UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
| [x] | Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| [ ] | Transition Report under Section 13 or 15(d) of the Exchange Act of 1934For the transition period from ________ to _________ |
Commission File Number: 000-51213 |
ECOLOCAP SOLUTIONS INC.
(formerly known as XLGI International Inc.)
(Exact Name of Small Business Issuer as specified in its charter)
| NEVADA | 20-0909393 |
| (State or other Jurisdiction of | (IRS Employer |
| Incorporation or Organization) | Identification No.) |
353, St-Nicolas Street
Suite 205
Montreal A8 H2Y 2P1
(Address of principal executive offices)
(514) 397-0575
(Issuer’s telephone number, including area code)
Sumpfstrasse 32
6304 Zug, Switzerland
(Former name, former address and former fiscal year, if changed since last report)
Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [x] No [ ]
The Issuer had 35,228,268 shares of Common Stock, par value $.001, outstanding as of November 14, 2007.
Transitional Small Business Disclosure format (Check one): Yes [ ] No [x]
| TABLE OF CONTENTS | ||
| PART I | ||
| Item 1. | Financial Statements | 3 |
| Balance Sheet | 3 | |
| Statements of Operations | 4 | |
| Statements of Cash Flows | 5 | |
| Notes to Financial Statements | 6 | |
| Item 2. | Management’s Discussion and Analysis or Plan of Operation | 14 |
| Item 3. | Controls and Procedures | 16 |
| PART II | 17 | |
| Item 1. | Legal Proceedings | 18 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 19 |
| Item 3. | Defaults Upon Senior Securities | 19 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 19 |
| Item 5. | Other Information | 19 |
| Item 6. | Exhibits | 19 |
| SIGNATURES | 20 | |
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| PART I: FINANCIAL INFORMATION | |||||||||
| Item 1. | Financial Statements | ||||||||
| ECOLOCAP SOLUTIONS INC. | |||||||||
| (Formally known as XL GENERATION INTERNATIONAL INC.) | |||||||||
| BALANCE SHEET | |||||||||
| September 30, | December 31, | ||||||||
| 2007 | 2006 | ||||||||
| (unaudited) | (audited) | ||||||||
| ASSETS | |||||||||
| CURRENT ASSETS | |||||||||
| Cash | $ | 66,191 | $ | 128,607 | |||||
| Prepaid expenses and sundry current assets | 0 | 41,345 | |||||||
| TOTAL CURRENT ASSETS | 66,191 | 169,952 | |||||||
| PROPERTY AND EQUIPMENT, AT COST, | |||||||||
| LESS ACCUMULATED DEPRECIATION | 0 | 29,352 | |||||||
| TOTAL ASSETS | $ | 66,191 | $ | 199,304 | |||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | |||||||||
| CURRENT LIABILITIES: | |||||||||
| Stock subscription payable (note 6) | $ | 0 | $ | 1,000,000 | |||||
| Note payable-stockholders (note 7) | 2,554,563 | 2,188,332 | |||||||
| Accounts payable- related party | 0 | 5,061,880 | |||||||
| Accrued expenses and sundry current liabilities (note 5) | 428,503 | 3,361,365 | |||||||
| TOTAL CURRENT LIABILITIES | $ | 2,983,066 | $ | 11,611,577 | |||||
| STOCKHOLDERS' DEFICIENCY | |||||||||
| Common stock | $ | 98,152 | $ | 97,502 | |||||
| Additional paid in capital | 15,171,059 | 13,329,355 | |||||||
| Accumulated Deficit | (18,186,086 | ) | (25,059,593 | ) | |||||
| Other comprehensive income (loss) | - | 220,463 | |||||||
| TOTAL STOCKHOLDERS' DEFICIENCY | $ | (2,916,875 | ) | $ | (11,412,273 | ) | |||
| TOTAL LIABILITIES AND STOCKHOLDERS’ | |||||||||
| DEFICIENCY | $ | 66,191 | $ | 199,304 | |||||
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ECOLOCAP SOLUTIONS INC. | ||||||||||||
(Formally known as XL GENERATION INTERNATIONAL INC.) | ||||||||||||
Nine months ended September 30, 2007 and 2006 and | ||||||||||||
| (unaudited) | ||||||||||||
| Nine Months ended | Three Months ended | |||||||||||
| September 30, September 30, September 30, September 30, | ||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
| SALES | $ | - | $ | 4,218,265 | $ | - | $ | 2,428,600 | ||||
| COSTS AND EXPENSES: | ||||||||||||
| Cost of sales | - | 3,643,840 | - | 2,368,906 | ||||||||
| Selling, general and administrative | 393,807 | 5,079,150 | 14,608 | 848,962 | ||||||||
| Provision for note receivable | - | 4,751,526 | - | 2,430,906 | ||||||||
| Gain on settlement of debts-foreign | ||||||||||||
| subsidiary (note 11) | (8,013,125 | ) | - | - | - | |||||||
| Forgiveness of accounts payable | - | - | - | - | ||||||||
| Compensation expense | 842,354 | - | - | |||||||||
| Interest | 115,201 | 183,856 | 60,463 | 95,815 | ||||||||
| Foreign exchange loss (Gain) | (211,744 | ) | (10,590 | ) | (211,744 | ) | (17,616 | ) | ||||
| Loss on settlement of debt | - | 2,471,944 | - | 2,471,944 | ||||||||
| TOTAL COSTS AND EXPENSES | (6,873,507 | ) | 16,119,726 | (136,673 | ) | 8,198,517 | ||||||
| NET INCOME (NET LOSS) | $ | 6,873,507 | $ | (11,901,461 | ) | $ | 136,673 | $ | (5,769,917 | ) | ||
| Net Income (Loss) Per Share | $ | 0.20 | $ | (0.34 | ) | $ | 0.00 | $ | (0.17 | ) | ||
| Average weighted Number of Shares | 34,835,675 | 34,044,725 | 35,228,268 | 34,044,725 | ||||||||
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ECOLOCAP SOLUTIONS INC.
