by the SEC as a "penny stock" because it trades at a price less than $5.00 per share. EcoSystem Corporation common stock also meets most common definitions of a "penny stock," since it trades for less than $1.00 per share. Many brokerage firms will discourage their customers from purchasing penny stocks, and even more brokerage firms will not recommend a penny stock to their customers. Most institutional investors will not invest in penny stocks. In addition, many individual investors will not consider a purchase of a penny stock due, among other things, to the negative reputation that attends the penny stock market. As a result of this widespread disdain for penny stocks, there will be a limited market for EcoSystem Corporation common stock as long as it remains a "penny stock." This situation may limit the liquidity of your shares. ITEM 2 DESCRIPTION OF PROPERTIES EcoSystem Corporation currently maintains office space at One Penn Plaza, Suite 1612, New York, NY. The lease for this space expires in May of 2011. We paid no rent during 2007 for these offices. During 2008 EcoSystem does not expect to pay rent for these offices. We believe these offices will be sufficient for our needs for the foreseeable future. ITEM 3 LEGAL PROCEEDINGS None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS EcoSystem's Common Stock trades on the OTC Bulletin Board under the symbol "ESYM." The following table sets forth, for the periods indicated, the range of high and low closing bid prices for EcoSystem Common Stock as reported by the National Association of Securities Dealers composite. The reported bid quotations reflect inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
Period High Low - ---------------------------------------------------------------------------------------- 2007 First Quarter 1.00 0.44 2007 Second Quarter 0.70 0.25 2007 Third Quarter 0.55 0.20 2007 Fourth Quarter 0.35 0.05 2006 First Quarter 0.95 0.55 2006 Second Quarter 4.50 0.60 2006 Third Quarter 1.80 1.05 2006 Fourth Quarter 1.15 0.45 Title of Class Approximate Number of Holders of Record as of April 11, 2008 Common Stock, 0.001 par 268
The number of holders does not give effect to beneficial ownership of shares held in the street name by stock brokerage houses or clearing agents. REVERSE SPLIT On February 11, 2008, the Company completed a 1 for 500 reverse stock split. All stock prices, share amounts, per share information, stock options and stock warrants in this Report reflect the reverse stock split. DIVIDENDS We have no present intention of paying dividends in the foreseeable future. Our policy for the time being is to retain earnings and utilize the funds for operations and growth. The Board of Directors based on our earnings, financial condition, capital requirements and other existing conditions will determine future dividend policies. SALE OF UNREGISTERED SECURITIES The Company did not sell any unregistered securities during the 4th quarter of 2007. REPURCHASE OF EQUITY SECURITIES The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the 4th quarter of 2007. 8 ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OVERVIEW We focus on the development of ecotech projects involving the balanced application of chemical, biological and mechanical processes to produce value-added resources in unconventional but sustainable ways. During our fiscal year ended December 31, 2007, our focus was limited to specialty metal manufacturing services including machine design, machine building, control system electronics and programming, and maintenance support services for third-party clients in the biofuels, automotive, electronics, lighting, plastics, rubber and food products industries. In December 2007, we liquidated our manufacturing operation and executed a license agreement for the exclusive use of GreenShift Corporation's patented and patent-pending bioreactor technology in applications involving certain commercial products not including fuels and energy. We are currently working with GreenShift in testing its recently completed bioreactor pilot facility in Ohio. In addition, we are actively exploring acquisition opportunities involving distressed or other assets that are compatible with our bioreactor technology and business model. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The financial statements included herein have been prepared by the Company, in accordance with Generally Accepted Accounting Principles. This requires the Company's management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. These estimates and assumptions will also affect the reported amounts of certain revenues and expenses during the reporting period. In the opinion of management, all adjustments which, except as described elsewhere herein, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Actual results could differ materially based on any changes in the estimates and assumptions that the Company uses in the preparation of its financial statements and any changes in the Company's future operational plans. RESULTS OF OPERATIONS Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 Revenues There were no revenues from continuing operations for the year ended December 31, 2007, and no revenues for the twelve months ended December 31, 2006. For the years ending December 31, 2007 and 2006, the revenues from discontinued operations were $5,695,482 and $5,913,799, respectively. All revenues realized in discontinued operations during the year ended December 31, 2007 were due to the operating activities of our former subsidiary, GS Design, Inc. ("GSD"). GSD has traditionally engaged in the engineering and fabrication of manufacturing equipment for large domestic and international manufacturers, and revenues for the year ended December 31, 2007 related primarily to orders from that customer base. Cost of Revenues There were no cost of revenues from continuing operations for the year