UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ü | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
| ACT OF 1934 |
For the quarterly period ended: September 30, 2009 | |
Or | |
|
|
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
| ACT OF 1934 |
For the transition period from: _____________ to _____________ | |
Commission file number: 000-25663
ECOSPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 20-3502861 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
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3515 S.E. Lionel Terrace, Stuart, FL |
| 34997 |
(Address of principal executive offices) |
| (Zip Code) |
(772) 287-4846
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the | ||||||||
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | ü | Yes |
| No | ||||
| ||||||||
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 | ||||||||
months (or for such shorter period that the registrant was required to submit and post such files). |
| Yes |
| No | ||||
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. | ||||||||
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Large accelerated filer |
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| Accelerated filer |
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Non-accelerated filer |
| (Do not check if a smaller |
| Smaller reporting company | ü |
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| reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | ||||||||
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| Yes | ü | No | ||||
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Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. The number of outstanding shares of the issuers common stock as of November 11, 2009, was 114,002,448. | ||||||||
ECOSPHERE TECHNOLOGIES, INC.
FORM 10-Q
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements.
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| September 30, |
| December 31, |
| ||
|
| (Unaudited) |
|
|
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| |
Current Assets |
|
|
|
|
|
|
|
Cash |
| $ | 51,620 |
| $ | 461,514 |
|
Accounts receivable |
|
| |
|
| 123,728 |
|
Inventories |
|
| |
|
| 32,426 |
|
Prepaid expenses and other current assets |
|
| 492,587 |
|
| 72,101 |
|
Total current assets |
|
| 544,207 |
|
| 689,769 |
|
Property and equipment, net |
|
| 1,826,230 |
|
| 1,875,891 |
|
Construction in progress |
|
| 3,318,713 |
|
| 319,975 |
|
Patents, net |
|
| 38,709 |
|
| 41,165 |
|
Debt issue costs, net |
|
| 10,000 |
|
| 276,055 |
|
Deposits |
|
| 14,650 |
|
| 55,998 |
|
Total assets |
| $ | 5,752,509 |
| $ | 3,258,853 |
|
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Liabilities, Redeemable Convertible Cumulative Preferred Stock and Stockholders Deficit | |||||||
Current Liabilities |
|
|
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|
|
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Accounts payable |
| $ | 3,536,766 |
| $ | 1,009,467 |
|
Accounts payable - related parties |
|
| |
|
| 5,485 |
|
Accrued liabilities |
|
| 968,326 |
|
| 1,457,497 |
|
Insurance premium finance contract |
|
| 6,189 |
|
| 42,270 |
|
Capital lease obligations |
|
| 23,684 |
|
| 38,249 |
|
Due to affiliate |
|
| 2,000 |
|
| 2,000 |
|
Deferred revenue |
|
| 200,000 |
|
| |
|
Notes payable related parties (net of discount) current portion |
|
| 755,600 |
|
| 1,370,141 |
|
Notes payable third parties (net of discount) current portion |
|
| 3,003,334 |
|
| 5,994,435 |
|
Fair value of liability for warrant derivative instruments |
|
| 7,813,639 |
|
| |
|
Fair value of liability for embedded conversion option derivative instruments |
|
| 1,275,574 |
|
| |
|
Total current liabilities |
|
| 17,585,112 |
|
| 9,919,544 |
|
Capital lease obligations less current portion |
|
| |
|
| 13,721 |
|
Deferred rent |
|
| |
|
| 4,126 |
|
Restructuring reserve |
|
| 185,671 |
|
| |
|
Notes payable - related parties - less current portion |
|
| |
|
| 115,818 |
|
Notes payable to third parties less current portion |
|
| 2,009,010 |
|
| 25,400 |
|
Total Liabilities |
|
| 19,779,793 |
|
| 10,078,609 |
|
Redeemable convertible cumulative preferred stock series A |
|
|
|
|
|
|
|
11 shares authorized; 7 and 7 shares issued and outstanding, respectively, $25,000 per |
|
| 1,130,994 |
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| 1,111,306 |
|
Redeemable convertible cumulative preferred stock series B |
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|
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484 shares authorized; 375 and 424 shares issued and outstanding, respectively, $2,500 per |
|
| 2,770,052 |
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| 2,822,239 |
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Commitments and Contingencies (Note 13) |
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Ecosphere Technologies, Inc. Stockholders Deficit |
|
|
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Common stock, $0.01 par value; 300,000,000 shares authorized; 111,654,210 and 83,791,919 |
|
| 1,116,538 |
|
| 837,914 |
|
Common stock issuable, $0.01 par value, 750,000 and 286,000 issuable at September 30, 2009 |
|
| 7,500 |
|
| 2,860 |
|
Additional paid-in capital |
|
| 63,498,891 |
|
| 53,399,704 |
|
Accumulated deficit |
|
| (85,782,728 | ) |
| (64,993,779 | ) |
Total Ecosphere Technologies, Inc. stockholders deficit |
|
| (21,159,799 | ) |
| (10,753,301 | ) |
Noncontrolling interest in consolidated subsidiary |
|
| 3,231,469 |
|
| |
|
Total stockholder' deficit |
|
| (17,928,330 | ) |
| (10,753,301 | ) |
Total liabilities, redeemable convertible cumulative preferred stock, and stockholders deficit |
| $ | 5,752,509 |
| $ | 3,258,853 |
|
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
1
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
| For The Three Months Ended |
| For The Nine Months Ended |
| ||||||||
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
Revenues |
| $ | 357,076 |
| $ | 122,454 |
| $ | 705,385 |
| $ | 123,474 |
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Cost of revenues |
|
| 136,257 |
|
| 27,276 |
|
| 391,006 |
|
| 27,276 |
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Gross profit |
|
| 220,819 |
|
| 95,178 |
|
| 314,379 |
|
| 96,198 |
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Operating expenses |
|
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Selling, general and administrative |
|
| 2,804,860 |
|
| 1,914,178 |
|
| 7,293,422 |
|
| 4,249,788 |
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Restructuring charge |
|
| |
|
| |
|
| 548,090 |
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| |
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Total operating expenses |
|
| 2,804,860 |
|
| 1,914,178 |
|
| 7,841,512 |
|
| 4,249,788 |
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Loss from operations |
|
| (2,584,041 | ) |
| (1,819,000 | ) |
| (7,527,133 | ) |
| (4,153,590 | ) |
|
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Other income (expense): |
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|
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|
|
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Other income |
|
| 2 |
|
| 769 |
|
| 2,758 |
|
| |
|
Other expense |
|
| |
|
| |
|
| (1,605 | ) |
| (12,652 | ) |
Loss on conversion |
|
| (27,288 | ) |
| (209,823 | ) |
| (716,538 | ) |
| (256,271 | ) |
Interest expense |
|
| (655,645 | ) |
| (1,740,534 | ) |
| (4,656,787 | ) |
| (4,108,378 | ) |
Change in fair value of derivative instruments |
|
| 2,173,567 |
|
| |
|
| (3,565,592 | ) |
| |
|
Total other income (expense) |
|
| 1,490,636 |
|
| (1,949,588 | ) |
| (8,937,764 | ) |
| (4,377,301 | ) |
|
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Net loss |
|
| (1,093,405 | ) |
| (3,768,588 | ) |
| (16,464,897 | ) |
| (8,530,891 | ) |
|
|
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|
Preferred stock dividends |
|
| (30,000 | ) |
| (34,937 | ) |
| (90,000 | ) |
| (105,188 | ) |
|
|
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|
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|
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|
Net loss applicable to common stock |
|
| (1,123,405 | ) |
| (3,803,525 | ) |
| (16,554,897 | ) |
| (8,636,079 | ) |
|
|
|
|
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|
|
|
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|
Less: Net loss applicable to noncontrolling interest in consolidated subsidiary |
|
| 268,531 |
|
| |
|
| 268,531 |
|
| |
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|
Net (loss) applicable to Ecosphere Technologies, Inc. common stock |
| $ | (854,874 | ) | $ | (3,803,525 | ) | $ | (16,286,366 | ) | $ | (8,636,079 | ) |
|
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Net income (loss) per common share applicable to common stock |
|
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Basic and diluted |
| $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.17 | ) | $ | (0.12 | ) |
|
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Weighted average number of common shares outstanding |
|
|
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|
|
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|
|
Basic and diluted |
|
| 110,461,145 |
|
| 74,858,556 |
|
| 96,419,567 |
|
| 69,605,413 |
|
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
2
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| For the Nine Months Ended September 30, |
| ||||
|
| 2009 |
| 2008 |
| ||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net (loss) before preferred dividends and after noncontrolling interest |
| $ | (16,196,366 | ) | $ | (8,530,891 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 438,549 |
|
| 143,725 |
|
Amortization of debt issue costs |
|
| 268,792 |
|
| 327,508 |
|
Amortization of prepaid expenses |
|
| 43,345 |
|
| 128,146 |
|
Accretion of discount on notes payable |
|
| 2,305,093 |
|
| 3,308,099 |
|
Loss on conversion of accrued interest to stock |
|
| 701,343 |
|
| 292,338 |
|
Non-cash compensation expense |
|
| 3,589,619 |
|
| 1,097,462 |
|
Interest expense for warrant derivative liability related to new warrants |
|
| 684,381 |
|
| |
|
Interest expense for embedded conversion option derivative liability of new convertible debt |
|
| 983,871 |
|
| |
|
Warrants issued for services |
|
| |
|
| 7,161 |
|
Impairment of inventory |
|
| |
|
| 6,601 |
|
Common stock issued for settlement |
|
| |
|
| 12,500 |
|
Options issued for services |
|
| |
|
| 10,808 |
|
Option/warrant exchange program expense |
|
| |
|
| 15,679 |
|
Changes in operating assets and liabilities |
|
| |
|
| |
|
Decrease (increase) in accounts receivable |
|
| 123,728 |
|
| (119,674 | ) |
(Increase) in inventories |
|
| |
|
| (32,426 | ) |
(Increase) decrease in prepaid expenses and other current assets |
|
| (463,243 | ) |
| 2,678 |
|
(Increase) in debt issue costs and other non-current assets |
|
| (2,737 | ) |
| (147,501 | ) |
Increase (decrease) in accounts payable |
|
| 2,527,299 |
|
| 86,476 |
|
Increase (decrease) in accounts payable - related parties |
|
| (5,485 | ) |
| |
|
Increase in restructuring reserve |
|
| 261,147 |
|
| |
|
Increase in deferred rent |
|
| 3,094 |
|
| 1,031 |
|
Increase in deposit |
|
| |
|
| 250,000 |
|
Increase in deferred revenue |
|
| 200,000 |
|
| |
|
Increase in accrued expenses |
|
| 178,449 |
|
| 216,245 |
|
Increase in fair value of warrant derivative liability |
|
| 1,804,869 |
|
| |
|
Increase in fair value of embedded conversion option derivative liability |
|
| 1,760,733 |
|
| |
|
Noncontrolling interest in consolidated subsidiary |
|
| (268,531 | ) |
| |
|
Net cash used in operating activities |
|
| (1,062,050 | ) |
| (2,924,035 | ) |
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
Proceeds from sale of investment |
|
| - |
|
| 250,000 |
|
Construction in process purchases |
|
| (3,292,989 | ) |
| (426,416 | ) |
Purchase of property and equipment |
|
| (60,343 | ) |
| (885,544 | ) |
Net cash (used in) investing activities |
|
| (3,353,332 | ) |
| (1,061,960 | ) |
FINANCING ACTIVITIES: |
|
|
|
|
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|
|
Proceeds from noncontrolling interest investment |
|
| 3,500,000 |
|
| |
|
Proceeds from issuance of notes payable and warrants |
|
| 575,000 |
|
| 3,294,790 |
|
Proceeds from issuance of notes payable |
|
| 45,500 |
|
| |
|
Proceeds from issuance of notes payable and warrants to related parties |
|
| 80,000 |
|
| 980,000 |
|
Proceeds from issuance of notes payable to related parties |
|
| |
|
| 41,856 |
|
Proceeds from warrant exercises |
|
| 75,938 |
|
| 166,800 |
|
Repayments of notes payable and insurance financing |
|
| (212,664 | ) |
| (173,618 | ) |
Repayments of notes payable to related parties |
|
| (30,000 | ) |
| (241,080 | ) |
Principal payments on capital leases |
|
| (28,286 | ) |
| (25,671 | ) |
Net cash provided by financing activities |
|
| 4,005,488 |
|
| 4,043,077 |
|
Net (decrease) increase in cash |
|
| (409,894 | ) |
| 57,082 |
|
Cash, beginning of period |
|
| 461,514 |
|
| 329,848 |
|
Cash, end of period |
| $ | 51,620 |
| $ | 386,930 |
|
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
3
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
|
| For The Nine Months Ended September 30, |
| ||||
|
| 2009 |
| 2008 |
| ||
Cash paid for interest |
| $ | 215,576 |
| $ | 176,051 |
|
Cash paid for income taxes |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
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|
|
|
|
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|
Accrued preferred stock dividends |
| $ | 90,000 |
| $ | 105,188 |
|
Beneficial conversion features of convertible notes and debentures |
| $ | |
| $ | 1,638,005 |
|
Common stock issued for services |
| $ | |
| $ | 343,161 |
|
Common stock issued for debt issue costs |
| $ | |
| $ | 523,017 |
|
Conversion of convertible debentures to common stock |
| $ | 1,057,442 |
| $ | 428,656 |
|
Conversion of convertible notes to common stock |
| $ | 1,455,000 |
| $ | 1,323,544 |
|
Conversion of related party debt to common stock |
| $ | 1,050,000 |
| $ | |
|
Reduction of derivative liability for embedded conversion options from |
| $ | 1,977,877 |
| $ | |
|
Reduction of derivative liability for embedded conversion options from |
| $ | 4,925,703 |
| $ | |
|
Warrant liability recorded as debt discount |
| $ | 231,248 |
| $ | |
|
Embedded conversion option liability recorded as debt discount |
| $ | 334,504 |
| $ | |
|
Common stock issued as payment of accrued interest |
| $ | 373,154 |
| $ | 79,775 |
|
Common stock issued in payment of services or accounts payable |
| $ | 85,814 |
| $ | 15,000 |
|
Series B Redeemable Convertible Cumulative Preferred Stock converted to |
| $ | 122,500 |
| $ | 32,174 |
|
Conversion of accrued interest to notes payable |
| $ | |
| $ | 184,214 |
|
The accompanying unaudited notes are an integral part of these condensed consolidated financial statements.
4
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
1.
NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Ecospheres mission is to become a globally branded company known for developing and introducing patented innovative clean technologies to the world marketplace. We invent, patent, develop and expect to license and/or sell clean technologies with the potential for practical, economical and sustainable applications across industries throughout the world. We were incorporated under the name UltraStrip Systems, Inc. in April 1998 in Florida. We reincorporated on September 8, 2006 in Delaware under the name Ecosphere Technologies, Inc. (Ecosphere or the Company).