(Formally known as XL GENERATION INTERNATIONAL INC.)
STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2007 and 2006
(unaudited)
| September 30 | September 30 | |||||
| 2007 | 2006 | |||||
| Net Income (Loss) | $ | 6,873,507 | $ | (11,901,461 | ) | |
| Adjustment to reconcile net income to net cash provided | ||||||
| by operating activities | ||||||
| Depreciation and amortization | 0 | 12,538 | ||||
| Stock based compensation | 842,354 | 0 | ||||
| Unrealized foreign exchange | (220,463 | ) | 268,232 | |||
| Issuance of common stock in exchange for debt | - | 2,471,944 | ||||
| Proceeds (repayments) of loans from suppliers | (5,060,586 | ) | - | |||
| Changes in operating assets and liabilities: | ||||||
| Inventory | 0 | (317,076 | ) | |||
| Note receivable | 0 | 1,046,956 | ||||
| Prepaid expenses and sundry current assets | 41,345 | (892,825 | ) | |||
| Accrued expenses and sundry current liabilities | (2,934,156 | ) | 1,001,211 | |||
| Net cash used by operating activities | $ | (457,999 | ) | $ | (8,310,481 | ) |
| Investing activities | ||||||
| (Acquisitions)Dispositions of property and equipment | 29,352 | (22,380 | ) | |||
| Net cash used in investing activities | $ | 29,352 | $ | (22,380 | ) | |
| Financing activities | ||||||
| Stock payable | (1,000,000 | ) | 0 | |||
| Issuance of common stock | 650 | 10,542 | ||||
| Premium on issuance of common stock | 999,350 | 6,129,099 | ||||
| Proceeds of loans payable stockholders | 366,231 | 1,201,521 | ||||
| Proceeds (repayments) of loans from suppliers | - | 1,111,973 | ||||
| Net cash provide by financing activities | $ | 366,231 | $ | 8,453,135 | ||
| Increase (decrease) in cash | (62,416 | ) | 120,274 | |||
| Cash- beginning of period | 128,607 | 262,446 | ||||
| Cash- end of period | $ | 66,191 | $ | 382,720 | ||
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ECOLOCAP SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-NATURE OF BUSINESS
Introduction
XL Generation International Inc. was the holding company of a Swiss entity, XL Generation AG, which was the manufacturer of an artificial sport surface called “XL Turf.” XL Turf is designed to reduce accidents while reproducing the natural feeling of playing on grass. Until September 2006, the Company aspired to become a leading global force in the artificial turf and flooring markets by building on the strength of the XL Generation brand and developing strategic partnerships with key regional turf and flooring providers. However, because of worsening financial conditions, irregularities regarding registration of certain intellectual property rights and deterioration of the brand name of the Company, the Board of Directors have decided that it is in the Company’s and the stockholders’ best interest to initiate a complete and total withdrawal from the artificial flooring sector, artificial turf and all related business as soon as reasonably possible.
Business Development
The Company was incorporated in the State of Nevada on March 18, 2004, as Cygni Systems Corporation. It was originally formed with the intent of raising funds and entering into business as a software design company. From the date of its incorporation until June 17, 2005, the Company was in the development stage of its business of developing online and network security management software and online and network security consulting services.
A change of control occurred on June 17, 2005. On August 19, 2005, the Company entered into and closed a Share Exchange Agreement (the "Share Exchange Agreement") with XL Generation AG. Pursuant to the terms of the Share Exchange Agreement, the Company acquired all of the issued and outstanding shares of common stock of XL Generation AG. On August 23, 2005, the Company filed a Certificate of Amendment with the States of Nevada, changing its name to "XL Generation International Inc."
Our Business
The Company currently has no employees or production. The Company's plan is now to seek, investigate and, if such investigation warrants, merge or acquire an interest in business opportunities presented to it by persons or companies who or which desired to seek the perceived advantages of a Securities Exchange Act of 1934 registered corporation. The Company's discretion in the selection of business opportunities is unrestricted, subject to the availability of such opportunities, economic conditions, and other factors.