ended December 31, 2007 or for the year ended December 31, 2007. Cost of revenues reflected in discontinued operations were incurred by GSD. The cost of revenues attributable to discontinued operations for the years ending December 31, 2007 and 2006 were $4,385,195 and $4,506,239, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses were $341,809 for the year ended December 31, 2007 and $1,325,049 for the year ending December 31, 2006. Selling, general and administrative expenses include stock based compensation of $229,231 and $1,079,013 for 2007 and 2006, respectively. Selling, general and administrative expenses are expected to remain high relative to revenues until such time that the Company can achieve enough revenue growth and obtain the economies of scale necessary to support these expenses. Selling, general and administrative expenses attributable to discontinued operations for the years ending December 31, 2007 and 2006 were $914,237 and $488,430, respectively. Interest Expense and Financing Costs Interest expenses and financing costs for the year ended December 31, 2007 were $25,665 and $16,930 for the year ended December 31, 2006. Net Income and Net Loss Our net loss from continuing operations for the year ended December 31, 2007 was $367,474 and $1,858,913 for the year ended December 31, 2006. The net loss incurred was due to the expenses and other factors described above. Our net income attributable to discontinued operations for the years ending December 31, 2007 and 2006 were $293,330 and $835,763, respectively. Liquidity and Capital Resources Our primary sources of liquidity are cash provided by investing and financing activities. For the twelve months ended December 31, 2007, net cash provided by operating activities was $160,231. The Company had $571,156 in liabilities at the end of the twelve months ended December 31, 2007, and may need to obtain additional financing to satisfy these obligations. The Company's capital requirements consist of general working capital needs, scheduled principal and interest payment on debt, obligations and capital leases and planned capital expenditures. The Company's capital resources consist primarily of cash generated from the issuance of debt and common stock. The Company's capital resources can be expected to be impacted by changes in accounts receivable as a result of revenue fluctuations, economic trends, and collection activities. At December 31, 2007 the company had $91 in cash. The Company plans to finance its planned development activities through the issuance of equity and debt. Cash Flows For the twelve months ending December 31, 2007, we used net cash from financing of $160,140. The Company had a working capital of $436,686 at December 31, 2007. In reviewing our financial statements as of December 31, 2007, our auditor concluded that there was substantial doubt as to our ability to continue as a going concern. Off Balance Sheet Arrangements None 10 ITEM 7 FINANCIAL STATEMENTS
Page No FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm...................................................12 Balance Sheet ............................................................................................13 Statements of Operations .................................................................................14 Statements of Stockholders' Equity........................................................................15 Statements of Cash Flows..................................................................................17 Notes to Financial Statements ............................................................................18
11 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders EcoSystem Corporation and Subsidiaries: We have audited the accompanying balance sheet of EcoSystem Corporation and Subsidiaries as of December 31, 2007 and the related statements of operations, stockholders' equity (impairment) and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the auditing standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of EcoSystem Corporation and Subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company has suffered losses from operations and has accumulated deficit and negative cash flow from operations as of December 31, 2007. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Rosenberg Rich Baker Berman & Company Bridgewater, New Jersey April 14, 2008 12
ECOSYSTEM CORPORATION BALANCE SHEET DECEMBER 31, 2007 ASSETS Current assets: Cash ......................................................... $ 91 Due from related parties ..................................... 1,007,751 ----------- Total current assets ............................................ 1,007,842 ----------- TOTAL ASSETS .................................................... $ 1,007,842 =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Due to related party ......................................... 400,863 Accounts payable and accrued expenses ........................ 170,293 ----------- Total current liabilities .................................... 571,156 ----------- TOTAL LIABILITIES ............................................... 571,156 STOCKHOLDERS' EQUITY Preferred stock, $0.001 par value: Series C: 400,000 authorized, 0 issued and outstanding ....... -- Series D: 1,000,000 authorized, 921,000 issued and outstanding 921 Common stock, $0.001 par value, 5,000,000,000 authorized; 8,354,328 issued and outstanding .............................. 8,354 Additional paid-in capital ...................................... 6,852,007 Accumulated deficit ............................................. (6,424,596) ----------- TOTAL STOCKHOLDERS' EQUITY ...................................... 436,686 ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ...................... $ 1,007,842 =========== The notes to the condensed financial statements are an integral part of these statements.