The accompanying unaudited condensed consolidated financial statements include the accounts of Ecosphere, its 90%-owned subsidiary, Ecosphere Systems, Inc. (ESI), its 67% -owned subsidiary Ecosphere Energy Services LLC (EES) and its wholly-owned subsidiaries Ecosphere Envirobotic Solutions, Inc. (UES), Ecosphere Energy Services, Inc. (EES, Inc.) and Ecosphere Renewable Energy Corp. (EREC) ESI was formed during the first quarter of 2005 and markets the Companys mobile water filtration technologies for disaster relief, homeland security and military applications. UES was formed in October 2005 to pursue the sale of UHP robotic coating removal equipment, technology and to perform contract services in the maritime coating removal industry that demonstrated the capabilities of the underlying technology. EES, Inc. was organized in November 2006. It develops and market s water filtration systems to the oil and gas exploration industry using the Companys patent pending Ozonix TM process. In July 2009, the Company contributed the assets and liabilities of EES, Inc. in exchange for a 67% share of EES. (See Note 15) EREC was formed in July 2008 to develop and market the Companys Ecos Lifelink and Power Cube technologies.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the U.S Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods shown. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. Certain prior period amounts have been reclassified to conform to the current period p resentation. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Managements Discussion and Analysis and Plan of Operation contained in this report and the audited consolidated financial statements and accompanying notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 25, 2009.
INVENTORIES
From time to time, the Company has inventory which consists of parts to be incorporated into future water processing units. At September 30, 2009, the Company had no parts in inventory.
CHANGE IN ACCOUNTING PRINCIPLE
In January 2009, the Company adopted the provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) 815-40 which was ratified by the Financial Accounting Standards Board on June 25, 2008 and became effective for financial statements issued after December 15, 2008. Earlier application was not permitted. Under the provisions of ASC 815-40, convertible instruments and warrants, which contain terms that protect holders from declines in the stock price (reset provisions), may no longer be exempt from derivative accounting treatment under ASC 815-10 Derivatives and Hedging. As a result, warrants and embedded conversion features of convertible notes may no longer be recorded in equity, but will rather be recorded as a liability which will be revalued at fair value at each reporting date. Further, under derivative accounting, the warrants will be valued
5
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
at their fair value, rather than their relative fair value. If the fair value of the warrants exceeds the face value of the related debt, the excess is recorded as change in fair value on the issuance date. Embedded conversion features will be valued at their fair value, rather than by the intrinsic value method. The fair value of the embedded conversion feature will be added to loan discount, in an amount which is the lesser of, the fair value of the embedded conversion feature or the excess of the face value of the debt over the fair value of the attached warrants or any other applicable debt discounts. If the amount of the fair value of embedded conversion feature applied to discount is less than the total fair value of the embedded conversion feature, the remainder will be recorded as change in fair value on the issuance date.
The Company applied the ASC 815-40 guidance to outstanding instruments as of January 1, 2009. The instruments affected by the ASC 815-40 guidance as of January 1, 2009 were as follows:
Convertible Debt |
|
|
|
|
|
|
|
|
| Conversion Rate |
| Principal Amount |
| ||
2006 Convertible Debentures |
| $ | 0.15 |
| $ | 1,151,876 |
|
2008 Secured Convertible Notes |
| $ | 0.15 |
|
| 2,415,000 |
|
2008 Secured Convertible Original Issue Discount Notes |
| $ | 0.36 |
|
| 1,851,111 |
|
Total |
|
|
|
| $ | 5,417,987 |
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
| Exercise Price |
| Number of Warrants |
| ||
Warrants attached to 2006 Convertible Debentures |
| $ | 0.15 |
|
| 10,162,602 |
|
Warrants attached to 2008 Secured Convertible Notes |
| $ | 0.15 |
|
| 4,985,000 |
|
Warrants issued as Finder's Fee for 2008 Secured Convertible Notes |
| $ | 0.15 |
|
| 2,415,000 |
|
Warrrants issued along with $1 million of Secured Promissory Notes |
| $ | 0.15 |
|
| 1,000,000 |
|
Warrrants issued along with $2 million of Secured Promissory Notes |
| $ | 0.25 |
|
| 666,667 |
|
Total |
|
|
|
|
| 19,229,269 |
|
The cumulative effect of the change in accounting principle was recorded as an adjustment to the opening balance of loan discounts, accumulated deficit and additional paid-in capital. The cumulative-effect adjustment was calculated as the difference between the amounts recognized in the Companys Consolidated Balance Sheet as of December 31, 2008 and the amounts recognized in the Companys Consolidated Balance Sheet at initial application of ASC 815-40. The amounts recognized in the Unaudited Condensed Consolidated Balance Sheet as of March 31, 2009 are the result of the initial application of ASC 815-40, as of January 1, 2009, and the revaluation of the derivative liabilities through March 31, 2009 and have been determined based on the amounts that would have been recognized if the guidance of ASC 815-40 had been applied from the issuance dates of the instruments.
The Company recorded a cumulative effect of a change in accounting principle as of January 1, 2009 in the amount of the estimated fair value of such warrants and embedded conversion options and will record future changes in fair value in results of operations. The Company calculated the estimated fair values of the liabilities for warrant derivative instruments and embedded conversion option derivative instruments with the Black-Scholes option pricing model using the share prices of the Companys stock on the dates of valuation and using the following ranges for volatility, expected term and the risk free interest rate at each respective valuation date, no dividend has been assumed for any of the periods:
6
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Table 1 |
| Black Scholes Inputs for the Three Months Ended | ||||
Warrants |
|
|
|
|
|
|
|
| Issuance of |
| As of |
| As of |
Volatility |
| 92.54% - 140.96% |
| 135.81% |
| 133.81% |
Expected Term |
| 3 - 5 years |
| 2.37 - 4.5 years |
| 2.13 - 4.3 years |
Risk Free Interest Rate |
| 1.15% - 4.21% |
| 0.75% - 1.40% |
| 0.85% - 1.47% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Conversion Options |
|
|
|
| ||
|
| Issuance of |
| As of |
| As of |
Volatility |
| 94.9% - 140.96% |
| 135.81% |
| 133.81% |
Expected Term |
| 1 - 2.19 years |
| .21 - .96 years |
| .001 - .71 years |
Risk Free Interest Rate |
| 0.45% - 4.15% |
| 0.10% - 0.37% |
| 0.01% - 0.47% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 2 |
| Black Scholes Inputs for the Three Months Ended | ||||
Warrants |
|
|
|
|
|
|
|
|
|
| Issuance of |
| As of |
Volatility |
|
|
| 132.91% - 133.73% |
| 132.91% |
Expected Term |
|
|
| 5 years |
| 1.88 - 5 years |
Risk Free Interest Rate |
|
|
| 1.65% - 2.70% |
| 1.11% - 2.54% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Conversion Options |
|
|
|
| ||
|
| Notes Converted |
| Issuance of |
| As of |
Volatility |
| 132.91% - 146.31% |
| 132.91% - 133.63% |
| 132.91% |
Expected Term |
| .001 - 0.67 years |
| 1 year |
| .16 - 1.0 years |
Risk Free Interest Rate |
| 0.0013% - 0.60% |
| 0.49% - 0.51% |
| 0.09% - 0.51% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 3 |
| Black Scholes Inputs for the Three Months Ended | ||||
Warrants |
|
|
|
|
|
|
|
|
|
| Issuance of |
| As of |
Volatility |
|
|
| 133.05% |
| 125.17% |
Expected Term |
|
|
| 5 years |
| 3.25 - 4.78 years |
Risk Free Interest Rate |
|
|
| 2.22% - 2.33% |
| 1.56% - 2.27% |
7
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Embedded Conversion Options |
|
|
|
| ||
|
| Notes Converted |
| Issuance of |
| As of |
Volatility |
| 132.67% - 133.05% |
| 125.7% - 133.05% |
| 125.17% |
Expected Term |
| 0.14 - 0.29 years |
| 1 year |
| 0.001 - .78 years |
Risk Free Interest Rate |
| 0.07% - 0.16% |
| 0.40% - 0.47% |
| 0.001% - 0.31% |
Based upon the estimated fair values, as calculated, the Company recorded a cumulative effect of approximately $10,218,000 as of January 1, 2009, which has been recorded by a credit to fair value liability for warrant derivative instruments of approximately $5,093,000 and fair value liability of embedded conversion option derivative instruments of approximately $5,125,000 and debits to loan discount of approximately $385,000, additional paid in capital of approximately $5,240,000 and accumulated deficit of approximately $4,593,000.
The Company calculated the estimated fair values of the liabilities for warrant derivative instruments at March 31, 2009 with the Black-Scholes option pricing model using the closing price of the Companys common stock, $0.16 and the ranges for volatility, expected term and risk free interest indicated in Table 1 above. Based upon the estimated fair value, the Company reduced the fair value of liability for warrant derivative instruments by approximately $2.7 million and recorded other income for the same amount for the three months ended March 31, 2009.
The Company calculated the fair values of the liabilities for embedded conversion option derivative instruments at March 31, 2009 with the Black-Scholes option pricing model using the closing price of the Companys common stock, $0.16 and the ranges for volatility, expected term and risk free interest indicated in Table 1 above. Based upon the estimated fair value, the Company reduced the fair value of liability for warrant derivative instruments by approximately $3.7 million and recorded other income for the same amount for the three months ended March 31, 2009.
Additionally, as a result of the additional loan discount recorded in the cumulative effect adjustment as of January 1, 2009, the Company recorded an additional $182,816 of interest expense for the three months ended March 31, 2009, related to the amortization of the additional loan discount.
The impact of the change in accounting principle on the unaudited condensed consolidated statement of operations of the Company for the three months ended March 31, 2009 was to change a net loss applicable to common stock of $3,390,163 or $0.04 per share basic into net income applicable to common stock of $3,072,838 or $0.04 per share basic and $0.03 per share diluted.
The Company calculated the estimated fair values of the liabilities for warrant derivative instruments at June 30, 2009 with the Black-Scholes option pricing model using the closing price of the Companys common stock, $0.49 and the ranges for volatility, expected term and risk free interest indicated in Table 2 above. Based upon the estimated fair value, the Company increased the fair value of liability for warrant derivative instruments by approximately $6.0 million which was recorded as other expense for the three months ended June 30, 2009.
The Company calculated the estimated fair values of the liabilities for embedded conversion option derivative instruments at June 30, 2009 with the Black-Scholes option pricing model using the closing price of the Companys common stock, $0.49 and the ranges for volatility, expected term and risk free interest indicated in Table 2 above. Based upon the estimated fair value, the Company increased the fair value of liability for embedded conversion option derivative instruments by approximately $6.2 million which was recorded as other expense for the three months ended June 30, 2009.
8
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
In addition, the Company recorded interest expense of $932,924 and debt discount of $188,504 related to the fair value of the liability for embedded conversion option derivative instruments contained in new convertible original issue discount notes with a face amount of $361,111 issued during the three months ended June 30, 2009. The notes are convertible at $0.36 per share. The fair value of the liability for embedded conversion option derivative instruments were calculated using the Black- Scholes option pricing model, the price of the companys stock on the dates of issuance of the notes, and the ranges for volatility, expected term and risk free interest indicated in Table 2 above.
Further, the Company recorded interest expense of $638,048 and debt discount of $136,496 related to the fair value of 325,000 five year warrants, with an exercise price of $0.25 per share, granted in connection with the issuance of new convertible original issue discount notes and 665,000 five year warrants, with an exercise price of $0.25 per share, granted as inducement to extend the repayment term of certain convertible notes the during the three months ended June 30, 2009. The warrants were calculated using the Black- Scholes option pricing model, the price of the companys stock on the dates of issuance of the notes, and the ranges for volatility, expected term and risk free interest indicated in Table 2 above.
A summary of the new secured convertible original issue discount notes and new warrants issued during the three months ended June 30, 2009 is as follows:
Convertible Debt |
|
|
|
|
|
|
|
|
| Conversion Rate |
| Principal Amount |
| ||
Secured Convertible Original Issue Discount Notes |
| $ | 0.36 |
|
| 361,111 |
|
Total |
|
|
|
| $ | 361,111 |
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
| Exercise Price |
| Number of Warrants |
| ||
Warrants issued to extend 2008 Secured Convertible Notes |
| $ | 0.15 |
|
| 665,000 |
|
Warrants issued to extend 2008 Secured Convertible Original Issue |
| $ | 0.25 |
|
| 1,228,500 |
|
Warrants issued in connection with new Secured Original Issue |
| $ | 0.25 |
|
| 325,000 |
|
Total |
|
|
|
|
| 2,218,500 |
|
The Company calculated the estimated fair values of the liabilities for warrant derivative instruments at September 30, 2009 with the Black-Scholes option pricing model using the closing price of the Companys common stock, $0.43 and the ranges for volatility, expected term and risk free interest indicated in Table 3 above. Based upon the estimated fair value, the Company decreased the fair value of liability for warrant derivative instruments by approximately $1,486,302 million which was recorded as other income for the three months ended September 30, 2009.
The Company calculated the estimated fair values of the liabilities for embedded conversion option derivative instruments at September 30, 2009 with the Black-Scholes option pricing model using the closing price of the Companys common stock, $0.43 and the ranges for volatility, expected term and risk free interest indicated in Table 3 above. Based upon the estimated fair value, the Company decreased the fair value of liability for embedded conversion option derivative instruments by approximately $687,265 which was recorded as other income for the three months ended September 30, 2009.
In addition, the Company recorded interest expense of $50,937 and debt discount of $169,616 related to the fair value of the liability for embedded conversion option derivative instruments contained in new convertible original issue discount notes with a face amount of $393,273 issued during the three months ended September 30, 2009. The notes are convertible at $0.36 per share. The fair value of the liability for embedded conversion option
9
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
derivative instruments were calculated using the Black- Scholes option pricing model, the price of the companys stock on the dates of issuance of the notes, and the ranges for volatility, expected term and risk free interest indicated in Table 3 above.
Further, the Company recorded debt discount of $141,105 related to the fair value of 353,945 five year warrants, with an exercise price of $0.25 per share, granted in connection with the issuance of new convertible original issue discount notes and 22,500 five year warrants, with an exercise price of $0.25 per share, granted as inducement to extend the repayment term of certain convertible notes the during the three months ended September 30, 2009. The warrants were calculated using the Black- Scholes option pricing model, the price of the companys stock on the dates of issuance of the notes, and the ranges for volatility, expected term and risk free interest indicated in Table 3 above.
A summary of the new secured convertible original issue discount notes and new warrants issued during the three months ended September 30, 2009 is as follows:
Convertible Debt |
|
|
|
|
|
|
|
|
| Conversion Rate |
| Principal Amount |
| ||
Secured Convertible Original Issue Discount Notes |
| $ | 0.36 |
|
| 393,273 |
|
Total |
|
|
|
| $ | 393,273 |
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
| Exercise Price |
| Number of Warrants |
| ||
Warrants issued to extend 2008 Secured Convertible Original Issue |
| $ | 0.25 |
|
| 22,500 |
|
Warrants issued in connection with new or renewed Secured Convertible Original Issue |
| $ | 0.25 |
|
| 353,945 |
|
Total |
|
|
|
|
| 376,445 |
|
FAIR VALUE ACCOUNTING
We measure our financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Amounts recorded for notes payable, net of discount, also approximate fair value because current interest rates available to us for debt with similar terms and maturities are substantially the same.
