Attached files
file | filename |
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EX-31.1 - CERTIFICATION - ECOSPHERE TECHNOLOGIES INC | esph_ex311.htm |
EX-32.1 - CERTIFICATION - ECOSPHERE TECHNOLOGIES INC | esph_ex321.htm |
EX-31.2 - CERTIFICATION - ECOSPHERE TECHNOLOGIES INC | esph_ex312.htm |
EX-21.1 - LIST OF SUBSIDIARIES - ECOSPHERE TECHNOLOGIES INC | esph_ex211.htm |
EX-23.1 - CONSENT OF SALBERG & CO. PA - ECOSPHERE TECHNOLOGIES INC | esph_ex231.htm |
EX-10.21 - UNIT PURCHASE AGREEMENT - ECOSPHERE TECHNOLOGIES INC | esph_ex1021.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
———————
FORM
10-K
———————
þ |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For the
fiscal year ended: December 31,
2009
OR
o |
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
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(State or
Other Jurisdiction
|
|
(I.R.S.
Employer
|
of
Incorporation or Organization)
|
|
Identification
No.)
|
3515
S.E. Lionel Terrace, Stuart, Florida
|
|
34997
|
(Address
of Principal Executive Office)
|
|
(Zip
Code)
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|
|
|
Registrant’s
telephone number, including area code: (772) 287-4846
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act: Common Stock $0.01 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.Yes o No þ
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. Yes þ No o
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 o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
o |
Accelerated
filer
|
o |
Non-accelerated
filer
|
o |
Smaller
reporting company
|
þ |
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). o Yes þ No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the closing price as of the last
business day of the registrant’s most recently completed second fiscal quarter,
June 30, 2009, was approximately $45,600,000.
The
number of shares outstanding of the registrant’s common stock, as of March 29,
2010, was 123,708,277.
INDEX
Page | ||
Part I. | ||
Item 1. | Business. | 1 |
Item 1A. | Risk Factors. | 11 |
Item 1B. | Unresolved Staff Comments. | 12 |
Item 2. | Properties. | 12 |
Item 3. | Legal Proceedings. | 12 |
Item 4. | Submission of Matters to a Vote of Security Holders. | 12 |
Part II. | ||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. | 13 |
Item 6. | Selected Financial Data. | 14 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 14 |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. | 32 |
Item 8. | Financial Statements and Supplementary Data. | 33 |
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. | 33 |
Item 9A. | Controls and Procedures. | 33 |
Item 9A(T) | Controls and Procedures. | 33 |
Item 9B. | Other Information. | 34 |
Part III. | ||
Item 10. | Directors, Executive Officers and Corporate Governance. | 35 |
Item 11. | Executive Compensation. | 42 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | 47 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence. | 49 |
Item 14. | Principal Accounting Fees and Services. | 50 |
Part IV. | ||
Item 15. |
Exhibits,
FinancialSstatement Schedules.
|
52 |
SIGNATURES | 54 |
PART
I
ITEM
1. BUSINESS.
Ecosphere
Technologies, Inc. (“Ecosphere” or the “Company”) is a diversified engineering,
technology development and manufacturing company dedicated to identifying,
creating, building and marketing innovative technology solutions that provide
for responsible, sustainable stewardship of the world’s natural
resources. Companies that use our patented technologies are able to
improve their financial metrics while also reducing their ecological and
environmental footprint. Ecosphere's business model has been to invent, develop,
license and sell green technologies to creative companies willing to respond to
changing industry requirements.
Presently,
the Company is using its patented Ecosphere Ozonix®
technology to assist gas and oil companies:
●
|
in
treating water used to fracture natural gas wells in an environmentally
friendly manner;
|
●
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in
eliminating the use of chemicals to treat bacteria and reduce scaling in
the fracturing process;
|
●
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in
eliminating the need to dispose of contaminated water which flows back
after fracturing wells, which reduces environmental regulatory issues;
and
|
●
|
improving
the efficiency and productivity of natural gas
wells.
|
Ecosphere
is the first company in the world that provides energy exploration companies
with an onsite, chemically free method to kill bacteria and reduce scaling
during fracturing and flowback operations.
To drill
for natural gas in unconventional shale plays, a well must be hydraulically
fractured or “fraced” to stimulate the flow of natural gas from the
reservoir. An energy company will use between 3,000,000 and 5,000,000
gallons of clean water for each well that they frac. Hydraulic
fracturing is used to create additional permeability in a producing formation to
allow gas to flow more easily to the wellbore. In order to produce
natural gas from shale, the wells must be injected with large volumes of clean
water, frac sand, and frac fluids, to drive the gas to the
surface. The conventional method of creating frac fluid was to treat
pond water with chemicals and additives, such as biocides and scale inhibitors
which eliminate aerobic and anaerobic bacteria from the pond
water. The chemicals, besides being expensive, create problems down
the wellbore including scaling and corrosion which reduce well
productivity.
Once the
frac flowback and produced water resurfaces, operators are forced to deal with
the wastewater. This wastewater is typically contaminated with salts,
heavy metals and hydrocarbons. The conventional methods of handling
the frac flowback were to dispose of the water either with deep hole injection
wells or in evaporation ponds. These methods require extensive
trucking of the water which is expensive and wasteful. Many of the
leading drilling companies are turning to recycling their frac flowback and
produced waters in order to reduce water consumption, control their costs for
clean water, and reduce their environmental impact. The Ecosphere
Ozonix®
technology is the right solution and is positioned to meet the growing
demand.
1
The
Scope of the Ecosphere Ozonix®
Process
Beyond the oil and gas
drilling business, the patented Ecosphere Ozonix®
technology provides solutions for treating wastewater in the energy business and
in many other industries as illustrated below:
|
Ecosphere
Ozonix® and the Oil and
Gas Industry
The
Company’s patented Ecosphere Ozonix® process is
designed to treat frac flowback and produced waters with highly concentrated
ozone, electro precipitation, and ultrasonic transducers. The
Ecosphere Ozonix® technology
combines ozone, hydrodynamic cavitation, acoustic cavitation, and
electro-chemical decomposition in a reaction vessel to cost-effectively treat
contaminated water without adding chemicals. Since late 2007, we have
tested our Ecosphere Ozonix® process on a
variety of industrial wastewaters. Ecosphere’s initial use of this
technology is to create a “closed loop” system providing a chemical-free total
water management solution to exploration and production companies drilling for
natural gas in unconventional shale plays.
EcosFrac™ and EcosBrine™
Our
EcosFrac™ and EcosBrine™ systems use hydrodynamic and acoustic cavitations to
create nano-sized bubbles that create hydroxyl radicals to oxidize organics and
heavy metals in industrial wastewaters. The process results in the
creation of EcosBrine™ fracturing fluid. EcosBrine™ is a clean high
chloride floatback water that is blended at the frac site with surface
water. The EcosBrine™ frac fluid has a negative scaling index that
does not allow bacteria to re-grow and helps to keep micro pores open, which
increases gas production. When the EcosBrine™ is added to pond,
flowback or produced water, it creates a very effective fracturing
solution. The EcosBrine™ frac fluid can be reused on the front end of
the frac site (mixed with the chemical free frac liquid and friction reducers)
to create completions fluid going down hole.
Our
EcosFrac™ units are housed in conventional trailers so they can be moved from
wellsite to wellsite as needed by drillers. We continue to refine our
technology in order to reduce the footprint and improve efficiency at lower
costs.
We have
created the EcosFrac™, a chemical free method to destroy aerobic and anaerobic
bacteria (which create scaling and corrosion) at the frac site, which works in
the following way:
●
|
Surface
water (and EcosBrine™ water if the energy company uses it) is put through
an EcosFrac™ tank, undergoing a chemical free process
whereby divalent cations as well as aerobic and anaerobic bacteria
are removed.
|
●
|
The
completions solution, which is chemical free, is then pumped through the
pumper trucks and into the well head. This eliminates the need
to purchase expensive and environmentally unfriendly biocides and
scale inhibitors to mix with completions
fluid.
|
2
Our
EcosFrac™ technology is currently operating in the Fayetteville Shale under a
long-term agreement with Southwestern Energy Production Company (“Southwestern
Energy”).
Our
EcosBrine™ units treat frac flowback water at the wellsite. The
resulting brine, which is saltwater without chemicals and sediment, can be used
by mixing it with surface water in the fracturing process or it can be stored in
a surface pond. Using our EcosBrine™ technology eliminates the cost
and environmental problems in storing, transporting and disposing of flowback
water. Newfield Exploration Co. ("Newfield") is currently using
our EcosBrine™ technology in the Woodford Shale in Oklahoma.
Our
customers can save hundreds of thousands of dollars on chemicals per hydraulic
fracture. In addition to the cost savings, this fracture solution
significantly enhances well productivity. This has helped us turn a
waste product into a valuable asset.
Ecosphere Energy Services,
LLC
Ecosphere
has issued an exclusive worldwide license, solely for the energy field of use
for the Ecosphere Ozonix® technology, to
Ecosphere Energy Services, LLC, or EES, a majority-owned subsidiary. EES is
currently providing onsite water processing services to oil and gas companies in
various states including Arkansas and Oklahoma. EES has
signed long-term agreements with two natural gas production companies:
Southwestern Energy and Newfield . Also EES has performed paid pilot
programs for BP American Production Company ("BP") and will soon perform pilots
with a Newfield/Cabot joint venture and Petrohawk.
Ecosphere
is the managing member of EES and Ecosphere officers and employees devote the
bulk of their time to the EES business. The only exceptions are
public company reporting, investor relations and
manufacturing. Ecosphere retained all manufacturing rights with
respect to the Ecosphere Ozonix®
technology. All EES employees are supervised by Ecosphere as the
managing member, although EES has its own senior management team.
We
manufactured and began testing the prototype of the EcosFrac™ tank in the first
quarter of 2009. In July 2009, the Company entered into a Master
Service Agreement with two subsidiaries of Southwestern Energy and received a
work order under this agreement for the deployment of EcosFrac™ tanks to
pre-treat water used to fracture natural gas wells in the Fayetteville
Shale. Under the work order, EES is providing the services for a
minimum two-year period with three one-year extension options. In
addition, the work order includes the option to purchase the EcosFrac™ units at
preset prices based upon the date the option is exercised, plus an ongoing
license fee for each barrel of water processed thereafter. The
Company delivered the Ecos Frac™ units in November, and December 2009 and
January 2010. This Agreement and the work order demonstrate that the
EcosFrac™ tank will be an important part of our product line to service the oil
and gas industry.
3
The
patented Ecosphere Ozonix® technology
process is an advanced oxidation process that we have developed to treat
industrial wastewater. Since late 2007, we have tested the Ecosphere
Ozonix® process on a
variety of industrial wastewaters. We feel one of the most promising
applications for our technology is in the natural gas exploration business to
help the energy companies recycle frac flowback and produced
waters. In June 2009, the Company entered into a Master Service
Agreement with BP to provide environmental water recycling
services. In August 2009, the Company received two work orders
from BP for pilot projects in Wyoming and one work order for a pilot in
Oklahoma.
Ecosphere
developed the Ecosphere Ozonix® technology in
the second half of 2007 and began testing it in late 2007 and early 2008 in the
Barnett Shale area of North Texas. From the testing, the Company
learned that the Ecosphere Ozonix® technology is
able to efficiently and in a cost effective manner, remove hydrocarbons and
heavy metals from frac flowback water and can, as part of a pre or post
treatment process, provide a solution to the disposal of this wastewater by
cleaning it and permitting it to be reused in the drilling process.
In
July 2009, the Corporation Commission of Oklahoma approved a permit
application by Newfield to build and operate a water recycling plant utilizing
the Ecosphere Ozonix® technology
water treatment system for two years. The permit allows Newfield to
process frac flowback water into freshwater and brine utilizing the Ecosphere
Ozonix® technology
system and to release the treated flowback onto the ground.
In April
2010, we expect to begin four paid pilots for other major energy exploration
companies.
Water and
Energy
The two
most important resources for the world are water and energy. Water
and energy are two highly interconnected sectors: energy is needed throughout
the water system, to supply water to its various users. Water is also
essential to producing energy. At present, water cools electric power
plants, flows through the turbines at hydroelectric dams, irrigates crops used
to produce biofuels, and is pumped underground to crack open rock formations and
force oil and gas to producing wells. The role of water in the energy
sector is increasingly critical as many future sources of fossil fuels,
including oil sands and unconventional natural gas, are water intensive to
produce. Other energy sources that may be useful for combating
climate change, such as carbon capture and storage, biofuels, and nuclear power,
also require large volumes of water. It is estimated that agriculture
uses 70% of all freshwater withdrawals and energy uses only 8% of freshwater
withdrawals. However, growing populations and growing demand from
other industries will likely squeeze energy’s already thin share of water,
especially in those parts of the world experiencing water
scarcity. When constraints on water resources are coupled with
pressures to reduce greenhouse gas emissions, the challenges for new energy
projects grow exponentially. Therefore, there is a burgeoning demand
for finding and implementing solutions that reduce water use and increase water
recycling.
4
In March
2010, the United Nations released a report that called for turning unsanitary
wastewater into an environmentally safe economic resource. According
to the report, 90% of wastewater discharged daily in developing countries is
untreated contributing to the deaths of 2.2 million people a year, but with the
proper management this wastewater can be an essential resource for supporting
livelihoods. The report also points to the abundant Green
Economy opportunities for turning a mounting challenge into an opportunity with
multiple benefits and noted that a solution may involve water recycling
systems.
Growth in Unconventional Gas
(Shale Plays)
Until
recently, unconventional sources accounted for a small portion of gas production
in the U.S. The term unconventional gas is used to describe deposits
of natural gas found in relatively impermeable rock formations. Over
the past decade, while U.S. conventional production was declining, technological
advances were reducing the cost of extracting unconventional gas, especially
shale gas. According to a Wall Street Journal article “The
Unconventional Gas Revolution”, the result was an unconventional gas boom and a
surge in U.S. production, particularly from shales, beginning in
2007. On a global basis, unconventional gas represents a potentially
recoverable resource equal to or even exceeding the conventional gas reserves in
the world.
Our
Strategy
We
currently operate in the Fayetteville Shale and the Woodfield
Shale. Our short-term plan is to expand our geographic reach from our
existing operations and begin operations in the other five major shales in North
America, the Haynesville Shale, the Barnett Shale, the Horn River Shale, the
Marcellus Shale and the Montney Shale. Offshore drilling has
accounted for approximately one-quarter of total U.S. natural gas production
over the past two decades and almost 30% of total U.S. oil production in recent
years. We are currently building a unit that utilizes
the Ecosphere Ozonix® technology to
treat flowback water from offshore drilling. We expect EES will enter
this field in 2010.
Our
Markets
Our
potential markets include all major shale plays in the
U.S. Currently, our technology is being utilized in the following
shale plays: (i) the Fayetteville Shale in Arkansas, and (ii) the
Woodford Shale in Southern Oklahoma. Southwestern Energy is the
largest gas producer in the Fayetteville Shale. Currently, we are
operating EcosFrac™ units in the Fayetteville Shale and an EcsoBrine™ unit in
the Woodford Shale and expect to use an additional EcosBrine™ unit in a pilot
program in the Marcellus Shale.
5
Water costs per
well
Based on
industry estimates, gas drillers spend approximately $224,000 buying,
transporting (from water source and to disposal pond), and storing water for a
frac and spend $500,000 moving water around a frac. This does not
include the cost of chemicals-$120,000. In total, a gas driller
spends between $5-$7 million to drill and complete a well. Therefore,
approximately 10% of the well costs are water-related and we are focused on
reducing these costs.
The
Ecosphere Ozonix® process reduces
well completion costs by recycling 25,000 barrels of water per
well. It reduces the use of trucks to transport water from the well
site and reduces the use of injection wells. As a result, the carbon
footprint is reduced.
Favorable
Environment
There is
a large “green” movement in the U.S. for identifying, developing and using
cleaner and more eco-friendly sources of energy. President Barack
Obama’s stated objective is to transform the entire U.S. economy onto a greener
path. He links energy and climate change to national security, citing
the nation’s dependence on fossil fuels, and foreign oil imports in particular,
as a dangerous and urgent threat. President Obama has said that energy is a high
priority for his administration. With respect to the clean energy,
President Obama stated his intention is to provide an additional $1 billion per
year to help manufacturers re-tool to adopt clean technologies and make clean
technology products. The Ecosphere Ozonix® process reduces
well completion costs by recycling flowback water. It reduces the use of trucks
to transport water from the well site and reduces the use of injection wells. As
a result, the carbon footprint is reduced.
According
to Ross Smith Energy, if President Obama succeeds in implementing the energy
policy he espoused during the election campaign, the winners look to be
renewable energy, energy efficiency technology, natural gas and plug-in hybrid
vehicles. On December 7, 2009, the U.S. Patent and Trademark Office
announced its pilot program to expedite the examination of patent applications
directed to certain green technology inventions. Secretary of
Commerce Gary Locke indicated that the pilot program was limited to the first
3,000 of the “most promising inventions.” In March 2010, Ecosphere
was provided with Notice of Allowance for two of its patent applications under
this pilot program. The patents are directed to the Ecosphere
Ozonix®
processes.
6
Competition
We have
been unable to identify any other company in the world that, at the wellsite,
can provide exploration and production companies with clean, bacteria-free frac
fluid at high volume without the use of chemicals. Because most
drilling companies are using chemicals in their completions solutions,
Ecosphere’s primary competitors/substitutes (on the front end) are the major
chemical companies that manufacture and sell the chemicals to the drillers going
down hole, such as Nalco (a division of Dow Chemical) and Champion.
The
energy companies use a myriad of different approaches to dealing with frac
flowback waters. The primary method of dealing with these waters
throughout the U.S. is hauling them to permitted underground injection
sites. In some cases vapor distillation technology is being used to
treat frac flowback and produced waters at a disposal facility. We
treat the frac flowback and produced waters at the wellsite. We
believe our Ecosphere Ozonix® technology is a
more cost effective alternative that energy companies will prefer due to our
pricing structure and the mobility of our solution.
Because
of environmental concerns about the use of chemicals, large oil and gas service
companies are seeking solutions. Bloomberg recently reported that the two
largest oilfield contractors are each testing new chemical free technologies.
The same article quoted an executive of Southwestern Energy referring to its
testing of our Ecosphere Ozonix®
technology.
Our
competitive advantages include cost and the ability to recycle much higher
volumes of wastewater. The footprint of the Ecosphere Ozonix® mobile water
treatment units is considerably smaller than a systam a competitor uses to treat
the same volumes of frac flowback waters. Unlike our competitor's
process, the Ecosphere Ozonix® process does
not need a particular water temperature or pH level, with expansion capability
to receive continuous water flow for treatment at high volume. Our
process provides an enhanced stream of clean water at the site. Our
competitors, including chemical companies, however, have substantially greater
financial, management, engineering, technical, sales, and marketing resources
than we currently have.
Manufacturing
We
manufacture and assemble our EcosFrac™ and EcosBrine™ units at our headquarters
in Stuart, Florida using a network of selected original equipment manufacturers
to supply us some components.We manufacture the critical and proprietary
components of the Ecosphere Ozonix®
process in-house. Our engineering staff continues to improve our products
at this manufacturing facility.
Sales and
Marketing
We rely
on our officers for the coordination of our sales and marketing
efforts. Management uses our website, www.ecospheretech.com, and
search engine optimization marketing programs to bring customers to our website
to learn about our technologies. We have developed a marketing and
communications strategy with our website design team to place our company
information and ads on various oil and gas industry websites. Additionally, EES
has its own president and chief operating officer who play an important role in
sales and marketing.
7
Government Regulation and
Environmental Laws
In 2004,
Congress exempted hydraulic fracturing from the Safe Drinking Water Act, or the
SDWA. Recently, proposals have been made to revisit the environmental
exemption for hydraulic fracturing under the SDWA or to enact separate federal
legislation or legislation at the state and local government levels that would
regulate hydraulic fracturing. Both the United States House of
Representatives and Senate are considering the Fracturing Responsibility and
Awareness of Chemicals Act, or the FRAC Act, and a number of states are looking
to more closely regulate hydraulic fracturing. The FRAC Act would
require companies to gain approval from the U.S. Environmental Protection
Agency (“EPA”) before using hydraulic fracturing to enhance production of oil
and natural gas wells. The bill would also require companies to make
public the chemicals they use in fracturing. In all, 48 House members
have signed on as co-sponsors of the FRAC Act. It is unclear how much
support the proposal will get in Congress or the White House. In
March 2010, the EPA announced it was studying the effects of fracturing on
water supplies and the environment.
We
believe that governmental regulations that regulate hydraulic fracturing will
benefit Ecosphere and lead companies to use our environmental friendly and
cost-effective technologies. If the exemption for hydraulic
fracturing is removed from the SDWA, or if the FRAC Act or other legislation is
enacted at the federal, state or local level, any restrictions on the use of
hydraulic fracturing contained in any such legislation could have a positive and
significant impact on our financial condition and results of operations. On the
other hand, if drilling is materially reduced, it would have a material adverse
effect on the Company's operations.
On
December 15, 2009, the EPA officially published its findings that emissions
of carbon dioxide, methane and other “greenhouse gases” present an endangerment
to human health and the environment because emissions of such gases are,
according to the EPA, contributing to warming of the earth’s atmosphere and
other climatic changes. These findings by the EPA allow the agency to
proceed with the adoption and implementation of regulations that would restrict
emissions of greenhouse gases under existing provisions of the Clean Air
Act. The EPA has proposed two sets of regulations that would require
a reduction in emissions of greenhouse gases from motor vehicles and these
regulations, if finalized, could lead to the imposition of greenhouse gas
emission limitations in Clean Air Act permits for certain stationary
sources. In addition, on September 22, 2009, the EPA issued a final
rule requiring the reporting of greenhouse gas emissions from specified large
greenhouse gas emission sources in the United States beginning in 2011 for
emissions occurring in 2010.
Congress
has been considering various bills that would establish an economy-wide
cap-and-trade program to reduce U.S. emissions of greenhouse gases, including
carbon dioxide and methane. Such a program, if enacted, could require
phased reductions in greenhouse gas emissions.
8
Enactment
of EPA Regulations and new cap-and-trade legislation could increase costs of
energy companies and result in reduced demand for natural gas and oil as prices
rise. Additionally, oil and gas drillers may face difficulties in
expanding their drilling operations. Because EES’ Ozonix® technology is
being used by gas drillers in unconventional sources such as shale plays, the
drilling operations produce much more hydrocarbons than production from
conventional sources. On the other hand, future EPA Regulations or
future legislation may encourage the use of natural gas, which is much cleaner
than oil. This in turn would encourage natural gas production, which
may increase the need for EES’ services and technology.