13 ECOSYSTEM CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
Twelve Months Twelve Months Ended Ended 12/31/07 12/31/06 ---------------------------- Revenues ............................................. $ -- $ -- Cost of revenues ..................................... -- -- ----------- ----------- Gross profit .................................... -- -- Operating expenses Selling, general and administrative expenses .... 341,809 1,325,049 ----------- ----------- Total operating expenses ........................ 341,809 1,325,049 ----------- ----------- Operating loss ....................................... (341,809) (1,325,049) Other expenses and financing costs Interest expense and financing costs ............ 25,665 16,930 Amortization of website cost .................... -- 52,801 Gain on disposal of convertible debenture ....... -- (46,573) Impairment of website cost ...................... -- 190,103 Amortization of beneficial conversion feature ... -- 245,111 Other Income .................................... -- 75,492 ----------- ----------- Other expense ................................... 25,665 533,864 ----------- ----------- Loss before provision for income taxes ............... (367,474) (1,858,913) Provision for income taxes ...................... -- -- ----------- ----------- Net loss from continuing operations .................. $ (367,474) $(1,858,913) ----------- ----------- Net income from discontinued operations .............. $ 293,330 $ 835,763 ----------- ----------- Net Income ........................................... $ (74,144) $(1,023,150) =========== =========== Net loss per common share from continuing operations . $ (.07) $ (.38) =========== =========== Net loss per common share from discontinued operations $ .06 $ .17 =========== =========== Weighted average of shares of common stock Outstanding, basic and diluted ....................... 5,260,701 4,913,564 =========== ===========
The notes to the condensed financial statements are an integral part of these statements. 14 ECOSYSTEM CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
Series A Series B Series C Series D Preferred Stock Preferred Stock Preferred Stock Preferred Stock ----------- ----------- ----------- ---------- ------------ ---------- ---------- ----------- Shares Amount Shares Amount Shares Amount Shares Amount --------------------------------------------------------------------------------------------- Balance at 12/31/05 1,000,000 $1,000 251,507 $252 400,000 $400 -- -- =========== =========== =========== ========== ============ ========== ========== =========== Stock issued for services -- -- -- -- -- -- -- -- Exercise of stock options -- -- -- -- -- -- -- -- Conversion of debentures to common stock -- -- -- -- -- -- -- -- Record GreenShift Preferred conversion (375,000) (375) -- -- -- -- -- -- Book remaining convertible debt to APIC -- -- -- -- -- -- -- -- Stock Option Compensation -- -- -- -- -- -- -- -- To record issuance Series C preferred to GreenShift for assuming convertible debentures -- -- (251,507) (252) 1,150,369 1,150 -- -- Record conversion preferred series A and common stock to series D (625,000) (625) -- -- -- -- 1,000,000 1,000 To record reduction of shares issued under contract & equity investment -- -- -- -- -- -- -- -- Record subscription receipts -- -- -- -- -- -- -- -- Preferred C shares in exchange for equity investment -- -- -- -- 450,000 450 -- -- Record transfer to GreenShift in exchange for redemption of preferred stock & settlement of debt -- -- -- -- (400,000) (400) -- -- Record 4th quarter stock issuance to officers -- -- -- -- -- -- -- -- Record adjustment of stock certificates from prior transfer agent -- -- -- -- -- -- -- -- Net loss -- -- -- -- -- -- -- -- ----------- ----------- ----------- ---------- ------------ ---------- ---------- ----------- Balance at 12/31/06 -- $-- -- $-- 1,600,369 $1,600 1,000,000 1,000 =========== =========== =========== ========== ============ ========== ========== =========== Cancellation of shares -- -- -- -- -- -- -- -- Conversion of series C to -- -- -- -- (1,600,369) (1,600) -- -- Common Cashless exercise of warrants -- -- -- -- -- -- -- -- Shares issued for services -- -- -- -- -- -- -- -- Conversion of series D Preferred -- -- -- -- -- -- (78,687) (79) Write off debt/receivables Transfer of subsidiaries ----------- ----------- ----------- ---------- ------------ ---------- ---------- ----------- Balance at 12/31/07 -- $-- -- $-- -- -- 921,313 $921 =========== =========== =========== ========== ============ ========== ========== ===========
15 ECOSYSTEM CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
Stock Total Subscription Additional Stockholders' on Paid-in Accumulated Equity Common Stock Receivables Capital Deficit (Deficit) ----------------------------- ------------- --------------- ----------- ---------------- Shares Amount -------------- -------------- Balance at 12/31/05 2,522,434 $2,522 $(25,000) 6,654,706 $(5,327,302) 1,306,578 ============== ============== ============= =============== =========== =============== Stock issued for services 357,134 357 -- 496,516 -- 496,873 Exercise of stock options 750,000 750 (237,500) 236,750 -- -- Conversion of debentures to common stock 873,914 874 -- 403,248 - 404,122 Record GreenShift Preferred conversion 6,000,000 6,000 -- (5,625) -- -- Book remaining convertible debt to APIC -- -- -- 1,080,697 -- 1,080,697 Stock Option Compensation -- -- -- 384,174 -- 384,174 To record issuance Series C preferred to GreenShift for assuming convertible debentures -- -- -- (898) -- -- Record conversion preferred series A and common stock to series D (6,000,000) (6,000) -- 5,625 -- -- To record reduction of shares issued under contract equity investment (47,120) (47) -- 47 -- -- Record subscription receivable -- -- 262,500 -- -- 262,500 Preferred C shares in exchange for equity investment -- -- -- 1,935,313 -- 1,935,763 Record transfer to GreenShift in exchange for redemption of preferred stock & settlement of debt -- -- -- (3,300,962) -- (3,301,362) Record 4th quarter stock issuance to 597,966 598 -- 197,368 -- 197,966 officers Net loss -- -- -- -- (1,023,150) (1,023,150) -------------- -------------- ------------- --------------- ----------- --------------- Balance at 12/31/06 5,054,328 5,054 -- 8,086,959 (6,350,452) 1,744,161 ============== ============== ============= =============== =========== =============== Cancellation of shares (60,000) (60) -- 60 -- -- Conversion of series C to Common 320,000 320 -- 1,280 -- -- Cashless exercise of warrants 123,077 123 -- (123) -- -- Shares issued for services 916,923 917 -- 228,314 -- 229,231 Conversion of series D Preferred 2,000,000 2,000 -- (1,921) -- -- Write off debt/receivables -- -- -- (155,348) -- (155,348) Transfer of subsidiaries -- -- -- (1,307,214) -- (1,307,214) Net Loss -- -- -- (74,144) (74,144) -- -------------- -------------- ------------- --------------- ----------- --------------- Balance at 12/31/07 8,354,328 8,354 -- 6,852,007 (6,424,596) 436,686 ============== ============== ============= =============== =========== =============== The notes to the condensed financial statements are an integral part of these statements.