Effective January 1, 2008, we adopted accounting guidance for financial assets and liabilities. The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
10
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
We currently measure and report at fair value the liability for warrant and embedded conversion option derivative instruments. The fair value liabilities for price adjustable warrants and embedded conversion options have been recorded as determined utilizing Black-Scholes option pricing model. The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009:
|
| Balance at |
| Quoted Prices in |
| Significant |
| Significant |
| ||||
|
|
|
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||
Fair value of liability for warrant derivative instruments |
| $ | 7,813,639 |
| $ | |
| $ | |
| $ | 7,813,639 |
|
Fair value of liability for embedded conversion option derivative instruments |
|
| 1,275,574 |
|
| |
|
| |
|
| 1,275,574 |
|
Total Financial Liabilities |
| $ | 9,089,213 |
| $ | |
| $ | |
| $ | 9,089,213 |
|
Following is a roll forward through September 30, 2009 of the fair value liability of warrant derivative instruments and embedded conversion option derivative instruments:
The Company had no non-financial assets or liabilities measured at fair value as of September 30, 2009 and 2008
Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) approved the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (SEC), have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become non-authoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15,
11
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
2009, and impacts the Companys financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of the Companys financial statements or disclosures as a result of implementing the Codification during the quarter ended September 30, 2009.
As a result of the Companys implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable. In the current quarter financial statements, will provide reference to the new guidance only.
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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying unaudited condensed consolidated financial statements include the allowance for doubtful accounts receivable, valuation of inventories, estimates of depreciable lives, valuation of property and equipment, estimates of amortization periods for intangible assets, valuation of discounts on debt, valuation of beneficial conversion features in convertible debt, valuation of equity based instruments issued for other than cash, valuation of derivatives, valuation of the restruc turing reserve and the valuation allowance on deferred tax assets.
2.
GOING CONCERN
The accompanying unaudited condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the realization of assets and the satisfaction of liabilities in the normal course of operations. During the nine months ended September 30, 2009, the Company incurred a net loss applicable to Ecosphere Technologies, Inc. common stock of approximately $16.3 million, and used cash in operations of approximately $1.1 million. At September 30, 2009, the Company had a working capital deficiency of approximately $17 million, a stockholders deficit of approximately $17.9 million and had outstanding convertible preferred stock that is redeemable under limited circumstances for approximately $3.9 million (including accrued dividends). In addition, loans and accrued interest of $713,000 to note holders were in default as of S eptember 30, 2009 (See Note 4). The Company has not attained a level of revenues sufficient to support recurring expenses, and the Company does not presently have the resources to settle previously incurred obligations. These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern.
The Companys continued existence is dependent upon its ability to resolve its liquidity problems. On November 9, 2009, the Companys 67% owned subsidiary, EES, received $7.5 million from an investor in exchange for a 19% equity interest in EES. In addition, in October 2009, EES received $350,000 from the Chairman of EES in exchange for a promissory note convertible into a 1% equity interest in EES. On November 9, 2009, the Chairman converted his note into a 1% equity interest in EES. EES paid a finders fee equal to a 1.5% equity interest in EES to the Chairman of EES. Following the transaction, the Company owns 52.6% of EES and will continue to be the managing member of EES. These investments will enable EES to pay for the 24 EcosFrac units the Company is currently manufacturing for EES and will provide working capital for EES.
The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern. There are no assurances that the Company will be successful in achieving the above plans, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue as a going concern.
12
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
3.
PROPERTY AND EQUIPMENT
During the nine months ended September 30, 2009, the Company completed the manufacture and assembly of the first Ecos Frac Tank which was delivered for testing in Oklahoma in March 2009. In connection with the delivery of the Ecos Frac Tank, the Company reclassified the cost of manufacturing the equipment from construction in progress to property and equipment and began depreciating the unit. During the three months ended September 30, 2009, EES capitalized $187,812 of additional costs associated with improvements to the original two Ozonix units. Depreciation for the nine months ended September 30, 2009 relating to these units was $231,732. Total depreciation expense for the nine months ended September 30, 2009 was $436,681.
4.
NOTES PAYABLE
On February 23, 2009, the Company received additional funding of $45,500 from the issuance of a secured promissory note of $50,000 with an original issue discount (OID) of $4,500, repayable in six months. The effective annual interest rate based upon the OID is 18%. The note is secured by the Companys EcosFrac Tank components. In September 2009, this note was exchanged for a one year convertible original issue discount note in the amount of $55,556, bearing interest of 11.11%, and 50,000 five year warrants to purchase common stock of the Company at $0.25 per share.
In addition, on February 25, 2009, our Chief Financial Officer (CFO) arranged for the Company to receive an additional funding of $50,000 from an entity controlled by the CFO, in exchange for the issuance of a secured promissory note of $54,945 with an OID of $4,945, repayable in six months. The effective annual interest rate based upon the OID is 18%. The note is secured by the Companys EcosFrac Tank components. In September 2009, this note was exchanged for a one year convertible original issue discount note in the amount of $59,839, bearing interest of 11.11%, and 53,945 five year warrants to purchase common stock of the Company at $0.25 per share.
In addition, the Companys Chairman and CEO advanced the Company $30,000 in short term financing secured by the Companys receivables. These advances were repaid in April 2009.
In June 2009, the Company received $325,000 in exchange for issuing secured one year notes, convertible at $0.36 per share, bearing total principal of $361,111 and total OID of $36,111. In addition, the Company granted 325,000 five year warrants to purchase shares of the Companys common stock for $0.25 per share. The derivative liabilities of the warrants and the embedded conversion options amounting to $136,496 and $259,275, respectively, were calculated using the Black-Scholes option pricing model and the related inputs identified in Table 2 of Note 1. As a result, the Company recorded a debt discount related to the derivative liabilities of $325,000 and interest expense of $70,771, representing the excess of the derivative liability over the aggregate amount of the loan principal, net of OID. In addition, the Company received $112,500 of funding representing 50% of the total amount to be funded for an additional $250,000 con vertible note. This amount has been recorded as a loan advance liability in the accompanying Unaudited Condensed Consolidated Balance Sheet as of September 30, 2009. The remainder of the funding was received in July 2009.
In March 2009, secured convertible notes in the amount of $665,000 became due. The Company offered the holders of these notes an additional grant of warrants to purchase 665,000 shares of the Companys common stock at an exercise price of $0.15 to induce the holders to extend the notes for an additional six months. All of the holders agreed to the Companys offer and were granted the additional warrants in April 2009. The derivative liability of the warrants amounting to $90,163 was calculated using the Black-Scholes option pricing model, based upon the market price of the stock on the date of issuance and the related inputs identified in Table 2 of Note 1. This amount was recorded as interest expense during the three months ended September 30, 2009. In June 2009, holders of $640,000 of these notes converted the notes into 4,266,667 shares of common stock. In accordance with ASC 815-40-05, the Company calculated t he fair value of the liability for the embedded conversion option derivative instruments as of the conversion date using the Black-Scholes option pricing model, based upon the market price of the stock on the conversion date and the related inputs identified in Table 2 of Note 1. The resulting increase in the derivative liability of $1,354,222 was recorded as other expense. Upon conversion, the Company recorded a
13
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
reduction in the fair value of liability for embedded conversion option derivative instruments of $1,458,219 with a corresponding increase to paid in capital.
During the three months ended June 30, 2009, convertible debentures with an aggregate principal amount of $607,442 were converted into 4,049,611 shares of common stock. In accordance with ASC 815-40-05, the Company calculated the fair value of the liability for the embedded conversion option derivative instruments as of the conversion dates using the Black-Scholes option pricing model, based upon the market price of the stock on the conversion dates and the related inputs identified in Table 2 of Note 1. The resulting increase in the derivative liability of $845,582 was recorded as other expense. Upon conversion, the Company recorded a reduction in the fair value of liability for embedded conversion option derivative instruments of $1,177,884 with a corresponding increase to paid in capital.
During the three months ended June 30, 2009, secured convertible notes with an aggregate principal amount of $1,650,000 were converted into 11,000,000 shares of common stock. In accordance with ASC 815- 40-05, the Company calculated the fair value of the liability for the embedded conversion option derivative instruments as of the conversion dates using the Black-Scholes option pricing model, based upon the market price of the stock on the dates of conversion and the related inputs identified in Table 2 of Note 1. The resulting increase in the derivative liability of $2,905,004 was recorded as other expense. Upon conversion, the Company recorded a reduction in the fair value of liability for embedded conversion option derivative instruments of $3,302,266 with a corresponding increase to paid in capital.
In connection with the above conversions the Company converted accrued interest on convertible debentures and secured convertible notes in the amounts of $29,118 and $313,200 into 194,120 and 2,088,000 shares of common stock, respectively. The shares were valued at the market value on the dates of conversion at prices from $0.23 to $0.49 per share resulting, in losses on conversion of $56,077 and $632,720 for convertible debentures and secured convertible notes, respectively.
During the three months ended June 30, 2009, the Company received monthly advances from Bledsoe Capital Group of $250,000 pursuant to a credit agreement and note for up to $1.5 million, entered into on April 14, 2009. The total amount advanced under the agreement as of June 30, 2009 was $750,000 which was included in loan advances liability as of June 30, 2009. In July 2009, the Company received an additional $250,000 advance. The total amount due to Bledsoe Capital Group for the advances, $1,000,000 was contributed to EES in connection with its formation. On July 16, 2009, this amount was forgiven in connection with the license agreement between EES and the Company.
During the three months ended September 30, 2009, secured convertible debentures with an aggregate principal amount $360,000 were converted into 2,400,000 shares of common stock. In accordance with ASC 815-40-05, the Company calculated the fair value of the liability for the embedded conversion option derivative instruments as of the conversion dates using the Black-Scholes option pricing model, based upon the market price of the stock on the dates of conversion and the related inputs identified in Table 3 of Note 1. The resulting decrease in the derivative liability of $61,748 was recorded as other income. Upon conversion, the Company recorded a reduction in the fair value of liability for embedded conversion option derivative instruments of $709,835 with a corresponding increase to paid in capital.
During the three months ended September 30, 2009, secured convertible notes with an aggregate principal amount of $75,000 were converted into 500,000 shares of common stock. In accordance with ASC 815-40-05, the Company calculated the fair value of the liability for the embedded conversion option derivative instruments as of the conversion dates using the Black-Scholes option pricing model, based upon the market price of the stock on the dates of conversion and the related inputs identified in Table 3 of Note 1. The resulting decrease in the derivative liability of $28,314 was recorded as other income. Upon conversion, the Company recorded a reduction in the fair value of liability for embedded conversion option derivative instruments of $138,645 with a corresponding increase to paid in capital.
14
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
In addition, during the three months ended September 30, 2009, secured convertible original issue discount notes with an aggregate principal amount of $90,000 were converted into 250,000 shares of common stock. In accordance with ASC 815-40-05, the Company calculated the fair value of the liability for the embedded conversion option derivative instruments as of the conversion dates using the Black-Scholes option pricing model, based upon the market price of the stock on the dates of conversion and the related inputs identified in Table 3 of Note 1. The resulting decrease in the derivative liability of $32,922 was recorded as other income. Upon conversion, the Company recorded a reduction in the fair value of liability for embedded conversion option derivative instruments of $26,573 with a corresponding increase to paid in capital.
In connection with the above conversions the Company converted accrued interest on convertible debentures and secured convertible notes in the amounts of $4,106 and $10,500 into 27,375 and 70,000 shares of common stock, respectively. The shares were valued at the market value on the dates of conversion at prices from $0.39 to $0.47 per share resulting, in losses on conversion of $7,988 and $19,300 for convertible debentures and secured convertible notes, respectively.
As of September 30, 2009, a loan in the principal amount of $340,733, plus accrued interest and penalties of $19,370 and a loan due to a director in the principal amount of $335,714, plus accrued interest of $17,625 were in default. Both loans are in default for failure to make payments of principal and interest as agreed. (See Note 16)
A summary of total loans and total discounts as of September 30, 2009 is as follows:
|
| Principal |
| Unamortized Discount |
| Debt, Net of Discount |
| |||
Unrelated parties |
|
|
|
|
|
|
|
|
|
|
Convertible & non-convertible notes payable |
| $ | 5,769,403 |
| $ | (757,059 | ) | $ | 5,012,344 |
|
Less current portion |
|
| 3,760,393 |
|
| (757,059 | ) |
| 3,003,334 |
|
Convertible & non-convertible notes payable, |
| $ | 2,009,010 |
| $ | |
| $ | 2,009,010 |
|
|
|
|
|
|
|
|
|
|
|
|
Related parties |
|
|
|
|
|
|
|
|
|
|
Convertible & non-convertible notes payable |
| $ | 817,876 |
| $ | (62,276 | ) | $ | 755,600 |
|
Less current portion |
|
| 817,876 |
|
| (62,276 | ) |
| 755,600 |
|
Convertible & non-convertible notes payable, net of current portion |
| $ | |
| $ | |
| $ | |
|
5.
REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK
Series A
As of September 30, 2009 and December 31, 2008, there were seven shares of Series A Redeemable Convertible Cumulative Preferred Stock outstanding. The shares are redeemable at the option of the Company at $27,500 per share plus accrued dividends, and the shares became redeemable at the option of the holder in September 2002 at $25,000 per share plus accrued dividends. The shares may be redeemed at the option of the holder upon the occurrence of a change in control of the Company, by the transfer of greater than 50% of the Companys common stock. The shares are convertible each into 24,000 common shares. Accrued dividends totaled $955,994 and $936,307 at September 30, 2009 and December 31, 2008, respectively. During the nine months ended September 30, 2009, no holders converted any shares of Series A preferred stock into common stock.
15
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Series B
As of September 30, 2009 and December 31, 2008, there were 375 and 424 shares of Series B Redeemable Convertible Cumulative Preferred Stock outstanding, respectively. The shares are redeemable at the option of the Company at $3,000 per share plus accrued dividends, and the shares became redeemable at the option of the holder in September 2002 at $2,500 per share plus accrued dividends. The shares may be redeemed at the option of the holder upon the occurrence of a change in control of the Company, by the transfer of greater than 50% of the Companys common stock. The shares are convertible each into 835 common shares. Accrued dividends totaled $1,832,551 and $1,762,239 as of September 30, 2009 and December 31, 2008, respectively. During the three months ended March 31, 2009, a holder of 49 shares of Series B Preferred Stock converted their shares of Series B preferred stock into 40,915 shares of common stock. During the three months ended September 30, 2009, no holders converted any shares of Series B preferred stock into common stock.
6.
RESTRUCTURING RESERVE
In June 2009, the Board of Directors approved an exit strategy to close the Companys New York office in order to reduce operating costs. The Company recognized aggregate restructuring charges related to the office closing in the amount of $548,090 consisting of future lease commitments and employee severance costs in the amount of $246,920 and $301,170, respectively.
The fair market value of the future lease payments was calculated based upon the amount of future rents due as of September 30, 2009 of approximately $710,000 spread over 44 payments less estimated sublease income of $10,000 per month, and discounted conservatively at 3.5%, the current prime lending rate resulting in a charge to restructuring of $246,920 in accordance with ASC 420-10-15.