Other
Ecosphere Ozonix®
Technology Applications
We intend
to market the Ecosphere Ozonix® technology
wherever there are large streams of industrial wastewater that need innovative
solutions to clean, recycle or completely eliminate the
wastewater. To date, Ecosphere is focused on hydraulic fracing as
part of the onshore natural gas drilling process. Our potential
markets include all industries around the world that use chemicals to treat
water. We are focused on developing strategic partnerships to deploy
our technology in a wide variety of global industrial and municipal wastewater
applications. The Ecosphere Ozonix® technology has
a broad spectrum of applications in a multitude of industry
segments. There is an inherent “uniqueness” of the Ecosphere
Ozonix® technology when
compared to traditional technologies that it either replaces or is combined with
to offer improved operational efficiencies and cost savings. In
addition to our current onshore and planned offshore gas and oil operations, the
following offers a very broad overview of some segments of industries where
thousands of potential clients exist. These primary applications
include, but are not limited to:
●
|
Beyond
oil and gas drilling, our patented technology has applications in other
parts of the energy business including conventional and nuclear power
plants and coal mining operations.
|
●
|
Mining Minerals –
Water-pollution problems caused by mining include acid mine drainage,
metal contamination and increased sediment levels in
streams. The EPA estimates that there are more than 600,000
mines, most of which are abandoned, have polluted over 180,000 acres of
reservoirs and lakes, and 12,000 miles of streams. Without
remediation and reclamation of these mines, they will continue to
discharge toxic metals in water and
sediment.
|
●
|
Municipal Wastewater –
Wastewater discharged into municipal wastewater systems travels to local
wastewater treatment plants where it is treated before being discharged
into the environment. According to the U.S. Census, in 2000,
there were 15,591 wastewater treatment facilities in the U.S. with a total
capacity of 42.225 billion gallons per
day.
|
●
|
Commercial Wastewater –
Diminishing quality water supplies, increasing water purchase costs and
strict environmental standards are forcing industries to target increased
water-efficiency and reuse.
|
●
|
Agricultural Wastewater
– As reported by the EPA, agriculture nonpoint source pollution is the
leading source of water quality impacts on surveyed rivers and lakes as
surveyed in the 2000 National Water Quality Inventory provided to
Congress. Agriculture is a highly intensified industry in many
parts of the world, producing a range of wastewaters including sediment
and nutrient runoffs, pesticides and animal wastes requiring a variety of
treatment technologies. The disposal of many of these wastes
can pose serious health problems.
|
9
Other
Technologies
The
Company has successfully demonstrated the ability to develop and monetize its
technologies. In 2007, the Company sold its ship stripping
technology, resulting in a net gain on sale of intellectual property and related
assets of approximately $5.3 million.
In
addition to the Ecosphere Ozonix® technology,
the Company presently owns several other technologies that are completed and
available for global marketing. Among these technologies is our clean
tech Ecos LifeLink. We completed the design and engineering for our
clean tech mobile micro-utility system in late 2006 and expect to construct a
prototype as resources become available. This new clean tech Ecos
LifeLink™
unit will provide power, telecommunications and clean water in remote regions of
the world without using any fossil fuel.
Research
and Development
We have
spent $97,389 and $1,090 on research and development in 2009 and 2008,
respectively.
Employees
As
of March 26, 2009, we had 63 total employees of which, 2 were
part time. This includes 27 EES employees. None of our
employees are covered by a collective bargaining agreement. We believe
that our relationships with our employees are good.
Corporate
History
We were
formed as a Florida corporation in 1998. In 2006, we reincorporated
in Delaware.
Intellectual
Property
In addition to the two new green tech
patents used in gas and oil drilling, Ecosphere holds an extensive patent
portfolio of clean technologies. Our two new patents were filed as
patent applications in December 2009 and we received notice of allowance of
the patents on March 16, 2010. This accelerated process occurred as
part of the Obama Administration’s Green Technology Fast Track program that
began December 1, 2009. Our intellectual property portfolio includes
registered and pending patents, trademarks, copyrights and trade
secrets. Our material intellectual property was invented by our
founder and Chief Executive Officer, Mr. Dennis McGuire, and assigned to
us. Our Senior Vice President of Engineering, Mr. Sanjeev Jahkete,
was the co-inventor with Mr. McGuire of our two new green tech
patents. We believe our intellectual property portfolio will act as a
barrier to entry for other competitors who may seek to provide competing
technology.
10
|
●
|
U.S. Patent (awaiting assignment of patent number) -
The Ecosphere Ozonix® process
for enhanced water treatment for reclamation of waste
fluids.
|
|
●
|
U.S. Patent (awaiting assignment of patent number) -
The Ecos Frac™ tank, real-time processing of water for hydraulic fracture
treatments using a transportable frac
tank.
|
The
following is a list of the Company’s existing intellectual property
estate:
|
●
|
U.S. Patent 6,287,389 -
Method of robotic automobile paint stripping – dated September 11,
2001.
|
|
●
|
U.S. Patent 6,745,108 -
Expansion of 3D robotic auto paint stripping patent to include any object
– dated June 1, 2004.
|
|
●
|
U .S. Patent 7,100,844 –
High Impact Waterjet Nozzle is constructed to infuse fluid into a high
velocity stream of liquid passing through a nozzle to create a bubble rich
waterjet that causes the bubbles to implode when the waterjet strikes the
surface amplifying the impact of the water – dated September 5,
2006.
|
|
●
|
U.S. Patent Pending -
Mobile Emergency Water Filtration System for Homeland Security and other
applications.
|
|
●
|
U.S. Patent Pending -
Business Model to provide response and training to public and private
suppliers of water resources in the event of an act of terrorism or a
natural disaster that contaminates a water
supply.
|
ITEM
1A. RISK
FACTORS.
Not applicable to smaller reporting
companies. To see our principal risk factors see Item
7. “Managements Discussions and Analysis or Financial Condition and
Results of Operations”
11
ITEM
1B. UNRESOLVED
STAFF COMMENTS.
None.
ITEM
2. PROPERTIES.
Ecosphere
leases three buildings in Stuart, Florida comprising an aggregate of 15,700
square feet of space. Our aggregate monthly rent is
$13,354. One building houses the corporate offices, and the second
building provides warehouse, manufacturing and testing space and the third
adjacent building provides additional warehouse space. The lease on
the corporate office expires on September 30, 2010, and the lease on the
warehouse and manufacturing building expires on August 31,
2011. If we do not renew these leases we believe there is an
abundance of office and manufacturing space available in the Stuart, Florida
area.
EES
leases a building in Conway, Arkansas, comprising approximately 7,500 square
feet of space which comprises our administrative offices and equipment
maintenance facility for our operations in Arkansas. The aggregate
monthly rent is $4,200. The lease on the building expires on October
31, 2012.
ITEM
3. LEGAL
PROCEEDINGS.
From time to time, we are involved in
litigation in the ordinary course of business. We are not presently a
party to any material litigation.
ITEM
4. (REMOVED
AND RESERVED).
12
PART
II
ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.
Our
common stock is quoted on the Over-the-Counter Bulletin Board, or the Bulletin
Board under the symbol “ESPH”. The following table provides the high
and low bid price information for our common stock for the periods indicated as
reported by the Bulletin Board. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions. We have approximately 1,437
holders of record
of our common stock.
Bid
Prices
|
||||||||
Year
|
Quarter
Ended
|
High
|
Low
|
|||||
($)
|
($)
|
|||||||
2009
|
March 31
|
0.35 | 0.14 | |||||
June 30
|
0.52 | 0.13 | ||||||
September 30
|
0.52 | 0.31 | ||||||
December 31
|
0.49 | 0.33 | ||||||
2008
|
March 31
|
0.25 | 0.10 | |||||
June 30
|
0.62 | 0.11 | ||||||
September 30
|
0.78 | 0.36 | ||||||
December 31
|
0.68 | 0.26 |
Dividend
Policy
We have
not paid any cash dividends on our common stock and do not plan to pay any such
dividends in the foreseeable future. Our Board of Directors, or
Board, will determine our future dividend policy on the basis of many factors,
including results of operations, capital requirements, and general business
conditions.
Recent
Sales of Unregistered Securities
In
addition to those unregistered securities previously disclosed in reports filed
with the Securities and Exchange Commission, or the SEC, we have sold securities
without registration under the Securities Act of 1933, or the Securities Act, in
reliance upon the exemption provided in Section 4(2) and Rule 506
thereunder as described below. Unless stated, all securities are
shares of common stock.
13
Name
of Class
|
Date
Sold
|
No. of
Securities
|
Reason
for Issuance
|
Holder
of Convertible Debentures
|
October
8, 2009
|
629,554
|
Conversion
of convertible debenture
|
Holder
of Convertible Debentures
|
October
8, 2009
|
944
|
In
lieu of cash interest
|
Debt
holder
|
October
16, 2009
|
20,000
|
Extension
of debt
|
Debt
holder
|
October
16, 2009
|
7,500
|
Satisfaction
of debt
|
Warrant
Holder
|
October
26, 2009
|
112,500
five-year warrants exercisable at $0.25 per share
|
In
connection with a new convertible note
|
Series
B holder
|
November
23, 2009
|
16,700
|
Conversion
of Series B Preferred Stock
|
Consultants
|
December
22, 2009
|
100,000
five-year warrants exercisable at $0.43 per share
|
Consulting
services
|
Employee
|
December
22, 2009
|
50,000
five-year stock options exercisable at $0.43 per share
|
Service
as employee
|
ITEM
6. SELECTED
FINANCIAL DATA.
Not applicable for smaller reporting
companies.
ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
You
should read the following discussion in conjunction with our audited historical
consolidated financial statements, which are included elsewhere in this Form
10-K. Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains statements that are
forward-looking. These statements are based on current expectations
and assumptions, which are subject to risk, uncertainties and other
factors. Actual results may differ materially because of the factors
discussed in the subsection titled “Risk Factors” which are located at the end
of this Item 7.
Company
Overview
At
present, Ecosphere is focusing its efforts on EES, its 52.6% owned subsidiary.
EES is engaged in operating high volume mobile water filtration equipment to
treat energy exploration related wastewaters. EES is successfully
providing water recycling services to major energy exploration companies
utilizing our patented Ecosphere Ozonix®
technology. The commercial viability of this technology is
demonstrated by the multi-year Agreements the Company has been able to
secure. These Agreements proved the technology was commercially
viable and led to the development of additional applications of our technologies
which will allow energy companies to optimize the revenues generated from a
wellsite.
14
2009
Highlights
2009 was
a transformational year for the Company as it developed and commercialized its
Ecosphere Ozonix®
technology. Highlights include:
●
|
In
July 2009, the Corporation Commission of Oklahoma approved a permit
application by Newfield to build and operate a water recycling plant
utilizing the Ecosphere Ozonix®
water treatment system to treat frac flowback water for two
years.
|
●
|
In
July 2009, the Company entered into a Master Service Agreement with
two subsidiaries of Southwestern Energy and received a work order for the
deployment of EcosFrac™
Tanks to pretreat water used to fracture natural gas wells in the
Fayetteville Shale.
|
●
|
The
Master Service Agreement and work order demonstrate that the
EcosFrac™ tank
will be an important part of our product line to service the oil and gas
industry.
|
●
|
In
August 2009, the EES entered into an agreement to process frac flowback
water in the Woodford shale in Oklahoma. The term of the
agreement is one year with the option for two additional
years.
|
●
|
Ecosphere
manufactured and EES delivered the majority of the EcosFrac™
tanks to Southwestern Energy in 2009 and the balance of the units in
the first few days of 2010.
|
●
|
EES
completed two pilots for BP in Wyoming and one in
Oklahoma.
|
●
|
Ecosphere
completed two significant financings related to EES as detailed
below.
|
In July
2009, the Company finalized a series of agreements with Clean Water Partners LLC
(“CWP”), an affiliate of Bledsoe Capital Group (“Bledsoe”). Under the
agreements, CWP became a 33% owner of EES in exchange for up to $10 million
as described below. As the then owner of the remaining 67% of EES,
the Company controlled a majority of the Board of Directors of EES and controls
and manages its daily operations. A supermajority vote is required
for major matters, including the sale of EES.
The
Company contributed to EES the assets and liabilities of EES, Inc., which
included $3.1 million of debt due to Bledsoe. CWP contributed
$2.5 million in cash plus $1.0 million in loan advances due from the
Company. In exchange for payment of $1.5 million and forgiveness
of the $1.0 million of loan advances, the Company granted EES an exclusive
license for all of its Ecosphere Ozonix® technology
relating to the recycling of water in the field of use which is
energy. This includes its core water recycling Ecosphere
Ozonix® processes
and technology, its EcosFrac™ technology and its associated
EcosBrine™
fluid. In addition, the Company will receive a priority distribution
of the first $2.5 million of CWP’s share of EES profits. An
additional $4 million is due to the Company upon achievement of a
significant event relating to EES, such as the sale of EES. See Note
19 of the accompanying notes to the consolidated financial statements for a
summary of the transaction.
In
addition to owning the right to a majority of the profits and other
distributions of EES, the Company will receive 100% of the first $7,575,000 of
the profits of EES with 33% of those profits representing the $2.5 million
priority distribution described above.
15
In
November 2009, EES received $7.5 million from Fidelity National Financial 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. Also in
November 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 continues to be the managing member of EES.
CRITICAL
ACCOUNTING ESTIMATES
In
response to the SEC’s financial reporting release, FR-60, Cautionary Advice
Regarding Disclosure About Critical Accounting Policies, the Company has
selected its more subjective accounting estimation processes for purposes of
explaining the methodology used in calculating the estimate, in addition to the
inherent uncertainties pertaining to the estimate and the possible effects on
the Company’s financial condition. These accounting estimates are
discussed below. These estimates involve certain assumptions that if
incorrect could create a material adverse impact on the Company’s results of
operations and financial condition. Some of the estimates are based upon the
intellectual property and related assets and inventory which were sold and are
included as a matter of explaining the historical results of
operations.
Revenue
Recognition
Revenue
from sales of equipment is recognized when products are delivered to and
accepted by the customer, economic risk of loss has passed to the customer,
price is fixed or determinable, collection is probable, and any future
obligations of the Company are insignificant. Revenue from
the Ecosphere Ozonix® water-filtration
contracts is earned based upon the volume of water processed plus additional
contractual period based charges and is recognized in the period the service is
provided. Payments received in advance of the performance of services
or of the delivery of goods are deferred as liabilities until the services are
performed or the goods are delivered. Revenue from the sale of
intellectual property and related assets is recognized as a gain from the sale
of intellectual property and related assets, an operating item, when payment has
been received and ownership of the patents and related assets has been
transferred to the buyer and is recorded net of any carrying value and selling
costs. Equipment or inventory sold in connection with the sale of
intellectual property is recognized as a wash sale with no resulting gain or
loss. The Company includes shipping and handling fees billed to
customers as revenues and shipping and handling costs as cost of
revenues.
Stock-Based
Compensation
The
Company follows the provisions of ASC 718-20-10 Compensation – Stock
Compensation which establishes standards surrounding the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. Under ASC 718-20-10, we recognize an expense for the fair
value of our outstanding stock options as they vest, whether held by employees
or others.
We
estimate the fair value of each stock option at the grant date by using the
Black-Scholes option pricing model based upon certain assumptions which are
contained in Note 12 to our consolidated financial statements contained in this
report. The Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price
volatility. Because our stock options and warrants have
characteristics different from those of traded options, and because changes in
the subjective input of assumptions can materially affect the fair value
estimate, in our management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of such stock
options.
Fair
Value of Liabilities for Warrant and Embedded Conversion Option Derivative
Instruments
We
estimate the fair value of each warrant and embedded conversion option at the
issuance date and at each subsequent reporting date by using the Black-Scholes
option pricing model based upon certain assumptions which are contained in Note
1 to our consolidated financial statements contained in this
report. The Black-Scholes model requires the input of highly
subjective assumptions including the expected stock price
volatility. Because our warrants and embedded conversion options have
characteristics different from those of traded options, and because changes in
the subjective input of assumptions can materially affect the fair value
estimate, in our management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of such warrants and
embedded conversion options.
16
Comparison of the Year ended December
31, 2009 with the Year ended December 31, 2008
The
following table sets forth a modified version of our Consolidated Statements of
Operations that is used in the following discussions of our results of
operations:
For
the Years Ended December 31,
|
||||||||||||||||
Change
|
||||||||||||||||
2009
|
2008
|
$ | % | |||||||||||||
|
|
|
|
|||||||||||||
Revenues
|
$ | 1,760,129 | $ | 247,202 | $ | 1,512,927 | 612 | % | ||||||||
Cost
of revenues
|
924,789 | 163,169 | 761,620 | 467 | % | |||||||||||
Gross
profit (loss)
|
835,340 | 84,033 | 751,307 | 894 | % | |||||||||||
Operating
expenses
|
||||||||||||||||
Salaries
and employee benefits
|
6,833,304 | 3,255,835 | 3,577,469 | 110 | % | |||||||||||
Administrative
and selling
|
1,211,662 | 1,314,418 | (102,756 | ) | -8 | % | ||||||||||
Professional
fees
|
1,162,772 | 1,227,810 | (65,038 | ) | -5 | % | ||||||||||
Depreciation
and amortization
|
686,309 | 259,642 | 426,667 | 164 | % | |||||||||||
Research
and development
|
97,389 | 24,951 | 72,438 | 290 | % | |||||||||||
Total
selling general and administrative
|
9,991,436 | 6,082,656 | 3,908,780 | 64 | % | |||||||||||
Restructuring
charge
|
548,090 | - | 548,090 | 100 | % | |||||||||||
Asset
impairment
|
- | 6,601 | (6,601 | ) | -100 | % | ||||||||||
Total
oerating expenses
|
10,539,526 | 6,089,257 | 4,450,269 | 73 | % | |||||||||||
Loss
from operations
|
(9,704,186 | ) | (6,005,224 | ) | (3,698,962 | ) | 62 | % | ||||||||
Other
income (expense):
|
||||||||||||||||
Other
income (expense)
|
1,758 | (12,599 | ) | 14,357 | 114 | % | ||||||||||
Gain
(loss) on conversion
|
(716,783 | ) | (256,271 | ) | (460,512 | ) | -180 | % | ||||||||
Interest
expense
|
(5,184,747 | ) | (5,419,562 | ) | 234,815 | 4 | % | |||||||||
Change
in fair value of derivative instruments
|
(3,446,612 | ) | - | (3,446,612 | ) | -100 | % | |||||||||
Total
other income (expense)
|
(9,346,384 | ) | (5,688,432 | ) | (3,657,952 | ) | 64 | % | ||||||||
Net
loss
|
(19,050,570 | ) | (11,693,656 | ) | (7,356,914 | ) | -63 | % | ||||||||
Preferred
stock dividends
|
118,750 | 138,250 | 19,500 | -14 | % | |||||||||||
Net
income (loss) applicable to common stock
|
(19,169,320 | ) | (11,831,906 | ) | (7,337,414 | ) | -62 | % | ||||||||
Net
loss applicable to noncontrolling interest of consolidated
subsidiary
|
743,417 | - | 743,417 | 100 | % | |||||||||||
Net
loss applicable to Ecosphere Technologies common stock
|
$ | (18,425,903 | ) | $ | (11,831,906 | ) | $ | (6,593,997 | ) | -56 | % |
17
RESULTS OF OPERATIONS
Comparison
of the Year Ended December 31, 2009 to the Year Ended December 31,
2008
The
Company’s net loss increased $6,593,997 during the year ended December 31, 2009
when compared to the year ended December 31, 2008. The primary
reasons for this increase was an increase in operating expenses of $4,450,269,
plus an increase in the fair value of the liabilities for derivative instruments
of $3,446,612 caused by the increase in the market price of the Company’s common
stock from $0.31 per share at January 1, 2008 to $0.47 per share at December 31,
2009, and an increase of $460,512 in losses on conversion related to the
conversion of interest on convertible notes into shares of the Company’ common
stock at contractual conversion rates that were considerably lower than the fair
market value of the Company’s common stock on the dates of
conversion. These negative influences on earnings were partially
offset by an increase in gross profit of $751,307 which was the result of the
Company manufacturing and deploying revenue generating equipment in the field,
plus a decrease in interest expense of $234,815 which resulted from our ability
to convert or repay a significant portion of our outstanding debt during the
year ended December 31, 2009.
Revenues
The
Company generated revenue of $1,760,129 during the year ended December 31, 2009,
an increase of $1,512,927 or 612% over our revenue of $247,202 for the year
ended December 31, 2008. The increase was the result of revenue
generated from the processing of frac flowback water in the Woodford Shale in
Oklahoma, treating a variety oil and gas exploration flowback water for three
separate oil and gas exploration companies through pilot projects in Wyoming,
Utah and Arkansas and through the deployment of our EcosFrac™ units in Arkansas
to treat water prior to its use in fracturing natural gas
wells. During the year ended December 31, 2008, the Company had
completed its first water filtration unit utilizing the Ecosphere
Ozonix® water
filtration technology and was using it in a pilot program in
Texas. Future revenues are expected to increase as they will include
revenue related to the Southwestern Energy contract which began in November
2009.
Operating
Expenses
Operating
expenses for the year ended December 31, 2009 were $10,539,526 as compared to
$6,089,257 for the year ended December 31, 2008, an increase of $4,450,269 or
73%. The increase was primarily caused by an increase of non-cash
compensation related to the vesting of employee options and restricted stock of
approximately $2,340,000, an increase of approximately $1.2 million of salary
and wage expense related to the staffing of our manufacturing plant and the
deployment of staff to supervise and operate our equipment in the field, an
increase in depreciation and amortization of $426,667 which resulted from our
investment in and deployment of equipment to generate revenue and a
restructuring charge of $548,090 which resulted from our decision to close our
New York office. These increases were partially offset by reductions
in administrative and selling expenses of $102,000 and professional fees of
$65,000. Future operating expenses are expected to increase related
to the operating expenses associated with the Southwestern Energy contract which
began in November 2009.
Loss
From Operations
Loss from
operations for the year ended December 31, 2009 was $9,704,186 compared to a
loss of $6,005,224 for the year ended December 31, 2008, an increase of
$3,698,962 or 64%. The increase in the loss from operations in 2009
versus 2008 was due to the increases in operating expenses identified above
which were partially offset by the additional gross profit earned in
2009.
Interest
Expense
Interest
expense was $5,184,747 for the year ended December 31, 2009 as compared to
$5,419,562 for the year ended December 31, 2008, a decrease of $234,815 or
4%. Of the 2009 amounts, approximately $4,125,000 related to the
accretion of the discounts and amortization of debt issue costs related to the
Company’s notes payable (non-cash), $325,000 related to debt discounts related
to notes that were converted into common stock and approximately $832,000
related to actual and accrued interest associated with the notes and debentures
payable.
18
Of the
2008 amounts, approximately $4,794,000 related to the accretion of the discounts
related to the issuance of warrants or common stock in connection with note
offerings and the beneficial conversion features of convertible
notes. Additionally, there were $229,750 of cash payments, $118,225
of interest payments in the form of issuance of shares of the Company’s common
stock and approximately $254,000 of additional accrued interest associated with
notes payable.
Loss
on Conversion
Loss on
conversion for the year ended December 31, 2009 was $716,783 as compared to a
loss of $256,271 for the year ended December 31, 2008. In 2009, the
Company issued 229,340 shares of common stock with a fair market value of
$99,163 based upon the quoted market prices for the Company’s common stock on
the dates of conversion that ranged from $0.19 to $0.49 per share to repay
interest on convertible debentures that amounted to $37,600. In
addition, the Company issued 2,158,000 shares of common stock with a fair market
value of $975,720 based upon the quoted market prices for the Company’s common
stock on the dates of conversion that ranged from $0.42 to $0.49 per share to
repay interest on convertible debentures that amounted to
$320,200. In 2008, the Company paid a finder’s fee of $87,500 owed to
its then Chairman and Co-CEO by issuing 450,000 shares of common stock with a
fair market value of $288,000 on the date of conversion, resulting in a loss on
conversion of $200,500. The Company issued 250,000 and 200,000 shares
to charities chosen by the Chairman in 2008 and 2009, respectively.
Change
in Fair Value of Derivative Instruments
The
change in fair value of derivative instruments resulted in other expense of
approximately $3,446,612 for the year ended December 31, 2009. This
change resulted from an increase in the fair value of the liability for embedded
conversion option derivative instruments of $1,682,882 and an increase in
the fair value of the liability for warrant derivative instruments of
$1,763,730. These increases in derivative liabilities were primarily
caused by an increase in the trading price of the Company’s common stock from
$0.31 per share as of January 1, 2009 to $0.47 per share as of December 31,
2009. This change from 2008 was caused by the Company’s adoption of
ASC 815-40 in January 2009. (See Note 1 of the accompanying
Notes to Consolidated Financial Statements). Absent a significant
change in the number of warrant and embedded conversion option derivative
instruments outstanding, future increases or decreases in the market price of
the Company’s common stock will have a negative or positive impact,
respectively, on the Company’s net income.