16 ECOSYSTEM CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007 AND DECEMBER 31, 2006
12/31/07 12/31/06 -------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss from continuing operations ....................................... $ (367,474) $(1,858,913) Net Income from discontinued operations ................................... 293,330 835,763 Adjustments to reconcile net loss to net cash used in operating activities: Impairment of website ................................................ -- 190,103 Amortization of website costs ........................................ -- 52,801 Amortization of deferred financing costs ............................. -- 16,930 Amortization of beneficial conversion feature ........................ -- 245,111 Stock and stock options issued for services .......................... 229,231 1,079,013 Changes in assets and liabilities: Decrease in prepaid expenses ......................................... -- 13,665 Increase in accounts payable and accrued expenses .................... 5,144 (149,744) ----------- ----------- Net cash provided (used) in operating activities ................. 160,231 424,729 CASH FLOW FROM FINANCING ACTIVITIES Repayment of related party debt ...................................... (160,140) (508,057) ----------- ----------- Net cash provided (used) by financing activities ................. (160,140) (508,057) ----------- ----------- Increase (decrease) in cash .......................................... 91 (83,328) Cash at beginning of period .......................................... -- 83,328 ----------- ----------- Cash at end of period ................................................ $ 91 $ -- =========== =========== SUPPLEMENTAL STATEMENT OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Conversion of debenture and accrued interest into common stock ............ $ -- $ 404,122 =========== =========== Issuance of preferred Series C additional paid in capital for acquisition . $ -- $ 1,935,313 =========== =========== Transfer of assets in exchange for redemption of preferred shares and settlement of debt ........................................... -- $ 3,301,362 =========== =========== Transfer of subsidiaries into equity ...................................... $ 1,307,214 $ -- =========== =========== The notes to the condensed financial statements are an integral part of these statements.
17 ECOSYSTEM CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 BASIS OF PRESENTATION THE COMPANY We focus on the development of ecotech projects involving the balanced application of chemical, biological and mechanical processes to produce value-added resources in unconventional but sustainable ways. During our fiscal year ended December 31, 2007, our focus was limited to specialty metal manufacturing services including machine design, machine building, control system electronics and programming, and maintenance support services for third-party clients in the biofuels, automotive, electronics, lighting, plastics, rubber and food products industries. In December 2007, we liquidated our manufacturing operation and executed a license agreement for the exclusive use of GreenShift Corporation's patented and patent-pending bioreactor technology in applications involving certain commercial products not including fuels and energy. We are currently working with GreenShift in testing its recently completed bioreactor pilot facility in Ohio. In addition, we are actively exploring acquisition opportunities involving distressed or other assets that are compatible with our bioreactor technology and business model. DISCONTINUED OPERATIONS Effective December 31, 2007, EcoSystem transferred its stakes in GS Design, Inc. and GS Rentals, LLC to GreenShift Corporation (f/k/a GS CleanTech) in return for the reduction in GreenShift's note receivable from EcoSystem by $170,385 and the issuance to EcoSystem of a term note in the amount of $319,517 which note bears interest at 6% per annum and matures on December 31, 2008. 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 $367,474 during the year ended December 31, 2007, and had an accumulated deficit and negative cash flow from continuing operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans include raising additional proceeds from debt and equity transactions and completing strategic acquisitions. NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION The Company follows the percentage-of-completion method of accounting for contracts for which the outcomes can be reliably estimated. Costs include all direct material and labor costs, and indirect costs, such as supplies, tools, repairs and depreciation. Revenue on such contracts is determined by reference to stage of completion. Revenue on long-term contracts is for which the outcomes cannot be estimated reliably at the outset is recognized to the extent that costs incurred are deemed recoverable. ACCOUNTS RECEIVABLE Accounts receivable are customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. No interest is charged on any past due accounts. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management's best estimate of the amount that will not be collected. Management reviews balances that are 90 days from the invoice date and based on assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, less accumulated depreciation. For financial reporting purposes, the costs of plant and equipment are depreciated over the estimated useful lives of the assets, which range from three to five years for equipment, and 40 years for real estate, using the straight-line method. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". SFAS No. 109 uses the asset and liability method so that deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws and tax rates. Deferred income tax expense or benefit is based on the changes in the financial statement basis versus the tax bases in the Company's assets or liabilities from period to period. 