Intellectual Property
The current relationship between XL Generation AG and the patents, patents pending and all the intellectual and industrial property rights (collectively, the "Intellectual Property") which XL Generation AG was using is as follows:
The Intellectual Property is owned by WKF/5 Ltd, a Maltese corporation controlled (and majority owned) by a related party, the Alain Lemieux Trust. Mr. Alain Lemieux served as President and CEO of the Company until August 18, 2006. WKF/5 Ltd owns the worldwide commercial and manufacturing rights for the "XL technology." The “XL technology” consists of six patents. Of these six patents, one is patented in 38 countries, with patents pending in 6 more countries; another is patented in 16 countries, with patents pending in 28 more; two of these patents are pending in seven countries; and two of the six patents are pending in one country each.
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On January 1, 2005, XL Generation AG was granted a worldwide exclusive license (the "License Agreement") to manufacture, assemble, sell, distribute and promote all the products covered by the Intellectual Property, by WKF5/Ltd. It was provided that the License Agreement shall continue in full force and effect until it automatically expires upon the later of (a) the termination or expiration date of the latest patent granted; or (b) the expiration date of any extension made by Licensee pursuant to the License Agreement. On October 2, 2006, WKF5/Ltd served a notice to XL Generation AG terminating the License agreement. This Notice claims that WKF/5 Ltd has the right to terminate the License, and claims the alleged insolvency of XL Generation AG as the cause of such right of termination.
There was no minimum quota required under the License Agreement. The royalty rate had been determined at 5% of gross sales of XL Generation AG. Subsequently, it was agreed by XL Generation AG and WKF/5 Ltd that the initial lump sum royalty fee would initially be $416,047. Pursuant to the same agreement entered into by WKF/5 Ltd, the lump sum royalty fee of $416,047 was assumed by a trust controlled by Alain Lemieux which assumed XL Generation AG’s duty to pay WKF/5 Ltd.
Irregularities concerning the proper registration of the trademarks “XL Turf” and “XL Generation” served as the basis of a legal action against WKF/5 Ltd, where the Company claimed that the Register of Trade-marks relating to registration no. 671 108 (application no. 1 266 983) for the trade-mark XLGENERATION, registered on August 24, 2006, be struck on the grounds that at the date of the application or at the date of registration, the entry as it appears on the Register does not accurately express or define the existing rights of the person appearing to be the registered owner of the mark. Furthermore, the Company asked for an order declaring that WKF/5 Ltd was not and is not entitled to obtain registration of any trade-mark containing the word XLGENERATION on the claim that the registration in the name of WKF/5 Ltd of the trade-mark XLGENERATION is contrary to the Company’s rights, as detailed in Part I I, Item 1 of this Report.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original maturities not exceeding three months to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable and collectibles is reasonably assured. The Company reduces revenue for estimated customer returns, rotations and sales rebates when such amounts are estimable. When not estimable, the Company defers revenue until the product is sold to the end customer. As part of its product sales price, the Company provides support, which is generally utilized by the customer shortly after the sale.
INCOME TAXES
The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.
LOSS PER COMMON SHARE
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding.
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Diluted net loss per common share is computed by dividing the net loss, adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities.
WARRANTY PROVISIONS
The Company provides a reserve based upon management experience and assessment of potential replacement costs. Company management will continue to monitor the stability of its products and will adjust the provision accordingly.
USE OF ESTIMATES
In preparing financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and revenue and expenses in the income statement. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for stock options and similar equity instruments issued in accordance with SFAS No. 123(revised), "Share-Based Payment". Accordingly, compensation costs attributable to stock options or similar equity instruments granted are measured at the fair value at the grant date, and expensed over the expected vesting period. Transactions in which goods or services are received in exchange for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. SFAS No. 123(revised) requires excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operations, financial position or cash flow. For further information regarding recent accounting pronouncements, please see Note 13.
NOTE 3-GOING CONCERN
The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business for the foreseeable future. During the three months ended September 30, 2007 and 2006, the Company has incurred profit of $136,673 and loss of $5,769,917 respectively. The Company had negative working capital of $2,916,875 and $5,838,060 at September 30, 2007 and 2006, respectively and a stockholders deficiency of $2,916,875 and $5,782,090 at September 30, 2007 and 2006. These factors among others raise substantial doubt about the Company's ability to continue as a going concern.
Management's plans for the Company's continued existence include selling additional stock and borrowing additional funds to pay overhead expenses.
The Company's plan is now to seek, investigate and, if such investigation warrants, merge or acquire an interest in business opportunities presented to it by persons or companies who or which desired to seek the perceived advantages of a Securities Exchange Act of 1934 registered corporation. The Company's discretion in the selection of business opportunities is unrestricted, subject to the availability of such opportunities, economic conditions, and other factors.
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The Company's future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares of common stock or borrow additional funds.
