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.)

 

 

 

3515 S.E. Lionel Terrace, Stuart, FL

 

34997

(Address of principal executive offices)

 

(Zip Code)

(772) 287-4846

 (Registrant’s 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
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was

required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

Large accelerated filer

 

 

 

Accelerated filer

 

 

Non-accelerated filer

 

 (Do not check if a smaller

 

Smaller reporting company

ü

 

 

 

 reporting company)

 

 

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 Yes

ü

 No

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  

The number of outstanding shares of the issuer’s common stock as of November 11, 2009, was 114,002,448.

 

 






ECOSPHERE TECHNOLOGIES, INC.

FORM 10-Q

TABLE OF CONTENTS

PAGE

PART I – FINANCIAL INFORMATION

Item 1.        Financial Statements.

1

Condensed Consolidated Balance Sheets

1

Condensed Consolidated Statements of Operations

2

Condensed Consolidated Stateements of Cash Flows

3

Condensed Consolidated Statements of Cash Flows

4

Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operation

30

Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operation

31

Item 3.        Quantitative and Qualitative Disclosures About Market Risk.

40

Item 4.        Controls and Procedures

40

Item 4T.     Controls and Procedures

41


PART II – OTHER INFORMATION


Item 1.        Legal Proceedings

42

Item 1A.     Risk Factors

42

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.        Defaults Upon Senior Securities

42

Item 4.        Submission of Matters to a Vote of Security Holders

42

Item 5.        Other Information

43

Item 6.        Exhibits

43

SIGNATURES

44




i





PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

September 30,
2009

 

December 31,
2008

 

 

     

(Unaudited)

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Liabilities, Redeemable Convertible Cumulative Preferred Stock and Stockholders’ Deficit

Current Liabilities

 

 

 

 

 

 

 

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
share redemption amount plus dividends in arrears ($1,130,994 at September 30, 2009)

 

 

1,130,994

 

 

1,111,306

 

Redeemable convertible cumulative preferred stock series B

 

 

 

 

 

 

 

484 shares authorized; 375 and 424 shares issued and outstanding, respectively, $2,500 per
share redemption amount plus dividends in arrears ($2,770,052 at September 30, 2009)

 

 

2,770,052

 

 

2,822,239

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ecosphere Technologies, Inc. Stockholders’ Deficit

 

 

 

 

 

 

 

Common stock, $0.01 par value; 300,000,000 shares authorized; 111,654,210 and 83,791,919
shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

 

 

1,116,538

 

 

837,914

 

Common stock issuable, $0.01 par value, 750,000 and 286,000 issuable at September 30, 2009
and December 31, 2008, respectively

 

 

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
September 30,

 

For The Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues

     

$

357,076

     

$

122,454

     

$

705,385

     

$

123,474

 

 

 

 

                      

 

 

                      

 

 

                      

 

 

                      

 

Cost of revenues

 

 

136,257

 

 

27,276

 

 

391,006

 

 

27,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

220,819

 

 

95,178

 

 

314,379

 

 

96,198

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

2,804,860

 

 

1,914,178

 

 

7,293,422

 

 

4,249,788

 

Restructuring charge

 

 

 

 

 

 

548,090

 

 

 

Total operating expenses

 

 

2,804,860

 

 

1,914,178

 

 

7,841,512

 

 

4,249,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(2,584,041

)

 

(1,819,000

)

 

(7,527,133

)

 

(4,153,590

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net  loss

 

 

(1,093,405

)

 

(3,768,588

)

 

(16,464,897

)

 

(8,530,891

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

(30,000

)

 

(34,937

)

 

(90,000

)

 

(105,188

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stock

 

 

(1,123,405

 

(3,803,525

)

 

(16,554,897

 

(8,636,079

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Net loss applicable to noncontrolling interest in consolidated subsidiary

 

 

268,531

 

 

 

 

268,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) applicable to Ecosphere Technologies, Inc. common stock

 

$

(854,874

)

$

(3,803,525

)

$

(16,286,366

)

$

(8,636,079

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share applicable to common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.01

)

$

(0.05

)

$

(0.17

)

$

(0.12

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

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
conversion of convertible debentures

 

$

1,977,877

 

$

 

Reduction of derivative liability for embedded conversion options from
conversion of convertible notes

 

$

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
common stock

 