18 USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject the Company to a concentration of credit risk, consist of cash and cash equivalents. The Company places its cash and cash equivalents with various high quality financial institutions; these deposits may exceed federally insured limits at various times throughout the year. The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheet as of December 31, 2007 for cash equivalents and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The fair value of notes payable and long-term debt approximates their carrying value as the stated or discounted rates of the debt reflect recent market conditions. LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. CASH AND CASH EQUIVALENTS For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. 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 approximately 275,000 shares issuable under outstanding options as of December 31, 2007. STOCK BASED COMPENSATION The Company accounts for stock based compensation in accordance with SFAS 123R, "Accounting for Stock-Based Compensation", under the fair value recognition provisions of SFAS 123R, 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. As required by Statement No. 123R 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 paid to our warrants issued 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 19 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. These costs were fully amortized in 2007. NOTE 4 DUE TO/FROM RELATED PARTIES As of December 31, 2007 the Company had a note receivable from GreenShift Corporation in the amount of $319,517 which was part of the consideration tendered as a result of Ecosystem's transfer of GS Design, Inc. and GS Rental Corporation. The note bears interest at 6% per annum and matures on December 31, 2008. In addition, the company had a note receivable from GS Design, Inc. in the amount of $688,234 which accrues 8% interest per annum, and a note payable to GS AgriFuels Corporation in the amount of $400,863 which accrues 8% interest per annum. The Company plans to consolidate these notes receivable and payable into one note receivable from GreenShfit during 2008. Notes Receivable: GreenShift Corporation: $ 319,517 GS Design, Inc.: $ 688,234 ------------ Total: $ 1,007,751 Note Payable: GS AgriFuels Corporation: $ (400,863) NOTE 5 DISCONTINUED OPERATIONS As of December 31, 2007 EcoSystem's holdings in GS Design were transferred to GreenShift at cost. In consideration of the transfer EcoSystem will carry a note receivable from GreenShift for $489,903. GS Design and GS Rentals were previously consolidated with EcoSystem. The operating results for 2007 for GS Design and GS Rentals are reflected in the Statement of Operations as Discontinued Operations. Effective December 31, 2007, EcoSystem transferred its stakes in GS Design, Inc. and GS Rentals, LLC to GreenShift Corporation (f/k/a GS CleanTech) in return for the reduction in GreenShift's note receivable from EcoSystem by $170,385 and the issuance to EcoSystem of a term note in the amount of $319,517 which note bears interest at 6% per annum and matures on December 31, 2008. 20 The components of discontinued operations are as follows:
2007 2006 ----------- ----------- Net revenues ............................................ $5,695,482 $5,913,799 Cost of revenues ........................................ 4,385,195 4,506,239 ---------- ---------- Gross profit ....................................... 1,310,287 1,407,560 ---------- ---------- Selling, general and administrative expense ............. 914,237 488,430 ---------- ---------- (Loss) income from operations ...................... 396,050 919,130 ---------- ---------- Other income and expenses, net .......................... 102,720 83,367 ---------- ---------- Total other income and expense ..................... 102,720 83,367 ---------- ---------- (Loss) income before provision for income taxes .... 293,330 835,763 Total provision for tax ................................. -- -- ---------- ---------- Net income (loss) from discontinued operations ..... 293,330 835,763 Gain (loss) on disposal of discontinued operations -- -- ---------- ---------- Total income (loss) - discontinued operations ...... $ 293,330 $ 835,763 ========== ==========
The results presented above for 2007 and 2006 include the operating activity for the discontinued operations for the year ended December 31, 2007. NOTE 6 RELATED PARTY TRANSACTIONS During the year ended December 31, 2006, Carbonics Capital advanced $50,893 to EcoSystem for operating expenses and EcoSystem repaid $250,000 to GreenShift, resulting in a balance due from GreenShift of $203,441. This advance is unsecured, bears interest at 8% and is considered payable on demand. During 2007 the Company wrote off the entire $250,000 loan. During the year ended December 31, 2007 Kevin Kreisler, the Company's Chief Executive Officer, received 25,000 shares valued at $6,250 for services provided to the Company. On May 5, 2006, GreenShift exchanged 6,000,000 shares of EcoSystem common stock and 625,000 shares of EcoSystem Series A Preferred Stock for 1,000,000 shares of EcoSystem Series D Preferred Stock. EcoSystem Series D Preferred Stock includes dilution protections such that the preferred shares are convertible into 80% of EcoSystem's issued and outstanding capital stock at the time of conversion. On November 9, 2007 Carbonics Capital Corporation contributed to GreenShift's capital 320,000 shares of common stock and 919,000 shares of the Series C preferred stock of EcoSystem Corporation, representing 75% of the outstanding capital stock of EcoSystem. On December 12, 2007, Carbonics converted 81,000 shares of EcoSystem Series D preferred stock into and subsequently distributed 1,000,000,000 Company common shares to the minority shareholders of Carbonics. Effective December 31, 2007, EcoSystem transferred its stakes in GS Design, Inc. and GS Rentals, LLC to GreenShift Corporation in return for the reduction in