In accordance with the Companys exit strategy, the Company granted a severance package to its Executive Vice President of Business Development. The severance package granted an additional 500,000 options which vested immediately and are exercisable at $0.41 per share over a five year term. In addition, two prior grants of options each for 500,000 shares of common stock, exercisable at $0.85 and $1.10 per share were immediately terminated and an additional grant of options to purchase 500,000 shares of common stock, exercisable at $0.42 per share was deemed immediately vested. The fair value of the new options was calculated with the Black-Scholes pricing model using the market value of the stock on the date of grant, $0.41 and the related inputs identified in Table 2 of Note 1. The total value of the new options, the vesting of the prior options and the termination of the prior options was $232,060. In addition, the remaining empl oyees were entitled to receive one months salary in the aggregate amount of $17,863 and were granted a total of 125,000 shares of immediately vesting restricted stock with a value of $51,250, based upon the fair market value of the stock on the date of grant, $0.41.
As of September 30, 2009, the restructuring reserve liability of $230,344 consists of the total restructuring cost of $548,090, less the fair value of the options and restricted stock grants of $283,310 and less the amount security deposit held by the landlord, $41,656, plus the amount of deferred rent previously recorded by the Company, $7,220. As of September 30, 2009, the liability for restructuring charges amounted to $185,671.
7.
COMMON STOCK
The Company is authorized to issue up to 300,000,000 shares of its $0.01 par value common stock as of September 30, 2009.
Shares issued
16
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Issuances of the Companys common stock during the three months ended March 31, 2009 included the following:
Shares Issued in Lieu of Salary
a)
190,894 shares of common stock with a value of $59,177, based upon the quoted trading price of $0.31 per share, were issued to our Chairman and CEO in lieu of salary. The amount owed our Chairman and CEO was $59,177.
b)
61,733 shares of common stock with a value of $19,137, based upon the quoted trading price of $0.31 per share, were issued to our Executive Vice President of Business Development lieu of salary. The amount owed was $19,137.
Shares Issued for Accrued Interest
c)
6,900 shares of common stock with a value of $1,488, based upon quoted trading prices of $0.19 to $0.33 per share, were issued in payment of $1,036 of accrued interest on debentures resulting in a loss on conversion of $452.
Shares Issued Upon Conversion of Convertible Notes and Debentures
d)
600,000 shares of common stock were issued to convert $90,000 of convertible debentures payable.
e)
333,333 shares of common stock were issued to convert $50,000 of secured convertible notes payable.
Share Issued Upon Conversion of Convertible Preferred Stock
f)
40,915 shares of common stock were issued upon the conversion of 49 shares of Series B Preferred Stock.
Issuances of the Companys common stock during the three months ended June 30, 2009 included the following:
Shares Issued for Accrued Interest
a)
194,120 shares of common stock with a value of $85,194, based upon quoted trading prices of $0.23 to $0.49 per share, were issued in payment of $29,118 of accrued interest on debentures resulting in a loss on conversion of $56,077.
b)
2,088,000 shares of common stock with a value of $945,920, based upon quoted trading prices of $0.42 to $0.49 per share, were issued in payment of $313,200 of accrued interest on secured convertible notes resulting in a loss on conversion of $632,720.
Shares Issued Upon Conversion of Convertible Notes and Debentures
c)
4,049,611 shares of common stock were issued to convert $607,442 of convertible debentures payable.
d)
15,266,667 shares of common stock were issued to convert $2,290,000 of secured convertible notes payable.
Share Issued Upon Exercise of Warrants
e)
759,375 shares of common stock were issued upon the exercise of 759,375 warrants resulting in proceeds of $75,938.
17
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Issuances of the Companys common stock during the three months ended September 30, 2009 included the following:
Shares Issued for Accrued Interest
a)
27,375 shares of common stock with a value of $12,095, based upon quoted trading prices of $0.39 to $0.47 per share, were issued in payment of $4,106 of accrued interest on debentures resulting in a loss on conversion of $7,988.
b)
70,000 shares of common stock with a value of $29,800, based upon quoted trading prices of $0.40 to $0.46 per share, were issued in payment of $10,500 of accrued interest on secured convertible notes resulting in a loss on conversion of $19,300.
Shares Issued Upon Conversion of Convertible Notes and Debentures
c)
2,400,000 shares of common stock were issued to convert $360,000 of convertible debentures payable.
d)
500,000 shares of common stock were issued to convert $75,000 of secured convertible notes payable.
e)
250,000 shares of common stock were issued to convert $90,000 of secured convertible original issue discount notes payable.
Shares Issued for Advances Received
f)
675,676 shares of common stock with a value of $250,000, based upon a quoted trading price of $0.37 per share were issued in repayment of an advance of $250,000 related to the possible investment in the Companys EcosLifelink Technology.
The Company recognized share-based compensation expense related to restricted stock grants, issued per the terms of the 2006 Equity Incentive Plan of $299,988 for the nine months ended September 30, 2009. In addition, the Company recorded $50,000 to restructuring charge, related to the granting of 125,000 shares of vested restricted stock granted as severance compensation in connection with the closing of the Companys New York office. The following table summarizes non-vested restricted stock and the related activity as of September 30, 2009:
|
| Shares |
| Weighted Average Grant-Date Fair-Value |
| ||
Non-vested at January 1, 2009 |
|
| 742,506 |
| $ | 0.40 |
|
Granted |
|
| 482,140 |
| $ | 0.45 |
|
Vested |
|
| (827,696 | ) | $ | |
|
Forfeited |
|
| |
| $ | |
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2009 |
|
| 396,950 |
| $ | 0.58 |
|
Total unrecognized share-based compensation expense from unvested restricted stock as of September 30, 2009 was $130,007 which is expected to be recognized over the next nine months.
8.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share applicable to common stockholders is computed on the basis of the weighted average number of common shares outstanding during each period presented. Diluted net loss per common share applicable to common stockholders is computed on the basis of the weighted average number of common shares and dilutive securities outstanding. Dilutive securities having an anti-dilutive effect on diluted net loss per common share are excluded from the calculation.
18
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
The Companys outstanding options and warrants to acquire common stock and shares of common stock which may be issued upon conversion of outstanding redeemable convertible cumulative preferred stock and convertible debt (all aggregating 93,557,082 shares of common stock at September 30, 2009) are not included in the computation of net loss per common share because the effects of inclusion would be anti-dilutive. These shares may dilute future earnings per share.
9.
STOCK OPTIONS AND WARRANTS
The Company follows the provisions of ASC 718-20-10 Compensation Stock Compensation which establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. ASC 718-20-10 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, such as options issued under the Companys Stock Option Plans. ASC 718-20-10 provides for, and the Company has elected to adopt the modified prospective application under which compensation cost is recognized on or after the required effective date for the fair value of all future share based award grants and the portion of outstanding awards at the date of adoption of this statement for which the requisite service has not been rendered, based on the grant-date fair value of those awards calculated under ASC 718-20-10 pro forma disclosures.
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option life and expected volatility in the market value of the underlying common stock. We used the following assumptions for options and warrants issued in the following periods:
|
| For the Nine Months Ended September 30, |
| ||||
|
| 2009 |
| 2008 |
| ||
Expected volatility |
|
| 125.17-137.11% |
|
| 92.5% -139.4% |
|
Expected lives |
|
| 2.5 - 5 years |
|
| 2.5 years. |
|
Risk-free interest rate |
|
| 1.24% - 2.7% |
|
| 2.23% - 3.33% |
|
Expected dividend yield |
|
| None |
|
| None |
|
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Companys stock options and warrants have characteristics different from those of its traded stock, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options. The risk free interest rate is based upon quoted market yields for United States Treasury debt securities. The expected dividend yield is based upon the Companys history of having never issued a dividend and managements current expectation of future action surrounding dividends. Expected volatility in 2009 and 2008 is based on historical volatility for the expected term or such shorter period as the stock has been traded, as it is a reasonable estimate of expected future volatility. Implied volatility was not considered as the Company does not have any traded options or warrants.
19
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Employee Fixed Plan Options
|
| For the Nine Months Ended |
| For the Nine Months Ended |
| ||||||
|
| Shares |
| Weighted Average |
| Shares |
| Weighted Average |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year |
| 6,741,796 |
| $ | 0.69 |
| 7,565,625 |
| $ | 0.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
| 797,521 |
| $ | 0.45 |
| 2,380,918 |
| $ | 0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
| |
| $ | |
| |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
| |
| $ | |
| (2,986,999) |
| $ | 1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
| |
| $ | |
| |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
| 7,539,317 |
| $ | 0.66 |
| 6,959,544 |
| $ | 0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
| 6,784,221 |
| $ | 0.68 |
| 5,199,126 |
| $ | 0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term |
|
|
|
| 3.68 |
|
|
|
| 4.6 |
|
Aggregate intrinsic value |
|
|
| $ | 287,037 |
|
|
| $ | 1,324,008 |
|
Weighted average grant date fair value |
|
|
| $ | 0.33 |
|
|
| $ | 0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term |
|
|
|
| 3.56 |
|
|
|
| 4.7 |
|
Aggregate intrinsic value |
|
|
| $ | 271,935 |
|
|
| $ | 1,138,800 |
|
During 2009, the Company issued options to purchase 42,425 shares of the company's common stock to a director in connection with a consulting arrangement. The options vested immediately and are exercisable at $0.24 per share, the fair market value on the date of grant, over a five year term.
During 2009, in accordance with the 2006 Equity Incentive Compensation Plan, the Company granted options to purchase 755,096 shares of the Companys common stock and granted 357,140 shares of restricted common stock to its Directors and its Advisory Board Members. The options and stock vest one year from the date of grant. The options are exercisable at $0.47 per share, the fair market value on the date of grant and expire in five years.
20
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Employee Fixed Non-Plan Options
|
| For the Nine Months Ended |
| For the Nine Months Ended |
| ||||||
|
| Shares |
|
| Weighted Average |
| Shares |
|
| Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year |
| 33,216,667 |
| $ | 0.45 |
| 11,316,667 |
| $ | 0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
| 6,900,000 |
| $ | 0.42 |
| 23,700,000 |
| $ | 0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
| |
| $ | |
| |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
| (6,500,000 | ) | $ | 0.57 |
| (2,300,000 | ) | $ | 1.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
| |
| $ | |
| |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
| 33,616,667 |
| $ | 0.44 |
| 32,716,667 |
| $ | 0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
| 23,903,333 |
| $ | 0.45 |
| 12,836,667 |
| $ | 0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term |
|
|
|
| 3.88 |
|
|
|
| 4.80 |
|
Aggregate intrinsic value |
|
|
| $ | 2,712,867 |
|
|
| $ | 3,205,633 |
|
Weighted average grant date fair value |
|
|
|
| N/A |
|
|
| $ | 0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term |
|
|
|
| 3.77 |
|
|
|
| 4.90 |
|
Aggregate intrinsic value |
|
|
| $ | 2,328,311 |
|
|
| $ | 2,239,633 |
|
In connection with the closing of the Companys New York office, the Company granted a severance package to its Executive Vice President of Business Development. The severance package granted an additional 500,000 options which vested immediately and are exercisable at $0.41 per share over a five year term. In addition, two prior grants of options, each for 500,000 shares of common stock, exercisable at $0.85 and $1.10 per share were immediately terminated and an additional prior grant of options to purchase 500,000 shares of common stock, exercisable at $0.42 per share was deemed immediately vested. The fair value of the new options was calculated with the Black-Scholes pricing model using the market value of the stock on the date of grant, $0.41 and the related inputs identified in Table 2 of Note 1. The total value of the new options, the vesting of the prior options and the termination of the prior options was $232,060 and is include d in restructuring charges in the accompanying unaudited condensed consolidated statements of operations.
On July 1, 2009, the Company granted options to purchase 2,500,000 and 1,100,000 shares of the Companys common stock to its Founder and Chief Executive Officer, and Chief Financial Officer, respectively. The options vest ratably over three years, are exercisable at $0.47 per share, the fair market value on the date of the grant, and expire in five years.
In addition, the Board of Directors approved the granting of options to purchase 1,500,000 shares of the Companys common stock to its former Chief Executive Officer and then Executive Chairman as severance to the former Chief Executive Officer, upon receipt of his resignation. The options vest immediately, are exercisable at $0.49 per share and expire in five years. In connection with his resignation, the former Chief Executive Officer forfeited the future vesting of options to purchase 5,500,000 shares of the Companys common stock at $0.50 per share.
21
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
During 2009, in connection with an employment agreement for the President of EES, the Company granted options to purchase 600,000 shares of common stock at an exercise price of $0.36 per share, the fair market value on the date of the grant. The options vest over three years and expire in five years.
During 2009, in connection with a new employment agreement for the Chief Operating Officer of EES, the Company granted options to purchase 600,000 shares of common stock at an exercise price of $0.36 per share, the fair market value on the date of the grant. The options vest over three years and expire in five years.
During 2009, in connection with an employment agreement for a Regional Field Engineer of EES, the Company granted options to purchase 100,000 shares of common stock at an exercise price of $0.47 per share, the fair market value on the date of the grant. The options vest over three years and expire in five years.
Non-Employee Fixed Non-Plan Options
|
| For the Nine Months Ended |
| For the Nine Months Ended |
| ||||||
|
| Shares |
| Weighted Average |
| Shares |
| Weighted Average |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year |
| 3,803,741 |
| $ | 0.59 |
| 5,495,000 |
| $ | 1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
| 500,000 |
| $ | 0.44 |
| 1,618,000 |
| $ | 0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
| |
| $ | |
| |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
| (500,000 | ) | $ | 0.42 |
| (4,045,000 | ) | $ | 1.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
| |
| $ | |
| |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
| 3,803,741 |
| $ | 0.59 |
| 3,068,000 |
| $ | 0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
| 3,318,000 |
| $ | 0.61 |
| 3,068,000 |
| $ | 0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term |
|
|
|
| 1.70 |
|
|
|
| 3.10 |
|
Aggregate intrinsic value |
|
|
| $ | 245,057 |
|
|
| $ | 453,040 |
|
Weighted average grant date fair value |
|
|
|
| N/A |
|
|
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual term |
|
|
|
| 1.30 |
|
|
|
| 3.10 |
|
Aggregate intrinsic value |
|
|
| $ | 242,700 |
|
|
| $ | 453,040 |
|
In connection with the signing of a consulting agreement in May 2009, the Company issued options to purchase 500,000 shares of common stock in May 2009, exercisable at $0.44 per share, the fair market value on the date of the grant, over a five year term. The options vested, 125,000 immediately, with the remainder vesting in equal installments every 120 days thereafter.
22
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Warrants
|
| For the Nine Months Ended |
| |||
|
| Shares |
| Weighted Average |
| |
|
|
|
|
|
|
|
Outstanding at beginning of year |
| 39,132,197 |
| $ | 0.51 |
|
|
|
|
|
|
|
|
Granted |
| 2,594,945 |
| $ | 0.22 |
|
|
|
|
|
|
|
|
Exercised |
| (759,375 | ) | $ | 0.10 |
|
|
|
|
|
|
|
|
Forfeited |
| |
| $ | |
|
|
|
|
|
|
|
|
Expired |
| (647,125 | ) | $ | |
|
|
|
|
|
|
|
|
Outstanding at end of period |
| 40,320,642 |
| $ | 0.51 |
|
|
|
|
|
|
|
|
Exercisable at end of period |
| 40,320,642 |
| $ | 0.51 |
|
|
|
|
|
|
|
|
Outstanding and exercisable |
|
|
|
|
|
|
Weighted average remaining contractual term |
|
|
|
| 2.33 |
|
Aggregate intrinsic value |
|
|
| $ | 6,391,186 |
|
During the three months ended March 31, 2009, there were no grants of warrants to purchase the Companys common stock.