Preferred
Stock Dividends
Preferred
stock dividends were $118,750 for the year ended December 31, 2009 and $138,250
for the year ended December 31, 2008. The dividends reflect Company
obligations to preferred shareholders that have not been paid and decreased from
2008 because the holders of 69 shares of Series B Preferred stock chose to
convert their preferred stock into 57,615 shares of common stock.
Noncontrolling
Interest of Consolidated Subsidiary
The
noncontrolling interest of consolidated subsidiary was $743,417 for the period
from inception, July 16, 2009, through December 31, 2009. This amount
represents the amount of the losses of EES for the period from inception, July
16, 2009, through December 31, 2009, which have been allocated to the
noncontrolling equity members of the subsidiary. Per the LLC
operating agreement, the amount allocated represented the entire loss for EES
for the period from inception July 16, 2009 through December 31,
2009.
Net
Loss Applicable to Common Stock of Ecosphere Technologies, Inc.
Net loss
applicable to common stock of Ecosphere Technologies, Inc. was $18,425,903 for
the year ended December 31, 2009, compared to a net loss applicable to common
stock of $11,831,906 for the year ended December 31, 2008. Net loss
per common share was $0.19 for the year ended December 31, 2009 as compared to a
net loss per common share of $0.16 for the year ended December 31,
2008. The weighted average number of shares outstanding was
99,627,077 and 73,158,831for the years ended December 31, 2009 and 2008,
respectively.
19
LIQUIDITY
AND CAPITAL RESOURCES
Net cash
used in operating activities was $4,342,143 for the year ended December 31,
2009, compared to $4,379,171 for the year ended December 31,
2008. This decrease in cash used relates to the significantly higher
non-cash expenses during the year ended December 31, 2009. The net
loss of $18.4 million was offset by non-cash expenses of
$10.3 million, plus an increase in the fair value of the liability for
derivative instruments of $3.4 million, an increase in accounts payable of
$750,000, an increase in the restructuring reserve of $198,000 and an increase
in deferred revenue of $672,000. These were partially offset by an
increase in accounts receivable of $578,000, a decrease in accrued expenses of
$106,000 and the allocation of the EES net loss to the noncontrolling equity
members of $743,417.
The
Company's net cash used in investing activities was $6,822,165 for the year
ended December 31, 2009 compared to net cash used in investing activities
of $1,655,290 for the year ended December 31, 2008. In 2009 the
Company invested approximately $5.1 million in equipment components to build
EcosFrac™ units. The units are being used to process water to be used
in fracturing natural gas wells in the Arkansas under a minimum two year
agreement. In addition, the Company invested approximately $725,000
in equipment components associated with the building of the first EcosBrine™
unit, the second generation Ecosphere Ozonix® unit for
processing frac flowback water and invested and additional $184,000 in equipment
and vehicles to support the manufacturing and field operations. In
addition, $425,000 of the proceeds from the November 2009 equity transactions
were held in escrow to provide funds for certain convertible notes that were
secured by EES assets. Subsequent to December 31, 2009, the holders
of the secured convertible notes elected to convert the notes into shares of the
Company’s common stock and the funds were released to the Company. In
2008, the Company invested in equipment components of $319,975 for the building
the third Ecosphere Ozonix® unit and the
initial EcosFrac™ unit and capitalized the cost of building the first two
EcosBrine™ units, $1,585,315. These expenditures in 2008 were
partially offset by proceeds of $250,000 from the Company’s sale of its 5%
investment in Chariot Robotics, LLC in January 2008.
The
Company’s net cash provided by financing activities was $11,792,032 for the year
ended December 31, 2009 compared to net cash provided by financing
activities of $6,166,327 for the year ended December 31, 2008. During
the year ended December 31, 2009, the Company received $700,000 in exchange
for warrants and new secured convertible notes, $45,500 for a new original issue
discount note, $80,000 from related parties and $466,055 from the exercise of
options and warrants. In addition, EES received $2.5 million in cash
and $1.0 in the form of debt forgiveness equity interest and received an
additional $7,850,000 from investors in exchange for a 21.5% equity
interest. These receipts were partially offset by repayments of
$800,565, $51,407 and $38,890 for notes payable and insurance financings,
related party debt and capital leases, respectively. In 2008 the proceeds
resulted from the issuance of new convertible notes of $5,627,500, proceeds from
the issuance of convertible notes with related parties of $1,080,000
and proceeds from the exercise of warrants of $189,300 which were
partially offset by repayments of notes due to related parties, notes and
insurance financings and capital leases of $347,445, $390,646 and
$34,238, respectively.
The
Company manufactures the equipment which is purchased and utilized by
EES. The costs incurred by the Company in manufacturing the equipment
include component, labor and overhead related to the manufacturing process. EES
reimburses the Company for these costs plus pays a fixed profit, which is
eliminated in consolidation. Based upon the contractual minimum
revenue of the Southwestern Energy Agreement, the EcosFrac™ units are
anticipated to and have begun generating monthly revenue sufficient to produce
positive cash flow to EES in 2010. The Company receives a
monthly management fee from EES for the cost of management and overhead related
to the manufacturing facility.
It is
anticipated that the combination of the management fee and distributions from
EES plus the reimbursement of costs to build additional equipment for EES, will
be sufficient to support the working capital needs of the Company for at least
the next 12 months.
20
This is
based upon a number of key assumptions:
●
|
Continued
generation of revenue by EES from our existing long term
Agreements;
|
●
|
A
new EES long-term Agreement from an existing or new customer through which
Ecosphere generates manufacturing
profits;
|
●
|
Favorable
financing terms to enable Ecosphere to finance the manufacturing of new
units needed for a new long-term
Agreement;
|
●
|
New
paid pilots throughout the 12
months;
|
●
|
Conversion
of debt, as described below;
|
●
|
2010
distributions of profits and priority distributions from
EES.
|
As of
December 31, 2009, the Company had approximately $2.4 million of secured
convertible original issue discount notes (“Notes”) with varying maturities over
the next 11 months. These notes are all convertible at $0.36 per
share. As of March 29, 2010, holders of Notes with an aggregate
principal amount of $1,787,726 have converted their Notes into 4,965,904 shares
of the Company’s common stock. If the remaining holders of these
Notes do not elect to convert their debt into common stock of the Company or are
not agreeable to extend the terms of their Notes, the Company may be required to
seek additional equity or debt financing. If this occurs, there can
be no assurances that the Company’s present cash flow will be sufficient to meet
current and future obligations.
The
Company anticipates the need for an additional $25 - $30 million in financing
over the next twelve months in order to fund the building of additional
EcosFrac™ and EcosBrine™ units to meet the growing demand for our
services. Assuming we receive a significant long-term agreement from
a customer, which agreement we are currently discussing. Management
is currently exploring several financing alternatives including both debt and
equity financing. However there can be no assurances that these
alternatives will come to fruition or that if the Company needs to raise capital
for working capital purposes, it will be successful.
The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the inability
of the Company to continue as a going concern. There are no
assurances that the Company will be able to achieve and sustain profitable
operations or continue as a going concern.
RELATED
PERSON TRANSACTIONS
For
information on related party transactions and their financial impact, see Note
18 to the consolidated financial statements.
RESEARCH
AND DEVELOPMENT
In
accordance with ASC 730-10 – Research and Development expenditures for research
and development of the Company's products are expensed when incurred, and are
included in operating expenses. The Company recognized research and
development costs of $97,389 and $1,090 for the years ended December 31, 2009
and 2008, respectively.
RECENT
ACCOUNTING PRONOUNCEMENTS
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 SEC have been superseded by the Codification. All
other non-grandfathered, non-SEC accounting literature not included in the
Codification has become non-authoritative. The Codification did not
change GAAP, but instead introduced a new structure that combines all
authoritative standards into a comprehensive, topically organized online
database. The Codification is effective for interim or annual periods
ending after September 15, 2009, and impacts the 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 year ended December 31,
2009.
21
As a
result of the Company’s implementation of the Codification during the year ended
December 31, 2009, previous references to new accounting standards and
literature are no longer applicable. The current financial statements
will provide reference to the new guidance only.
In May
2009, the FASB issued guidance on subsequent events. This guidance does
not result in significant changes in the subsequent events that an entity
reports in its financial statements. The guidance requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. This
guidance was effective for the Company in the second quarter of 2009, and the
required disclosure has been included in the consolidated financial statements.
The adoption of this guidance did not have a significant impact on the
Company’s consolidated financial statements.
On
January 1, 2009, the Company adopted new guidance and as a result evaluates its
options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted
for under GAAP. The result of this accounting treatment is that the
fair value of the derivative is marked-to-market each balance sheet date and
recorded as a liability. In the event that the fair value is recorded as a
liability, the change in fair value is recorded in the statement of operations
as other income (expense). Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and
then that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to reclassification under
GAAP are reclassified to liability at the fair value of the instrument on the
reclassification date. See Change in Accounting Principle for the impact
of this guidance on the Company’s consolidated financial
statements.
In May
2008, the FASB issued guidance which identifies the sources of accounting
principles and provides entities with a framework for selecting the principles
used in preparation of financial statements that are presented in conformity
with GAAP. The current GAAP hierarchy has been criticized because it
is directed to the auditor rather than the entity, it is complex, and it ranks
FASB Statements of Financial Accounting Concepts, which are subject to the same
level of due process as FASB Statements of Financial Accounting Standards, below
industry practices that are widely recognized as generally accepted but that are
not subject to due process. The Board believes the GAAP hierarchy
should be directed to entities because it is the entity (not its auditors) that
is responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. The adoption of this guidance
has not had a material impact on the Company’s consolidated financial
statements.
In May
2008, the FASB issued guidance that requires the issuer to separately account
for the liability and equity components of convertible debt instruments in a
manner that reflects the issuer’s nonconvertible debt borrowing
rate. The guidance will result in companies recognizing higher
interest expense in the statement of operations due to amortization of the
discount that results from separating the liability and equity
components. This guidance was effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Through December 31, 2009, there was no
impact of adopting this guidance on the Company’s consolidated financial
statements.
In April
2008, the FASB issued guidance that amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under GAAP. This guidance was
effective for fiscal years beginning after December 15, 2008. Through
December 31, 2009, there was no impact of this guidance on the Company’s
consolidated financial statements.
In March
2008, the FASB issued guidance that amends and expands the disclosure
requirement for derivative instruments and hedging activities. It
requires enhanced disclosure about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedge items are
accounted for under GAAP, and (iii) how derivative instruments and related hedge
items affect an entity’s financial position, financial performance, and cash
flows. This guidance is effective for the Company as of January 1,
2009. Through December 31, 2009, there was no impact of this guidance
on the Company’s consolidated financial statements.
On
January 1, 2008, the Company adopted guidance that defines fair value as
used in numerous accounting pronouncements, establishes a framework for
measuring fair value and expands disclosure of fair value measurements. In
February 2008, the Financial Accounting Standards Board (“FASB”) issued
further guidance, which delays the effective date of this guidance for one year
for certain nonfinancial assets and nonfinancial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). Excluded from the scope of the
guidance are certain leasing transactions accounted for under GAAP. The
exclusion does not apply to fair value measurements of assets and liabilities
recorded as a result of a lease transaction but measured pursuant to other
pronouncements within the scope of this guidance. The Company adopted
this guidance in the third quarter and has since that time presented the
disclosure required by the guidance.
22
Forward Looking Statements
The
statements in this report relating to the other applications for our Ecosphere
Ozonix®
technology, our estimates of demand for solutions that reduce water
use and increase recycling, the impact of future government laws and regulations
relating to fracturing on gas drilling, our belief our
intellectual property portfolio will act as a barrier to competition, EES’
expansion in 2010 to supplying its Ecosphere Ozonix® technology to offshore
drilling, our working capital needs over the next 12 months including the
various assumptions we are relying upon, our future financing needs and the
completion of any financings are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of
1995. Additionally, words such as “expects,” “anticipates,”
“intends,” “believes,” “will” and similar words are used to identify
forward-looking statements.
The
results anticipated by any or all of these forward-looking statements might not
occur. Important factors, uncertainties and risks that may cause
actual results to differ materially from these forward-looking statements are
the condition of the credit and financial markets, the effects of the global
recession, our negative working capital and other factors contained in the Risk
Factors that follow. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as the result of new information,
future events or otherwise. For more information regarding some of
the ongoing risks and uncertainties of our business, see the Risk Factors and
our other filings with the SEC.
23
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should
carefully consider the following risk factors before deciding whether to invest
in Ecosphere. Additional risks and uncertainties not presently known
to us, or that we currently deem immaterial, may also impair our business
operations or our financial condition. If any of the events discussed
in the risk factors below occur, our business, consolidated financial condition,
results of operations or prospects could be materially and adversely
affected. In such case, the value and marketability of the common
stock could decline, and you might lose all or part of your
investment.
Risk
Factors Relating to Our Company
Our
ability to continue as a going concern is in doubt absent obtaining adequate new
debt or equity financing and achieving sufficient sales levels.
We
incurred net losses applicable to common stock of approximately $18.4 million in
2009 and $11.8 million in 2008. We have a significant working capital
deficiency, and have not reached a profitable level of operations, all of which
raise doubt about our ability to continue as a growing concern. Our
continued existence is dependent upon generating working
capital. Working capital limitations continue to impinge on our
day-to-day operations, thus contributing to continued operating
losses.
If
we do not generate positive cash flow and earnings or raise additional debt or
equity capital, we will need to raise additional debt on equity and may not be
successful.
At
December 31, 2009, we had a working capital deficit of approximately $11.8
million and total indebtedness of $5.9 million. We presently have
negative working capital and minimal cash although we generate revenue from our
operations. Although we anticipate that over the next 12 months we
will generate working capital, that assumption is based upon continuation of
current revenues from our existing long-term agreements at the same rate,
revenues from new customers including planned paid pilots, manufacturing profits
from new units needed by EES, and EES conducting profitable operations in order
to provide distributions to the Company. Because we are not currently
generating positive cash flow or if we do not generate working capital over the
next 12 months, we may need to sell debt or equity securities in the
future. Because of the continuing decline in the economy in the
United States and overseas, the substantial reduction in available credit and
the severe decline in the stock market and our stock price, we maybe hampered in
our ability to raise the necessary working capital. If we do not
raise the necessary working capital, we may not be able to remain operational or
we may have to scale back our operations.
24
If
the current prices of natural gas remain at current low levels, energy companies
may reduce their drilling operations in shale deposits, which could adversely
affect the attractiveness of our Ecosphere Ozonix®
business.
In early
2008, with high prices for natural gas, energy companies began profitably
drilling in shale areas. These operations rely on enormous supplies
of clean water. Much of the water used in drilling gas wells in shale
areas flows back in a polluted state creating an opportunity for our Ecosphere
Ozonix®
business. Horizontal drilling in shale areas is very expensive;
however, if prices for natural gas are high this expense can be
justified. If current prices continue to decline, horizontal drilling
may not be cost-effective and may adversely affected our Ecosphere
Ozonix®
business.
If
we are unable to generate material service revenue, it will have an adverse
effect upon our future results of operations.
We are
presently relying upon revenue from our Ozonix®
systems. While our revenue year-over-year is increasing, we still
have negative cash flow. If we are unable to deploy additional
Ecosphere Ozonix® systems, we
will not derive material service revenue. In that event, our future
results of operations and financial condition will be adversely
affected. Like any new technology, repeat orders from a customer
provide credibility for a technology and encourage other customers to consider
using the technology. Until we receive a repeat order for the sale or
long-term use of a material number of Ecosphere Ozonix® units, we
expect that we will have negative cash flow.
If
we need additional capital to fund our growing operations, we may not be able to
obtain sufficient capital and may be forced to limit the scope of our
operations.
The
severe recession, freezing of the global credit markets and the decline in the
stock market may adversely affect our ability to raise
capital. Because we have not reported profitable operations to date
on an annual basis if we fail to generate substantial revenue, we may need to
raise working capital. If adequate additional financing is not
available on reasonable terms or at all, we may not be able to undertake
expansion, and we will have to modify our business plan
accordingly.
Even if
we do find a source of additional capital, we may not be able to negotiate terms
and conditions for receiving the additional capital that are acceptable to
us. Any future capital investments may dilute or otherwise materially
and adversely affect the holdings or rights of our existing
shareholders. In addition, new equity or debt securities issued by us
to obtain financing could have rights, preferences and privileges senior to our
common stock. We cannot give you any assurance that any additional
financing will be available to us, or if available, will be on terms favorable
to us.
25
Because
our Ecosphere Ozonix® systems are
designed to provide a solution which competes with existing methods; we are
likely to face resistance to change, which could impede our ability to
commercialize this business.
Our
Ecosphere Ozonix® systems are
designed to provide a solution to environmental challenges created by
contaminated water. Specifically, we believe it can provide a
solution to the disposal of wastewater in the oil and gas, marine, coal and
other industries. Currently, large and well capitalized companies
provide services in these areas. These competitors have strong
relationships with their customers’ personnel, and there is a natural reluctance
for businesses to change to new technologies. This reluctance is
increased when potential customers make significant capital investments in
competing technologies. Because of these obstacles, we may face
substantial barriers to commercializing our business.
Because
we commercialized our Ecosphere Ozonix® business in
2009, it is subject to all of the risks inherent in a new business.
Our
Ecosphere Ozonix® business is
brand new and is subject to a number of risks, including:
|
●
|
Our
ability to convince customers to use our
services;
|
|
●
|
Our
ability to finance the units;
|
|
●
|
Our
ability to operate units that are built;
and
|
|
●
|
Our
ability to manage the operations of our Ecosphere Ozonix® systems
at multiple locations.
|
If
we do not achieve broad market acceptance of our clean technology products, we
may not be successful.
Although
all of our products and services serve existing needs, our delivery of these
products and services is unique and subject to broad market
acceptance. As is typical of any new product or service, the demand
for, and market acceptance of, these products and services are highly
uncertain. We cannot assure you that any of our products and services
will be commercialized on a widespread basis. The commercial
acceptance of our products and services may be affected by a number of factors,
including the willingness of operators in the natural gas industry and in other
industries to use the Ecosphere Ozonix® system for
wastewater.
If the
markets for our products and services fail to develop on a meaningful basis, if
they develop more slowly than we anticipate or if our products and services fail
to achieve sufficient market acceptance, our business and future results of
operations could be adversely affected.
26
If
chemical companies engage in predatory pricing, we may lose customers, which
could materially and adversely affect us.
In the
gas drilling business, energy companies traditionally have used chemicals to
clean the water used to fracture wells by destroying bacteria and metal
residues. The chemical companies represent our most significant
competitive factor. The chemical companies who supply chemicals
to gas drillers may, in order to maintain their business relationship with
drillers drastically reduce their price and seek to undercut the pricing at
which we can realistically charge for our services. While predatory
pricing that is designed to drive us out of business may be illegal under the
United States anti-trust and other laws, we may lose customers as a result of
any future predatory pricing and be required to file lawsuits against any
companies who engage in such improper tactics. Any such litigation
may be very expensive which will further impact us and affect their financial
condition. As a result, predatory pricing by chemical companies could
materially and adversely affect us.
Our
growth strategy reflected in our business plan may not be achievable or may not
result in profitability.
Our
growth strategy reflected in our business plan may not be able to be implemented
at all or rapidly enough for us to achieve profitability. Our growth
strategy is dependent on several factors, such as our ability to respond to the
technological needs of our customers and others in the markets in which we
compete and a degree of market acceptance of our products and
services. We cannot assure you the potential customers we intend to
target will purchase our products or services in the future or that if they do,
our revenues and profit margins will be sufficient to achieve
profitability.
Because
of the severity of the global economic recession, our customers may delay in
paying us or not pay as at all. This would have a material adverse
effect in our future operating results and financial condition.
One of
the effects of the severe global economic recession is that businesses are
tending to maintain their cash reserves and delay paying their creditors
whenever possible. As a trade creditor, we lack the leverage which
secured lenders and providers of essential services have. If the
economy continues to deteriorate, we may find that our oil and gas customer and
our future customers may delay in paying us. This could result in a
number of adverse effects upon us including increasing our borrowing costs,
reducing our profit margins, severely impacting liquidity and reducing our
ability to grow our business which could have a material adverse affect on
Ecosphere.
Because
our operating results have and may continue to fluctuate dramatically,
particularly from quarter to quarter, investors should not rely upon our results
in any given quarter as being part of a trend.
In the
past, our quarterly operating results fluctuated and may continue to do so in
the future as a result of a number of factors, including the
following:
|
●
|
Our
receipt of orders from existing and new
customers;
|
|
●
|
The
availability of components from our suppliers for Ecosphere Ozonix®
systems;
|
|
●
|
Operating
results from our Ecosphere Ozonix® units and
the announcement of future agreements for our Ecosphere Ozonix®
units;
|
|
●
|
Our
raising necessary working capital and any associated costs which will be
charged as expenses to our future results of
operations;
|
27
|
●
|
Our
continuing to develop new
technologies;
|
|
●
|
Pricing
pressures;
|
|
●
|
General
economic and political conditions;
|
|
●
|
Our
sales of assets similar to the October 2007 sale of the intellectual
property and related assets of our ship stripping
technology;
|
|
●
|
Our
ability to develop a working prototype of our Ecos LifeLink and market it
in third world countries; and
|
|
●
|
Our
sales or licensing of our technologies in
inventory.
|
As a
result of these and other factors, we have experienced, and may continue to
experience, fluctuations in revenues and operating results. As a
consequence, it is possible that fluctuations in our future operating results
may cause the price of our common stock to fall.
If
we cannot manage our growth effectively, we may not become
profitable.
Businesses
which grow rapidly often have difficulty managing their growth. We
have been growing rapidly. If this growth continues, we will need to
expand our management by recruiting and employing experienced executives and key
employees capable of providing the necessary support. We cannot assure you
that our management will be able to manage our growth effectively or
successfully. Our failure to meet these challenges could cause us to
lose money, and your investment could be lost.
Because
we are pursuing a strategy of developing markets for our products
internationally which subject us to risks frequently associated with
international operations, we may sustain large losses if we cannot deal with
these risks.
Our
business plan includes seeking to develop market opportunities overseas
including third world countries where the market for our new Ecosphere Ozonix®
process is much larger than in the United States. If we are able to
successfully develop international markets, we would be subject to a number of
risks, including:
|
●
|
Changes
in laws or regulations resulting in more burdensome governmental controls,
tariffs, restrictions, embargoes or export license
requirements;
|
|
●
|
Laws
which require that local citizens or residents own a majority of a
business;
|
|
●
|
Difficulties
in obtaining required export
licenses;
|
|
●
|
Volatility
in currency exchange rates;
|
|
●
|
Political
and economic instability;
|
|
●
|
Extended
payment terms beyond those customarily offered in the United
States;
|
|
●
|
Difficulties
in managing distributors or representatives outside the United States;
and
|
|
●
|
Potentially
adverse tax consequences.
|
If we
cannot manage these risks, we may sustain large losses.
28
Because
our business model is centered on partnering with third parties, we will not be
able to control key aspects of the commercialization of our business, which can
adversely affect our future results of operations.
We are
not, and do not intend to, actively commercialize our Ecosphere Ozonix®
technology or expand outside of the energy business overseas. Rather,
in order to reduce operating costs, we intend to focus on licensing our
intellectual property to third-party operators. By doing so, we lose
the power to control day-to-day operations. If these third parties do
not exploit the licenses effectively, our ability to penetrate markets and our
future revenue will be adversely affected.
If
we lose the services of key personnel, it could adversely affect our
business.