The Company's inability to obtain additional cash could have a material adverse effect on its financial position, results of operations and its ability to continue in existence. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 4-PROPERTY & OFFICE EQUIPMENT
Equipment is stated at cost. Depreciation is computed using the straight-line method over 3 to 10 years.
| September 30, | December 31 | ||||||
| 2007 | 2006 | ||||||
| Computer equipment--3 yrs | $ | 0 | $ | 2,904 | |||
| Furniture & fixtures--5 yrs | 0 | 46,364 | |||||
| $ | 0 | $ | 49,268 | ||||
| Less: accumulated depreciation | (0 | ) | (19,916 | ) | |||
| Balance September 30, 2007 | $ | 0 | $ | 29,352 | |||
| NOTE 5-ACCRUED EXPENSES AND SUNDRY CURRENT LIABILITIES | |||||||
| Accrued expenses consisted of the following at: | |||||||
| September 30 | December 31 | ||||||
| 2007 | 2006 | ||||||
| Accrued interest | $ | 114,477 | $ | 252,000 | |||
| Accrued operating expenses | 314,026 | 1,468,365 | |||||
| Warranty | $ | - | $ | 1,641,000 | |||
| $ | 428,503 | $ | 3,361,365 | ||||
| NOTE 6-STOCK SUBSCRIPTION PAYABLE | |||||||
The Company received a deposit of five hundred thousand dollars ($500,000) from Aton Select Fund Ltd on July 6, 2006 to purchase from the Company (i) 250,000 shares of the Company's common stock. The shares have not been issued as of the date of the accompanying financial statements. The Company received a deposit of five hundred thousand dollars ($500,000) from Emper Overseas S.A. on August 10, 2006 to purchase from the Company (i) 400,000 shares of the Company's common stock; and (ii) Series A Warrants to purchase up to an additional 400,000 shares of the company's common stock at an exercise price initially set at $1.25 per share. The shares were issued on May 22, 2007.
NOTE 7-NOTE PAYABLE - STOCKHOLDERS
On December 31, 2006, the Company had received loans from CAPEX Investment Limited, a stockholder, in the amount of $2,068,474. In 2007, the Company received additional loans from CAPEX Investment Limited in the amount of $486,089. These loans carry an interest of 10% and are payable on demand.
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| Amounts owed to stockholders at September 30, 2007 are as follows: | ||
| Payable Capex Investment Ltd | 2,554,563 | |
| Payable stockholders | $ | 2,554,563 |
NOTE 8-STOCKHOLDER’S EQUITY
STOCK-BASED COMPENSATION EXPENSE
During the year ended December 31, 2006, the Company issued 1,455,000 stock options to officers and directors of the Company with an average exercise price of $1.05 per share. Of the stock options issued, 320,000 vested on September 6, 2006, 150,000 vested on September 7, 2006, 25,000 vested on September 15, 2006, 150,000 vested on December 25, 2006, 660,000 will vest on September 6, 2007 and the balance will vest on September 6, 2008. These options will expire on September 6, 2008 (240,000), September 15, 2008 (25,000), December 25, 2006 (150,000), September 6, 2013 (440,000) and September 6, 2016 (600,000). The options had a fair value of $1,526,989 at the date of grant. The Company valued these options using the Black-Scholes option -pricing valuation model. The model uses market sourced inputs such as interest rates, stock prices, and option volatilities, the selection of which requires Company management’s judgment, and which may impact the value of the options. The assumptions used in the Black-Scholes valuation model were: a risk-free interest rate of 3.8%, 3.9% and 4.0%; the current stock price at date of issuance of $1.04, $1,10 and $0.90 per share; the exercise price of the options of $1.05 and $0.01 per share; the term of 2, 7 and 10 years; volatility of 315% and 311%. For the three month period ended September 30, 2007, the Company did not record any stock-based compensation expense. As of September 30, 2007, there was no unrecognized compensation cost related to non-vested share-based compensation. No options were exercised during the three month period ended September 30, 2007.
A summary of option activity for the three month period ended September 30, 2007 is presented below:
| Weighted- | |||||
| Weighted- | Average | ||||
| Average | Remaining | ||||
| Exercise | Contractual | ||||
| Options | Shares | Price | Term | ||
| Outstanding at December 31, 2006 | - | - | - | ||
| Granted | 1,455,000 | $ | 1.48 | 5.72 | |
| Exercised, forfeited, or expired | - | - | - | ||
| Outstanding at September 30, 2007 | 1,455,000 | $ | 1.48 | 5.72 | |
| Exercisable at September 30, 2007 | 1,305,000 | $ | 1.48 | 5.72 | |
The weighted-average grant-date fair value of options granted during the period ended December 31, 2006 was $1.05 per share.
NOTE 9-INCOME TAXES
Income taxes are not due since the Company has incurred a loss since inception. The Company has deductible net operating losses of approximately $7,321,193 at September 30, 2007. These losses expire as follows: in 2023 $626,000 will expire and in 2024 $2,142,000 will expire.
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Components of deferred tax assets and liabilities at September 30, 2007 are as follows:
| Deferred tax asset | $ | 2,768,000 | |
| Valuation allowance | (2,768,000 | ) | |
| Net deferred tax asset | $ | 0 |
The Company has recorded a full valuation allowance against its deferred tax asset since it believes it is more likely than not that such deferred tax asset will not be realized.
NOTE 10-RELATED PARTY TRANSACTIONS
Mr. Albert Beerli, a significant stockholder, advanced funds and then was repaid by the Company during the year. The total note balance at September 30, 2007 was $0 ($119,858 as of December 31, 2006). The note carried an interest of 4.5% and was payable on demand.
The Company has reviewed the recoverability of a receivable from XL Generation Canada Inc., a related party. The Company had taken a charge of $5,916,694 in respect of such receivable as of December 31, 2006. The funds underlying the receivable were previously forwarded to XL Generation Canada Inc. for Company-related activities in Canada, including building up inventory with our suppliers to facilitate shorter delivery periods. As XL Generation Canada Inc. does not have sufficient cash resources to repay the advance, management determined to take a charge for the full amount of such outstanding advances.