In April 2009, the Company issued warrants to purchase 665,000 shares of common stock at an exercise price of $0.15 per share. The warrants are exercisable over a five year term and contain a re-pricing clause based upon future transactions. The warrants were issued as inducement to extend, for six months, the term of secured convertible notes in the aggregate amount of $665,000. The Company determined the fair value of the liability for the warrant derivative instrument, $90,163, with the Black-Scholes option pricing model using the fair market value of the stock on the dates of issuance and the related inputs identified in Table 2 of Note 1. The amount of the fair value of the derivative liability was recorded as interest expense, since debt discounts had previously been recorded for the full amount of principal value of the secured convertible notes.
On June 30, 2009, the Company issued warrants to purchase 1,228,500 shares of common stock at an exercise price of $0.25 per share. The warrants are exercisable over a five year term and contain a re-pricing clause based upon future transactions. The warrants were issued as inducement to extend, for six months, the term of secured original issue discount convertible notes in the aggregate amount of $1,365,000. The Company determined the fair value of the liability for the warrant derivative instrument, $547,885, with the Black-Scholes option pricing model using the fair market value of the stock on the date of issuance and the related inputs identified in Table 2 of Note 1. The amount of the fair value of the derivative liability was reco rded as interest expense, since debt discounts had previously been recorded for the full amount of principal value of the secured original issue discount convertible notes, net of OID.
In June 2009, the Company issued warrants to purchase 325,000 shares of common stock at an exercise price of $0.25 per share. The warrants are exercisable over a five year term and contain a re-pricing clause based upon future transactions. The warrants were issued in connection with new secured original issue discount convertible notes in the aggregate amount of $361,111. The Company determined the fair value of the liability for the warrant derivative instrument, $136,496, with the Black-Scholes option pricing model using the fair market value of the stock on the dates of issuance and the related inputs identified in Table 2 of Note 1. The amount of the
23
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
fair value of the derivative liability was recorded as debt discount and will be amortized to interest expense over the life of the debt, one year.
In July 2009, the Company issued warrants to purchase 250,000 shares of common stock at an exercise price of $0.25 per share. The warrants are exercisable over a five year term and contain a re-pricing clause based upon future transactions. The warrants were issued in connection with new secured original issue discount convertible notes in the aggregate amount of 278,778. The Company determined the fair value of the liability for the warrant derivative instrument, $104,000, with the Black-Scholes option pricing model using the fair market value of the stock on the dates of issuance and the related inputs identified in Table 3 of Note 1. The amount of the fair value of the derivative liability was recorded as debt discount and will be amortized to interest expense over the life of the debt, one year.
In September 2009, the Company issued warrants to purchase 103,945 shares of common stock at an exercise price of $0.25 per share. The warrants are exercisable over a five year term and contain a re-pricing clause based upon future transactions. The warrants were issued in connection with the one year extension of two previously issued six month secured original issue discount convertible notes with a new aggregate principal amount of 115,495 which are owed by EES. The Company determined the fair value of the liability for the warrant derivative instrument, $37,105, with the Black-Scholes option pricing model using the fair market value of the stock on the dates of issuance and the related inputs identified in Table 3 of Note 1. The amount of the fair value of the derivative liability was recorded as debt discount by EES and will be amortized to interest expense over the life of the debt, one year.
In July 2009, the Company issued warrants to purchase 22,500 shares of common stock at an exercise price of $0.25 per share. The warrants are exercisable over a five year term and contain a re-pricing clause based upon future transactions. The warrants were issued as an inducement for a six month extension of a secured convertible original issue discount note in the amount of $25,000. The Company determined the fair value of the liability for the warrant derivative instrument, $9,389, with the Black-Scholes option pricing model using the fair market value of the stock on the dates of issuance and the related inputs identified in Table 3 of Note 1. The amount of the fair value of the derivative liability was recorded as debt discount by EES and will be amortized to interest expense over the life of the debt, one year.
A summary of the outstanding warrants previously issued for cash, financing, services and settlement as of September 30, 2009 is presented below:
|
| Shares |
| |
Warrants issued for cash |
|
| 762,375 |
|
Warrants issued for financing |
|
| 35,803,267 |
|
Warrants issued for services |
|
| 3,665,000 |
|
Warrants issued in settlement of lawsuit |
|
| 90,000 |
|
Outstanding at September 30, 2009 |
|
| 40,320,642 |
|
10.
INCOME TAXES
The Company and one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states. The Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2004. None of the tax years subject to examination are currently under examination by a tax authority and the Company has not received notice of the intent by any tax authority to commence an examination.
24
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
The Company adopted the provisions of ASC 740-10 on January 1, 2007. As a result of the implementation of ASC 740-10, the Company did not recognize any liability for unrecognized tax benefits, since the Company has concluded that all of its tax positions are highly certain of being upheld upon examination by federal or state tax authorities.
11.
OPERATING SEGMENTS
Pursuant to ASC 280-10, the Company defines an operating segment as:
·
A business activity from which the Company may earn revenue and incur expenses;
·
Whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and
·
For which discrete financial information is available.
In 2005, the Company expanded its business offerings to include the water filtration technology business. Recognizing that each business offering applied to different markets, the Company established three operating entities or segments, which are defined as each business line that it operates. This however, excludes corporate headquarters, which does not generate revenue. It does not include EREC since there are no assets associated with EREC and there has been no activity since formation.
Our operating entities are defined as follows:
·
ESI which we organized in April 2005 to operate our non-Ozonix TM water filtration system business;
·
UES, formerly UltraStrip Envirobotic Solutions, Inc., which we organized in October 2005 to operate our coating removal business; and,
·
EES, Inc., which we organized in November 2006. EES, Inc. conducts our water processing for the oil and gas industry using the Ozonix TM technology. In July 2009, the assets and liabilities of EES, Inc. were contributed in the formation of EES LLC. As of September 30, 2009, the Company has a 67% ownership position in EES LLC. (See Note16)
The table below presents certain financial information by business segment for the nine months ended September 30, 2009:
|
| Ecosphere Systems, |
| Ecosphere Envirobotic Solutions, Inc. |
| Ecosphere Energy Solutions, Inc. |
| Ecosphere Energy Services LLC |
| Segment Totals |
| Corporate |
| Consolidated Totals |
| |||||||
Revenue from external customers |
| $ | |
| $ | |
| $ | 394,830 |
| $ | 310,055 |
| $ | 705,385 |
| $ | |
| $ | 705,385 |
|
Interest expense and amortization of debt discount |
| $ | |
| $ | |
| $ | |
| $ | (127,909 | ) | $ | (127,909 | ) | $ | (4,528,878 | ) | $ | (4,656,787 | ) |
Change in fair value of liability for derivative instruments |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | (3,565,592 | ) |
| (3,565,592 | ) |
Depreciation and amortization |
| $ | (85,692 | ) | $ | (808 | ) | $ | (194,455 | ) | $ | (93,108 | ) | $ | (374,063 | ) | $ | (64,486 | ) | $ | (438,369 | ) |
Income Tax Expense |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
Net Income (loss) |
| $ | (85,692 | ) | $ | (7,762 | ) | $ | (277,840 | ) | $ | (268,531 | ) | $ | (639,825 | ) | $ | (15,556,541 | ) | $ | (16,196,366 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment fixed assets & construction in process |
| $ | 865,375 |
| $ | 25,824 |
| $ | |
| $ | 2,193,665 |
| $ | 3,084,864 |
| $ | 3,991,591 |
| $ | 7,076,455 |
|
Fixed asset additions (disposals) (net) |
| $ | |
| $ | |
| $ | (1,626,055 | ) | $ | 1,653,818 |
| $ | 27,763 |
| $ | 32,580 |
| $ | 60,343 |
|
Total Assets |
| $ | 221,451 |
| $ | 6,390 |
| $ | |
| $ | 1,913,176 |
| $ | 2,141,017 |
| $ | 3,611,492 |
| $ | 5,752,509 |
|
25
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
The table below presents certain financial information by business segment for the nine months ended September 30, 2008:
|
| Ecosphere Systems, Inc. |
| Ecosphere Envirobotic Solutions, Inc. |
| Ecosphere Energy Solutions, Inc |
| Segment Totals |
| Corporate |
| Consolidated Totals |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external |
| $ | |
| $ | |
| $ | 123,474 |
| $ | 123,474 |
| $ | |
| $ | 123,474 |
|
Interest expense and |
| $ | |
| $ | |
| $ | (128 | ) | $ | (128 | ) | $ | (4,108,250 | ) | $ | (4,108,378 | ) |
Depreciation and amortization |
| $ | (85,692 | ) | $ | (2,785 | ) | $ | (28,985 | ) | $ | (117,462 | ) | $ | (24,688 | ) | $ | (142,150 | ) |
Income Tax Expense |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
Net Income (loss) |
| $ | (85,692 | ) | $ | (2,785 | ) | $ | (257,021 | ) | $ | (345,498 | ) | $ | (8,185,393 | ) | $ | (8,530,891 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment fixed assets & |
| $ | 865,487 |
| $ | 25,824 |
| $ | 1,260,090 |
| $ | 1,578,312 |
| $ | 976,103 |
| $ | 2,554,415 |
|
Fixed asset additions |
| $ | |
| $ | 4,899 |
| $ | 1,260,090 |
| $ | 1,264,989 |
| $ | 44,825 |
| $ | 1,309,814 |
|
Total Assets |
| $ | 335,708 |
| $ | 4,818 |
| $ | 1,415,090 |
| $ | 1,755,616 |
| $ | 995,789 |
| $ | 2,751,405 |
|
The table below presents certain financial information by business segment for the three months ended September 30, 2009:
|
| Ecosphere Systems, Inc. |
| Ecosphere Envirobotic Solutions, Inc. |
| Ecosphere Energy Solutions, Inc |
| Ecosphere Energy Services LLC |
| Segment Totals |
| Corporate |
| Consolidated Totals |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
| $ | |
| $ | |
| $ | 46,521 |
| $ | 310,055 |
| $ | 357,076 |
| $ | |
| $ | 357,076 |
|
Interest expense and amortization of debt discount |
| $ | |
| $ | |
| $ | |
| $ | (127,909 | ) | $ | (127,909 | ) | $ | (527,736 | ) | $ | (655,645 | ) |
Change in fair value of liability for derivative instruments |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
| 2,173,567 |
|
| 2,173,567 |
|
Depreciation and amortization |
| $ | (28,564 | ) | $ | (245 | ) | $ | (33,433 | ) | $ | (93,108 | ) | $ | (155,350 | ) | $ | (33,738 | ) | $ | (189,088 | ) |
Income Tax Expense |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
Net Income (loss) |
| $ | (28,564 | ) | $ | (245 | ) | $ | (28,363 | ) | $ | (268,531 | ) | $ | (325,703 | ) | $ | (499,171 | ) | $ | (824,874 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment fixed assets & construction in process |
| $ | 865,375 |
| $ | 25,824 |
| $ | |
| $ | 2,193,665 |
| $ | 3,084,864 |
| $ | 3,991,591 |
| $ | 7,076,455 |
|
Fixed asset additions (disposals) (net) |
| $ | |
| $ | |
| $ | (1,626,055 | ) | $ | 1,653,818 |
| $ | 27,763 |
| $ | 29,410 |
| $ | 57,173 |
|
Total Assets |
| $ | 221,451 |
| $ | 6,390 |
| $ | |
| $ | 1,913,176 |
| $ | 2,141,017 |
| $ | 3,611,492 |
| $ | 5,752,509 |
|
26
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
The table below presents certain financial information by business segment for the three months ended September 30, 2008:
|
| Ecosphere Systems, Inc. |
| Ecosphere Envirobotic Solutions, Inc. |
| Ecosphere Energy Solutions, Inc. |
| Segment Totals |
| Corporate |
| Consolidated |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external |
| $ | |
| $ | (1,020 | ) | $ | 123,474 |
| $ | 122,454 |
| $ | |
| $ | 122,454 |
|
Interest expense and |
| $ | |
| $ | |
| $ | (106 | ) | $ | (106 | ) | $ | (1,740,428 | ) | $ | (1,740,534 | ) |
Depreciation and |
| $ | (28,564 | ) | $ | (1,320 | ) | $ | (28,558 | ) | $ | (58,442 | ) | $ | (7,274 | ) | $ | (65,716 | ) |
Income Tax Expense |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
|
Net Income (loss) |
| $ | (29,719 | ) | $ | (979 | ) | $ | (28,541 | ) | $ | (59,239 | ) | $ | (3,709,349 | ) | $ | (3,768,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment fixed assets |
| $ | 865,487 |
| $ | 25,824 |
| $ | 1,260,090 |
| $ | 1,578,312 |
| $ | 976,103 |
| $ | 2,554,415 |
|
Fixed asset additions |
| $ | |
| $ | 4,688 |
| $ | 571,420 |
| $ | 576,108 |
| $ | 44,825 |
| $ | 620,933 |
|
Total Assets |
| $ | 335,708 |
| $ | 4,818 |
| $ | 1,415,090 |
| $ | 1,755,616 |
| $ | 995,789 |
| $ | 2,751,405 |
|
12.
RELATED PARTY TRANSACTIONS
An unsecured note payable to a director, bearing interest at prime plus 2%, was modified during the three months ended September 30, 2008. Under the new agreement, the Company agreed to repay the principal balance of $374,423, plus annual interest of 7%, by making quarterly payments of $50,000. In connection with the agreement, the Company paid the director $69,789. One payment has been made on this note since September 30, 2008.
In addition, on February 25, 2009, our Chief Financial Officer (CFO) arranged for the Company to receive an additional funding of $50,000 from an entity controlled by the CFO, in exchange for the issuance of a secured promissory note of $54,945 with an OID of $4,945, repayable in six months. The effective annual interest rate based upon the OID is 18%. The notes are secured by the Companys EcosFrac Tank components. In September 2009, this note was exchanged for a one year convertible original issue discount note in the amount of $59,939, bearing interest of 11.11%, and 53,945 five year warrants to purchase common stock of the Company at $0.25 per share. (See Note 16)
In addition, the Companys Chairman and CEO advanced the Company $30,000 in short term financing secured by the Companys receivables. The Company repaid the advance in April 2009.
13.
COMMITMENT AND CONTINGENCIES
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. To our knowledge, except as described below, no legal proceedings, government actions, administrative actions, investigations or claims are currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.
The Company had a long term relationship with Kamimura International Associates (KIA), a Washington D.C. based organization, whereby the principals at KIA agreed to assist the Company in developing the coating removal market in the Far East. The relationship resulted in the establishment of UltraStrip Japan, Ltd. (USJ), a company whose purpose was to market and deliver ship stripping services in Japan. The agreement with KIA was never formalized. In February 2007, KIA filed a lawsuit against the Company. In March 2007, the Company filed a Motion to Dismiss, Motion to Strike, and Motion for More Definite Statement. The Company intends to vigorously defend itself in this litigation; the Company believes that the plaintiff will not prevail. The Company has expensed
27
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
and accrued an amount it reasonably estimates may be required to resolve any outstanding issues between the Company and KIA.