Our
future success is dependent upon our Chief Executive Officer and President,
Dennis McGuire. Mr. McGuire has played a significant role in
inventing and developing our technologies has also provided the necessary drive
and vision. The loss of the services of Mr. McGuire could have a
material adverse effect on our business, financial condition and results of
operations. We cannot assure you that he will remain with us in the
future due to circumstances either within or outside of our
control. We do not have any key man life insurance covering the life
of Mr. McGuire.
If
we are unable to protect our proprietary technology, our business could be
harmed.
Our
intellectual property including our patents is our key asset. In
addition to our existing patents, we have filed United States patent
applications covering certain
technologies. If one or more patents are not issued by the United
States, the value of our other technologies could be materially
reduced. Competitors may also be able to design around our patents
and to compete effectively with us. The cost to prosecute
infringements of our intellectual property or the cost to defend our products
against patent infringement or other intellectual property litigation by others
could be substantial. We cannot assure you that:
|
●
|
Pending
and future patent applications will result in issued
patents;
|
|
●
|
Patents
we own or which are licensed by us will not be challenged by
competitors;
|
|
●
|
The
patents will be found to be valid or sufficiently broad to protect our
technology or provide us with a competitive advantage;
and
|
|
●
|
We
will be successful in defending against future patent infringement claims
asserted against our products.
|
29
Risks
Related to Our Common Stock
Because
the market for our common stock is limited, persons who purchase our common
stock may not be able to resell their shares at or above the purchase price paid
by them.
Our
common stock trades on the Bulletin Board which is not a liquid
market. Until 2010 there was only a limited public market for our
common stock. We cannot assure you that an active public market for
our common stock will continue in the future. If an active market for
our common stock is not sustained, the price may continue to
decline.
Because
we are subject to the “penny stock” rules, brokers cannot generally solicit the
purchase of our common stock which adversely affects its liquidity and market
price.
The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share, subject to
specific exemptions. The market price of our common stock on the
Bulletin Board has been substantially less than $5.00 per share and therefore we
are currently considered a “penny stock” according to SEC rules. This
designation requires any broker-dealer selling these securities to disclose
certain information concerning the transaction, obtain a written agreement from
the purchaser and determine that the purchaser is reasonably suitable to
purchase the securities.
These
rules limit the ability of broker-dealers to solicit purchases of our common
stock and therefore reduce the liquidity of the public market for our
shares.
Due
to factors beyond our control, our stock price may be volatile.
Any of
the following factors could affect the market price of our common
stock:
|
●
|
Our
failure to generate increasing
revenues;
|
|
●
|
Short
selling activities;
|
|
●
|
Our
failure to achieve and maintain
profitability;
|
|
●
|
Actual
or anticipated variations in our quarterly results of
operations;
|
|
●
|
Announcements
by us or our competitors of significant contracts, new products,
acquisitions, commercial relationships, joint ventures or capital
commitments;
|
|
●
|
The
loss of major customers or product or component
suppliers;
|
|
●
|
The
loss of significant business
relationships;
|
|
●
|
Our
failure to meet financial analysts’ performance
expectations;
|
|
●
|
Changes
in earnings estimates and recommendations by financial analysts;
or
|
|
●
|
Changes
in market valuations of similar
companies.
|
30
In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been
instituted. A securities class action suit against us could result in
substantial costs and divert our management’s time and attention, which would
otherwise be used to benefit our business.
We
may issue preferred stock without the approval of our shareholders, which could
make it more difficult for a third party to acquire us and could depress our
stock price.
Our Board
may issue, without a vote of our shareholders, one or more additional series of
preferred stock that have more than one vote per share. This could
permit our Board to issue preferred stock to investors who support our
management and give effective control of our business to our
management. Additionally, issuance of preferred stock could block an
acquisition resulting in both a drop in our stock price and a decline in
interest of our common stock. This could make it more difficult for
shareholders to sell their common stock. This could also cause the
market price of our common stock shares to drop significantly, even if our
business is performing well.
If the holders of our outstanding
warrants and options exercise their securities into common stock, we will issue
up to 85,427,727 shares , which will materially dilute the voting power of our
currently outstanding common stock and possibly change control of
Ecosphere.
As of March 29, 2010, we have
123,708,277 shares of our common stock outstanding. We have
30,749,114 warrants to purchase shares of common stock and 48,081,197 stock
options. If the holders of the securities described in this risk
factor exercise their securities into common stock, it will materially dilute
the voting power of our outstanding common stock and may change the control of
our company.
An
investment in Ecosphere will be diluted in the future as a result of the
issuance of additional securities, the exercise of options or warrants or the
conversion of outstanding preferred stock.
In order
to raise additional capital to fund its strategic plan, we may issue additional
shares of common stock or securities convertible, exchangeable or exercisable
into common stock from time to time, which could result in substantial dilution
to investors. We cannot assure you that we will be successful in
raising additional capital.
Because
our management and employees do not solely by virtue of their ownership of our
common stock control Ecosphere, it is possible that third parties could obtain
control and change the direction of our business.
Our
officers, directors and one employee own 9,152,681 shares of our common
stock or 7% of the shares actually outstanding. By including shares
of common stock which are issuable upon exercise of outstanding options and
warrants held by them, they beneficially own 33,753,921 shares or
22.8%. If all of our equity equivalents are exercised, we would have
209,598,510 shares outstanding. For that reason, a third party could
obtain control of Ecosphere and change the direction of our
business.
31
Since
we intend to retain any earnings for development of our business for the
foreseeable future, you will likely not receive any dividends for the
foreseeable future.
We have
not and do not intend to pay any dividends in the foreseeable future, as we
intend to retain any earnings for development and expansion of our business
operations. As long as our three-year senior convertible debentures
remain outstanding, we cannot pay any dividends. As a result, you
will not receive any dividends on your investment for an indefinite period of
time.
Because
almost all of our outstanding shares are freely tradable, sales of these shares
could cause the market price of our common stock to drop significantly, even if
our business is performing well.
As of the
date of this report, we had outstanding 123,708,277 shares of common stock of
which our directors and executive officers own approximately
2.3 million shares which are subject to the limitations of Rule 144
under the Securities Act. Most of the remaining outstanding shares,
including a substantial amount of shares issuable upon exercise of options, are
and will be freely tradable.
In
general, Rule 144 provides that any non-affiliate of Ecosphere, who has held
restricted common stock for at least six-months, is entitled to sell their
restricted stock freely, provided that we stay current in our SEC
filings. After one year, a non-affiliate may sell without any
restrictions.
An
affiliate of Ecosphere may sell after six months with the following
restrictions:
(i)
|
we
are current in our filings,
|
(ii)
|
certain
manner of sale provisions,
|
(iii)
|
filing
of Form 144, and
|
Because
almost all of our outstanding shares are freely tradable and a number of shares
held by our affiliates may be freely sold (subject to Rule 144 limitation),
sales of these shares could cause the market price of our common stock to drop
significantly, even if our business is performing well.
Because
we may not be able to attract the attention of major brokerage firms, it could
have a material impact upon the price of our common stock.
It is not
likely that securities analysts of major brokerage firms will provide research
coverage for our common stock since the firm itself cannot recommend the
purchase of our common stock under the penny stock rules referenced in an
earlier risk factor. The absence of such coverage limits the
likelihood that an active market will develop for our common
stock. It may also make it more difficult for us to attract new
investors at times when we acquire additional capital.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for smaller reporting
companies.
32
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
See pages
F-1 through F-51.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
ITEM
9A. CONTROLS
AND PROCEDURES.
Not applicable.
ITEM
9A(T). CONTROLS
AND PROCEDURES.
Disclosure
Controls
We
carried out an evaluation required by Rule 13a-15 of the Securities
Exchange Act of 1934, or the Exchange Act, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined in Exchange Act Rule
13a–15(e). Disclosure controls and procedures are designed with the
objective of ensuring that (i) information required to be disclosed in an
issuer's reports filed under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC rules and forms and
(ii) information is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosures.
The
evaluation of our disclosure controls and procedures included a review of our
objectives and processes and effect on the information generated for use in this
report. This type of evaluation is done quarterly so that the
conclusions concerning the effectiveness of these controls can be reported in
our periodic reports filed with the SEC. We intend to maintain these
controls as processes that may be appropriately modified as circumstances
warrant.
Based on
their evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information which is required to be included in our
periodic reports filed with the SEC as of the end of the period covering this
report.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2009 based on the criteria set
forth in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the criteria set forth in Internal Control — Integrated
Framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2009.
33
However,
a control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Management necessarily applied its judgment in assessing the
benefits of controls relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote. Because of the inherent limitations in a control system,
misstatements due to error or fraud may occur and may not be
detected.
This report does not include an
attestation report of our independent registered public accounting firm
regarding internal control over financial reporting. We were not
required to have, nor have we engaged our independent registered public
accounting firm to perform an audit on our internal control over financial
reporting pursuant to the rules of the SEC that permit us to provide only
management’s report in this report.
Changes
in Internal Control Over Financial Reporting
During our most recent fiscal
quarter, there has not been any change in our internal control over financial
reporting as such term is defined in Exchange Act Rule 13a-15(f) that has
materially affected, or is reasonably likely to affect, our internal control
over financial reporting.
ITEM
9B. OTHER
INFORMATION.
None.
34
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
following is a list of our directors. All directors serve one-year
terms or until each of their successors are duly qualified and
elected.
Name
|
Age
|
|||
Charles
Vinick
|
63
|
Chairman
of the Board
|
||
Joe
Allbaugh
|
57
|
Director
|
||
Gene
Davis
|
56
|
Director
|
||
Michael
Donn, Sr.
|
62
|
Director
|
||
D.
Stephen Keating
|
54
|
Director
|
||
George
Sterner
|
69
|
Director
|
||
Thomas
Wolfe
|
62
|
Director
|
Charles
Vinick was
appointed a director in August 2006 and has served as the Chairman of the
Board since December 22, 2009. He serves as Director of Business Development and
Government Relations for Dehlsen Associates, a renewable energy technology
development firm in Carpinteria, Carlifornia. Mr. Vinick has more than
25 years of experience directing and managing non-profit organizations and
programs. From June 2005 through August 2007, he was the President and Chief
Executive Officer of the Alliance to Protect Nantucket Sound. He
served as Chief Executive Officer of the Foundation for Santa Barbara City
College from June 2004 through May 2005 and as Vice President of Fritz
Institute from October 2003 to April 2004. Mr. Vinick was
Executive Vice President of the Ocean Futures Society from its founding in 1998
through September 2003. Including the Ocean Futures Society,
Mr. Vinick has previously held executive positions for over 20 years with
organizations headed by Jacques or Jean-Michel Cousteau. Mr. Vinick
was selected as a director due to his long relationship with the Cousteau
family, his commitment to the environment, and his business experience and
judgment.
Joe
Allbaugh was appointed a
director in October 2005. Mr. Allbaugh has been the managing
member of The Allbaugh Company LLC, a strategic consulting firm, since
approximately March 2003. From September 2006 to
May 15, 2007, Mr. Allbaugh was the president of our subsidiary,
Ecosphere Systems. Mr. Allbaugh was Director of the Federal
Emergency Management Agency, Inc. from February 2001 to March 2003,
and in 1999 was made the National Campaign Manager of Bush-Cheney
2000. In addition, Mr. Allbaugh was Chief of Staff to President
George W. Bush from 1995 through 1999 when he was Governor of
Texas. Mr. Allbaugh was selected as a director because his
relationships could potentially assist us in growing our business and he had
administrative experience managing large organizations.
35
Gene Davis
was appointed a director in August 2008. Since 2008, Mr. Davis has been
employed as Vice President/General Manager of the Denver Region for NFR Energy,
LLC, an independent oil and gas production company headquartered in Houston, TX.
He manages the staff and producing assets of the company in Colorado, Utah,
North Dakota and Montana. From December 2004 to March 2008, Mr. Davis
was the Geological and Geophysical Manager for the Western Business Unit of
Forest Oil Corp. where he evaluated and implemented drilling
programs. From July 2004 until December 2004, Mr. Davis was a Project
Geologist for EOG Resources Inc. From September 2000 to July 2004, he
was an Exploration Geologist for Chi Energy, Inc. Mr. Davis has over
28 years of executive geoscience and asset management, successful exploratory
and development geology and geophysics experience. Mr. Davis was
selected as a director because of his extensive experience in the energy
business and his ability to provide valuable insight to our
management.
Michael Donn,
Sr. was appointed a director in March 2005 and was appointed our Chief
Operating Officer on March 27, 2008. Mr. Donn has held a number
of senior executive positions with us since January 2000. As part of
his duties, Mr. Donn set up and coordinated our relief effort in Waveland,
Mississippi following Hurricane Katrina. Mr. Donn was the
Project Manager for Ecosphere’s EPA Verification testing of its Water Filtration
System. From November 2006 until January 29, 2010, Mr. Donn was
a director of GelTech Solutions, Inc. He also served on the Audit
Committee of GelTech. From 1994 to 2000, he served as President of
the Miami-Dade County Fire Fighters Association, a 1,700-member employee
association for which he previously served as Vice President and Treasurer
beginning in 1982. His responsibilities included negotiating,
lobbying at the local, state and national levels and head of the business
operations for the Association. He was also Chairman of the Insurance
Trust. Following Hurricane Andrew, Mr. Donn coordinated the fire
fighter relief efforts for the Miami-Dade fire fighters. He is the
brother of our Senior Vice President of Administration, Jacqueline McGuire, and
the brother-in-law of our President and Chief Executive Officer, Dennis McGuire.
Mr. Donn
was selected as a director because of his administrative experience with the
firefighters union and has remained as a director as a representative of
management.
D. Stephen
Keating was appointed a director in August 2008. Since
December 2008, Mr. Keating has served as the Vice President of Taxes at Crocs,
Inc. Mr. Keating served as the Vice President of the Worldwide Taxes
for CA, Inc. from 1988 through June 2008. Mr. Keating was the senior
officer responsible for the worldwide tax, which included tax planning and
strategy, tax accounting and day-to-day supervision for the U.S. and
international tax departments. At CA, Inc., Mr. Keating was involved
with approximately 100 mergers, acquisitions and
divestitures. Additional responsibilities included negotiating with
the IRS and various countries tax authorities on audit issues and APA
reports. Mr. Keating was selected as a director due to his extensive
executive experience and his accounting and tax knowledge.
Vice-Admiral
George Sterner, USN, (Retired) was appointed a
director in March 2002. Vice-Admiral Sterner was our Chairman of
the Board from March 2005 until March 1, 2008. Vice-Admiral
Sterner was Vice President, Strategic Pursuits for Raytheon Company until his
retirement in late 2005. His naval career spanned 36 years and
included command of two nuclear submarines. Prior to his retirement
from the United States Navy in 1998 he commanded the Naval Sea Systems Command
where he had oversight of the design, construction and life cycle support of all
Navy ships. Vice-Admiral Sterner was selected as a director due to
his achievements with the United States Navy, together with his executive,
administrative and organizational skills.
36
Thomas
Wolfe was
appointed a director in August 2008. Since July 2008, Mr. Wolfe has
been the Vice President of Software at Toray Membrane. From December
2006 through July 2008, Mr. Wolfe was the Chief Technology Officer and Senior
Vice President of R&D of Open Energy Corporation. In 1998, Mr. Wolfe founded
WaterEye Corporation where he served as its President and Chief Executive
Officer and until WaterEye was acquired by Open Energy in December
2006. Mr. Wolfe has over 25 years’ experience in the chemical process
industries, with particular experience in power, water and wastewater treatment
technologies. Mr. Wolfe is one of the pioneers in the reverse osmosis
field and has made many contributions to the development and advancement of
reverse osmosis membrane technology and wastewater evaporation technology dating
back to the early 1970’s. He has participated at all levels in some
of the largest membrane and evaporator installations in the world and has hands
on experience with a wide variety of evaporator configurations including vapor
recompression, steam driven single and multiple effect systems, as well as
direct contact and submerged combustion processes. Mr. Wolfe
developed much of the software currently in use today for reverse osmosis
membrane performance prediction and computational chemistry for recovery
determination and scale control.
Mr. Wolfe
has authored more than 20 technical articles and papers in his various fields of
involvement and is a member of the American Chemical Society and the American
Water Works Association. Mr. Wolfe was selected as a director
because of his expertise with water and water recycling.
Executive Officers
The
following is a list of our executive officers. The executive officers
are elected by our Board.
Name
|
Age
|
|||
Dennis
McGuire
|
59
|
Chief
Executive Officer and President
|
||
Adrian
Goldfarb
|
52
|
Chief
Financial Officer
|
||
Michael
Donn, Sr.
|
62
|
Chief
Operating Officer
|
||
Jacqueline
McGuire
|
47
|
Senior
Vice President of Administration and
Secretary
|
Dennis
McGuire is
our Chief Executive Officer and President. Mr. McGuire was appointed
President and Chief Executive Officer of Ecosphere on September 28,
2005. From November 12, 2008 until August 1, 2009, Mr. McGuire was
the Chief Technology Officer of Ecosphere. From June 17, 2008 until
November 12, 2008, Mr. McGuire was the Co-Chief Executive Officer of Ecosphere,
sharing the role with Mr. Patrick Haskell. Mr. McGuire was a
founder of Ecosphere together with his wife Jacqueline. He also is
the inventor of all of our intellectual property. From 2000 through
October 3, 2003, he served as our Chief Technology Officer and Director of
Sales, and served as a consultant from October 3, 2003 until he became
an employee on October 1, 2005. Mr. McGuire was appointed
our Chief Technology Officer in April 2005, which post he held until
August 2, 2005, when he became Executive Vice President of Business
Development and Technology.
37
Adrian
Goldfarb has been our Chief Financial Officer since February 11, 2008.
From December 2007 Mr. Goldfarb was the President of WSR Consulting, Inc.
(“WSR”), a consulting services company that currently provides accounting and
operational management to us. From February 11, 2008 through December
20, 2008, WSR also provided Chief Financial Officer service to us and Mr.
Goldfarb was a consultant. Since December 20, 2008, he has been a full-time
employee. From June 2002 to December 2007,
Mr. Goldfarb was on the Board of Directors of MOWIS GmbH, a Weather
Technology Media company. He also was interim Chief Financial Officer
where he led the management team in securing seed capital, government grants and
loans and bank guarantees. Mr. Goldfarb has more than 25 years’
experience in a number of different technology companies, including IBM and a
subsidiary of Fujitsu.
See above for Mr. Donn’s
biography.
Jacqueline
McGuire has been our Senior Vice President of Administration since
January 2001 and Secretary since our founding in 1998. She and her
husband Dennis, our Chief Executive Officer, were two of our
founders.
Key Employees.
The
following is a list of key employees of Ecosphere and EES.
Name
|
Age
|
Position(s)
|
||
Sanjeev
Jahkete
|
41
|
Senior
Vice President of Engineering
|
||
Aaron
Horn
|
31
|
President
of EES
|
||
Robert
Cathey
|
33
|
Chief
Operating Officer of EES
|
Sanjeev
Jahkete has served as our Senior Vice President of Engineering
since 2008 and has been employed with Ecosphere since 2004. Mr.
Jahkete co-invented the Ecosphere Ozonix® process
with our founder, Dennis McGuire. Mr. Jahkete served as a team leader
for Ecosphere’s EPA Verification testing of its water filtration
system. Mr. Jahkete led Ecosphere’s deployment of the water
filtration system in Waveland, Mississippi following Hurricane
Katrina.
Aaron Horn
has served as the President of EES since August
2009. From May 2008 to August 2009, Mr. Horn served as
an Operational Engineer for Newfield in the Woodford Shale with a special
emphasis on water management. Mr. Horn has served on several industry
water committees and authored an Society of Petroleum Engineers paper on water
management in Shale Plays. Mr. Horn
graduated from the U.S. Military Academy with a degree in
engineering. He then served in the U.S. Army from 2001 through
2007, rising in rank from 2nd Lieutenant in
2001 to Captain in 2005.
38
Robert
Cathey has served as the Chief Operating Officer and Senior Vice
President and Chief Operating Officer of EES since July 2009. Mr.
Cathey joined Ecosphere in December 2008 as our Vice President, Natural Gas
Field Operations. He worked for Carrier Sales and Distribution from
April 2007 to December 2008 as Operations Manager for their North Texas and
Oklahoma business units. After graduating the U.S. Military Academy
at West Point with a degree in American Legal Systems / Systems Engineer, Mr.
Cathey served in the U.S. Army from June 2001 through April 2007, rising in rank
from Knight Platoon Leader (Reconnaissance) in 2001 to Battalion Assistant
Operations Officer in 2007.
Corporate
Governance
Board
Responsibilities and Structure
The Board
oversees, counsels, and directs management in the long-term interest of
Ecosphere and its shareholders. The Board’s responsibilities include
establishing broad corporate policies and reviewing the overall performance of
Ecosphere. The Board is not, however, involved in the operating
details on a day-to-day basis.
Board
Committees and Charters
The Board
and its Committees meet throughout the year and act by written consent from
time-to-time as appropriate. The Board delegates various
responsibilities and authority to different Board
Committees. Committees regularly report on their activities and
actions to the Board. The Board currently has and appoints the
members of: the Audit Committee and the Compensation Committee. The
Audit Committee has a written charter approved by the Board.
The
following table identifies the independent and non-independent current Board and
Committee members:
Name
|
|
Independent
|
Audit
|
Compensation
|
||
Joe
Allbaugh
|
P
|
P
|
||||
Gene
Davis
|
P
|
P
|
||||
Michael
Donn, Sr.
|
||||||
D.
Stephen Keating
|
P
|
Chairman
|
||||
George
Sterner
|
P
|
P
|
||||
Charles
Vinick
|
P
|
Chairman
|
||||
Thomas
Wolfe
|
P
|
P
|
39
Board
of Directors Independence
We
believe that the following individuals qualify as independent directors within
the meaning of the NASDAQ Stock Market listing rules: Joe Allbaugh, Gene Davis,
D. Stephen Keating, George Sterner, Charles Vinick and Thomas
Wolfe.
Committees
of the Board of Directors
Our Board
has established two standing committees to assist it in discharging its
responsibilities: the Audit Committee and the Compensation
Committee.
Audit
Committee
The Audit
Committee’s primary role is to review our accounting policies and any issues
which may arise in the course of the audit of our financial
statements. The Audit Committee selects our independent registered
public accounting firm, approves all audit and non-audit services, and reviews
the independence of our independent registered public accounting
firm. The Audit Committee also reviews the audit and non-audit fees
of the auditors. Our Audit Committee is also responsible for certain
corporate governance and legal compliance matters.
Our Board
has determined that Mr. Keating is qualified as an Audit Committee
Financial Expert, as that term is defined by the rules of the SEC and in
compliance with the Sarbanes-Oxley Act of 2002. We believe that
Messrs. Keating, Wolfe and Vice-Admiral Sterner are independent in accordance
with the NASDAQ Stock Market independence standards for audit
committees.
Compensation
Committee
The
function of the Compensation Committee is to review and recommend the
compensation of benefits payable to our officers, review general policies
relating to employee compensation and benefits and administer our various stock
option plans, including the 2006 Equity Incentive Plan (the
“Plan”).
Board
Diversity
While we
do not have a formal policy on diversity, the Board considers as one of the
factors the diversity of the composition of our Board and the skill set,
background, reputation, type and length of business experience of our Board
members as well as a particular nominee’s contributions to that
mix. Although there are many other factors, the Committee seeks to
attract individuals with knowledge of water recycling, the oil and gas
industries, environmental solutions, and accounting and
finance. Additionally, we seek individuals with experience on public
company boards, marketing expertise and international background.