Note 11-SETTLEMENT OF LITIGATION AND RELATED MATTERS
The Company has experienced a number of unresolved matters regarding certain individuals and entities involved in the August 2005 reverse takeover (RTO) through which it entered the artificial turf business. Efforts to resolve these matters lead to the filing of five actions against these individuals and entities in Quebec Provincial or Canadian Federal courts between September and November 2006 seeking a variety of relief and remedies. Discussions subsequent to these filings resulted in settlement of all matters of controversy and in April 2007 notices of settlement and discharge were filed with the courts. Among the outcomes from the foregoing was the cancellations of various operating agreements and understandings entered into as part of the RTO and the Board’s decision to cancel 15,000,000 unregistered shares of the Company’ issued at the time of the above RTO. While the Company believes there are no impediments to such cancellation and intends to cancel such shares, it has referred the matter to its legal counsel for final review prior to effecting cancellation.
The cancellation of various operating agreements and understandings referred to above lead to the May 2007 resignation of the Directors of the Company’s wholly-owned Swiss subsidiary XL Generation AG (XLG AG) and the inability of the Company to replace such Directors (required by law to be Swiss residents). This situation was reported to the Cantonal Commerce Register Office in Zug, Switzerland which, after a statutory waiting period when public notices concerning the matter were posted, delivered the XLG AG entity to the Swiss courts in order to wind up its affairs. Swiss Counsel has advised the Company that under Swiss law concerning such matters a shareholder’s liability is limited to the amount of stated capital of the entity being delivered to the Swiss Courts and, as in the case of XLG AG, where all of the stated capital had been paid in by the shareholders, the law does not provide for further claims against the shareholders. Counsel has also advised that while Swiss law does not provide for further liabilities and/or claims against the shareholders when stated capital is fully paid, aggrieved parties may from time to time file claims in Swiss courts against the former management and directors of the entity whose affairs are being settled by the Court as well as its former shareholders.
In accounting for the above settlements and possible legal actions in Switzerland the Company has (1) recognized the winding up of the affairs of XLG AG by the Swiss courts and (2) provided for the possible costs of litigation. The effects of these actions beyond the Company’s exit from the artificial turf business within the Company’s balance sheet at June 30, 2007 are summarized below. The Company has recognized approximately $8,000,000 in gain on settlement of debts-foreign subsidiary.
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| Effects of Settlement | ||||
| Before | After | |||
| Outstanding Common Shares | 34,578,268 | 34,578,268 | ||
| Wind up of XLG AG affairs | ||||
| Asset | 77,372 | 0 | ||
| Liabilities* | 11,758,979 | 2,649,148 | ||
| Shareholder Deficiency | (11,681,607 | ) | (2,649,148 | ) |
(*) Includes provision of $250,000 for litigation arising from XLG AG
Note 12 – SUBSEQUENT EVENTS
On October 10, 2007, the Board of Directors of the Company has filed a definitive proxy statement on form 14A, calling for a special meeting of the shareholders of the Company on October 25,2007 for the purpose of considering and acting upon the proposed amendment of the Company’s Certificate of Incorporation to change the name of the Company from XL Generation International Inc. to Ecolocap Solutions Inc., a name more representative of the business opportunities.
Note 13 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements ("SFAS 154") . SFAS 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS 154 requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements. Th e Company does not believe that the adoption of SFAS 154 will have a material effect on its financial position, results of operations or cash flows.
In September 2005, the FASB issued EITF No. 05-08, Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature ("EITF 05 -08"). This EITF deals with the accounting for the tax implications of beneficial conversion features associated with convertible debt. As a result, companies should now recognize deferred tax liabilities for the difference between the book and tax basis of any beneficial conversion feature with a corresponding adjustment to additional paid-in capital. EITF 05-08 is effective for the Company in the first quarter of 2006 and management currently estimates that the impact of adoption will not affect the financial position or the results of operations.
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Company's first fiscal year that begins after September 15, 2006. SFAS No. 155 is not expected to have a material effect on the consolidated financial position or results of operations of the Company.
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In March 2006 FASB issued SFAS 156 `Accounting for Servicing of Financial Assets' this Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
1. Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract.
2. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.
3. Permits an entity to choose `Amortization method' or Fair value measurement method' for each class of separately recognized servicing assets and servicing liabilities:
4. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.
5. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.
This Statement is effective as of the beginning of the Company's first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the consolidated financial statements.
The Company has adopted SFAS 123 (R) "Share-Based Payment", which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted and recognized in the statement of operations based on their fair value. SFAS No. 123(R) is effective for public companies that file as small business issuers as of the first interim or annual reporting period that begins after December 15, 2005.. Depending upon the number of and terms for options that may be granted in future periods, the implementation of this standard could have a significant non-cash impact on results of operations in future periods.