the Company's note receivable from EcoSystem by $170,385 and the issuance to EcoSystem of a term note in the amount of $319,517 which note bears interest at 6% per annum and matures on December 31, 2008. On October 31, 2006 EcoSystem guaranteed the following obligations: >> 14-month Term Note in the principal amount of $6,000,000 issued by NextGen Acquisition, Inc. to Stillwater Asset-Based Fund, LP; >> 3-year Secured Convertible Debenture in the principal amount of $13,000,000 issued by GS AgriFuels Corporation to Cornell Capital Partners, LP. 21 NextGen Acquisition, Inc. and GS AgriFuels Corporation were affiliates of EcoSystem by reason of common ownership. NOTE 7 INCOME TAXES EcoSystem Corporation has incurred losses, which have generated net operating loss carry forwards for EcoSystem Corporation as of December 31, 2007. These loss carry forwards are subject to limitation in future years should certain ownership changes occur. For the years ended December 31, 2007 and 2006, EcoSystem Corporation's effective tax rate differs from the federal statutory rate principally due to net operating losses and other temporary differences for which no benefit was recorded. The provision for income taxes for the years ended December 31, 2007 and 2006 consisted of state income tax provisions. Deferred tax assets are as follows: 12/31/2007 12/31/2006 ------------------------- Deferred Tax Asset: Total deferred tax assets 1,130,000 1,099,820 Less: Valuation allowance (1,130,000) (1,099,820) ----------- ----------- Net deferred tax asset .. $ -- $ -- =========== =========== EcoSystem Corporation has federal net operating loss carry-forwards of approximately $3,300,000 which expire through December 31, 2026. NOTE 8 OPTIONS AND WARRANTS The following is a table of stock options and warrants outstanding as of December 31, 2006 and December 31, 2007. The number of shares and price have been adjusted to reflect the 500-1 reverse stock split which occurred on February 11, 2007.
Weighted Average Number of Shares Exercise Price ----------------------------------------- Outstanding at December 31, 2006 475,000 $ 0.45 Issued -- $ -- Exercised (200,000) $ 0.25 Cancelled -------- $ -- Outstanding at December 31, 2007 275,000 $ 0.6136 ========
Summarized information about EcoSystem Corporation's stock options outstanding at December 31, 2007 is as follows:
Weighted Exercisable Number of Average Weighted --------------------------------------- Options Remaining Average Number of Options Weighted Average Exercise Prices Outstanding Contractual Life Exercise Price Exercise Price - --------------------------------------------------------------------------------------------------------------------------- $0.25 75,000 7 0.25 75,000 0.25 $0.75 200,000 7 0.75 200,000 0.75 ---------------- ----------- 275,000 -- -- 275,000 --
Options exercisable at December 31, 2007 were 275,000, with a weighted average exercise price of $0.6136 per share. The fair value of each option granted during 2006 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: 2007 -------------- Dividend yield -- Expected volatility 69% Risk-free interest rate 2% Expected life 10 yrs. NOTE 9 SUBSEQUENT EVENTS On January 25, 2008, a financing was completed that resulted in EcoSystem becoming the guarantor of the debts of several of its affiliates. The beneficiary of the guarantees was YA Global Investments, LP ("YAGI"), which committed to extend credit to those affiliates. EcoSystem issued the guarantees because it expects to be the beneficiary of the projects being funded through that credit. 22 EcoSystem also guaranteed the obligations of several affiliates arising under debentures they issued to YAGI (the "Debentures"). The following table shows the current status of the convertible debentures issued by affiliates of EcoSystem to YAGI.
Principal Amount Current of Amended and Original Principal Accrued and Restated Creditor Original Issuance Date Principal Balance Balance Unpaid Interest Debentures - --------------------------------------------------------------------------------------------------------------------- GreenShift Corporation February 8, 2006 $1,900,000 $1,900,000 $184,986 $2,084,986 April 13, 2006 $4,400,000 $2,400,000 $389,277 $2,789,277 February 27, 2007 $1,125,000 $1,125,000 $99,062 $1,224,062 March 31, 2004 $2,190,410 $712,510 $120,453 $832,963 GS AgriFuels Corporation (subsidiary of GreenShift) June, 2006 $5,500,000 $5,500,000 $863,425 N.A. October, 2006 $13,000,000 $12,860,000 $1,524,384 N.A.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A 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 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. The Company's disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in its reports filed under the Exchange Act, such as this Form 10-KSB, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. The Company's disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. The Company's internal controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its financial statements in conformity with GAAP. Management determined that at December 31, 2007, the Company had a material weakness because it did not have a sufficient number of personnel with an appropriate level of knowledge and experience of generally accepted accounting principles in the United States of America (U.S. GAAP) that are commensurate with the Company's financial reporting requirements. As a result, Management concluded that the Company's disclosure controls and procedures were not effective at December 31, 2007. 