14.
CONCENTRATIONS
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through September 30, 2009.
During the nine months ended September 30, 2009 one customer accounted for 100% of sales.
During the nine months ended September 30, 2009, all sales resulted from processing frac flowback water for one customer.
15.
EES TRANSACTION
On July 21, 2009, the Company finalized a series of agreements with Clean Water Partners, LLC (CWP), an affiliate of Bledsoe Capital Group, LLC ("Bledsoe). Under the agreements CWP became a 33% owner of EES in exchange for up to $10 million as described below. As the owner of the remaining 67% of EES, the Company will control a majority of the Board of Directors of EES and control and manage its daily operations. A supermajority vote is required for major matters including the sale of EES. The transaction is summarized on a consolidated basis as follows:
Cash contribution from CWP |
| $ | 2,500,000 |
|
Forgiveness of loan advances from Bledsoe |
|
| 1,000,000 |
|
Future priority distribution to the Company of EES profits |
|
| 2,500,000 |
|
Other possible future priority distributions to the Company |
|
| 4,000,000 |
|
Total transaction amount |
| $ | 10,000,000 |
|
The Company contributed to EES the assets and liabilities of EES Inc., which included $3.1 million of debt due to Bledsoe. CWP contributed $2.5 million in cash plus $1.0 million in loan advances due from the Company. In exchange for payment of $1.5 million and forgiveness of the $1.0 million of loan advances, the Company granted EES an exclusive license for all of its Ozonix technology relating to the recycling of water in the field of use which is Energy. This includes its core water recycling Ozonix processes and technology, its EcosFrac technology and its associated Ecos Brine fluid. In addition, the Company will receive a priority distribution of the first $2.5 million of CWPs share of EES profits. An additional $4 million is due the Company upon achievement of a significant event relating to EES, such as the sale of EES.
Finally, amended option agreements entered into on April 14, 2009, which had no accounting effect, and all previous option agreements between the Company, EES Inc. and Bledsoe through which Bledsoe had the right to acquire a 50% interest in the Ozonix technology for the energy business have been terminated.
For the nine months ended September 30, 2009, the Company allocated 100% of the net loss of EES, $268,531, to the noncontrolling interest of EES as stipulated in the LLC operating agreement.
16.
SUBSEQUENT EVENTS
On October 6, 2009 , the Company issued 629,554 shares of common stock upon the conversion of convertible debentures with an aggregate principal amount of $94,433. After the conversion, no convertible debentures remain outstanding. In addition, the Company issued 944 shares of common stock in exchange for accrued interest on the debentures in the amount of $142.
28
ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
In October 2009, the Company issued a new secured convertible original issue discount note payable with an aggregate principal amount of $125,000. The note is convertible at $0.36 per share, bears interest of 11.1% and is due in one year. In connection with the note, the Company granted the holder five year warrants to purchase 112,500 shares of common stock at an exercise price of $0.25 per share.
Since October 1, 2009, the Company has issued 2,428,655 shares of common stock upon cashless exercise of 4,000,000 warrants with an exercise price of $0.15 per share, based upon the fair market values of the stock of between $0.355 and $0.42 per share on the dates of exercise.
On November 9, 2009, EES received $7.5 million from an investor in exchange for a 19% equity interest in EES. In addition, in October 2009, EES received $350,000 from the Chairman of EES in exchange for a promissory note convertible into a 1% equity interest in EES. On November 9, 2009, the Chairman converted his note into a 1% equity interest in EES. EES paid a finders fee equal to a 1.5% equity interest in EES to the Chairman of EES. Following the transaction, the Company owns 52.6% of EES and continues to be the managing member of EES.
Since October 1, 2009, the Company has issued 414,000 shares of common stock in exchange for $62,100 from the exercise of options with an exercise price of $0.15 per share. In addition, the Company issued 50,000 shares of common stock in exchange for $7,500 from the exercise of options with an exercise price of $0.15 per share.
In November 2009, the EES entered into a three year lease for an operating facility in Conway, Arkansas. The lease agreement calls for monthly payments of $4,200 and provides a right of first refusal on a 5 acre property located across the street from the leased premises. This location will provide our base of operations for the Fayetteville shale.
In November 2009, the Company paid $359,358 to retire the principal, accrued interest and late fee amounts for a loan that was in default as of September 30, 2009. In addition, the Company paid $101,556 for principal and interest in retirement of a promissory note and paid $36,239 to satisfy secured convertible original issue discount notes.
In November 2009, EES made a payment of $20,947 to a Company managed by the Chief Financial Officer of the Company as a partial repayment of a secured convertible original issue discount note with a face amount of $59,938.
On November 12, 2009, the Board of Directors of the Company approved the payment of a cash performance bonus to the Chief Executive Officer of the Company in the amount of $150,000.
Management evaluated all activity of the Company through November 16, 2009 (the issue date of the Companys condensed unaudited consolidated financial statements) and concluded that no additional subsequent events have occurred that would require recognition in the consolidated financial statements.
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ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES
Item 2:
Managements Discussion and Analysis of Financial Condition and Results of Operation
Ecosphere Technologies Inc. is a diversified water engineering and services company dedicated to solving critical water recovery, treatment and recycling challenges through its proprietary and innovative solutions. Since inception, the Companys strategy has been and continues to be: (1) Invent a technology that addresses a major industrial and environmental problem, (2) Develop the technology from concept design to patenting and prototype, (3) Begin the commercialization of the technology through manufacturing, sales, and services, (4) Identify a partner who will be able to take it to the next level, (5) Create shareholder value through licensing or sale of the technology to market leaders. The Company has a portfolio of technologies that are in the various stages of development.
The Company has a history of successfully developing and monetizing its technologies. During 2007, the Company sold its ship stripping technology, resulting in a net gain on sale of intellectual property and related assets of approximately $5.3 million. At present, Ecospheres 52.6% owned subsidiary Ecosphere Energy Services LLC (EES) is engaged in operating high volume mobile water filtration equipment to treat energy related wastewaters. EES is successfully providing water recycling services to a major energy company through a license agreement with the Company for the patent pending Ecosphere Ozonixä System. The successful pilot project and subsequent contract with this company proved the technology was commercially viable and led to the development of additional applications of our technologies which will allow energy companies to optimize the revenues generated from a wel l site. We manufactured and began testing the prototype of the EcosFrac Tank in the first quarter of 2009. In July 2009, the Company entered into a Master Service Agreement with two subsidiaries of Southwestern Energy Company and received a work order under this agreement for the deployment of 24 EcosFrac Tanks to pretreat water used to fracture natural gas wells in the Fayetteville Shale. Under the work order, EES will provide the services for a minimum two year period with three one year extension options. This agreement and work order demonstrate that the EcosFrac Tank will be an important part of our product line to service the oil and gas industry.
The Ecosphere Ozonix™ process is an advanced oxidation process that we have developed to treat industrial wastewater. Since late 2007, we have tested our Ecosphere Ozonix™ process on a variety of industrial wastewaters. We feel one of the most promising applications for our technology is in the natural gas exploration business to help the energy companies recycle frac flowback and produced waters. In July 2009, the Company entered into a Master Service Agreement with BP America Production Company to provide environmental water recycling services. In August 2009, the Company received two work releases for pilot projects in Wyoming.
Ecosphere developed the Ozonix™ process in the second half of 2007 and began testing it in late 2007 and early 2008 in the Barnett Shale area of North Texas. From the testing, the Company learned that the Ozonix™ process is able to efficiently and in a cost effective manner, remove hydrocarbons and metals from frac flowback water and can, as part of a pre or post treatment process, provide a solution to the disposal of this wastewater by cleaning it and permitting it to be reused in the drilling process. In July 2009, the Corporation Commission of Oklahoma approved a permit application by Newfield Exploration Mid-Continent, Inc. to build and operate a water recycling plant utilizing the Ecosphere Ozonix Water Treatment System for two years. The permit will allow Newfield to process frac flowback water into freshwater and brine utilizing Ecosphere's Ozonix system.
In addition to the Ozonix™ technology, the Company presently owns several other technologies that are completed and available for global marketing. The attendant water filtration systems can be containerized and sold independently of the truck to hospitals and other markets. Additionally, we completed the design and engineering for our clean tech mobile micro-utility system in late 2006 and expect to construct a prototype as resources become available. This new clean tech Ecos LifeLink unit will provide power, telecommunications and clean water in remote regions of the world without using any fossil fuel.
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ECOSPHERE TECHNOLOGIES, INC.
Item 2:
Managements Discussion and Analysis of Financial Condition and Results of Operation
The following is a list of the Companys existing intellectual property estate:
·
U.S. Patent 6,287,389 - Method of robotic automobile paint stripping dated September 11, 2001.
·
U.S. Patent 6,745,108 - Expansion of 3D robotic auto paint stripping patent to include any object dated June 1, 2004.
·
U .S. Patent 7,100,844 High Impact Waterjet Nozzle is constructed to infuse fluid into a high velocity stream of liquid passing through a nozzle to create a bubble rich waterjet that causes the bubbles to implode when the waterjet strikes the surface amplifying the impact of the water dated September 5, 2006.
·
U.S. Patent Pending - Mobile Emergency Water Filtration System for Homeland Security and other applications.
·
U.S. Patent Pending - Business Model to provide response and training to public and private suppliers of water resources in the event of an act of terrorism or a natural disaster that contaminates a water supply.
·
U.S. Patent Pending - The Ecosphere Ozonix™ Process for enhanced water treatment for reclamation of waste fluids.
·
U.S. Patent Applied For - The Ecos Frac Tank, Real-time processing of water for hydraulic fracture treatments using a transportable frac tank.
2009 Highlights
The most significant material accomplishments during the nine months ended September 30, 2009 was our ability to identify, develop and design and successfully test the EcosFrac Tank , an additional piece of equipment which uses our Ozonix™ technology to further improve the profitability of each well site. In addition, we continued to demonstrate the effectiveness of the Ozonix™ technology by processing frac flowback water in the Woodford Shale and at pilots in Wyoming and the Uinta Basin in Utah.
On July 10, 2009, the Company entered into a Master Services Agreement with two subsidiaries of Southwestern Energy Company and received a work order to provide 24 EcosFrac Tank units to pre-treat water to be used in hydraulic fracturing of wells in the Fayetteville Shale. The work order provides for an initial two year term, which begins 120 150 days from the date of the work order, and may be extended in one year increments for up to an additional three years. In addition, the work order includes the option to purchase the EcosFrac units at preset prices based upon the date the option is exercised, plus an ongoing license fee for each barrel of water processed thereafter. The Company has begun to build the units to fulfill this work order. As of the date of this filing, the Company has completed and delivered the first 12 EcosFrac Tank units and anticipates delivery of the 2nd 12 units by mid December.
On July 21, 2009, the Company finalized a series of agreements with CWP, an affiliate of Bledsoe. Under the agreements CWP became a 33% owner of EES in exchange for up to $10 million as described below. As the owner of the remaining 67% of EES, the Company will control a majority of the Board of Directors of EES and control and manage its daily operations. A supermajority vote is required for major matters, including the sale of EES.
The Company contributed to EES the Assets and Liabilities of Ecosphere Energy Services, Inc. (EES Inc.), which included $3.1 million of debt due to Bledsoe Capital Group. CWP contributed $2.5 million in cash plus $1.0 million in loan advances due from the Company. In exchange for payment of $1.5 million and forgiveness of the $1.0 million of loan advances, the Company granted EES an exclusive license for all of its Ozonix technology relating to the recycling of water in the field of use which is Energy. This includes its core water recycling Ozonix processes and technology, its Ecos Frac technology and its associated Ecos Brine fluid. In addition, the Company will receive a priority distribution of the first $2.5 million of CWPs share of EES profits. An additional $4 million
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ECOSPHERE TECHNOLOGIES, INC.
is due the Company upon achievement of a significant event relating to EES, such as the sale of EES. See Note 15 of the accompanying notes to the unaudited condensed consolidated financial statements for a summary of the transaction.
In addition to owning the right to a majority of the profits and other distribution of EES, the Company will receive 100% of the first $7,575,000 of the profits of EES with 33% of those profits representing the $2.5 million priority distribution described above.
Finally, the amended option agreements entered into on April 14, 2009 and all previous option agreements between EES and Bledsoe through which Bledsoe had the right to acquire a 50% interest in the Ozonix technology for the energy business have been terminated.
On June 25, 2009, the Company signed a Master Service Agreement with Houston based BP America Production Company (BP) to provide environmental water recycling services. The Master Service Agreement calls for EES to provide its Ecosphere Ozonix, EcosFrac, and EcosBrine equipment and personnel to BP for its North America Gas operations. On August 1, 2009, the Company received two work releases for the Company to provide services to BP in Wyoming.
In September 2009, EES entered into a non-exclusive agreement with an investment bank to assist EES in evaluating strategic transaction and financing alternatives.
On November 9, 2009, the Companys 67% owned subsidiary, EES, received $7.5 million from an investor in exchange for a 19% equity interest in EES. In addition, in October 2009, EES received $350,000 from the Chairman of EES in exchange for a promissory note convertible into a 1% equity interest in EES. On November 9, 2009, the Chairman converted his note into a 1% equity interest in EES. EES paid a finders fee equal to a 1.5% equity interest in EES to the Chairman of EES. Following the transaction, the Company owns 52.6% of EES and will continue to be the managing member of EES.
CRITICAL ACCOUNTING ESTIMATES
In response to the SECs financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, the Company has selected its more subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate, in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the Companys financial condition. The five accounting estimates are discussed below. These estimates involve certain assumptions that if incorrect could create a material adverse impact on the Companys results of operations and financial condition. Some of the estimates are based upon the intellectual property and related assets and inventory which were sold and are included as a matter of explaining the historical results of operations.
Revenue Recognition
Revenue from sales of equipment is recognized when products are delivered to and accepted by the customer, economic risk of loss has passed to the customer, price is fixed or determinable, collection is probable, and any future obligations of the Company are insignificant. Revenue from the Ozonix™ water-filtration contracts is earned based upon the volume of water processed plus additional contractual period based charges and is recognized in the period the service is provided. Payments received in advance of the performance of services or of the delivery of goods are deferred as liabilities until the services are performed or the goods are delivered. Revenue from the sale of intellectual property and related assets is recognized as a gain from the sale of intellectual property and related assets, an operating item, when payment has been received and ownership of the patents and related assets has been transferred to the buyer and is re corded net of any carrying value and selling costs. Equipment or inventory sold in connection with the sale of intellectual property is recognized as a wash sale with no resulting gain or loss. The Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs as cost of revenues.
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ECOSPHERE TECHNOLOGIES, INC.
Useful Lives and Impairment of Machinery and Equipment and Patents
The Company capitalizes as machinery and equipment its water filtration systems upon completion of all manufacturing and testing and when such systems are placed into service. The Company determines the useful lives of machinery and equipment based on the forecasted durability of the raw materials used in the manufacture and the technologies utilized in the system. While some of the individual components of the Companys systems may individually have longer useful lives than the Companys estimate for the useful life of the entire system (i.e., 10 years or longer), the Company believes that the technological advancement and the configuration of the entire water filtration system would be obsolete after five years. Accordingly, the Company has used five years to depreciate its water filtration systems.