$

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

Ecosphere’s 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 Company’s 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 Company’s 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 Company’s 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 Management’s Discussion and Analysis and Plan of Operation contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s 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 Company’s Consolidated Balance Sheet as of December 31, 2008 and the amounts recognized in the Company’s 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 Company’s 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
March 31, 2009

Warrants

 

 

 

 

 

 

 

     

Issuance of
Warrants

     

As of
December 31,
2008

     

As of
March 31,
2009

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
Convertible
Note

 

As of
December 31,
2008

 

As of
March 31,
2009

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
June 30, 2009

Warrants

 

 

 

 

 

 

 

 

 

 

Issuance of
New Warrants

 

As of
June 30,
2009

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
During the Three
Months Ended
June 30, 2009

 

Issuance of
New Convertible
Notes

 

As of
June 30,
2009

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
September 30, 2009

Warrants

 

 

 

 

 

 

 

 

 

 

Issuance of
New Warrants

 

As of
September 30,
2009

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
During the
Three Months
Ended September 30,
2009

 

Issuance of
New Convertible
Notes

 

As of
September 30,
2009

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 company’s 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 company’s 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
Discount Notes

 

$

0.25

 

 

1,228,500

 

Warrants issued in connection with new Secured Original Issue
Discount Notes

 

$

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 Company’s 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 Company’s 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 company’s 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 company’s 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
Discount Notes

 

$

0.25

 

 

22,500

 

Warrants issued in connection with new or renewed Secured Convertible Original Issue
Discount Notes

 

$

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
September 30,
2009

 

Quoted Prices in
Active Markets
for Identical
Assets

 

Significant
Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

 

 

 

 

 

(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:


 

 

Fair Value of
Liability For
Warrant
Derivative
Instruments

 

 

Fair Value of
Liability For
Embedded
Conversion
Option
Derivative
Instruments

 

Balance December 31, 2008

     

$

     

$

 

Cumulative effect of adoption of accounting principle

 

 

5,093,141

 

 

5,125,017

 

Balance at January 1, 2009

 

 

5,093,141

 

 

5,125,017

 

Adjustments for issuances and conversions, net

 

 

915,629

 

 

(5,610,176

)

Change in fair value included in other (income) loss

 

 

1,804,869

 

 

1,760,733

 

Balance at September 30, 2009

 

$

7,813,639

 

$

1,275,574

 

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 Company’s 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 Company’s financial statements or disclosures as a result of implementing the Codification during the quarter ended September 30, 2009.

As a result of the Company’s 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 Company’s ability to continue as a going concern.

The Company’s continued existence is dependent upon its ability to resolve its liquidity problems. On November 9, 2009, the Company’s 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 finder’s 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 Company’s 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 Company’s 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 Company’s Chairman and CEO advanced the Company $30,000 in short term financing secured by the Company’s 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 Company’s 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 Company’s 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 Company’s 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,
net of current portion

 

$

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 month’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 management’s 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 Company’s history of having never issued a dividend and management’s 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
September 30, 2009

 

For the Nine Months Ended
September 30, 2008

 

 

 

Shares

 

Weighted Average
Exercise Price

 

Shares

 

Weighted Average
Exercise Price

 

 

 

                   

 

 

                   

 

                   

 

 

                   

 

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 Company’s 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
September 30, 2009

 

For the Nine Months Ended
September 30, 2008

 

 

 

Shares

 

 

Weighted Average
Exercise Price

 

Shares

 

 

Weighted Average
Exercise Price

 

 

     

                     

     

     

                   

     

                     

     

     

                   

 

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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
September 30, 2009

 

For the Nine Months Ended
September 30, 2008

 

 

 

Shares

 

Weighted Average
Exercise Price

 

Shares

 

Weighted Average
Exercise Price

 

 

     

                    

     

 

                    

     

                    

     

 

                    

 

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
September 30, 2009

 

 

 

Shares

 

Weighted Average
Exercise Price

 

 

     

                    

     

 

                    

 

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 Company’s 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,
Inc.

 

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
customers

 

$

 

$

 

$

123,474

 

$

123,474

 

$

 

$

123,474

 

Interest expense and
amortization of debt discount

 

$

 

$

 

$

(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 &
construction in process

 

$

865,487

 

$

25,824

 

$

1,260,090

 

$

1,578,312

 

$

976,103

 

$

2,554,415

 

Fixed asset additions
(disposals) (net)

 

$

 

$

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)