F-11
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Item 2. Management’s Discussion and Analysis
The Company's Operations
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-QSB for the period ended September 30, 2007 (this “Report”). This Report contains certain forward-looking statements and the Company's future operating results could differ materially from those discussed herein. Certain statements contained in this Report, including, without limitation, statements containing the words "believes," "anticipates," "expects" and the like, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). However, as the Company issues “penny stock,” as such term is defined in Rule 3a51-1 promulgated under the Exchange Act, the Company is ineligible to rely on these safe harbor provisions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments.
The Company was incorporated in the State of Nevada on March 18, 2004 as Cygni Systems Corporation. On August 19, 2005, the Company entered into the Share Exchange Agreement with XL Generation AG. Pursuant to the terms of the Share Exchange Agreement, the Company acquired all of the issued and outstanding shares of Common Stock of XL Generation AG in exchange for the issuance at closing of an aggregate of fifteen million shares of restricted Common Stock of the Company.
The Company served as the holding company for XL Generation AG. Management's Discussion and Analysis of Financial Condition and Results of Operations describe the financial condition and results of operations for XL Generation International. The Company had no other operations other than XL Generation AG.
On August 23, 2005, the Company filed a Certificate of Amendment with the State of Nevada, changing its name to "XL Generation International Inc." The Company also changed its stock symbol to XLGI.
XL Generation AG, based in Zug, Switzerland, designed specific flooring products for sports, recreational and commercial markets. XL Generation AG developed new artificial turf systems for sports fields. XL Generation AG held the worldwide commercial and manufacturing rights for the "XL technology." The “XL technology” consists of six patents owned by WKF5/Ltd. However, on October 2, 2006, WKF5/Ltd served a notice to XL Generation AG terminating the usage of the XL Technology. This Notice claimed that WKF/5 Ltd has the right to terminate the License, and claimed the alleged insolvency of XL Generation AG as the cause of such right of termination.
On November 13, 2007 the Company changed its name from “XL Generation International Inc.” to “Ecolocap Solutions Inc.”. The Company’s trading symbol on the over-the-counter bulletin board has been changed to ECOS.OB.
Business Plan
Initially, XL Generation AG's core business was the production, distribution and sales of artificial turf sport surfaces, using Expanded Polypropylen (EPP) as a replacement for the usual infill (sand and/or rubber) used in the installation of artificial sport surfaces.
Due to worsening financial conditions, irregularities regarding registration of certain intellectual property rights and deterioration of the brand name of the Company, the Company’s Board of Directors have decided that it is in the Company’s and investors’ best interest to initiate a complete and total withdrawal from the artificial flooring sector, artificial turf and all related concerns as soon as possible. The Company currently has no employees or production.
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The Company's plan is now to seek, investigate and, if such investigation warrants, merge or acquire an interest in business opportunities presented to it by persons or companies who or which desired to seek the perceived advantages of a Securities Exchange Act of 1934 registered corporation. The Company's discretion in the selection of business opportunities is unrestricted, subject to the availability of such opportunities, economic conditions, and other factors.
Results of Operations
For the Three and Nine Month Periods ended September 30, 2007
Overview
The Company posted for the three and nine month periods ended September 30, 2007 net profit of $136,673 and $6,873,507, respectively, as compared to net losses of $5,769,917 and $11,901,461 for the comparable period of 2006. The increase in profits of the Company resulted from actions within Swiss court concerning the windup of the former Swiss subsidiary (see note 11).
Sales
For the three and the nine month periods ended September 30, 2007, the Company achieved no gross revenues. This compared to gross revenues of $2,428,600 and $4,218,265 for the same periods of 2006. The decrease in revenues results from the Company’s exit from its former line of business as part of its effort to redeploy its assets into a new line of business.
Total Cost and Expenses
For the three and nine month periods ended September 30, 2007, the Company incurred total costs and expenses of $(136,673) and $(6,873,507), respectively. This compared to $8,198,517 and $16,119,726 for the same periods last year. The decrease in total cost and expenses was caused by the gain on settlement of debts-foreign subsidiary related to the winding up of the affairs of XLG AG.
Cost of Sales
There were no fields sold during the three and nine month periods ended September 30, 2007. For the three and nine month periods ended September 30, 2006, the Company realized gross margins of 2% and 17%, respectively.
Selling, General and Administration
For the three and nine month periods ended September 30, 2007, the Company incurred selling, general and administration expenses of $14,608 and $393,807, respectively. This compared to $848,962 and $5,079,150 for the same periods last year. The decrease was due to the layoff of all of the Company’s staff. The Company has undertaken a review of corporate overhead and implemented measures to reduce corporate overhead to a level more sustainable in relation to current revenue volume and management’s expectations.
Depreciation and Amortization
Depreciation and amortization for the three and nine month periods ended September 30, 2007 were $0 and $3,044.
Interest
The Company calculates interest in accordance with the respective note payable. For the three and nine month periods ended September 30, 2007, the Company incurred a charge of $60,463 and $115,201. This compared to $95,815 and $183,856 for the same periods of the previous year. This decrease mirrors the decrease liabilities which the Company has assumed to finance its operations.