23 Management's Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in rules 13a-15(f) and 15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of change in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has conducted, with the participation of the Chief Executive Officer and the Chief Financial Officer, an assessment, including testing of the effectiveness of our internal control over financial reporting. The assessment was conducted using the criteria in Internal Control--Integrated Framework issued by the committee of Sponsoring Organizations of the Treadway Commission ("COSO"). A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. In connection with management's assessment of the company's internal control over financial reporting, management identified the following material weakness in the company's internal control over financial reporting as of December 31, 2007. Management determined that at December 31, 2007, the company had a material weakness related to its control environment because it did not have a sufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience commensurate with its financial reporting requirements. Contributing to this lack of sufficient resources was the unanticipated voluntary turnover of key personnel late in the year. This material weakness resulted in the identification of adjustment during the financial statement close process that have been recorded in the financial statements. Because of the material weakness described above, management has concluded that the company did not maintain effective internal control over financial reporting as of December 31, 2007, based on the Internal Control--Integrated Framework issued by COSO. Other than described above, 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. This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. Item 8B OTHER INFORMATION None. 24 PART III ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS Name Age Position - ------------------------------------------------------------------------- Kevin Kreisler 35 Chairman, Chief Executive Officer, Chief Financial Officer Kevin Kreisler is currently serving as the acting chief executive officer and chief financial officer of the Company until new management can be located and hired. Mr. Kreisler is also the chairman and chief executive officer of GreenShift Corporation. Mr. Kreisler served as GreenShift's vice president from 1998 to 2000, president from 2000 to 2002, chief executive officer from 2002 to 2005 and has served as GreenShift's chairman from 2005 to the present. Mr. Kreisler is a graduate of Rutgers University College of Engineering (B.S., Civil and Environmental Engineering, 1994), Rutgers University Graduate School of Management (M.B.A., 1995), and Rutgers University School of Law (J.D., 1997). Mr. Kreisler was admitted to practice law in New Jersey and the United States District Court for the District of New Jersey. NOMINATING, COMPENSATION AND AUDIT COMMITTEE The Board of Directors does not have an audit committee, a compensation committee or a nominating committee due to the small size of the Board. The Board of Directors also does not have an audit committee financial expert, for the same reason. CODE OF ETHICS The Company does not have a written code of ethics applicable to its executive officers. The Board of Directors has not adopted a written code of ethics because there is only one member of management. SHAREHOLDER COMMUNICATIONS The Board of Directors will not adopt a procedure for shareholders to send communications to the Board of Directors until it has reviewed the merits of several alternative procedures. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE None of the officers, directors or beneficial owners of more than 10% of the Company's common stock failed to file on a timely basis the reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2007. ITEM 10 EXECUTIVE COMPENSATION The following table sets forth compensation information for EcoSystem Corporation's executive officers during the years indicated as relevant. As of December 31, 2007, no executive officer held shares of exercisable options for EcoSystem Corporation's Common Stock.
Name and Principal Position Annual Compensation Long-term Compensation ------------------------------------------------------------------------------------------------------------------- Other Securities Underlying All Other Year Salary Bonus Options Granted (shares) Compensation - -------------------------------------------------------------------------------------------------------------------- Kevin Kreisler 2007 $ -- $ -- $ -- 25,000 $ -- Chairman and Chief Executive Officer 2006 -- -- -- 25,000 --
EMPLOYMENT AGREEMENTS EcoSystem's relationships with its officer is on an at-will basis. COMPENSATION OF DIRECTORS Our directors are reimbursed for out-of-pocket expenses incurred on our behalf, but receive no additional compensation for service as directors. 25 ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the voting stock beneficially owned by any person who, to our knowledge, owned beneficially more than 5% of any class of voting stock as well as by the members of our Board of Directors and by all officers and directors as a group.
Amount and Nature of Beneficial Ownership -------------------------------------------------------------------------------------------- Name and Address(1) Series B Series C Percentage of Of Beneficial Owner Common % of Class Preferred % of Class Preferred % of Class Voting Power ---------- ----------- ------------ ----------- ----------- ----------- ------------- Kevin Kreisler(2), 320,000 3.83% -- -- 921,000 100% 74.69% (1) The address of each shareholder is c/o Viridis Capital, LLC, One Penn Plaza, Suite 1612, New York, NY 10119. (2) All shares listed for Mr. Kreisler are owned of record by Viridis Capital, LLC, of which Mr. Kreisler is the sole member.