The Company determines the useful lives of its patents based on the remaining life of the patent issued by the U.S. Patent Office. Management believes the legal life of the patent is a reasonable period of time over which the Company expects to realize the benefits of its intellectual property rights because of the broad nature of the Companys patents and the Companys intent to protect its intellectual property rights over the lives of its patents.
The Company reviews for impairment its machinery and equipment used in its products, whenever events or changes in circumstances indicate that the carrying amount of its assets may not be recoverable. Such events or changes in circumstances might occur when a new version of a product is launched or when a major technological advancement becomes available. During the year ended December 31, 2007, the Company did not have any impairment write offs. During the year ended December 31, 2008, the Company wrote off the cost of the original Ozonix™ unit, $162,601, which was built for testing in the Barnett Shale of Texas, when it was determined the value of the unit was impaired. In connection with the write-off, the Company also reduced deferred revenue related to the unit in the amount of $156,000, resulting in a loss on impairment of $6,601.
Stock-Based Compensation
The Company follows the provisions of ASC 718-20-10 Compensation Stock Compensation which establishes standards surrounding the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Under ASC 718-20-10, we recognize an expense for the fair value of our outstanding stock options as they vest, whether held by employees or others.
We estimate the fair value of each stock option at the grant date by using the Black-Scholes option pricing model based upon certain assumptions which are contained in Note 11 to our unaudited condensed consolidated financial statements contained in this Report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our stock options and warrants have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such stock options.
Fair Value of Liabilities for Warrant and Embedded Conversion Option Derivative Instruments
We estimate the fair value of each warrant and embedded conversion option at the issuance date and at each subsequent reporting date by using the Black-Scholes option pricing model based upon certain assumptions which are contained in Note 1 to our unaudited condensed consolidated financial statements contained in this Report. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because our warrants and embedded conversion options have characteristics different from those of traded options, and because changes in the subjective input of assumptions can materially affect the fair value estimate, in our managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such warrants and embedded conversion options.
Restructuring Reserve
The Company estimated the liability for restructuring reserve in accordance with ASC 420-10 Exit or Disposal Cost Obligations. As such, the Company has recorded a liability for the estimated fair value of future rentals due under a lease agreement for the Companys New York office, which was closed in June 2009.
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ECOSPHERE TECHNOLOGIES, INC.
RESULTS OF OPERATIONS
Comparison of the Quarter Ended September 30, 2009 to the Quarter Ended September 30, 2008
The Companys net loss decreased $2,948,651 during the three months ended September 30, 2009 when compared to the three months ended September 30, 2008. The primary reasons for this increase was the adoption of ASC 815-40 in January 2009 which resulted in other income of $2.2 million for the three months ended September 30, 2009, due to the decrease in the fair value of the liability for derivative instruments, caused by the decrease in the market price of the Companys common stock from $0.49 per share at June 30, 2009 to $0.43 per share at September 30, 2009. In addition, there was a decrease of $1.1 million in interest expense resulting from the conversion of debentures and notes payable, in the amounts of $735,000 and $2,505,000, into common stock during the three months ended September 30, 2009. Gross profit for the three months ended September 30, 2009 increased $125,641 as compared to the same period in th e prior year as a result of higher service revenues. Losses on conversion of amounts payable to common stock were $182,535 less than the prior year, All of these positive developments were partially offset by an increase in selling general and administrative expense of $890,682.
Revenues
The Company generated revenue of $357,076 during the three months ended September 30, 2009 compared to revenue of $122,454 for the same period in 2008. The increase was the result of revenue generated from water processing services provided to an oil and gas exploration customer in Oklahoma. During the three months ended September 30, 2008, the Company had completed its first water filtration unit utilizing the Ozonix™ water filtration technology and was using it in a pilot program in Texas. Future revenues are expected to increase as they will include revenue related to the Southwestern Energy contract which is anticipated to begin in November 2009.
Operating Expenses
Operating expenses for the three months ended September 30, 2009 were $2,804,860 compared to $1,914,178 or the three months ended September 30, 2008. This increase resulted from an increase in non-cash compensation expense of $1,031,000 associated with restricted stock and option vesting during the period. In addition, depreciation expense increased $110,000 due to the Company deploying three operating units as compared to one unit in 2008. These increases were partially offset by reductions in consulting fees of $55,000, travel expenses of $40,000, equipment rentals and shop supplies of $73,000, fuel costs of $28,000 and rent of $31,000. Future operating expenses are expected to increase related to the operating expenses associated with the Southwestern Energy contract which is anticipated to begin in November 2009.
Loss From Operations
Loss from operations for the three months ended September 30, 2009 was $2,584,041 compared to a loss of $1,819,000 for the three months ended September 30, 2008. The increase in the loss from operations in 2009 versus 2008 was due to the increases in operating expenses identified above which were partially offset by gross profit earned in 2009.
Interest Expense
Interest expense was $655,645 and $1,740,534 for the three months ended September 30, 2009 and 2008, respectively. Of the 2009 amounts, approximately $390,421 related to the accretion of the discounts and debt issue costs related to the Companys notes payable (non-cash), $110,000 related to debt discounts related to notes that were converted into common stock, $105,000 actual and accrued interest associated with the notes payable and $50,937 related to the fair value of the liability for embedded conversion option derivative instruments related to new convertible notes issued during the three months ended September 30, 2009. Of the 2008 amounts, approximately $1,509,829 related to the accretion of the discounts related to the Companys notes payable (non-cash), $217,732 actual and accrued interest associated with the notes payable.
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ECOSPHERE TECHNOLOGIES, INC.
Loss on Conversion
Loss on conversion for the three months ended September 30, 2009 was $27,288 as compared to a loss of $209,823 for the three months ended September 30, 2008. In 2008, the Company converted a finders fee of $87,500 owed to its then Chairman and Co-CEO into 450,000 shares of common stock with a fair market value of $288,000 on the date of conversion, resulting in a loss on conversion of $200,500. Losses on conversion in 2009 relate to the conversion of accrued interest into shares of common stock in connection with the conversion of the underlying debt.
Change in Fair Value of Derivative Instruments
The change in fair value of derivative instruments resulted in other income of approximately $2.2 million for the three months ended September 30, 2009. This change resulted from a decrease in the fair value of the liability for embedded conversion option derivative instruments of $687,285 and a decrease in the fair value of the liability for warrant derivative instruments of $1,486,302. These decreases in derivative liabilities were primarily caused by a decrease in the trading price of the Companys common stock from $0.49 per share as of June 30, 2009 to $0.43 per share as of September 30, 2009. This change from 2008 was caused by the Companys adoption of ASC 815-40 in January 2009. (See Note 1 of the accompanying Unaudited Notes to Condensed Consolidated Financial Statements) Absent a significant change in the amount of warrant and embedded conversion option derivative instruments outstanding, future increases or decreases in the market price of the Companys common stock will have a negative or positive impact, respectively, on the Companys net income.
Preferred Stock Dividends
Preferred stock dividends were $30,000 for the three months ended September 30, 2009 and $34,937 for the three months ended September 30, 2008. The dividends reflect Company obligations to preferred shareholders that have not been paid and decreased from 2008 because a significant number of holders chose to convert their preferred stock into common stock.
Noncontrolling Interest of Consolidated Subsidiary
The noncontrolling interest of consolidated subsidiary was $268,531 for the period from inception, July 16. 2009, through September 30, 2009. This amount represents the proportionate share of the losses of Ecosphere Energy Services LLC for the period from inception, July 16. 2009, through September 30, 2009, which have been allocated to the noncontrolling equity members of the subsidiary.
Net Loss Applicable to Common Stock of Ecosphere Technologies, Inc.
Net loss applicable to common stock of Ecosphere Technologies, Inc. was $854,874 for the three months ended September 30, 2009, compared to a net loss applicable to common stock of $3,803,525 for the three months ended September 30, 2008. Net loss per common share was $0.01 for the three months ended September 30, 2009 as compared to a net loss per common share of $0.05 for the three months ended September 30, 2008. The weighted average number of shares outstanding was 110,461,145 and 74,858,556 for the three months ended September 30, 2009 and 2008, respectively.
Comparison of the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008
The Companys net loss increased $7,650,287 during the nine months ended September 30, 2009 when compared to the nine months ended September 30, 2008. The primary reasons for this increase was the adoption of ASC 815-40 in January 2009 which resulted in other expense of $3.6 million for the nine months ended September 30, 2009, related to the increase in the fair value of the liability for derivative instruments, caused by the increase in the market value of the Companys common stock from $0.31 per share at December 31, 2008 to $0.43 per share at September 30, 2009. In addition there were increases in stock based compensation, interest expense, loss on conversion of interest into common stock and a restructuring charge related to the closing of our New York office.
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ECOSPHERE TECHNOLOGIES, INC.
Revenues
Revenues were $705,385 for the nine months ended September 30, 2009 as compared to $123,474 for the nine months ended September 30, 2008. The increase was the result of revenue generated from water processing services provided to an oil and gas exploration customer in Oklahoma for nine months in 2009 versus revenue from a 45 day pilot project in 2008. In 2008, prior to the pilot project, the Company was focused on the production of the initial water filtration unit utilizing the Ozonix™ water filtration technology which was completed in August 2008. Future revenues are expected to increase as they will include revenue related to the Southwestern Energy contract which is anticipated to begin in November 2009.
Operating Expenses
Operating expenses for the nine months ended September 30, 2009 were $7,293,422 compared to $4,249,788 for the nine months ended September 30, 2008. This increase resulted from an increase in non-cash compensation expense of $2.2 million associated with restricted stock and option vesting during the period. In addition, salaries and employee benefits increased $533,000 due to additional staffing to operate our equipment in the field and staff our New York office. The Company recorded a restructuring charge of $548,000 during the nine months ended September 30, 2009 for future rents due and employee severance costs related to a decision by our board of directors to close the New York office. Professional fees increased $216,000 for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily due to legal costs associated with new service agreements and the transactions with Bledsoe Capital Group. Rents increased $47,000 for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 primarily due to rent for the Companys New York office in the first six months of 2009. In addition, depreciation expense increased $198,000 for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 due to the additions of two Ozonix water processing units and one EcosFrac Tank since September 30, 2008. These expense increases were partially offset by decreases in consulting fees of $173,000. Future operating expenses are expected to increase related to the operating expenses associated with the Southwestern Energy contract which is anticipated to begin in November 2009.
Loss From Operations
Loss from operations for the nine months ended September 30, 2009 was $7,527,133 compared to a loss of $4,153,590 for the nine months ended September 30, 2008. The increase in the loss from operations in 2009 versus 2008 was due to the increases in operating expenses identified above which were partially offset by additional gross profit earned in 2009.
Interest Expense
Interest expense was $4,656,787 and $4,108,378 for the nine months ended September 30, 2009 and 2008, respectively. Of the 2009 amounts, approximately $1,992,150 related to the accretion of the discounts and amortization of debt acquisition costs, related to the Companys notes payable (non-cash), $446,000 actual and accrued interest associated with the notes payable, $638,000 related to the fair value of the liability for warrant derivative instruments related to new warrants issued during the nine months ended September 30, 2009, $1,167,000 related to the fair value of the liability for embedded conversion options related to new and extended secured convertible original issue discount notes issued during the nine months ended September 30, 2009 and $309,000 related to debt discount associated with debentures and convertible notes converted into common stock during the nine months ended September 30, 2009. Of the 2008 amounts, app roximately $2,016,000 related to the accretion of the discounts associated with warrants granted and conversion features included in the Companys notes payable (non-cash) and $345,000 actual and accrued interest associated with the notes payable.
Loss on Conversion
Loss on conversion for the nine months ended September 30, 2009 was $716,538 as compared to $256,271 for the nine months ended September 30, 2008. The increase resulted from the payment of accrued interest on convertible notes and debentures in the aggregate amount of $343,353 at through the issuance of common stock with a total fair market value of $1,032,603 on the dates of conversion.
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ECOSPHERE TECHNOLOGIES, INC.
Change in Fair Value of Derivative Instruments
The change in fair value of derivative instruments was an expense of $3.6 million for the nine months ended September 30, 2009. This change resulted from a net increase in the fair value of the liability for embedded conversion option derivative instruments of $1.8 million and an increase in the fair value of the liability for warrant derivative instruments of $1.8 million. These increases in derivative liabilities were primarily caused by an increase in the trading price of the Companys common stock from $0.31 per share as of December 31, 2008 to $0.43 per share as of September 30, 2009. This change from 2008 was caused by the Companys adoption of ASC 815-40 in January 2009. (See Note 1 of the accompanying Unaudited Notes to Condensed Consolidated Financial Statements). During the nine months ended September 30, 2009, convertible notes and debentures with an aggregate principal balance of approximately $ 3.2 million were converted into common stock. The net $1.8 million increase in the fair value of the liability for embedded conversion option derivative instruments during the nine months ended September 30, 2009 consisted of an increase of $9.8 million increase in the liability less a $6.9 million reduction in the liability as a result of the conversion of the convertible notes and debentures. Absent significant change in the amount of warrant and embedded conversion option derivative instruments outstanding, future increases or decreases in the market price of the Companys common stock will have a negative or positive impact, respectively, on the Companys net income.
Preferred Stock Dividends
Preferred stock dividends were $90,000 for the nine months ended September 30, 2009 and $105,188 for the nine months ended September 30, 2008. The dividends reflect Company obligations to preferred shareholders that have not been paid and decreased from 2008 because a significant number of holders chose to convert their preferred stock into common stock.
Noncontrolling Interest of Consolidated Subsidiary
The noncontrolling interest of consolidated subsidiary was $268,531 for the nine months ended September 30, 2009. This amount represents the proportionate share of the losses of Ecosphere Energy Services LLC for the nine months ended September 30, 2009 which have been allocated to the noncontrolling equity members of the subsidiary.
Net Loss Applicable to Common Stock of Ecosphere Technologies, Inc.
Net loss applicable to common stock of Ecosphere Technologies, Inc. was $16,286,366 for the nine months ended September 30, 2009, compared to a net loss of $8,636,079 for the nine months ended September 30, 2008. Net loss per common share was $0.17 for the nine months ended September 30, 2009 as compared to a net loss per common share of $0.12 for the nine months ended September 30, 2008. The weighted average number of shares outstanding was 96,419,567 and 69,605,413 for the nine months ended September 30, 2009 and 2008, respectively. The primary cause of the increase in net loss applicable to common stock is the increase in interest expense partially offset by a decrease in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1,062,050 for the nine months ended September 30, 2009, compared to $2,924,035 for the nine months ended September 30, 2008. This decrease in cash used relates to the significantly higher non-cash expenses during the nine months ended September 30, 2009. The net loss of $16.2 million was offset by non-cash expenses of $9.0 million, plus an increase in the fair value of the liability for derivative instruments of $3.6 million, an increase in accounts payable and accrued liabilities of $2.7 million, an increase in the restructuring reserve of $261,000, an increase in deferred revenue of $200,000 and a decrease in accounts receivable of $124,000 which were partially offset by a an increase in vendor deposits of $463,000 and income allocation to the noncontrolling interest of our consolidated subsidiary of $268,531.