40
Board
Structure
Ecosphere
has traditionally chosen (with one limited exception) to separate the Chief
Executive Officer and Board Chairman positions. We believe that this
Board leadership structure is the most appropriate for Ecosphere because our
founders found that it improved our corporate governance and was in the best
interest of our shareholders. This structure has been particularly
useful given the amount of time consumed by our Chief Executive Officer working
with our engineers improving upon our existing technologies and creating new
ones. Also, this structure ensures a greater role for the independent
directors in the oversight of Ecosphere and active participation of the
independent directors in setting agendas and establishing priorities and
procedures for the work of the Board.
Board
Assessment of Risk
Our risk
management function is overseen by our Board. Through our policies,
our Code of Ethics and our Board committees’ review of financial and other
risks, our management keeps our Board apprised of material risks and provides
our directors access to all information necessary for them to understand and
evaluate how these risks interrelate, how they affect Ecosphere, and how
management addresses those risks. Mr. McGuire, Chief Executive
Officer, and Mr. Goldfarb, our Chief Financial Officer, will work closely
together with the Board once material risks are identified on how to best
address such risk. If the identified risk poses an actual or
potential conflict with management, our independent directors may conduct the
assessment. The Board focuses on key risks and interfaces with
management on seeking solutions.
Code
of Ethics
Our Board
of Directors has adopted a Code of Ethics that applies to all of our employees,
including our Chief Executive Officer and Chief Financial
Officer. Although not required, the Code of Ethics also applies to
our Board of Directors. The Code provides written standards that we
believe are reasonably designed to deter wrongdoing and promote honest and
ethical conduct, including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships, full, fair,
accurate, timely and understandable disclosure and compliance with laws, rules
and regulations, including insider trading, corporate opportunities and
whistle-blowing or the prompt reporting of illegal or unethical
behavior. We will provide a copy of the Code of Ethics to any person
without charge, upon request. The request for a copy can be made in
writing to Ecosphere Technologies, Inc., 3515 S.E. Lionel Terrace, Stuart,
Florida 34997, Attention: Mrs. Jacqueline McGuire.
41
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a)
of the Exchange Act requires our directors and executive officers, and persons
who beneficially own more than 10% of a registered class of our equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of common stock and the other equity
securities. These persons are required by SEC regulations to furnish
us with copies of all reports they file. Based solely on a review of
the copies of the forms furnished to us, and written representations from
reporting persons that no Form 5s were required, we believe that all filing
requirements were complied with during 2009 except as follows:
Name
|
Number
of
Late
Reports
|
Number
of
Late
Transactions
|
Number
of
Known
Failures to File
|
|||||||||
D.
Stephen Keating
|
1 | 1 | — | |||||||||
Thomas
Wolfe
|
1 | 1 | — | |||||||||
George
Sterner
|
1 | 1 | — |
ITEM
11. EXECUTIVE COMPENSATION
2009
Summary Compensation Table
The
following information related to the compensation paid by us for 2009 and 2008
to our Chief Executive Officer (principal executive officer), our former Chief
Executive Officer and the two other most highly compensated executive officers
serving at the end of the last fiscal year whose compensation exceeded
$100,000.
Name
and
Principal
Position
(a)
|
Year
(b)
|
Salary
($)(c)
|
Bonus
($)(c)
|
Stock
Awards
($)(e)(1)
|
Option
Awards
($)(f)(1)
|
Non-Equity
Incentive Plan Compensation ($)(g)
|
All
Other
Compensation
($)(i)
|
Total
($)(j)
|
|||||||||||
Dennis
McGuire
|
2009
|
250,000 | 250,000 | (2) | --- | 1,221,599 | (3) | 92,916 | --- | 1,814,515 | |||||||||
Chief
Executive Officer
|
2008
|
306,561 | --- | 37,000 | 2,558,017 | (4) | — | --- | 2,901,578 | ||||||||||
Patrick
Haskell
|
2009
|
281,459 | --- | 50,000 | (5) | 539,578 | (5) | — | --- | 871,037 | |||||||||
Former
Chief Executive Officer
|
2008
|
63,700 | --- | 59,177 | (5) | 2,998,998 | (5) | — | 288,000 | (5) | 3,409,875 | ||||||||
Michael
Donn, Sr.
|
2009
|
160,854 | 5,000 | (6) | --- | 64,250 | (6) | — | --- | 230,104 | |||||||||
Chief
Operating Officer
|
2008
|
212,143 | --- | 29,600 | (7) | 170,357 | (7) | — | --- | 412,100 | |||||||||
Adrian
Goldfarb
|
2009
|
142,531 | 5,000 | (8) | --- | 432,108 | (9) | — | --- | 579,639 | |||||||||
Chief
Financial Officer
|
2008
|
86,631 | --- | --- | 277,341 | (10) | — | --- | 363,972 |
____________________
(1)
|
The
amounts in these columns represent the fair value of the award as of the
grant date as computed in accordance with FASB ASC Topic 718 and the
recently revised SEC disclosure rules. These rules also require
prior years amounts to be recalculated in accordance with the rule and
therefore any number previously disclosed in our Form 10-K regarding NEO
compensation on this table or any other table may not
reconcile. These amounts represent awards that are paid in
shares of common stock or options to purchase shares of our common stock
and do not reflect the actual amounts that may be realized by the Named
Executive Officers.
|
(2)
|
On
November 12, 2009, the Board awarded Mr. McGuire a $150,000 bonus and on
December 22, 2009, Mr. McGuire was awarded a $100,000
bonus.
|
(3)
|
On
July 1, 2009, Mr. McGuire was granted 2,500,000 stock options vesting
annually over a three year period (beginning July 1, 2010) exercisable at
$0.49 per share. On December 22, 2009, Mr. McGuire was granted
1,500,000 stock options vesting semi-annually in six equal increments
(beginning June 30, 2010) exercisable at $0.43 per
share. Non-Equity Incentive Plan Compensation represents a cash
payment for commissions received. See the description of Mr.
McGuire’s compensation arrangement
below.
|
(4)
|
On
May 20, 2008, Mr. McGuire was granted 7,000,000 options exercisable at
$0.30 per share. Additionally, Mr. McGuire was granted
3,300,000 stock options exercisable at $0.50 per share on June 17,
2008. All of these options have fully vested. The stock award
represents stock issued in lieu of a cash
bonus.
|
(5)
|
Effective
June 17, 2008, Mr. Haskell was granted 8,250,000 stock options exercisable
at $0.50 per share. Of the options, 2,750,000 were subject to
both performance and time based vesting. The remaining options
were to vest ratably over a three-year period, subject to continued
employment with us on each applicable vesting date. On July 1,
2009, Mr. Haskell was granted 1,500,000 stock options exercisable at $0.49
per share which vested upon his resigning as Chief Executive Officer and
agreeing to waive the vesting of all his unvested options from the June
17, 2008 grant date. On July 31, 2009, Mr. Haskell resigned as
Chief Executive Officer. On December 22, 2009, Mr. Haskell was
granted 50,000 fully-vested stock options exercisable at $0.43 per
share. The stock award for 2009 represents a bonus. The stock
award for 2008 represents shares issued in lieu of salary. All Other
Compensation represents the value of shares issued to Mr. Haskell as a
finders’ fee for arranging a financing prior to becoming a director or
officer of Ecosphere.
|
(6)
|
On
December 22, 2009, Mr. Donn received a $5,000 bonus and was granted
250,000 stock options vesting on June 22, 2010, exercisable at $0.43 per
share.
|
(7)
|
On
June 30, 2008, Mr. Donn was granted 500,000 stock options exercisable at
$0.47 per share. Of the options, 350,000 have vested and the
remaining vest on June 30, 2010. The stock award represents stock issued
in lieu of a cash bonus.
|
(8)
|
On
December 22, 2009, Mr. Goldfarb received a $5,000
bonus.
|
(9)
|
On
July 1, 2009, Mr. Goldfarb was granted 1,100,000 stock options vesting
annually over a three year period (beginning July 1, 2010) exercisable at
$0.49 per share. On December 22, 2009, Mr. Goldfarb was granted
250,000 stock options vesting on June 22, 2010, exercisable at $0.43 per
share.
|
(10)
|
On
November 22, 2008, Mr. Goldfarb was granted 400,000 stock options vesting
annually over three years exercisable at $0.27 per share. On
December 20, 2008, Mr. Goldfarb was granted 500,000 stock options vesting
semi-annually over a three years beginning December 31, 2008 exercisable
at $0.45 per share.
|
42
Employment
Arrangements
Described
below are the compensation packages our Board approved for our executive
officers. The compensation arrangements were approved by our Board
based upon the recommendation of our Compensation Committee, which conducted a
thorough review over an extensive period of time.
Dennis
McGuire
Effective
June 17, 2008, our Board approved a new compensation package for our Chief
Technology Officer, Dennis McGuire, who was Co-Chief Executive Officer on that
date. Mr. McGuire received an annual base salary of $325,000 per
year which would have increased to $400,000 upon the achievement of a specific
milestone or event. As part of our cost cutting measures, on May 5,
2009, Mr. McGuire agreed to a reduced base salary of $250,000 per year and will
receive a bonus of 3% of Ecosphere’s revenues from operations.
Patrick
Haskell
Prior to
resigning effective July 31, 2009, Mr. Haskell received an annual base
salary of $450,000 per year. Because of lack of working capital, Mr.
Haskell received his salary in restricted common stock.
Michael Donn,
Sr.
On June
30, 2008, our Board approved a new compensation package for Michael Donn, Sr.,
our Chief Operating Officer. Mr. Donn receives an annual base
salary of $125,000 per year. On December 22, 2009, the Board approved
an increase in Mr. Donn’s base salary to $146,250.
Adrian
Goldfarb
On
December 16, 2008, our Board approved a compensation arrangement for Adrian
Goldfarb, the Company’s Chief Financial Officer. From February 11,
2008 until December 20, 2008, Mr. Goldfarb was acting as our Chief Financial
Officer on behalf of WSR. On December 20, 2008, Mr. Goldfarb became a
full-time employee and resigned as president of WSR and relinquished all
ownership rights in WSR (See Item 13). Mr. Goldfarb received an
annual base salary of $150,000 per year over a three-year term. On
December 22, 2009, the Board approved an increase in Mr. Goldfarb’s base salary
to $187,500.
Jacqueline
McGuire
On June
30, 2008, our Board approved a new compensation package for Jacqueline McGuire,
our Senior Vice President of Administration. Mrs. McGuire received an
annual base salary of $85,000 per year. Additionally, Mrs. McGuire
was granted 300,000 stock options exercisable at $0.47 per share. Of
the options, 200,000 have vested and the remaining vest on June 30,
2010. On December 22, 2009, the Board approved an increase in Mrs.
McGuire’s base salary to $93,500 and approved a bonus of $5,000.
Termination
Provisions
Mr.
McGuire is entitled to two years base salary and benefits upon both a change of
control and resignation for good reason.
43
Outstanding
Equity Awards At 2009 Fiscal Year-End
Listed
below is information with respect to unexercised options for each Named
Executive Officer as of December 31, 2009:
OUTSTANDING EQUITY AWARDS AT 2009 FISCAL YEAR-END | |||||||||||||
OPTION
AWARDS
|
|||||||||||||
Name
(a)
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(b)
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(c)
|
Option
Exercise
Price
($)
(e)
|
Option
Expiration
Date
(f)
|
|||||||||
Dennis
McGuire
|
|||||||||||||
618,750 | 0 | 0.83 |
5/25/11
|
||||||||||
2,990,000 | 0 | 1.00 |
11/8/15
|
||||||||||
1,247,000 | (1) | 0 | 0.15 |
10/9/12
|
|||||||||
1,200,000 | 0 | 0.28 |
1/31/11
|
||||||||||
800,000 | 0 | 0.28 |
1/31/11
|
||||||||||
4,750,000 | 0 | 0.30 |
5/20/13
|
||||||||||
2,000,000 | 0 | 0.30 |
5/20/13
|
||||||||||
3,300,000 | 0 | 0.50 |
6/17/13
|
||||||||||
0 | 2,500,000 | (2) | 0.47 |
7/1/14
|
|||||||||
0 | 1,500,000 | (3) | 0.43 |
12/22/14
|
|||||||||
Patrick
Haskell
|
|||||||||||||
2,750,000 | 0 | 0.50 |
6/17/13
|
||||||||||
81,081 | 0 | 0.15 |
7/31/12
|
||||||||||
1,500,000 | 0 | 0.49 |
7/1/14
|
||||||||||
50,000 | 0 | 0.43 |
12/22/14
|
||||||||||
Michael
Donn, Sr.
|
|||||||||||||
200,000 | 0 | 1.10 |
12/31/14
|
||||||||||
309,375 | 0 | 0.83 |
5/25/11
|
||||||||||
50,000 | 0 | 0.44 |
12/18/11
|
||||||||||
515,667 | 0 | 0.15 |
7/31/13
|
||||||||||
200,000 | 0 | 0.28 |
1/31/11
|
||||||||||
375,000 | 125,000 | (4) | 0.47 |
6/30/13
|
|||||||||
0 | 250,000 | (3) | 0.43 |
12/22/14
|
|||||||||
Adrian
Goldfarb
|
133,333 | 266,667 | (5) | 0.27 |
11/22/13
|
||||||||
250,000 | 250,000 | (6) | 0.45 |
7/3/13
|
|||||||||
0 | 1,100,000 | (2) | 0.47 |
7/1/14
|
|||||||||
0 | 250,000 | (3) | 0.43 |
12/22/14
|
———————
(1) These
options were accepted in lieu of cash in the UES sale.
(2) These
options vest in equal annual increments over a three year period. The vesting
dates are July 1, 2010, 2011 and 2012.
(3) These
options vest on June 22, 2010.
(4) These
unvested options vest in two equal increments on June 30, 2010 and June 30,
2011.
(5) These
unvested options vest in two equal increments on December 20, 2010 and December
20, 2011.
(6) These
unvested options vest in three equal increments on June 30, 2010, December 31,
2010 and June 30, 2011.
44
Director
Compensation
We do not
pay cash compensation to our directors for service on our
Board. Non-employee members of our Board were compensated with
restricted stock and stock options. Directors are reimbursed for
reasonable expenses incurred in attending meetings and carrying out duties as
Board and committee members.
2009
Director Compensation
Name
(a)
|
Stock
Awards
($)(c)(1)
|
Option
Awards
($)(d)
(1)
|
Total
($)(j)
|
||||
George
Sterner
|
— |
68,248
|
68,248
|
||||
Joe
Allbaugh
|
33,571
|
23,887
|
57,458
|
||||
Charles
Vinick
|
75,000
|
112,523
|
187,523
|
||||
D.
Stephen Keating
|
38,367
|
27,299
|
65,666
|
||||
Gene
Davis
|
33,571
|
23,887
|
57,458
|
||||
Thomas
Wolfe
|
33,571
|
23,887
|
57,458
|
———————
(1) This
represents the fair value of the award as of the grant date in accordance with
FASB ASC Topic 718.
Automatic
Board Grants
Initial
Grants
On the
date on which a non-employee director (or director advisor) is first elected or
appointed, whether elected by shareholders or appointed by the Board to fill a
Board vacancy, the director receives an automatic grant of restricted stock and
options with the number of shares and options based upon Fair Market Value (as
defined in the Plan).
Options
|
Restricted
Stock
|
|||||||
Initial
appointment as Chairman of the Board
|
$ | 75,000 | $ | 75,000 | ||||
Initial
election or appointment of a non-employee director
|
$ | 40,000 | $ | 40,000 | ||||
Initial
appointment as a director advisor
|
$ | 15,000 | $ | 10,000 |
Annual Grants and Other
Grants
On July
1st of
each year, each non-employee director (or director advisor) receives an
automatic grant of restricted stock and options with the number of shares and
options based upon Fair Market Value (as defined in the Plan).
Options
|
Restricted
Stock
|
|||||||
Chairman
of the Board
|
$ | 40,000 | $ | 40,000 | ||||
Non-employee
director
|
$ | 25,000 | $ | 25,000 | ||||
Director
advisor
|
$ | 10,000 | $ | 5,000 | ||||
Initial
appointment of and annual grant to a non-employee director serving as Lead
Director or Chairman of the following: Audit Committee,
Compensation
Committee and other committees at the discretion of the Compensation
Committee
|
$ | 15,000 | $ | 15,000 | ||||
Initial
appointment of and annual grant to a non-employee director serving on the
following: Audit Committee, Compensation Committee
and
other committees at the discretion of the Compensation
Committee
|
$ | 10,000 | $ | 10,000 |
45
Equity
Compensation Plan
The following chart reflects the number
of awards granted under equity compensation plans approved and not approved by
shareholders and the weighted average exercise price for such plans as of
December 31, 2009.
Name
Of Plan
|
Number
of
securities
to be issued upon exercise of outstanding options, warrants and
rights(1)
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities
remaining
available for future issuance under equity compensation plans (excluding
securities reflected in column (a))
|
||||||
Equity
compensation plans approved by security holders
|
|||||||||
2000
Long Term Incentive Program and 2003 Equity Incentive Plan(2)
|
175,500
|
$0.91
|
3,824,500
|
||||||
2003
Stock Option Plan for Outside Directors and Advisory Board Members
(2)
|
1,803,000
|
$0.66
|
2,197,000
|
||||||
2006
Equity Incentive Plan
|
9,490,235
|
$0.57
|
509,765
|
(3)
|
|||||
Equity
compensation plans not approved by security holders
(4)
|
36,919,155
|
$0.46
|
N/A
|
||||||
Total
|
48,387,890
|
N/A
|
———————
(1)
|
Consists
of stock options.
|
(2)
|
Ecosphere
does not intend to issue options under these plans in the
future.
|
(3)
|
The
Plan was approved by our shareholders at our 2008 annual meeting held on
November 13, 2008. We may issue a
total of 10,000,000 shares under the Plan, which includes restricted
stock, options, restricted stock units and stock appreciation
rights. Because Ecosphere has issued shares of restricted
stock, the number of securities available for grant has been
reduced.
|
(4)
|
Represents
outstanding options which have been granted in conjunction with directors
and employee compensation and consulting arrangements. These
options vest over a three year period and are generally exercisable over
periods ranging from five to 10 years. The exercise price of
the options granted ranges from $0.15 to $3.00 per share. Includes
1,488,000 options issued to directors, with exercise prices between
$0.28 and $1.00 and expiring through March 31, 2011 and
26,737,333 options issued to current and former executive officers,
with exercise prices between $0.15 and $1.10 and expiring through
December 31, 2014.
|
46
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The
following table sets forth the number of shares of Ecosphere’s common stock
beneficially owned as of March 29, 2010 by (i) those persons known by
Ecosphere to be owners of more than 5% of our common stock, (ii) each director,
(iii) each Named Executive Officer and (iv) all executive officers and directors
as a group:
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
Beneficially
Owned(1)
|
Percent of
Class (1)
|
|||||||
Named Executive Officers | ||||||||||
Common
Stock
|
Dennis
and Jacqueline McGuire
3515
S.E. Lionel Terrace
Stuart,
FL 34997
(2)
|
17,874,810 | 12.6 | % | ||||||
Common
Stock
|
Patrick
Haskell
45
East 89th
Street, Apt. 27A
New
York, NY 10129 (3)
|
12,931,241 | 9.9 | % | ||||||
Common
Stock
|
Adrian
Goldfarb
3515
S.E. Lionel Terrace
Stuart,
FL 34997
(4)
|
508,333 | * | |||||||
Common
Stock
|
Michael
Donn, Sr.
3515
S.E. Lionel Terrace
Stuart,
FL 34997
(5)
|
1,799,842 | 1.4 | % | ||||||
Directors
|
||||||||||
Common
Stock
|
Charles
Vinick
2323
Foothill Lane
Santa
Barbara, CA 93105
(6)
|
724,965 | * | |||||||
Common
Stock
|
Joe
Allbaugh
400
North Capitol Street, NW, Ste. 475 Washington, DC 20001 (7)
|
1,375,238 | 1.1 | % | ||||||
Common
Stock
|
Gene
Davis
27
S. Monroe Street
Denver,
CO 80209
(8)
|
140,873 | * | |||||||
Common
Stock
|
D.
Stephen Keating
65
Kensington Road
Garden
City, NY 11530
(9)
|
1,429,638 | 1.2 | % | ||||||
Common
Stock
|
George
Sterner
2708
Hatmark Street
Vienna,
VA 22181
(10)
|
1,760,339 | 1.4 | % | ||||||
Common
Stock
|
Thomas
Wolfe
P.O.
Box 190
Rough
and Ready, CA 95975
(11)
|
140,874 | * | |||||||
Common
Stock
|
All
directors and executive officers
as
a group (10 persons)
|
25,727,911 | 17.5 | % | ||||||
5%
Shareholder
|
||||||||||
Common
Stock
|
Kevin
Grady
3515
S.E. Lionel Terrace
Stuart,
FL 34997 (12)
|
8,026,010 | 6.4 | % |
———————
* Less than
1%
47
(1)
|
Applicable percentages
are based on 123,708,277 shares outstanding as of adjusted as
required by rules of the SEC. Beneficial ownership is
determined under the rules of the SEC and generally includes voting or
investment power with respect to securities. Shares of common
stock subject to options, warrants and convertible notes currently
exercisable or convertible, or exercisable or convertible within 60 days
after the date of this report are deemed outstanding for computing
the percentage of the person holding such securities but are not
deemed outstanding for computing the percentage of any other
person. Unless otherwise indicated in the footnotes to this
table, Ecosphere believes that each of the shareholders named in the table
has sole voting and investment power with respect to the shares of common
stock indicated as beneficially owned by them.
|
(2)
|
Includes:
|
●
|
155,000
shares of common stock owned by
Mrs. McGuire,
|
●
|
302,372
shares owned jointly,
|
●
|
16,105,750
shares issuable upon exercise of vested options owned by
Mr. McGuire,
|
●
|
484,688
shares issuable upon exercise of vested options owned by
Mrs. McGuire, and
|
●
|
800,000
shares issuable upon exercise of jointly owned
options.
|
Does not
include:
●
|
4,000,000
options not exercisable within 60 days of this report held by Mr. McGuire,
and
|
●
|
200,000
options not exercisable within 60 days of this report held by Mrs.
McGuire.
|
Mr. McGuire
disclaims beneficial ownership of the securities held solely in
Mrs. McGuire’s name and Mrs. McGuire disclaims beneficial ownership of
the securities held solely in Mr. McGuire’s name, and the disclosure in
this report shall not be deemed an admission that either is the beneficial owner
of the other’s securities solely held in that person’s name for any
purpose.
(3)
|
Mr.
Haskell is our former Chief Executive Officer. Includes:
4,381,081 shares of common stock issuable upon the exercise of options,
1,935,000 shares of common stock issuable upon exercise of warrants,
308,642 shares of common stock issuable upon conversion of convertible
notes.
|
(4) |
Includes 508,333
shares of common stock issuable upon the exercise of
options. Does not include 1,741,667 options which are not
exercisable within 60 days of this report.
|
(5)
|
Mr.