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Liquidity and Capital Resources
At September 30, 2007, the Company had $66,191 in cash, as opposed to $128,607 in cash at December 31, 2006. As a result of certain measures implemented to reduce corporate overhead, management estimates that cash requirements through the end of the fiscal year ended December 31, 2007 will be between $1.0 million to $1.2 million. As of the date of this Report, the Company does not have available resources sufficient to cover the expected cash requirements through the end of the third quarter of 2007 or the balance of the year. As a result, there is substantial doubt that we can continue as an ongoing business without obtaining additional financing. Management's plans for maintaining Company operations and continued existence include selling additional equity securities and borrowing additional funds to pay operational expenses. There is no assurance that the Company will be able to generate sufficient cash from operations, sell a dditional shares of Common Stock or borrow additional funds. The Company's inability to obtain additional cash could have a material adverse effect on our financial position, results of operations and the Company's ability to continue its existence. If our losses continue and we are unable to secure additional financing, we may ultimately be required to seek protection from creditors under applicable bankruptcy laws.
At September 30, 2007, the Company had total assets of $66,191 compared to total assets of $199,304 at December 31, 2006. The decrease is mainly due to general and administration expenses.
At September 30, 2007, the Company had total current liabilities of $2,983,066 compared to total current liabilities of $11,611,577 at December 31, 2006. The liabilities are mainly due to (i) accrued operational costs; (ii) loan notes from shareholders and suppliers.
On December 31, 2006, the Company had received loans from CAPEX Investment Limited, a stockholder, in the amount of $2,068,474. In the first nine months of 2007, the Company received loans from CAPEX Investment Limited, a stockholder, in the amount of $486,089. These loans carry an interest of 10% and are payable on demand. As of September 30, 2007, total loans from CAPEX Investment Limited amounted to $2,554,563. This compared to $2,068,474 as of December 31, 2006.
The financial conditions of the Company raise substantial doubt about the Company's ability to continue as a going concern. Management's plan for the Company's continued existence includes selling additional stock through private placements and borrowing additional funds to pay overhead expenses. The future success of the Company is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares of Common Stock or borrow additional funds. The inability of the Company to obtain additional cash could have a material adverse effect on its financial position, results of operations and its ability to continue as a going concern.
Off-Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements.
ITEM 3. Controls and Procedures
As of the end of the period covered by this Report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934 (the “Exchange Act”). Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions on required disclosure and is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no changes in the Company’s internal controls over financial reporting during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
As of the filling of the present Quarterly report on form 10QSB and during the quarter-ended September 30 2007, there was no pending or threatened litigation, claims, or assessments against the Company. During the quarter-ended June 30 2007, several pending legal proceedings involving the Company were resolved. On April 24, 2007, the Company entered into four settlement agreements to resolve certain disputes. Three of these settlement agreements were filed with the Quebec Superior Court and Quebec Court, District of Montreal (under court file numbers 500-17-033768-063, 500-22-129010-065, 500-17-033823-066). One settlement agreement was filed at the Canadian Federal Court of the District of Montreal (under court file number T-1872-06). Neither the Company nor any other party to these settlement agreements made any admission of wrongdoing or liability. In each of these settlement agreements, the parties agreed to be responsible for their own legal fees, court fees or other fees. Each of the settlement agreements shall be governed and construed in accordance with the laws of the Province of Quebec, Canada. The settlements and a related dismissal of a bankruptcy action are summarized as follows:
WKF/5 Ltd-Settled on April 24, 2007
On October 26, 2006, the Company filed a motion against WKF/5 Ltd, the Alain Lemieux Trust (Jersey) and Professional Trust Company Limited in the Canadian Federal Court of the District of Montreal (court file number T-1872-06). The Company claimed that the Register of Trade-marks relating to registration no. 671 108 (application no. 1 266 983) for the trade-mark XLGENERATION, registered on August 24, 2006, be struck on the grounds that at the date of the application or at the date of registration, the entry as it appears on the Register does not accurately express or define the existing rights of the person appearing to be the registered owner of the mark. Furthermore, the Company asked for an order declaring that WKF/5 Ltd was not and is not entitled to obtain registration of any trade-mark containing the word XLGENERATION on the claim that the registration in the name of WKF/5 Ltd of the trade-mark XLGEN ERATION is contrary to the Company’s rights. Pursuant to the settlement agreement dated April 24, 2007, the Company has agreed to relinquish its license to manufacture products utilizing the technology patented by WKF/5 Ltd, retroactively effective October 2, 2006. For up to six (6) months from April 24, 2007, the Company may continue to utilize (i) technology created by WKF/5 Ltd; and (ii) the trademark XL Generation. Thereafter, the Company will have no rights to use either the technology owned by WKF/5 Ltd or the trademark XL Generation. The Company has agreed that for a period of five (5) years thereafter, the Company and its subsidiaries may not engage in any business related to the production of artificial turf.
Solutions Highmedia Interactif Inc.-Settled on April 24, 2007
On November 10, 2006, the Company filed a motion seeking injunctive relief against Solutions Highmedia Interactif Inc. and Domenico Malatesta, in the Quebec Superior Court of the District of Montreal (court file number 500-17-033768-063) to forbid the selling, and prevent the cession of the internet domain name and emails of the Company and its affiliates, and to reactivate the Company’s and its affiliates related internet services. In a related matter, on November 16, 2006, Solutions Highmedia Interactif Inc. filed a motion for monetary claim against the Company, XL Generation AG and XL Canada, in the Quebec Court of the District of Montreal (court file number 500-22-129010-065) totalling $54,418 CAD covering expenses for webdesign, printing, translation, and webhosting mandates performed towards the website of the Company and its affiliates between January 1, 2006 and August 15, 2006. Pursuant to th e settlement agreement dated April 24, 2007, Solutions Highmedia Interactif Inc. and Domenico Malatesta have agreed to release the Company from any amounts owed. The Company has agreed that the Company’s domain name will become the property of WKF/5 Ltd.