The Company's net cash used in investing activities was $3,353,332 for the nine months ended September 30, 2009 compared to net cash used by investing activities of $1,061,960 for the nine months ended September 30, 2008. In 2009 the Company has invested $3.0 million in equipment components to build 24 EF 600 EcosFrac units. The units will be used to process water to be used in fracturing natural gas wells in the Arkansas under a minimum two year agreement. In addition, the Company invested approximately $300,000 in equipment components
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ECOSPHERE TECHNOLOGIES, INC.
associated with the building of the first EB 600 unit, the second generation Ozonix™ unit for processing frac flowback water. In 2008, the Company invested in equipment components of $426,416 for the building the second Ozonix™ unit and capitalized the cost of building the first unit, $885,544. These expenditures in 2008 were partially offset by proceeds of $250,000 from the Companys sale of its 5% investment in Chariot Robotics, LLC in January 2008.
The Companys net cash provided by financing activities was $4,005,488 for the nine months ended September 30, 2009 compared to net cash provided by financing activities of $4,043,077 for the nine months ended September 30, 2008. During the nine months ended September 30, 2009, the Company received $575,000 in exchange for warrants and new secured convertible notes, $45,500 for a new original issue discount note, $80,000 from related parties and $75,938 from the exercise of warrants. In addition, the Companys 67% owned subsidiary received $2.5 million in cash and $1.0 in the form of debt forgiveness in exchange for a 33% equity interest in the Companys new subsidiary, EES. These receipts were partially offset by repayments of $212,664, $30,000 and $28,286 for notes payable and insurance financings, related party debt and capital leases, respectively. In 2008 the proceeds resulted from the issuance of new con vertible notes of $3,294,790, proceeds from the issuance of convertible notes with related parties of $1,021,856 and proceeds from the exercise of warrants of $166,800 which were partially offset by repayments of notes due to related parties, notes and insurance financings and capital leases of $241,080, $173,618 and $25,671, respectively.
On November 9, 2009, the Companys 67% owned subsidiary, EES, received $7.5 million from an investor in exchange for a 19% equity interest in EES. In addition, in October 2009, EES received $350,000 from the Chairman of EES in exchange for a promissory note convertible into a 1% equity interest in EES. On November 9, 2009, the Chairman converted his note into a 1% equity interest in EES. EES paid a finders fee equal to a 1.5% equity interest in EES to the Chairman of EES. Following the transaction, the Company owns 52.6% of EES and will continue to be the managing member of EES. These investments will enable EES to pay for the 24 EcosFrac units the Company is currently manufacturing for EES and will provide working capital for EES. The Ecos Frac units will begin generating revenue to EES and the Company in November 2009.
Of the $7.5 million amount received by EES, the proceeds are anticipated to be used for the following:
Proceeds |
| $ | 7,500,000 |
|
Additional payments to the Company for equipment |
|
| (5,275,000 | ) |
Amount escrowed for debt service of the Company |
|
| (425,000 | ) |
2009 EES debt service |
|
| (100,500 | ) |
Amount available for working capital |
| $ | 1,699,500 |
|
The amount paid to the Company for equipment will reimburse the Company for the costs incurred to build the 24 EcosFrac Units which are being deployed in the Fayetteville shale, plus one EB600 Ozonix water processing unit, delivered to EES in October that is being deployed on various pilot projects. Based upon the contractual minimum revenue of the Southwestern Energy contract, the 24 EcosFrac units are anticipated to begin generating monthly revenue sufficient to produce positive cash flow to EES in early 2010. The Company will receive a monthly management fee from EES for the cost of management and overhead related to the manufacturing facility.
It is anticipated that the combination of the management fee and distributions from EES plus the reimbursement of costs to build additional equipment for EES, will be sufficient to support the working capital needs of the Company. The Company has approximately $2.4 million of secured convertible original issue discount notes with varying maturities over the next 11 months. These notes are all convertible at $0.36 per share. If the holders of these notes do not elect to convert their debt into common stock of the Company or are not agreeable to extend the terms of their notes, or if EES does not place orders with the Company to build additional equipment, the Company may be required to seek additional equity or debt financing. If this occurs, there can be no assurances that the Companys present cash flow will be sufficient to meet current and future obligations.
The unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of the Company to continue as a going concern. There are no assurances that the Company will be able to achieve and sustain profitable operations or continue as a going concern.
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ECOSPHERE TECHNOLOGIES, INC.
RELATED PERSON TRANSACTIONS
For information on related party transactions and their financial impact, see Note 12 to the Condensed Consolidated Financial Statements (Unaudited).
RESEARCH AND DEVELOPMENT
In accordance with ASC 730-10 Research and Development expenditures for research and development of the Company's products are expensed when incurred, and are included in operating expenses. The Company recognized research and development costs of $42,794 for the nine months ended September 30, 2009.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB Accounting Standards Codification
(Accounting Standards Update (ASU) 2009-01)
In June 2009, the Financial Accounting Standards Board (FASB) approved the FASB Accounting Standards Codification (the Codification) as the single source of authoritative nongovernmental GAAP. All existing accounting standard documents, such as FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature, excluding guidance from the Securities and Exchange Commission (SEC), have been superseded by the Codification. All other non-grandfathered, non-SEC accounting literature not included in the Codification has become non-authoritative. The Codification did not change GAAP, but instead introduced a new structure that combines all authoritative standards into a comprehensive, topically organized online database. The Codification is effective for interim or annual periods ending after September 15, 2009, and impacts the Companys financial statements as all future references to authoritative accounting literature will be referenced in accordance with the Codification. There have been no changes to the content of the Companys financial statements or disclosures as a result of implementing the Codification during the quarter ended September 30, 2009.
As a result of the Companys implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable. In the current quarter financial statements, will provide reference to the new guidance only.
As a result of the Companys implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable. In the current quarter financial statements, will provide reference to the new guidance only.
Subsequent Events
(Included in Accounting Standards Codification (ASC) 855 Subsequent Events, previously SFAS No. 165 Subsequent Events)
SFAS No. 165 established general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued (subsequent events). An entity is required to disclose the date through which subsequent events have been evaluated and the basis for that date. For public entities, this is the date the financial statements are issued. SFAS No. 165 does not apply to subsequent events or transactions that are within the scope of other GAAP and did not result in significant changes in the subsequent events reported by the Company. SFAS No. 165 became effective for interim or annual periods ending after June 15, 2009 and did not impact the Companys financial statements. The Company evaluated for subsequent events through the issuance date of the Companys financial statements. No recognized or non-recognized subsequent eve nts were noted.
Determination of the Useful Life of Intangible Assets
(Included in ASC 350 Intangibles Goodwill and Other, previously FSP SFAS No. 142-3 Determination of the Useful Lives of Intangible Assets)
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ECOSPHERE TECHNOLOGIES, INC.
FSP SFAS No. 142-3 amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under previously issued goodwill and intangible assets topics. This change was intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under topics related to business combinations and other GAAP. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. FSP SFAS No. 142-3 became effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The a doption of FSP SFAS No. 142-3 did not impact the Companys financial statements.
Noncontrolling Interests
(Included in ASC 810 Consolidation, previously SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51)
SFAS No. 160 changed the accounting and reporting for minority interests such that they will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 became effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company implemented SFAS No. 160 at the start of fiscal 2009. Any excess or shortfall for buyouts of noncontrolling interests is recognized as an adjustment to additional paid-in capital in stockholders equity. Any shortfall resulting from the early buyout of noncontrolling interests will continue to be recognized as a benefit in partner investment expense up to the initial amount recognized at the time of buy-in. Additionally, operating losses can be allocated to noncontrolling interests even when such allocation results in a deficit balance (i.e. book value can go negative).
The Company presents noncontrolling interests (previously shown as minority interest) as a component of equity on its consolidated balance sheets. Minority interest expense is no longer separately reported as a reduction to net income on the consolidated income statement, but is instead shown below net income under the heading net income attributable to noncontrolling interests. The adoption of SFAS No. 160 did not have any other material impact on the Companys financial statements.
Consolidation of Variable Interest Entities Amended
(To be included in ASC 810 Consolidation, SFAS No. 167 Amendments to FASB Interpretation No. 46(R))
SFAS No. 167 amends FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities regarding certain guidance for determining whether an entity is a variable interest entity and modifies the methods allowed for determining the primary beneficiary of a variable interest entity. The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS No. 167 is effective for the first annual reporting period beginning after November 15, 2009, with earlier adoption prohibited. The Company will adopt SFAS No. 167 in fiscal 2010 and does not anticipate any material impact on the Companys financial statements.
Forward Looking Statements
The statements in this report relating to the Southwestern Energy Agreement and Newfields using the Companys Ozonix system, future revenues increasing, future positive cash flow, receipt of management fees by the Company, future liquidity, future operating expenses related to the Southwestern Energy Agreement, and the use of the $7.5 million of proceeds are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Additionally, words such as expects, anticipates, intends, believes, will and similar words are used to identify forward-looking statements.
Some or all of the results anticipated by these forward-looking statements may not occur. Important factors, uncertainties and risks that may cause actual results to differ materially from these forward-looking statements include, but are not limited to, successful operation of the EES units in the field, the future price of natural gas, future legislation, and the future condition of the capital and credit markets and For more information regarding
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ECOSPHERE TECHNOLOGIES, INC.
some of the ongoing risks and uncertainties of our business, see the Risk Factors contained in our Form 10-K for the year ended December 31, 2008.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to smaller reporting companies
Item 4.
Controls and Procedures.
Not applicable to smaller reporting companies
Item 4T.
Controls and Procedures.
Disclosure Controls
We carried out an evaluation required by Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 (the Exchange Act) under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.
Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in an issuer's reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) information is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
The evaluation of our disclosure controls and procedures included a review of our objectives and processes and effect on the information generated for use in this Report. This type of evaluation is done quarterly so that the conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. We intend to maintain these controls as processes that may be appropriately modified as circumstances warrant.
Based on their evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information which is required to be included in our periodic reports filed with the SEC as of the filing of this Report.
Changes in Internal Controls Over Financial Reporting
During the three months ended September 30, 2009, the Company made no changes in the control procedures related to financial reporting.
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ECOSPHERE TECHNOLOGIES, INC.
PART II OTHER INFORMATION
Item 1.
Legal Proceedings.
Item 1A.
Risk Factors.
Not applicable to smaller reporting companies
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
In addition to those unregistered securities previously disclosed in reports filed with the SEC, we have sold securities without registration under the Securities Act of 1933 in reliance upon the exemption provided in Section 4(2) and Rule 506 thereunder as described below. All securities in the table below are shares of common stock, except as indicated.
Name or Class of Investor | Date Sold | No. of Securities | Consideration |
Warrant Holders | July 1, 2009 through September 14, 2009 | 126,445 five-year warrants exercisable at $0.25 per share | In consideration for the extension of notes |
Note Holder | July 2, 2009 | 41,667 | Conversion of note at $0.36 per share |
Holders of Convertible Debentures | July 7, 2009 through September 23, 2009 | 2,400,000 | Partial conversion of convertible debentures |
Holders of Convertible Debentures | July 7, 2009 through September 23, 2009 | 27,375 | In lieu of paying cash interest on convertible debentures |
Warrant Holder | July 8, 2009 | 112,500 | Exercise of warrants at $0.10 per share |
Note Holders | July 9 through September 14, 2009 | 126,445 five-year warrants exercisable at $0.25 per share | In consideration for the extension of notes |
Note Holders | July 10, 2009 through August 27, 2009 | 2,733,334 | Conversion of notes at $0.15 per share |
Note Holders | July 10, 2009 through August 27, 2009 | 492,000 | In lieu of paying cash on convertible promissory notes |
Lender | August 17, 2009 | 675,676 | In consideration for loan advance |
Lenders | August 25, 2009 and September 14, 2009 | $277,778 in convertible notes convertible at $0.36 per share and 250,000 five-year warrants exercisable at $0.25 per share | Loans |
Finder | August 28, 2009 | 200,000 | 2008 Finders fee |
Item 3.
Defaults Upon Senior Securities.
None
Item 4.
Submission of Matters to a Vote of Security Holders.
None
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ECOSPHERE TECHNOLOGIES, INC.
Item 5.
Other Information.
Item 6.
Exhibits.
No. |
| Description |
| Incorporated By Reference |
| Exhibit # |
|
|
|
|
|
|
|
3.1 |
| Certificate of Incorporation |
| Form 10-QSB filed on December 11, 2006 |
| 3.1 |
3.2 |
| Certificate of Amendment |
| Form 10-K filed on March 25, 2009 |
| 3.2 |
3.3 |
| Certificate of Correction |
| Form 10-K filed on March 25, 2009 |
| 3.3 |
3.4 |
| Bylaws |
| Form 10-QSB filed on December 11, 2006 |
| 3.3 |
3.5 |
| Amendment to Bylaws |
| Form 10-K filed on March 25, 2009 |
| 3.3 |
4.1 |
| Form of Warrant |
| Form 10-Q filed on August 14, 2009 |
| 4.1 |
10.1 |
| Goldfarb Secured Line of Credit Agreement dated February 25, 2009* |
| Filed with this report |
|
|
10.2 |
| Secured Convertible Note dated February 25, 2009 |
| Filed with this report |
|
|
10.3 |
| Bledsoe Credit Agreement dated April 14, 2009 |
| Form 10-Q filed on August 14, 2009 |
| 10.3 |
10.4 |
| Amended and Restated Limited Liability Company Agreement of Ecosphere Energy Services, LLC dated July 14, 2009* |
| Filed with this report |
|
|
10.5 |
| Amended and Restated Credit Agreement dated July 15, 2009* |
| Filed with this report |
|
|
10.6 |
| Contribution Agreement dated July 15, 2009* |
| Filed with this report |
|
|
| Certification of Principal Executive Officer (Section 302) |
| Filed with this report |
|
| |
| Certification of Principal Financial Officer (Section 302) |
| Filed with this report |
|
| |
| Certification of Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer (Section 906) |
| Furnished with this report |
|
|
*The confidential disclosure schedules are not filed in accordance with SEC Staff policy, but will be provided to the Staff upon request. Certain material agreements contain representations and warranties, which are qualified by the following factors:
(i)
the representations and warranties contained in any agreements filed with this report were made for the purposes of allocating contractual risk between the parties and not as a means of establishing facts;
(ii)
the agreement may have different standards of materiality than standards of materiality under applicable securities laws;
(iii)
the representations are qualified by a confidential disclosure schedule that contains nonpublic information that is not material under applicable securities laws;
(iv)
facts may have changed since the date of the agreements; and
(v)
only parties to the agreements and specified third-party beneficiaries have a right to enforce the agreements.
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ECOSPHERE TECHNOLOGIES, INC.
Notwithstanding the above, any information contained in a schedule that would cause a reasonable investor (or that a reasonable investor would consider important in making a decision) to buy or sell our common stock has been included. We have been further advised by our counsel that in all instances the standard of materiality under the federal securities laws will determine whether or not information has been omitted; in other words, any information that is not material under the federal securities laws may be omitted. Furthermore, information which may have a different standard of materiality will nonetheless be disclosed if material under the federal securities laws.
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ECOSPHERE TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements 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.
45