Donn is also a director. Includes 1,625,042 shares of common
stock issuable upon exercise of options. Does not include
400,000 options which are not exercisable within 60 days of this
report.
|
(6)
|
Includes
209,092 shares of common stock issuable upon exercise of
options. Does not include 337,684 options which are not
exercisable within 60 days of this report.
|
(7)
|
Includes
1,245,834 shares of common stock issuable upon exercise of
options. Does not include 71,428 options which are not
exercisable within 60 days of this report.
|
(8)
|
Includes
69,445 shares of common stock issuable upon exercise of
options. Does not include 210,317 options which are not
exercisable within 60 days of this report.
|
(9)
|
Includes
888,889 shares issuable upon the conversion of a convertible
note. Also includes 100,000 shares issuable upon exercise of
warrants and 76,389 shares issuable upon exercise of
options. Does not include 234,410 options which are not
exercisable within 60 days of this report.
|
(10)
|
Includes
1,218,334 shares of common stock issuable upon exercise of
options. Does not include 204,080 options which are not
exercisable within 60 days of this report.
|
(11)
|
Includes
69,445 shares of common stock issuable upon exercise of
options. Does not include 210,318 options which are not
exercisable within 60 days of this report.
|
(12)
|
Mr. Grady
is an employee. Includes 1,200,000 shares of common stock
issuable upon exercise of options. Does not include 225,000
options which are not exercisable within 60 days of this
report.
|
48
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Beginning
in the summer of 2006, Dennis McGuire and his wife, Jacqueline McGuire, have
lent money to us on an as needed basis evidenced by a demand note at 8% per
annum interest. The highest balance due was $400,000. All
of the loans were repaid in 2008. Since our
inception in 1998, we have owed $40,000 to a company controlled by Dennis and
Jacqueline McGuire. In 2008, we paid the remaining
principal amount of $26,000 and $18,750 of accrued interest. In
August 2008, Mr. Patrick Haskell our former Chief Executive Officer and Chairman
lent us $41,656 as an interim loan. This amount was paid in full in
December 2008. Messrs. Haskell and Michael Furman, our former
Executive Vice President, each lent us $100,000 and Mr. Keating, a director,
lent us $180,000 and received convertible notes and warrants as part of our 2008
private placements. The terms of their investment were the same as provided to
other unaffiliated investors. Since January 2008, Messrs. Haskell,
Furman and Keating have lent us $750,000, $400,000 and $230,000, respectively.
Mr. Furman and Mr. Haskell converted their remaining note at $0.36 per share in
March 2010. In March 2009, Mr. Haskell advanced us $15,000
against accounts receivable, which was repaid.
Beginning
in May 2007, we ceased paying salaries to our management on a regular
basis. The following chart reflects the amounts due at December 31,
2008, December 31, 2009 and as of March 31, 2010.
Name
|
December
31, 2008
|
December
31, 2009
|
March
31, 2010
|
|||||||||
Dennis
McGuire
|
$ | 29,207 | $ | --- | $ | --- | ||||||
James
Rushing III
|
$ | 24,015 | $ | --- | $ | --- | ||||||
Michael
Donn, Sr.
|
$ | 16,226 | $ | --- | $ | --- | ||||||
Jacqueline
McGuire
|
$ | --- | $ | --- | $ | --- | ||||||
Adrian
Goldfarb
|
$ | --- | $ | --- | $ | --- | ||||||
Stephen
Johnson
|
$ | 10,625 | $ | --- | $ | --- |
As of
January 1, 2009, Ecosphere owed Vice-Admiral Sterner, a director, $335,714
representing a loan and commissions due from 2005. In June 2008, we
renegotiated this indebtedness paying Vice-Admiral Sterner and issued him a new
note of $374,423 with 7% annual interest to be paid in quarterly installments of
$50,000 including interest. In 2009, Ecosphere paid Vice-Admiral
Sterner $50,000 and in December 2009, he agreed to accept quarterly payments of
$25,000. As of the date of this report, there was a balance of
$310,871 on this loan.
In
December 2007, in order to provide us with additional authorized shares, we
offered our option and warrant holders the right to exchange their current
warrants and/or options for new options with an exercise price of $0.28 expiring
on January 31, 2011 (the “Exchange Offer”). The exchange ratio was
four new options for each 10 old warrants and/or options. The
Exchange Offer closed on March 31, 2008, resulting in the cancellation of
9,130,801 options and warrants and the issuance of 6,087,200 new
options.
49
The
following table represents our directors and officers who participated in the
Exchange Offer:
No.
of
Options/Warrants
Cancelled
|
No.
of
Options
Issued
|
|||||||
Dennis
McGuire (1)
|
3,000,000 | 1,200,000 | ||||||
Jacqueline
McGuire (1)
|
199,999 | 80,000 | ||||||
Dennis
and Jacqueline McGuire (2)
|
2,000,000 | 800,000 | ||||||
Michael
Donn, Sr.
|
500,000 | 200,000 | ||||||
James
Rushing, III (3)
|
1,315,000 | 526,000 | ||||||
Vice-Admiral
George Sterner
|
1,275,000 | 510,000 | ||||||
Barry
Hechtman (3)
|
105,000 | 42,000 |
———————
(1)
|
All
directors and officers exchanged only options, except Mr. and Mrs. McGuire
who also exchanged warrants.
|
(2)
|
Warrants
jointly owned by Mr. Dennis McGuire and Mrs. Jacqueline
McGuire.
|
(3)
|
Messrs.
Rushing and Hechtman resigned from the Board in August
2008.
|
On
February 11, 2008, James C. Rushing III resigned as Chief Financial Officer and
agreed to serve as Vice Chairman of the Board and assist our new Chief Financial
Officer in the transition. We agreed to compensate him at the annual
rate of $92,500 (his then base salary). The services ended on July
31, 2008. Mr. Patrick Haskell began investing in Ecosphere in late
December 2007 and was instrumental in helping us raise approximately
$3,416,000. We agreed to pay him a finder’s fee in January 2008 prior
to the time he became an officer and director. In September 2008 we
issued Mr. Haskell 450,000 shares of common stock as payment of the finder’s
fee.
Jacqueline
McGuire and Michael Donn, Sr., are the wife and brother-in-law of
Mr. Dennis McGuire, our Chief Executive Officer. We also employ
three members of their families. We believe that based upon the
services we receive from these related parties the compensation is fair to
us.
In February 2009, Adrian Goldfarb, our
Chief Financial Officer, arranged for additional financing of up to $150,000 for
Ecosphere through a limited liability company managed by him and his
wife. We received a total of $50,000 from this financing and issued a
$54,945 convertible note. The funds came from domestic and
international investors and Mr. Goldfarb received no benefit from the
transaction. The funds were secured by an interest in our service
equipment. During 2009, the Company repaid $21,497 due on the note.
The investor converted the note in January 2010 at the rate of $0.36 per
share.
In March 2009, Ecosphere issued Mr.
Charles Vinick, a director, 42,425 five-year options exercisable at $0.24 per
share for consulting services.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES.
Ecosphere’s
Audit Committee reviews and approves audit and permissible non-audit services
performed by its independent registered public accounting firm, as well as the
fees charged for such services. In its review of non-audit service
and its appointment of Salberg & Company, P.A. as our independent registered
public accounting firm, the Audit Committee considered whether the provision of
such services is compatible with maintaining independence. All of the
services provided and fees charged by Salberg & Company, P.A. in 2009 were
approved by the Audit Committee. The following table shows the fees
for the year ended December 31, 2009 and for the year ended December 31,
2008.
50
2009
|
2008
|
|||||||
Audit
Fees (1)
|
$ | 94,000 | $ | 90,000 | ||||
Audit
Related Fees (2)
|
$ | 600 | $ | 8,000 | ||||
Tax
Fees (3)
|
$ | 0 | $ | 0 | ||||
All
Other Fees
|
$ | 0 | $ | 0 |
———————
(1)
|
Audit
fees – these fees relate to the audit of our annual financial statements
and the review of our interim quarterly financial
statements.
|
(2)
|
Audit
related fees – these fees relate primarily to the auditors’ review of our
registration statements and audit related
consulting.
|
(3)
|
Tax
fees – no fees of this sort were billed by Salberg & Company P.A., our
principal accountant during 2009 and
2008.
|
51
PART
IV
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
(a) Documents
filed as part of the report.
(1)
|
Financial
Statements. See Index to Consolidated Financial Statements,
which appears on page F-1 hereof. The financial statements
listed in the accompanying Index to Consolidated Financial Statements are
filed herewith in response to this
Item.
|
(2)
|
Financial
Statements Schedules. All schedules are omitted because they
are not applicable or because the required information is contained in the
consolidated financial statements or notes included in this
report.
|
(3)
|
Exhibits. |
Exhibit
|
Incorporated
by Reference
|
Filed
or Furnished
|
|||||||||
No.
|
Exhibit
Description
|
Form
|
Date
|
Number
|
Herewith
|
||||||
3.1 |
Certificate
of Incorporation
|
10-QSB
|
12/11/06
|
3.1 | |||||||
3.2 |
Certificate
of Amendment
|
10-K |
3/25/09
|
3.2 | |||||||
3.3 |
Certificate
of Correction
|
10-K |
3/25/09
|
3.3 | |||||||
3.4 |
Bylaws
|
10-QSB
|
12/11/06
|
3.2 | |||||||
3.5 |
Amendment
to the Bylaws
|
10-Q |
11/13/08
|
3.3 | |||||||
10.1 |
2006
Equity Incentive Plan*
|
10-QSB
|
12/11/06
|
10.3 | |||||||
10.2 |
First
Amendment to the 2006 Equity Incentive Plan*
|
10-Q |
11/13/08
|
10.9 | |||||||
10.3 |
Second
Amendment to the 2006 Equity Incentive Plan*
|
10-Q |
11/13/08
|
10.10 | |||||||
10.4 |
Summary
of Employment Arrangement –McGuire*
|
10-Q |
8/14/09
|
10.2 | |||||||
10.5 |
Summary
of Employment Arrangement – Goldfarb*
|
10-K |
3/25/09
|
10.18 | |||||||
10.6 |
Summary
of Employment Arrangement –Haskell*
|
10-Q |
8/14/08
|
10.3 | |||||||
10.7 |
Summary
of Employment Arrangement –Donn*
|
10-Q |
8/14/08
|
10.6 | |||||||
10.8 |
Form
of Stock Option – Exchange Offer*
|
10-KSB | 4/15/00 | 10.13 |
|
||||||
10.9 |
G3PRA,
LLC Secured Line of Credit Agreement*
|
10-Q |
11/16/09
|
10.1 | |||||||
10.10 |
G3PRA,
LLC Secured Note*
|
10-Q |
11/16/09
|
10.2 | |||||||
10.11 | WSR Agreement* | 10-KSB | 4/15/08 | 10.17 | |||||||
10.12 |
Amendment
to WSR Agreement*
|
10-K |
3/25/09
|
10.21 | |||||||
10.13 |
Form
of Warrant dated May 5, 2009 – Note holders Extension
|
10-Q |
8/14/09
|
4.1 | |||||||
10.14 |
Bledsoe
Credit Agreement dated May 16, 2008
|
10-Q |
11/13/08
|
10.13 | |||||||
10.15 |
Bledsoe
Credit Agreement dated November 12, 2008
|
10-K |
3/25/09
|
10.15 | |||||||
10.16 |
Bledsoe
Credit Agreement dated April 14, 2009
|
10-Q |
8/14/09
|
10.3 | |||||||
10.17 |
Amended
and Restated Bledsoe Credit Agreement dated July 15, 2009
|
10-Q |
11/16/09
|
10.5 | |||||||
10.18 |
Bledsoe
Contribution Agreement dated July 15, 2009
|
10-Q |
11/16/09
|
10.6 | |||||||
10.19 |
Amended
and Restated EES Limited Liability Company Agreement
|
10-Q |
11/16/09
|
10.4 | |||||||
10.20 |
First
Amendment to the Amended and Restated EES Limited Liability Company
Agreement (Exhibit A to the Fidelity Unit Purchase Agreement dated
November 9, 2009 filed in this report as Exhibit 10.21)
|
Filed
|
|||||||||
10.21 |
Fidelity
Unit Purchase Agreement dated November 9, 2009**
|
Filed
|
|||||||||
10.22 |
EES
Amended and Restated Replacement Secured Note dated November 1, 2009
(Exhibit C to the Fidelity Unit Purchase Agreement dated November 9, 2009
filed in this report as Exhibit 10.21)
|
Filed
|
|||||||||
10.23 |
Secured
Line of Credit Agreement dated May 12, 2008
|
10-Q |
11/13/08
|
10.1 | |||||||
10.33 |
Secured
Line of Credit Agreement dated August 28, 2008
|
10-Q |
11/13/08
|
10.2 | |||||||
21.1 |
List
of Subsidiaries
|
Filed
|
|||||||||
23.1 |
Consent
of Salberg & Co. PA
|
Filed
|
|||||||||
31.1 |
Certification
of Principal Financial Officer (Section 302)
|
Filed
|
|||||||||
31.2 |
Certification
of Principal Financial Officer (Section 302)
|
Filed
|
|||||||||
32.1 |
Certification
of Principal Executive Officer and Principal Financial Officer
(Section 906)
|
Furnished
|
* Management compensatory
agreement
**The confidential disclosure
schedules are not filed in accordance with SEC Staff policy, but will be
provided to the Staff upon request. Certain material agreements contain
representations and warranties, which are qualified by the following
factors:
52
(i)
|
the
representations and warranties contained in any agreements filed with this
report were made for the purposes of allocating contractual risk between
the parties and not as a means of establishing
facts;
|
(ii)
|
the
agreement may have different standards of materiality than standards of
materiality under applicable securities
laws;
|
(iii)
|
the
representations are qualified by a confidential disclosure schedule that
contains nonpublic information that is not material under applicable
securities laws;
|
(iv)
|
facts
may have changed since the date of the agreements;
and
|
(v)
|
only
parties to the agreements and specified third-party beneficiaries have a
right to enforce the agreements.
|
Notwithstanding
the above, any information contained in a schedule that would cause a reasonable
investor (or that a reasonable investor would consider important in making a
decision) to buy or sell our common stock has been included. We have
been further advised by our counsel that in all instances the standard of
materiality under the federal securities laws will determine whether or not
information has been omitted; in other words, any information that is not
material under the federal securities laws may be
omitted. Furthermore, information which may have a different standard
of materiality will nonetheless be disclosed if material under the federal
securities laws.
Copies of
this report (including the financial statements) and any of the exhibits
referred to above will be furnished at no cost to our shareholders who make a
written request to Ecosphere Technologies, Inc., 3515 S.E. Lionel Terrace,
Stuart, Florida 34997 Attention: Mrs. Jacqueline McGuire.
53
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date:
March 31, 2010
|
Ecosphere
Technologies, Inc.
|
|
|
||
By:
|
/s/
DENNIS
McGUIRE
|
|
Dennis
McGuire
|
||
Chief
Executive Officer
(Principal
Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Adrian Goldfarb
|
Chief
Financial Officer (Principal Financial Officer and Chief Accounting
Officer)
|
March 31,
2010
|
||
Adrian
Goldfarb
|
||||
/s/ Joe Allbaugh
|
Director
|
March 31,
2010
|
||
Joe
Allbaugh
|
||||
/s/ Gene Davis
|
Director
|
March 31,
2010
|
||
Gene
Davis
|
||||
/s/ Michael Donn, Sr.
|
Director
|
March 31,
2010
|
||
Michael
Donn, Sr.
|
||||
/s/ D.
Stephen
Keating
|
Director
|
March 31,
2010
|
||
D.
Stephen Keating
|
||||
/s/ George Sterner
|
Director
|
March 31,
2010
|
||
George
Sterner
|
||||
/s/ Charles Vinick
|
Director
|
March 31,
2010
|
||
Charles
Vinick
|
||||
/s/ Thomas Wolfe
|
Director
|
March 31,
2010
|
||
Thomas
Wolfe
|
54
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets
|
F-3
|
|
Consolidated
Statements of Operations
|
F-4
|
|
Consolidated
Statements of Changes in Stockholders’ Deficit
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders' of
Ecosphere
Technologies, Inc.
We have
audited the accompanying consolidated balance sheets of Ecosphere Technologies,
Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in stockholders' deficit and cash
flows for the years ended December 31, 2009 and 2008. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ecosphere
Technologies, Inc. and Subsidiaries at December 31, 2009 and 2008, and the
consolidated results of its operations and its cash flows for the years ended
December 31, 2009 and 2008, in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has a net loss applicable to
Ecosphere Technologies, Inc. common stock of $18,425,903, and net cash used in
operations of $4,342,143 for the year ended December 31, 2009, and a working
capital deficit, a stockholders' deficit and an accumulated deficit of
$11,758,337, $20,368,907 and $87,893,515, respectively, at December 31, 2009. In
addition, the Company has redeemable convertible cumulative preferred stock that
is eligible for redemption at a redemption amount of $3,879,795 including
accrued dividends as of December 31, 2009 and is in default on certain
promissory notes at December 31, 2009. These matters raise substantial
doubt about its ability to continue as a going concern. Management’s Plan in
regards to these matters is also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/
Salberg & Company, P.A.
SALBERG
& COMPANY, P.A.
Boca
Raton, Florida
March 31,
2010
F-2
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
BALANCE SHEETS
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Current
Assets
|
||||||||
Cash
|
$ | 1,089,238 | $ | 461,514 | ||||
Restricted
cash
|
425,000 | - | ||||||
Accounts
receivable
|
701,999 | 123,728 | ||||||
Inventories
|
- | 32,426 | ||||||
Prepaid
expenses and other current assets
|
30,656 | 72,101 | ||||||
Total
current assets
|
2,246,893 | 689,769 | ||||||
Property
and equipment, net
|
7,174,919 | 1,875,891 | ||||||
Construction
in progress
|
764,229 | 319,975 | ||||||
Patents,
net
|
37,891 | 41,165 | ||||||
Debt
issue costs, net
|
- | 276,055 | ||||||
Deposits
|
22,205 | 55,998 | ||||||
Total
assets
|
$ | 10,246,137 | $ | 3,258,853 | ||||
Liabilities,
Redeemable Convertible Cumulative Preferred Stock and
|
||||||||
Stockholders’
Deficit
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 1,759,308 | $ | 1,009,467 | ||||
Accounts
payable - related parties
|
- | 5,485 | ||||||
Accrued
liabilities
|
705,510 | 1,457,497 | ||||||
Insurance
premium finance contract
|
- | 42,270 | ||||||
Vehicle
financing
|
41,339 | - | ||||||
Capital
lease obligations
|
13,080 | 38,249 | ||||||
Due
to affiliate
|
2,000 | 2,000 | ||||||
Deferred
revenue
|
672,000 | - | ||||||
Notes
payable – related parties (net of discount) – current
portion
|
1,795,376 | 1,370,141 | ||||||
Notes
payable – third parties (net of discount) – current
portion
|
1,616,078 | 5,994,435 | ||||||
Fair
value of liability for warrant derivative instruments
|
6,315,631 | - | ||||||
Fair
value of liability for embedded conversion option derivative
instruments
|
1,084,908 | - | ||||||
Total
current liabilities
|
14,005,230 | 9,919,544 | ||||||
Capital
lease obligations – less current portion
|
- | 13,721 | ||||||
Deferred
rent
|
- | 4,126 | ||||||
Restructuring
reserve
|
123,436 | - | ||||||
Notes
payable - related parties - less current portion
|
2,000,000 | 115,818 | ||||||
Notes
payable to third parties – less current portion
|
- | 25,400 | ||||||
Total
Liabilities
|
16,128,666 | 10,078,609 | ||||||
Redeemable
convertible cumulative preferred stock series A
11
shares authorized; 7 shares issued and outstanding, $25,000 per share
redemption
amount plus dividends in arrears ($1,137,556 at December 31,
2009)
|
1,137,556 | 1,111,306 | ||||||
|
||||||||
Redeemable
convertible cumulative preferred stock series B
484
shares authorized; 355 and 424 shares issued and outstanding,
respectively, $2,500
per
share redemption amount plus dividends in arrears ($2,742,239 at December
31, 2009)
|
2,742,239 | 2,822,239 | ||||||
Commitments and
Contingencies (Note 14)
|
||||||||
Ecosphere
Technologies, Inc. Stockholders’ Deficit
|
||||||||
Common stock, $0.01 par
value; 300,000,000 shares authorized; 116,830,850
and
83,791,919 shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
1,168,308 | 837,914 | ||||||
Common stock issuable,
$0.01 par value, 630,089
and
286,000 issuable at December 31, 2009 and 2008,
respectively
|
6,301 | 2,860 | ||||||
Additional
paid-in capital
|
66,349,999 | 53,399,704 | ||||||
Accumulated
deficit
|
(87,893,515 | ) | (64,993,779 | ) | ||||
Total
Ecosphere Technologies, Inc. stockholders’ deficit
|
(20,368,907 | ) | (10,753,301 | ) | ||||
Noncontrolling
interest in consolidated subsidiary
|
10,606,583 | - | ||||||
Total
stockholder' deficit
|
(9,762,324 | ) | (10,753,301 | ) | ||||
Total
liabilities, redeemable convertible cumulative preferred
stock,
|
$ | 10,246,137 | $ | 3,258,853 | ||||
and
stockholders’ deficit
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
For
the Year Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 1,760,129 | $ | 247,202 | ||||
Cost
of revenues
|
924,789 | 163,169 | ||||||
Gross
profit
|
835,340 | 84,033 | ||||||
Operating
expenses
|
||||||||
Selling,
general and administrative
|
9,991,436 | 6,082,656 | ||||||
Impairment
of assets
|
- | 6,601 | ||||||
Restructuring
charge
|
548,090 | - | ||||||
Total
operating expenses
|
10,539,526 | 6,089,257 | ||||||
Loss
from operations
|
(9,704,186 | ) | (6,005,224 | ) | ||||
Other
income (expense):
|
||||||||
Other
income
|
1,758 | - | ||||||
Other
expense
|
- | (12,599 | ) | |||||
Loss
on conversion
|
(716,783 | ) | (256,271 | ) | ||||
Interest
expense
|
(5,184,747 | ) | (5,419,562 | ) | ||||
Change
in fair value of derivative instruments
|
(3,446,612 | ) | - | |||||
Total
other income (expense)
|
(9,346,384 | ) | (5,688,432 | ) | ||||
Net loss
|
(19,050,570 | ) | (11,693,656 | ) | ||||
Preferred
stock dividends
|
(118,750 | ) | (138,250 | ) | ||||
Net
loss applicable to common stock
|
(19,169,320 | ) | (11,831,906 | ) | ||||
Less:
Net loss applicable to noncontrolling interest in consolidated
subsidiary
|
743,417 | - | ||||||
Net
(loss) applicable to Ecosphere Technologies, Inc. common
stock
|
$ | (18,425,903 | ) | $ | (11,831,906 | ) | ||
Net
income (loss) per common share applicable to common stock
|
||||||||
Basic
and diluted
|
$ | (0.19 | ) | $ | (0.16 | ) | ||
|
||||||||
Weighted
average number of common shares outstanding
|
||||||||
Basic
and diluted
|
99,627,077 | 73,158,831 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
||||||||||||||||||||
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
|
||||||||||||||||||||
For
the Years Ended December 31, 2009 and 2008
|
||||||||||||||||||||
|
|
|
|
|
||||||||||||||||
Common Stock |
Common Stock |
Common Stock |
Common Stock |
Additional Paid In |
Accumulated Deficit |
Total
|
||||||||||||||
Balance
at December 31, 2007
|
63,927,180
|
$
|
639,266
|
297,763
|
$
|
2,978
|
$
|
45,214,073
|
$
|
(53,300,123)
|
|
$
|
(7,443,806)
|
|||||||
Shares
issued for services
|
559,524
|
5,595
|
250,000
|
2,500
|
375,905
|
—
|
384,000
|
|||||||||||||
Shares
issued in connection with debt offerings, renewals
|
881,622
|
8,817
|
(297,763)
|
|
(2,978)
|
|
113,266
|
—
|
119,105
|
|||||||||||
Conversions
of notes and debentures to common stock
|
12,599,112
|
125,991
|
—
|
—
|
1,754,055
|
—
|
1,880,046
|
|||||||||||||
Shares
issued for interest
|
431,848
|
4,319
|
—
|
—
|
113,906
|
—
|
118,225
|
|||||||||||||
Conversion
of Series A Preferred Stock to common stock
|
12,000
|
120
|
36,000
|
360
|
49,520
|
—
|
50,000
|
|||||||||||||
Conversion
of Series B Preferred Stock to common stock
|
4,170
|
41
|
—
|
—
|
12,459
|
—
|
12,500
|
|||||||||||||
Vesting
of Restricted Stock
|
1,093,050
|
10,931
|
—
|
—
|
210,932
|
—
|
221,863
|
|||||||||||||
Exercise
of warrants for cash
|
1,285,000
|
12,850
|
—
|
—
|
176,450
|
—
|
189,300
|
|||||||||||||
Cashless
exercise of warrants
|
2,998,413
|
29,984
|
—
|
—
|
(29,984)
|
—
|
—
|
|||||||||||||
Warrants
and options granted for services
|
—
|
—
|
—
|
—
|
541,886
|
—
|
541,886
|
|||||||||||||
Beneficial
conversion features of debt offerings
|
—
|
—
|
—
|
—
|
1,374,636
|
—
|
1,374,636
|
|||||||||||||
Warrants
issued in connection with debt offerings
|
—
|
—
|
—
|
—
|
2,253,062
|
—
|
2,253,062
|
|||||||||||||
Stock
options granted and vested to employees, directors
and
advisors |
—
|
—
|
—
|
—
|
1,377,788
|
—
|
1,377,788
|
|||||||||||||
Redeemable
preferred stock dividends
|
—
|
—
|
—
|
—
|
(138,250)
|
—
|
(138,250)
|
|||||||||||||
Net
loss, 2008
|
—
|
—
|
—
|
—
|
—
|
(11,693,656)
|
|
(11,693,656)
|
||||||||||||
Balance
at December 31, 2008
|
83,791,919
|
|