Share Exchange Agreement-Settled on April 24, 2007
On November 14, 2006, the Company filed a motion seeking the annulment of the Share Exchange Agreement signed on August 19, 2005 between the Company and XL Generation AG. In addition, this action seeks to require certain of the Company’s former management and affiliated parties to pay
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$11,000,000 in damages and to order the escrow agent and Pacific Stock Transfer Company to deposit the 13,500,000 shares of the Company issued to the Alain Lemieux Trust and Professional Trust Company Limited at the Quebec Superior Court of the District of Montreal (court file number 500-17-033823-066). This action alleged misconduct by former officers and directors of the Company, including unjustified and irresponsible spending of the Company’s financial resources. Pursuant to the settlement agreement dated April 24, 2007, all claims for damages and for the annulment of the Share Exchange Agreement have been dropped, and the Alain Lemieux Trust was permitted to receive the disputed 13,500,000 shares of the Company’s common stock, and sell such shares to a third party for $500,000.
Polyprod Litigation
XL Generation AG has ceased pursuing judicial proceedings seeking injunctive and other relief against Polyprod Inc. in the Quebec Superior Court of the District of Montreal (court file number 500-17-032933-064) to allow XL Generation AG to halt Polyprod Inc. from locking XL Generation AG out of the production site, and to force Polyprod Inc. to allow XL Generation AG access to said production site.
Bankruptcy Dismissed on May 11, 2007
On May 11, 2007 the Bankruptcy Court of the Québec Superior Court of the District of Montreal (court file number 500-11-029010-069) dismissed claims made by XL Generation AG seeking to have Polyprod Inc. declared bankrupt pursuant to applicable law for an unpaid claim totalling $1,052,069 CAD. This amount represented monetary advances towards the production of artificial turf and related products, made by XL Generation AG to Polyprod Inc. from January 5, 2006 to October 10, 2006. Neither party was awarded costs.
XL Generation AG Wind up
In May 2007, the Directors of the Company’s wholly-owned Swiss subsidiary XL Generation AG gave their resignation and the Company was unable to replace such Directors (required by law to be Swiss residents). This situation was reported to the Cantonal Commerce Register Office in Zug, Switzerland which, after a statutory waiting period when public notices concerning the matter were posted, delivered the XL Generation AG entity to the Swiss courts in order to wind up its affairs. Swiss Counsel has advised the Company that under Swiss law concerning such matters, a shareholder’s liability is limited to the amount of stated capital of the entity being delivered to the Swiss Courts and, as in the case of XL Generation AG, where all of the stated capital had been paid in by the shareholders, the law does not provide for further claims against the shareholders. Counsel has also advised that while Swiss law does not provide for further liabilities and/or claims against the shareholders when stated capital is fully paid, aggrieved parties may from time to time file claims in Swiss courts against the former management and directors of the entity whose affairs are being settled by the Court as well as its former shareholders. At the moment of the decision of the Swiss court XL Generation AG was facing pending and threatened litigation, claims and assessments. The Company has no intention to intervene these said litigations or claims, and no litigations or claim were filed against the Company by XL Generation AG’s creditors following XL Generation AG’s wind up.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company received a deposit of five hundred thousand dollars ($500,000) from Emper Overseas S.A. on August 10, 2006 to purchase from the Company (i) 400,000 shares of the Company's common stock; and (ii) Series A Warrants to purchase up to an additional 400,000 shares of the company's common stock at an exercise price initially set at $1.25 per share. The shares of the Company's common stock were issued on May 22, 2007 pursuant to the exemption from registration provided by Regulation S.
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| 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 and Reports on Form 8-K |
(a) Reports on Form 8-K
The Company filed a Report on Form 8-K on April 23, 2007 reporting a stock transaction between the Alain Lemieux Trust (Jersey) and DT Crystal Holdings Ltd.
The Company filed a Report on Form 8-K on May 31, 2007 reporting the resignation of Mr. Albert Beerli and Mr. Pascal Beerli as the Directors of XL Generation AG.
| (b) Exhibits | ||
| Exhibit No. | Description of Exhibits | |
| Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of | |
| 2002. | ||
| Exhibit 31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of | |
| 2002. | ||
| Exhibit 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted | |
| pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| Exhibit 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted | |
| pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ECOLOCAP SOLUTIONS INC. | ||
| November 14, 2007 | By:ALEXANDER C. GILMOUR | |
| Name: | Alexander C. Gilmour | |
| Title: | Acting Principal Executive Officer | |
| By:MICHEL ST-PIERRE | ||
| Name: | Michel St-Pierre | |
| Title: | Acting Principal Financial Officer and | |
| Acting Principal Accounting Officer | ||
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