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the year ended December 31, 2006, GreenShift advanced $50,893 to EcoSystem for operating expenses and EcoSystem repaid $250,000 to GreenShift, resulting in a balance due from GreenShift of $203,441. This advance is unsecured, bears interest at 8% and is considered payable on demand. During the year ended December 31, 2007 Kevin Kreisler, the Company's Chief Executive Officer, received 25,000 shares valued at $6,250 for services provided to the Company. On May 5, 2006, Carbonics Capital (f/k/a GreenShift Corporation) exchanged 6,000,000 shares of EcoSystem common stock and 625,000 shares of EcoSystem Series A Preferred Stock for 1,000 shares of EcoSystem Series D Preferred Stock. EcoSystem Series D Preferred Stock includes dilution protections such that the preferred shares are convertible into 80% of EcoSystem's issued and outstanding capital stock at the time of conversion. On November 9, 2007 Carbonics Capital Corporation contributed to GreenShift Corporation (f/k/a GS CleanTech Corporation) capital 320,000 shares of common stock and 919,000 shares of the Series D preferred stock of GS Energy Corporation, representing 74.69% of the outstanding capital stock of EcoSystem. On December 12, 2007, Carbonics converted 81,000 shares of EcoSystem Series D preferred stock into and subsequently distributed 1,000,000,000 Company common shares to the minority shareholders of Carbonics. Effective December 31, 2007, EcoSystem transferred its stakes in GS Design, Inc. and GS Rentals, LLC to GreenShift Corporation in return for the reduction in Greenhift's note receivable from EcoSystem by $170,385 and the issuance to EcoSystem of a term note in the amount of $319,517 which note bears interest at 6% per annum and matures on December 31, 2008, for a total of $489,902 in consideration. GUARANTEE AGREEMENT WITH STILLWATER ASSET-BASED FUND, LP On October 31, 2006 EcoSystem guaranteed the following obligations: >> 14-month Term Note in the principal amount of $6,000,000 issued by NextGen Acquisition, Inc. to Stillwater Asset-Based Fund, LP; >> 3-year Secured Convertible Debenture in the principal amount of $13,000,000 issued by GS AgriFuels Corporation to YA Global Investments, LP. NextGen Acquisition, Inc. and GS AgriFuels Corporation were affiliates of EcoSystem by reason of common ownership. DIRECTOR INDEPENDENCE None of the members of the Board of Directors is independent as "independent" is defined in the rules of the NASDQ Stock Market. 26 PART IV ITEM 13 EXHIBITS AND REPORTS ON FORM 8K Index to Exhibits Exhibit Number Description 3.1 Certificate of Incorporation - filed as an exhibit to the Current Report on Form 8-K filed on July 15, 2005 and incorporated herein by reference. 3.1(a) Certificate of Amendment of Certificate of Incorporation - filed as an Exhibit to the Current Report on Form 8-K filed on February 13, 2008, and incorporated herein by reference. 3.2 By-Laws - filed as an exhibit to the Current Report on Form 8-K filed on July 15, 2005 and incorporated herein by reference. 10.1 GS AgriFuels Guaranty agreement with Stillwater Asset-Backed Fund, LP - filed as an exhibit to the current report on form 8K filed on November 7, 2006 and incorporated herein by reference. 10.2 Credit Agreement dated January 11, 2008 between GS COES (Yorkville I), LLC and YA Global Investments, LP - filed as an Exhibit to the Current Report on Form 8-K filed on January 13, 2008, and incorporated herein by reference. 10.3 Global Guaranty Agreement dated January 11, 2008 among Viridis Capital LLC, Kevin Kreisler, Carbonics Capital Corporation, GreenShift Corporation, GS AgriFuels Corporation, each of their subsidiaries, and YA Global Investments, LP - filed as an Exhibit to the Current Report on Form 8-K filed on January 13, 2008, and incorporated herein by reference. 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. 27 ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES INDEPENDENT AUDITOR FEES Audit Fees Rosenberg Rich Baker Berman & Company, P.A. billed $57,040 to the Company in 2007 and $60,590 in 2006 for professional services rendered for the audit of our 2007 financial statements. Audit-Related Fees Rosenberg Rich Baker Berman & Company, P.A. billed $0 to the Company in 2007 and $29,345 in 2006 for assurance and related services that are reasonably related to the performance of the 2005 audit or review of the quarterly financial statements. Tax Fees Rosenberg Rich Baker Berman & Company, P.A. billed $0 to the Company in 2007 and $0 in 2005 for professional services rendered for tax compliance, tax advice and tax planning. All Other Fees Rosenberg Rich Baker Berman & Company, P.A. billed $0 to the Company in 2007 and $0 in 2005 for services not described above. It is the policy of the Company's Board of Directors that all services other than audit, review or attest services, must be pre-approved by the Board of Directors. All of the services described above were approved by the Audit Committee. 28 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 Chairman and Chief Executive Officer Date: April 15, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ KEVIN KREISLER ----------------------- KEVIN KREISLER Director, Chief Executive Officer, Chief Financial Officer Date: April 15, 2008 29 EX-31 2 esymex31-110k07.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION OF ANNUAL REPORT I, KEVIN KREISLER, certify that: 1. I have reviewed this Annual Report on Form 10-KSB of EcoSystem Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and, d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Company's Board of Directors of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and, b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ KEVIN KREISLER -------------------------------------- KEVIN KREISLER, Chief Executive Officer, Chief Financial Officer Date: April 15, 2008 EX-32 3 esym32-110k07.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION OF PERIODIC REPORT Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of EcoSystem Corporation (the "Company"), certifies that: 1. The Annual Report on Form 10-KSB of the Company for the year ended December 31, 2007 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ KEVIN KREISLER ---------------------------------- Dated: April 15, 2008 KEVIN KREISLER Chief Executive Officer, Chief Financial Officer This certification is made solely for the purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. -----END PRIVACY-ENHANCED MESSAGE-----