837,914
|
286,000
|
|
2,860
|
|
53,399,704
|
|
(64,993,779)
|
|
|
(10,753,301)
|
|||||||
Cumulative
effect adjustment of a change in
accounting
principle |
-
|
-
|
-
|
|
-
|
(5,240,525)
|
(4,592,583)
|
(9,833,108)
|
||||||||||||
Common
stock issued for conversion of debentures
|
7,679,166
|
76,796
|
-
|
-
|
1,075,083
|
-
|
1,151,879
|
|||||||||||||
Common
stock issued for conversion of debenture interest
|
229,340
|
2,293
|
-
|
-
|
96,870
|
-
|
99,163
|
|||||||||||||
Common
stock issued for conversion of convertible notes
|
16,350,006
|
163,500
|
-
|
-
|
2,341,500
|
-
|
2,505,000
|
|||||||||||||
Common
stock issued for conversion of convertible
note
interest |
2,158,000
|
21,580
|
-
|
-
|
954,140
|
-
|
975,720
|
|||||||||||||
Common
stock issued for options and warrants exercised
for
cash |
2,000,635
|
20,007
|
-
|
-
|
446,050
|
-
|
466,057
|
|||||||||||||
Common
stock issued for cashless warrant exercises
|
3,080,714
|
30,807
|
-
|
-
|
(30,807)
|
-
|
-
|
|||||||||||||
Common
stock issued for the conversion of Series B
preferred
stock |
57,615
|
576
|
-
|
-
|
171,924
|
-
|
172,500
|
|||||||||||||
Common
stock issued /issuable for restricted stock vesting
|
61,696
|
|
617
|
773,810
|
8,785
|
825,015
|
-
|
834,417
|
||||||||||||
Issuance
of issuable shares, net of cancellations
|
493,456
|
4,935
|
(546,000)
|
(5,460)
|
525
|
-
|
-
|
|||||||||||||
Common
stock issued for salary
|
252,627
|
2,526
|
-
|
-
|
75,788
|
-
|
78,314
|
|||||||||||||
Common
stock issued for liability
|
675,676
|
6,757
|
-
|
-
|
243,243
|
-
|
250,000
|
|||||||||||||
Common
stock issued as severance
|
-
|
-
|
116,279
|
116
|
49,884
|
-
|
50,000
|
|||||||||||||
Stock
options granted and vested to employees, directors
and
advisors |
-
|
-
|
-
|
-
|
3,382,633
|
-
|
3,382,633
|
|||||||||||||
Options
issued for services
|
-
|
-
|
-
|
-
|
45,738
|
-
|
45,738
|
|||||||||||||
Reclassification
of embedded conversion option
derivative
liability to equity for note conversions/repayments |
-
|
-
|
-
|
-
|
7,138,569
|
-
|
7,138,569
|
|||||||||||||
Reclassification
of warrant derivative liability to equity
for
warrrant exercises |
-
|
-
|
-
|
-
|
1,493,415
|
-
|
1,493,415
|
|||||||||||||
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
(118,750)
|
-
|
(118,750)
|
|||||||||||||
Net
loss, 2009
|
-
|
(18,307,153)
|
(18,307,153)
|
|||||||||||||||||
Balance
at December 31, 2009
|
116,830,850
|
$
|
1,168,308
|
630,089
|
$
|
6,301
|
$
|
66,349,999
|
$
|
(87,893,515)
|
|
$
|
(20,368,907)
|
|||||||
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
For
the Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
OPERATING
ACTIVITIES:
|
||||||||
Net
(loss) before preferred dividends and after noncontrolling
interest
|
$ | (18,307,153 | ) | $ | (11,693,656 | ) | ||
Adjustments
to reconcile net income (loss) to net cash used in operating
activities
|
. | |||||||
Depreciation
and amortization
|
688,177 | 259,642 | ||||||
Amortization
of debt issue costs
|
276,055 | 515,363 | ||||||
Provision
for asset impairment
|
- | 6,601 | ||||||
Accretion
of discount on notes payable
|
2,631,289 | 4,294,206 | ||||||
Loss
on conversion of accrued interest to stock
|
716,783 | 208,500 | ||||||
Non-cash
stock-based compensation expense
|
4,305,292 | 1,583,972 | ||||||
Interest
expense for warrant derivative liability related to new
warrants
|
684,381 | - | ||||||
Interest
expense for embedded conversion option derivative liabilty of new
convertible debt
|
983,871 | - | ||||||
Non-cash
expense to renew/extend loans
|
- | 12,500 | ||||||
Warrants issued
for services
|
- | 17,969 | ||||||
Options
issued for services
|
7,500 | 33,170 | ||||||
Option/warrant
exchange program expense
|
- | 15,679 | ||||||
Increase in fair value of derivative liability | 3,446,612 | - | ||||||
Noncontrolling interest in consolidated subsidiary | (743,417 | ) | - | |||||
Changes
in operating assets and liabilities
|
- | |||||||
Decrease
(increase) in accounts receivable
|
(578,271 | ) | (119,928 | ) | ||||
(Increase)
in inventories
|
- | (32,426 | ) | |||||
(Increase)
decrease in prepaid expenses and other current assets
|
35,296 | 122,975 | ||||||
(Increase)
in debt issue costs and other non-current assets
|
- | (180,001 | ) | |||||
Increase in
accounts payable
|
749,841 | 67,652 | ||||||
Increase
(decrease) in accounts payable - related parties
|
(5,485 | ) | (1,389 | ) | ||||
Increase
in restructuring reserve
|
198,912 | - | ||||||
Increase
in deferred rent
|
3,094 | 4,126 | ||||||
Increase
in deferred revenue
|
672,000 | - | ||||||
(Decrease)
Increase in accrued expenses
|
(106,920 | ) | 505,874 | |||||
Net
cash used in operating activities
|
(4,342,143 | ) | (4,379,171 | ) | ||||
INVESTING
ACTIVITIES:
|
||||||||
Proceeds
from sale of investment
|
- | 250,000 | ||||||
Construction
in process purchases
|
(6,212,776 | ) | (319,975 | ) | ||||
Investment
in restricted cash
|
(425,000 | ) | - | |||||
Purchase
of property and equipment
|
(184,389 | ) | (1,585,315 | ) | ||||
Net
cash (used in) investing activities
|
(6,822,165 | ) | (1,655,290 | ) | ||||
FINANCING
ACTIVITIES:
|
||||||||
Proceeds
from noncontrolling interest investment
|
11,350,000 | - | ||||||
Proceeds
from issuance of notes payable and warrants
|
700,000 | 5,627,500 | ||||||
Proceeds
from issuance of notes payable
|
45,500 | - | ||||||
Proceeds
from issuance of notes payable and warrants to related
parties
|
80,000 | 1,080,000 | ||||||
Proceeds
from issuance of notes payable to related parties
|
- | 41,856 | ||||||
Proceeds
from warrant and option exercises
|
466,055 | 189,300 | ||||||
Proceeds
from vehicle financing
|
41,339 | - | ||||||
Repayments
of notes payable and insurance financing
|
(800,565 | ) | (390,646 | ) | ||||
Repayments
of notes payable to related parties
|
(51,407 | ) | (347,445 | ) | ||||
Principal
payments on capital leases
|
(38,890 | ) | (34,238 | ) | ||||
Net
cash provided by financing activities
|
11,792,032 | 6,166,327 | ||||||
Net
(decrease) increase in cash
|
627,724 | 131,666 | ||||||
Cash,
beginning of year
|
461,514 | 329,848 | ||||||
Cash, end of year | $ | 1,089,238 | $ | 461,514 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
SUPPLEMENTAL
CASH FLOW INFORMATION
|
||||||||
For
the Year Ended
December
31,
|
||||||||
|
||||||||
2009 | 2008 | |||||||
Cash
paid for interest
|
$ | 364,739 | $ | 229,750 | ||||
Cash
paid for income taxes
|
$ | — | $ | 0 | ||||
Non-cash investing and financing
activities:
|
||||||||
Accrued
preferred stock dividends
|
$ | 118,750 | $ | 138,250 | ||||
Beneficial
conversion features of convertible notes and debentures
|
$ | — | $ | 1,374,636 | ||||
Warrants
issued in connection with financing
|
$ | — | $ | 2,253,062 | ||||
Common
stock issued for services
|
$ | — | $ | 88,000 | ||||
Common
stock issued for debt issue costs
|
$ | — | $ | 288,000 | ||||
Conversion
of convertible debentures to common stock
|
$ | 1,151,879 | $ | 1,880,046 | ||||
Conversion
of convertible notes to common stock
|
$ | 1,455,000 | $ | |||||
Conversion
of related party debt to common stock
|
$ | 1,050,000 | $ | — | ||||
Reduction
of derivative liability for embedded conversion options from conversion of
convertible debentures
|
$ | 1,480,985 | $ | — | ||||
Reduction
of derivative liability for embedded conversion options from conversion of
convertible notes
|
$ | 4,947,750 | $ | — | ||||
Common
stock issued as payment of accrued interest
|
$ | 1,074,884 | $ | 118,225 | ||||
Common
stock issued in payment of services or accounts payable
|
$ | 328,314 | $ | — | ||||
Series
A Redeemable Convertible Cumulative Preferred Stock converted to common
stock
|
$ | — | $ | 50,000 | ||||
Series
B Redeemable Convertible Cumulative Preferred Stock converted to common
stock
|
$ | 172,500 | $ | 12,500 | ||||
Conversion
of accrued interest to notes payable
|
$ | — | $ | 145,383 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-7
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
1.
NATURE
OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE
OF OPERATIONS AND BASIS OF PRESENTATION
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’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.
In addition, if we obtain sufficient capital, we may acquire other patents which
are not being exploited, develop the products and/or services, initiate the
commercialization and then seek to license and/or sell the patents to large
companies.
The
accompanying consolidated financial statements include the accounts of Ecosphere
Technologies, Inc. (“Ecosphere” or the “Company”), its 90%-owned subsidiary,
Ecosphere Systems, Inc. (“ESI”), its 52.6% owned subsidiary Ecosphere
Energy Services LLC (“EES”), and its wholly-owned subsidiaries Ecosphere
Envirobotic Solutions, Inc. (“UES”), Ecosphere Energy Solutions, 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 and technology and to perform contract
services in the maritime coating removal industry that demonstrated the
capabilities of the underlying technology. EES was organized in
November 2006. It develops and markets water processing systems
to the oil and gas exploration industry using the Company’s patent pending
Ozonix
TM Process. EREC was formed in July 2008 to market the
Company’s LifeLink and Ecos Power Cube technologies. In November
2008, the Company changed the name of EES, Inc. to Ecosphere Energy Services,
Inc. In July 2009, the Company contributed the assets and
liabilities of EES, Inc. in exchange for an initial 67% share of EES. (See Note
19) Except for EES, all of the Company’s subsidaries are
inactive.
PRINCIPALS
OF CONSOLIDATION
The
consolidated financial statements include the accounts of Ecosphere
Technologies, Inc. and its subsidiaries. All significant inter-company balances
and transactions have been eliminated in the consolidation.
CASH
AND CASH EQUIVALENTS
For the
purposes of the statements of cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less when
purchased to be cash equivalents. The Company’s cash equivalents consist of a
money market account.
For
purposes of the statement of cash flows for sales of intellectual property and
related assets and liabilities, which is treated as an operating activity with
net proceeds recognized as operating gains (see revenue recognition
policy below) such intellectual property and related assets and liabilities are
considered to be transferred to inventory prior to the sale.
Restricted
cash, which amounted to $425,000 as of December 31, 2009, consists of amounts
held in escrow to provide the funds necessary to repay certain secured
convertible original issue discount notes.
ACCOUNTS
RECEIVABLE
Accounts
receivable are customer obligations due under normal trade terms. The Company
generally requires deposits or letters of credit from customers who purchase its
water filtration systems. Senior management reviews accounts receivable on a
monthly basis to determine if any receivables will potentially be uncollectible.
The Company includes any accounts receivable balances that are determined to be
uncollectible, along with a general reserve, in its overall allowance for
doubtful accounts. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance.
CONSTRUCTION
IN PROGRESS
Construction in progress includes the
direct cost of parts and components plus direct labor and allocated overhead for
the manufacturing of Ecos Brine and EcosFrac water processing equipment for use
in the oil and gas exploration business. As of December 31, 2008, the
balance of construction in progress relates to the original EcosFrac unit and an
EcosBrine unit. As of December 31, 2009, the balance of construction in progress
relates to uncompleted EcosFrac units.
F-8
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
INVENTORIES
Inventories
are stated at the lower of cost or market, with cost determined using a
first-in, first-out method. During 2008, the value of the prototype was written
down to zero. At December 31, 2008, inventory of $32,426 consists of the
cost of a trailer which was incorporated into a new water processing unit in
2009. No inventory was on hand as of December 31, 2009.
PROPERTY AND EQUIPMENT AND
DEPRECIATION
Property
and equipment is recorded at cost. For equipment manufactured for use by the
Company, cost includes direct component parts and supplies plus direct
labor. Depreciation is computed using the straight-line method based
on the estimated useful lives of the related assets of 5 to 7 years. Leasehold
improvements are amortized over the lesser of the lease term or the useful life
of the improvements. Expenditures for maintenance and repairs are expensed as
incurred.
PATENTS
Patents
are stated at cost and are being amortized on a straight-line basis over the
estimated future periods to be benefited (16.5 years). All patents at
December 31, 2009 and 2008 have either been acquired from a related Company
or assigned to the Company by a shareholder of the Company. Patents are recorded
at the historical cost basis. The Company recognized amortization expense of
$3,275 and $2,100 for the years ended December 31, 2009 and 2008,
respectively.
DEBT
ISSUE COSTS
In
connection with the debenture financings, the Company incurred debt acquisition
costs in the form of commissions paid to various third parties. The Company
capitalizes these costs and amortizes them over the life of the debenture, using
the effective interest method of amortization. In 2008, the Company
incurred additional debt acquisition costs of $791,417 related to the various
financings during the year, $180,000 of which were paid in cash with the
remainder paid in common stock and warrants. No additional costs were
incurred during the year ended December 31, 2009. Amortization
expense in 2009 and 2008 amounted to $276,054 and
$515,363, respectively. Accumulated amortization at December 31, 2009
and 2008 amounted to $791,417 and $515,363, respectively. (Notes 10 and
12)
IMPAIRMENT
OF LONG-LIVED ASSETS
The
Company accounts for long-lived assets in accordance with the provisions of ASC
360-10 "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. During the year ended December 31,
2008, the Company wrote off the cost of the original Ecosphere
Ozonix® unit, $162,601,
which was built for testing in the Barnett Shale of Texas, when it was
determined the value of the unit was impaired. In connection with the
write-off, the Company also reduced deferred revenue related to the unit in the
amount of $156,000, resulting in a loss on impairment of
$6,601. There were no write-offs for the impairment of
long-lived assets during the year ended December 31, 2009.
F-9
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
DEFERRED
REVENUE
Deferred revenue consists of amounts
received by the Company prior to the Company performing the
services. In October 2009, the Company received a payment of $960,000
from one customer as prepayment for ten months of water processing
services. The Company recorded the amount in deferred revenue and is
amortizing $96,000 each month to revenue as the water processing services are
performed.
REVENUE
RECOGNITION
In
accordance with ASC 605-10, revenue from sales of equipment is
recognized when persuasive evidence of an arrangement exists, products are
delivered to and accepted by the customer, economic risk of loss has passed to
the customer, the price is fixed or determinable, collection is reasonably
assured, and any future obligations of the Company are
insignificant.
Revenue
from water-filtration contracts is earned based upon the volume of water
processed plus additional period based contractual charges and is recognized in
the period the service is provided. Payments received in advance of the
performance of services or of the delivery of goods are deferred as liabilities
until the services are performed or the goods are delivered.
Revenue
from the sale of intellectual property and related assets is recognized as a net
gain from the sale of intellectual property and related assets, an operating
item, when payment has been received and ownership of the patents and related
assets has been transferred to the buyer and is recorded net of any carrying
value and selling costs. Equipment or inventory sold in connection with the sale
of intellectual property is recognized as a wash sale with no resulting gain or
loss.
Some
projects we undertake are based upon our providing water processing services for
fixed periods of time. Revenue from these projects is recognized
based upon the number of days the service has been provided during
the reporting period.
The Company includes shipping and
handling fees billed to customers as revenues and handling costs as cost of
revenues.
RESEARCH
AND DEVELOPMENT
In
accordance with ASC 730-10, “Accounting for Research and Development Costs”
expenditures for research and development of the Company's products are expensed
when incurred, and are included in operating expenses. The Company recognized
research and development costs of $97,389 and $1,090 for the years ended
December 31, 2009 and 2008, respectively.
ADVERTISING
The
Company conducts advertising for the promotion of its products and services. In
accordance with ASC 720-35, advertising costs are charged to operations when
incurred; such amounts aggregated $10,537 in 2009 and $4,224 in
2008.
NON-CONTROLLING
INTEREST
The Company
accounts for its less than 100% interest in consolidated subsidiaries in
accordance with ASC 810 and accordingly the Company presents noncontrolling
interests (previously shown as minority interest) as a component of equity on
its consolidated balance sheets and reports noncontrolling interest
net loss under the heading net loss applicable to noncontrolling interest
in consolidated subsidiary in the consolidated statements of
operations.
F-10
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
STOCK-BASED
COMPENSATION
The
Company follows the provisions of ASC 718-20-10 Compensation – Stock
Compensation which establishes standards surrounding the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. 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.
INCOME
TAXES
The
Company accounts for income taxes pursuant to the provisions of ASC 740-10
"Accounting for Income Taxes," which requires, among other things, an asset and
liability approach to calculating deferred income taxes. The asset and liability
approach requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. A valuation allowance is
provided to offset any net deferred tax assets for which management believes it
is more likely than not that the net deferred asset will not be
realized.
Beginning
January 1, 2007, the Company adopted the provisions of ASC 740-10, Accounting for Uncertain Income Tax
Positions. When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken
or the amount of the position that would be ultimately sustained. In accordance
with the guidance of FIN 48, the benefit of a tax position is recognized in the
financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than
50 percent likely of being realized upon settlement with the applicable
taxing authority. The portion of the benefits associated with tax positions
taken that exceeds the amount measured as described above should be reflected as
a liability for unrecognized tax benefits in the accompanying balance sheet
along with any associated interest and penalties that would be payable to the
taxing authorities upon examination. The Company believes its tax positions are
all highly certain of being upheld upon examination. As such, the Company has
not recorded a liability for unrecognized tax benefits. As of
December 31, 2009, tax years 2006, 2007 and 2008 remain open for IRS
audit. The Company has received no notice of audit from the Internal
Revenue Service for any of the open tax years.
Effective
January 1, 2007, the Company adopted ASC 740-10 which provided guidance on
how an entity should determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. The term
“effectively settled” replaces the term “ultimately settled” when used to
describe recognition, and the terms “settlement” or “settled” replace the terms
“ultimate settlement” or “ultimately settled” when used to describe measurement
of a tax position and clarifies that a tax position can be effectively settled
upon the completion of an examination by a taxing authority without being
legally extinguished. For tax positions considered effectively settled, an
entity would recognize the full amount of tax benefit, even if the tax position
is not considered more likely than not to be sustained based solely on the basis
of its technical merits and the statute of limitations remains open. This
adoption did not have an impact on the accompanying consolidated financial
statements.
NET LOSS PER SHARE
Basic net
loss per share is computed on the basis of the weighted average number of common
shares outstanding during each year. Diluted net loss per share 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 loss per share are excluded from the calculation.
F-11
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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 consolidated financial statements
include the allowance for doubtful accounts receivable, valuation of
inventories, estimates of depreciable lives and valuation of property and
equipment, estimates of the amortization period of intangible assets,
restructuring charges, valuation of discounts on debt, valuation of
the liabilities for warrant and embedded conversion option derivative
instruments, beneficial conversion features in convertible debt, valuation of
equity based instruments issued for other than cash and the valuation allowance
on deferred tax assets.
RECLASSIFICATIONS
Certain
amounts included in the 2008 consolidated financial statements have been
reclassified to conform to the 2009 presentation. These reclassifications had no
effect on total assets, liabilities, stockholders’ deficit or gross profit
(loss), loss from operations or net loss.
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 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
|
||
Warrants
issued along with $1 million of Secured Promissory Notes
|
$
|
0.15
|
1,000,000
|
||
Warrants
issued along with $2 million of Secured Promissory Notes
|
$
|
0.25
|
666,667
|
||
Total
|
19,229,269
|
F-12
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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 Consolidated Balance Sheet as of December 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 December 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:
F-13
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
|
0.001
- 0.67 years
|
1
year
|
0.16
- 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%
|
||||
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
- 0.78 years
|
|||
Risk
Free Interest Rate
|
0.07%
- 0.16%
|
0.40%
- 0.47%
|
0.001%
- 0.31%
|
|||
Table
4
|
Black
Scholes Inputs for the Three Months Ended December 31,
2009
|
|||||||||||
Warrants
|
||||||||||||
|
Warrants
Exercised During
the Three Months Ended December 31, 2009
|
Issuance
of New Warrants
|
As
of December 31, 2009
|
|||||||||
Volatility
|
105.08 - 116.29% | 116.29% | 103.40% | |||||||||
Expected
Term
|
2.08
- 2.15 years
|
5
years
|
1.95
- 4.71 years
|
|||||||||
Risk
Free Interest Rate
|
0.78% - 0.95% | 2.53% | 0.51% - 2.45% | |||||||||
Embedded
Conversion Options
|
||||||||||||
|
Notes
Converted During the Three Months Ended December 31,
2009
|
Issuance
of New Convertible Note
|
As
of December 31, 2009
|
|||||||||
Volatility
|
115% | 116.40% | 103.40% | |||||||||
Expected
Term
|
0.19
years
|
1 year |
0.001
- 0.82 years
|
|||||||||
Risk
Free Interest Rate
|
0.08% | 0.41% | 0.001% - 2.53% |
F-14
Based
upon the estimated fair values, as calculated, the Company recorded a cumulative
effect adjustment of a change in accounting principle 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 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.
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.
F-15
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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 $1,486,302 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 $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 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:
F-16
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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 |
The
Company calculated the estimated fair values of the liabilities for warrant
derivative instruments at December 31, 2009 with the Black-Scholes option
pricing model using the closing price of the Company’s common stock, $0.47 and
the ranges for volatility, expected term and risk free interest indicated in
Table 4 above. Based upon the estimated fair value, the Company decreased the
fair value of liability for warrant derivative instruments by $41,129 which was
recorded as other income for the three months ended December 31.
2009.
The
Company calculated the estimated fair values of the liabilities for embedded
conversion option derivative instruments at December 31, 2009 with the
Black-Scholes option pricing model using the closing price of the Company’s
common stock, $0.47 and the ranges for volatility, expected term and risk free
interest indicated in Table 4 above. Based upon the estimated fair value, the
Company decreased the fair value of liability for embedded conversion option
derivative instruments by $77,851 which was recorded as other income for the
three months ended December 31, 2009.
In
addition, the Company recorded debt discount of $73,588 related to the fair
value of the liability for embedded conversion option derivative instruments
contained in a new convertible original issue discount note with a face amount
of $125,000 issued during the three months ended December 31, 2009. The note is
convertible at $0.36 per share. The fair value of the liability for embedded
conversion option derivative instrument was 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 4 above.
Further,
the Company recorded debt discount of $36,536 related to the fair value of
112,500 five year warrants, with an exercise price of $0.25 per share, granted
in connection with the issuance of the new convertible original issue discount
note. The warrants were valued 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 4
above.
A summary
of the new secured convertible original issue discount notes and new warrants
issued during the three months ended December 31, 2009 is as
follows:
Convertible
Debt
|
||||||||
Conversion
Rate
|
Principal
Amount
|
|||||||
Secured
Convertible Original Issue Discount Notes
|
$ | 0.36 | 125,000 | |||||
Total
|
$ | 125,000 | ||||||
Warrants
|
||||||||
Exercise
Price
|
Number
of
Warrants
|
|||||||
Warrants
issued in connection with new Secured Convertible Original
Issue
Discount
Note
|
$ | 0.25 | 112,500 | |||||
Total
|
112,500 |
F-17
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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 fair value accounting guidance for financial
assets and liabilities (ASC 820). 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:
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 December 31,
2009:
Balance
at December 31, 2009
|
Quoted
Prices in Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
|||||||||||||
Liabilities |
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Fair
value of liabilities for warrant derivative instruments
|
$ | 6,315,631 | $ | - | $ | - | $ | 6,315,631 | ||||||||
Fair
value of liability for embedded conversion option derivative
instruments
|
1,084,908 | - | - | 1,084,908 | ||||||||||||
Total
Financial Liabilities
|
$ | 7,400,539 | $ | - | $ | - | $ | 7,400,539 |
Following
is a roll forward through December 31, 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 | ||||||
Fair
value of new warrants and embedded conversion options
|
952,165 | (1,415,578 | ) | |||||
Fair
value of warrants exercised or embedded conversion options
converted
|
(1,493,415 | ) | (7,138,569 | ) | ||||
Change
in fair value included in other (income) loss
|
1,763,740 | 1,682,882 | ||||||
Balance
at December 31, 2009
|
$ | 6,315,631 | $ | 1,084,908 |
RECENT
ACCOUNTING PRONOUNCEMENTS
In
June 2009, the Financial Accounting Standards Board (FASB) approved the
FASB Accounting Standards Codification (“the Codification”) as the single source
of authoritative nongovernmental GAAP. All existing accounting standard
documents, such as FASB, American Institute of Certified Public Accountants,
Emerging Issues Task Force and other related literature, excluding guidance from
the Securities and Exchange Commission (“SEC”), have been superseded by the
Codification. All other non-grandfathered, non-SEC accounting literature not
included in the Codification has become non-authoritative. The Codification did
not change GAAP, but instead introduced a new structure that combines all
authoritative standards into a comprehensive, topically organized online
database. The Codification is effective for interim or annual periods ending
after September 15, 2009, and impacts the 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 year ended December 31, 2009.
F-18
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
As a
result of the Company’s implementation of the Codification during the year ended
December 31, 2009, previous references to new accounting standards and
literature are no longer applicable. The current financial statements will
provide reference to the new guidance only.
In May
2009, the FASB issued guidance on subsequent events. This guidance does
not result in significant changes in the subsequent events that an entity
reports in its financial statements. The guidance requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. This
guidance was effective for the Company in the second quarter of 2009, and the
required disclosure has been included in the consolidated financial statements.
The adoption of this guidance did not have a significant impact on the
Company’s consolidated financial statements.
On
January 1, 2009, the Company adopted new guidance and as a result evaluates its
options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted
for under GAAP. The result of this accounting treatment is that the
fair value of the derivative is marked-to-market each balance sheet date and
recorded as a liability. In the event that the fair value is recorded as a
liability, the change in fair value is recorded in the statement of operations
as other income (expense). Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and
then that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to reclassification under
GAAP are reclassified to liability at the fair value of the instrument on the
reclassification date. See Change in Accounting Principle for the impact
of this guidance on the Company’s consolidated financial
statements.
ASC 810
changed the accounting and reporting for minority interests such that they will
be recharacterized as noncontrolling interests and classified as a component of
equity. ASC 810 became effective for fiscal years beginning after
December 15, 2008 with early application prohibited. The Company
implemented ASC at the start of fiscal 2009. The
Company presents noncontrolling interests (previously shown as minority
interest) as a component of equity on its consolidated balance sheets. Minority
interest expense is no longer separately reported as a reduction to net income
on the consolidated income statement, but is instead shown below net (loss)
under the heading “net loss applicable to noncontrolling interests in
consolidated subsidiary.” The adoption of ASC 810 did not have any other
material impact on the Company’s financial statements.
In May
2008, the FASB issued guidance which identifies the sources of accounting
principles and provides entities with a framework for selecting the principles
used in preparation of financial statements that are presented in conformity
with GAAP. The current GAAP hierarchy has been criticized because it is directed
to the auditor rather than the entity, it is complex, and it ranks FASB
Statements of Financial Accounting Concepts, which are subject to the same level
of due process as FASB Statements of Financial Accounting Standards, below
industry practices that are widely recognized as generally accepted but that are
not subject to due process. The Board believes the GAAP hierarchy should be
directed to entities because it is the entity (not its auditors) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. The adoption of this guidance has not had
a material impact on the Company’s consolidated financial
statements.
In May
2008, the FASB issued guidance that requires the issuer to separately account
for the liability and equity components of convertible debt instruments in a
manner that reflects the issuer’s nonconvertible debt borrowing rate. The
guidance will result in companies recognizing higher interest expense in the
statement of operations due to amortization of the discount that results from
separating the liability and equity components. This guidance was effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Through December 31, 2009, there
was no impact of adopting this guidance on the Company’s consolidated financial
statements.
In April
2008, the FASB issued guidance that amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under GAAP. This guidance was effective for
fiscal years beginning after December 15, 2008. Through December 31, 2009, there
was no impact of this guidance on the Company’s consolidated financial
statements.
F-19
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
In March
2008, the FASB issued guidance that amends and expands the disclosure
requirement for derivative instruments and hedging activities. It requires
enhanced disclosure about (i) how and why an entity uses derivative instruments,
(ii) how derivative instruments and related hedge items are accounted for under
GAAP, and (iii) how derivative instruments and related hedge items affect an
entity’s financial position, financial performance, and cash flows. This
guidance is effective for the Company as of January 1, 2009. Through December
31, 2009, there was no impact of this guidance on the Company’s consolidated
financial statements.
On
January 1, 2008, the Company adopted guidance that defines fair value as
used in numerous accounting pronouncements, establishes a framework for
measuring fair value and expands disclosure of fair value measurements. In
February 2008, the Financial Accounting Standards Board (“FASB”) issued
further guidance, which delays the effective date of this guidance for one year
for certain nonfinancial assets and nonfinancial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). Excluded from the scope of the
guidance are certain leasing transactions accounted for under GAAP. The
exclusion does not apply to fair value measurements of assets and liabilities
recorded as a result of a lease transaction but measured pursuant to other
pronouncements within the scope of this guidance. The Company adopted
this guidance in the third quarter and has since that time presented the
disclosure required by the guidance.
2.
GOING
CONCERN
The
accompanying 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 year ended December 31, 2009, the Company
incurred net losses applicable to Ecosphere Technology, Inc. common stock of
approximately $18.4 million. At December 31, 2009, the Company had a
working capital deficiency of approximately $11.8 million, a stockholders’
deficit of approximately $20.4 million, had an accumulated deficit of
approximately $87.9 million and had outstanding convertible preferred stock that
is redeemable under limited circumstances for approximately $3.9 million
(including accrued dividends) as of December 31, 2009. The Company has not
yet 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 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. During the year ended December 31, 2009.
management secured two multi year operating agreements with two large
natural gas exploration companies. The contracts provide for minimum
annual revenues to the Company’s 52.6% owned subsidiary in excess of $7.5
million. Despite the continuing decline in the economy in the United States and
overseas, we were able to raise an additional $11.3 million during 2009 which
provided the funds necessary to build and deploy the equipment related to the
operating agreements indentified. We anticipate the need for
additional financing of $25- $30 million to manufacture additional equipment to
meet the growing demand for our services. Management is currently is
discussions with several possible sources for this financing. The
continued support and forbearance of its creditors and preferred shareholders
will be required, although this is not assured.
The
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.
3.
ACCOUNTS
RECEIVABLE
As of December 31, 2009, accounts
receivable in the amount of $701,999 consisted of amounts due from three
customers, two for processing frac flowback water and one for providing EcoFrac
services to treat water without the use of chemicals prior to the water being
used in the process of fracturing natural gas wells. As of December 31, 2008,
accounts receivable in the amount of $123,728, related to amounts due from one
customer for processing frac flowback water in November and December
2008. As of December 31, 2009 and 2008, the Company had not
recorded an allowance for doubtful accounts as all amounts due were considered
fully collectible.
F-20
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
4.
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets are summarized as follows:
December 31,
2009
|
December 31,
2008
|
|||||||
Vendor
deposits
|
$ | — | $ | 14,351 | ||||
Prepaid
insurance
|
14,847 | 55,750 | ||||||
Other
|
15,709 | 2,000 | ||||||
Total
prepaid expenses and other current assets
|
$ | 30,656 | $ | 72,101 |
5.
PROPERTY
AND EQUIPMENT
Property
and equipment consists of the following:
Est.
Useful
Lives
|
December 31,
2009
|
December 31,
2008
|
||||||||
Plant
and machinery
|
5
years
|
$ | 7,383,345 | $ | 1,526,330 | |||||
Water
filtration equipment
|
5
years
|
865,375 | 865,375 | |||||||
Furniture
and fixtures
|
5-
7 years
|
300,360 | 286,694 | |||||||
Automobile
and trucks
|
5
years
|
153,815 | 56,047 | |||||||
Leasehold
improvements
|
5
years
|
234,718 | 234,718 | |||||||
Office
equipment
|
5
years
|
450,275 | 436,859 | |||||||
9,387,888 | 3,406,023 | |||||||||
Less
total accumulated depreciation
|
(2,212,969 | ) | (1,530,132 | ) | ||||||
Property
and equipment, net
|
$ | 7,174,919 | $ | 1,875,891 |
The
Company entered into a capital lease during the year ended December 31,
2007 for a copier. During the years ended December 31, 2009 and 2008,
depreciation expense related to this asset amounted to $21,404 and
$21,404.
The Company placed two Ozonix
filtration units into service during the year ended December 31, 2008 at an
aggregate capitalized cost of approximately $1,467,000. These units
are being depreciated using the straight line method over five
years. These units plus the Water Filtration Truck and another
non-Ozonix water filtration unit collateralize certain secured notes payable of
the Company. As of December 31, 2008, the aggregate carrying value of
these assets was approximately $1,676,000.
During
the year ended December 31, 2009, the Company transferred the cost of Ecos Frac
units and an Ecos Brine unit into plant and machinery. The total aggregate
capitalized cost of these asset amounted to $5,694,196. These assets
are being depreciated using the straight line method over five
years. As of December 31, 2009, the aggregate carrying value of these
units was $5,487,524.
Depreciation
expense for the years ended December 31, 2009 and 2008 amounted to $684,902 and
$257,542, respectively.
6.
ACCRUED
EXPENSES
The major
components of accrued expenses are summarized as follows:
December 31,
2009
|
December 31,
2008
|
|||||||
Accrued
payroll and related benefits
|
$ | 217,004 | $ | 441,342 | ||||
Accrued
interest
|
210,147 | 476,753 | ||||||
Other
accrued expenses
|
278,359 | 539,402 | ||||||
Total
accrued expenses
|
$ | 705,510 | $ | 1,457,497 |
F-21
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
7.
NOTES
PAYABLE
(a.) Related
Parties
Notes
payable to related parties consist of the following:
December 31,
2009
|
December 31,
2008
|
|||||
Unsecured
notes payable to Director, interest at prime plus 2% (9.25% at
December 31, 2007). Effective January 1, 2007, the Company and
Director modified the note whereby the Company agreed to pay Director
$40,000 per quarter beginning on March 31, 2007, until all amounts
currently owed to Director (this $240,000 note, plus accrued interest and
commissions earned, totaling $341,412) are paid in full. Per the
agreement, payments will first be applied to accrued interest, then
accrued commissions and then the principal balance of the note. After no
payments were made under the January 1, 2007 terms, the Company and the
Director entered into a new agreement in June 2008 whereby the Company
made a payment of $31,080 to the Director and signed a new note agreement
for the balance of all amounts due under the prior agreement plus accrued
interest, $374,423. The new agreement calls for quarterly
principal and interest payments of $50,000 and a fixed interest rate of
7%. As of December 31, 2008, the Company has made one
payment of $50,000 under new terms. During 2009, the Company
made two payments of totaling $50,000 consisting of principal in the
amount of $24,843 and interest of $25,157. In December 2009, the holder
agreed to receive quarterly payments of $25,000.
|
$
|
310,871
|
$
|
335,714
|
||
Secured
12 % one year notes convertible at $0.15 per share of common stock payable
to the Company’s former Chief Executive Officer with principal amounts of
$650,000. The holder received 1,300,000 three year warrants
exercisable at $0.15 per share. The Company recorded a note
discount related to the warrants and the beneficial conversion of $318,307
which is being amortized over the life of the notes. As of
December 31, 2008 the unamortized amount of this these discounts is
$48,419. The notes were due in varying amounts from March 2009
to May 2009. As of December 31, 2008, the Company owes accrued
interest of $57,317 on these notes. $325,000 of these notes
were reclassified to related party in 2008. During the year
ended December 31, 2009, The holder received an additional
385,000 five year warrants at an exercise price of $0.15 per share as
inducement to extend the terms of notes with a principal
balance of $385,000 for six months. The holder subsequently
converted all amounts due under these convertible notes into 4,333,333
shares of common stock and converted accrued interest
of $101,100 on these notes into 674,000 shares of common stock
resulting in a loss on conversion of $201,660. This individual
resigned as Chief Executive Officer effective July 31,
2009.
|
—
|
601,581
|
||||
Secured
one year original issue discount note convertible at $0.36 per share of
common stock payable to the Company’s former Chief Executive Officer with
a principal amount of $111,111. The holder funded $100,000 to
the Company. As such the Company recognized an original issue
discount of $11,111 which is being amortized over the term of the
note. In addition, the Company recorded a note discount related
to the beneficial conversion feature of $24,691 which is being amortized
over the life of the note. As of December 31, 2009 the
unamortized amount of these discounts is $-0-. The note
was due in August 2009 and is technically in default as of
December 31, 2009. In March 2010, the Company issued 308,642
shares of the Company’s common stock to the holder upon conversion of the
note payable.
|
111,111
|
87,668
|
F-22
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
December 31,
2009
|
December 31,
2008
|
|||||
Secured
12 % one year note convertible at $0.15 per share of common stock payable
to a Director with a principal amount of $50,000. The holder
received 100,000 three year warrants exercisable at $0.15 per
share. The Company recorded a note discount related to the
warrants and the beneficial conversion of $33,299 which has been fully
amortized as of December 31, 2008, since the note was exchanged in
2008. During the year ended December 31, 2009, The
holder received an additional 50,000 five year warrants at an exercise
price of $0.15 per share as inducement to extend the term
of note for six months. The holder subsequently
converted all amounts due under the note into 333,333 shares of common
stock and converted accrued interest of $9,000 on the note into
60,000 shares of common stock resulting in a loss on conversion of
$18,600.
|
—
|
50,000
|
||||
Secured
one year original issue discount note convertible at $0.36 per share of
common stock payable to a Director with a principal amount of
$200,000. The holder funded $180,000 to the
Company. As such the Company recognized an original issue
discount of $20,000 which is being amortized over the term of the
note. In addition, the Company recorded a note discount related
to the beneficial conversion feature of $166,667 which is being amortized
over the life of the note. As of December 31, 2009 the
unamortized amount of these discounts is $-0-. In
September 2009, the Company issued 180,000 five year warrants exercisable
at $0.25 per share to extend the due date of this note until March
2010.
|
200,000
|
70,622
|
||||
Secured
12 % one year notes convertible at $0.15 per share of common stock payable
to the Company’s former Senior Vice President of Business Development with
principal amounts of $300,000. The holder received 600,000
three year warrants exercisable at $0.15 per share. The Company
recorded a note discount related to the warrants and the beneficial
conversion of $221,882 which is being amortized over the life of the
debt. During the year ended December 31, 2009, the
holder received an additional 25,000 five year warrants at an exercise
price of $0.15 per share as inducement to extend the term of one of the
notes with a principal balance of $25,000 for six months. The
holder subsequently converted all amounts due under these notes into
2,000,000 shares of common stock and converted accrued interest
of $37,500 on the note into 250,000 shares of common stock
resulting in a loss on conversion of $75,900.
|
—
|
217,706
|
||||
Secured
one year original issue discount note convertible at $0.36 per share of
common stock payable to the Company’s former Senior Vice President of
Business Development with a principal amount of $111,111. The
holder funded $100,000 to the Company. As such the Company
recognized an original issue discount of $11,111 which is being amortized
over the term of the note. In addition, the Company recorded a
note discount related to the beneficial conversion feature of $24,691
which is being amortized over the life of the note. As of
December 31, 2009 the unamortized amount of this discount is
$-0-. The note was due in September 2009 and is technically in
default as of December 31, 2009. In March 2010, the Company issued 308,642
shares of the Company’s common stock to the holder upon conversion of the
note payable.
|
111,111
|
87,668
|
F-23
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
December 31,
2009
|
December 31,
2008
|
|||||
Secured
12 % one year note convertible at $0.15 per share of common stock payable
to an Employee with a principal amount of $35,000. The holder
received 70,000 three year warrants exercisable at $0.15 per
share. The Company recorded a note discount related to the
warrants and the beneficial conversion of $15,592 which has been fully
amortized as of December 31, 2008, since the note was exchanged in
2008. During the year ended December 31, 2009, the
holder received an additional 35,000 five year warrants at an exercise
price of $0.15 per share as inducement to extend the term of one of the
notes with a principal balance of $35,000 notes for six
months. The holder subsequently converted all amounts due under
these notes into 233,333 shares of common stock and converted accrued
interest of $6,300 on the note into 42,000 shares of common
stock resulting in a loss on conversion of $13,020.
|
—
|
35,000
|
||||
Secured
six month original issue discount note due to a company then controlled by
the Chief Financial Officer of the Company. In February 2009,
the Company received $50,000 in exchange for the note with a principal
amount of $54,945. The note was due in August and was secured
by the Company’s original EcosFrac unit. The original issue
discount of $4,945 was amortized over the original term of the
note. In July, the Company repaid $1,000 of the note. Further,
in July 2009 this debt was transferred to EES along with the transfer of
the asset securing the debt. In August 2009, the holder agreed to extend
the term of the note for 12 months in exchange for receiving five year
warrants to purchase 53,945 shares of the Company’s common stock for $0.25
per share. The new note was convertible at $0.36 per share and had a
principal balance of $59,939. The Company recorded an original issue
discount of $5,994 and a discount of $35,532 related to the warrants ,
both of which are being amortized over the term of the new
note. In November 2009, the Company prepaid $20,497 of the note
which resulted in a reduction of the discount and principal of $2,946 and
$22,213. As such the remaining balance of principal and
unamortized discount as of December 31, 2009 amounted to $37,726 and
$28,095, respectively. In January 2010, the holder
converted the remaining principal balance into 104,794 shares of the
Company’s common stock.
|
9,631
|
—
|
||||
Secured
$1 million, one year line of credit agreement bearing interest of 10% and
secured by the initial pilot project Ozonix unit. The Company issued
warrants to purchase 1,000,000 shares of the Company’s common stock at an
exercise price of $0.15 per share expiring in five years. The
Company recorded a debt discount for the relative fair market value of the
warrants, $182,567 and is amortizing the discount over the term of the
notes. As of December 31, 2008, the balance of unamortized
discount was $54,168. Principal and interest were due
under this agreement on May 21, 2009. In May 2009, the
term of the note was extended to December 31, 2009. This note
holder became a related party in July 2009 when the holder became an
investor in EES and this note became an obligation of EES. In
November 2009, the note was converted into a one year installment note
bearing of 9.056% with monthly payment of principal and interest of
$100,546. Accrued interest as of December 31, 2009 amounted to
$8,772.
|
1,052,652
|
—
|
||||
Secured
$2 million, notes payable bearing interest of 15% and secured by the
second and third EcosBrine Ozonix units. Amounts under this
agreement are due in November and December 2009. The Company issued
warrants to purchase 666,667 shares of the Company’s common stock at an
exercise price of $0.38 per share expiring in five years. The
Company recorded a debt discount for the relative fair market value of the
warrants, $190,076 and is amortizing the discount over the term of the
notes. As of December 31, 2008, the balance of unamortized
discount was $166,316. Accrued interest as of December 31, 2008 amounted
to $25,274. This note holder became a related party in July 2009 when the
holder became an investor in EES and this note became an obligation of
EES. In connection with the investment, the annual interest
rate was reduced to 12% and the due date of the note was extended to
December 2011.
|
2,000,000
|
—
|
||||
Total
|
3,795,376
|
1,485,959
|
||||
Less:
current portion
|
1,795,376
|
1,370,141
|
||||
Related
party notes payable – net of current portion
|
$
|
2,000,000
|
$
|
115,818
|
F-24
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(b.) Other
Notes
payable consist of the following:
December 31,
2009
|
December 31,
2008
|
|||||
Unsecured,
convertible, three year, 9% debentures (December 2006 Convertible
Debenture Financing), with a principal amount of $5,595,238 at
December 31, 2006, issued at an original discount, with warrants.
During 2007, the debentures were replaced by new debentures that are
convertible into common stock at $0.15 per share and the original warrants
were replaced by warrants exercisable at $0.15 per share, as a result of
the closing of the UES asset sale on October 9, 2007. In addition,
principal in the amount of $4,000,000 was repaid and principal in the
amount of $14,706 was converted into 97,410 shares of common stock,
resulting in a principal balance of $1,580,532 at December 31, 2007.
The debt modification and repayment has been treated as a debt
extinguishment under EITF 96-19 and accordingly, all pre-extinguishment
discounts were written-off, resulting in a loss on extinguishment of debt
in 2007 in the amount of $2,648,534, and the new discounts have been
recorded. The Company recorded a discount in the amount of $1,045,260
related to the warrants and a discount of $535,273 related to the
beneficial conversion feature. At December 31, 2009 and 2008,
unamortized discounts totaled $-0- and $503,655,
respectively. During the year ended December 31, 2008, the
holders converted $428,657 of principal into 2,857,713 shares of common
stock. During the year ended December 31, 2009, the holders
converted the remaining principal balance of $1,151,876 into 7,679,166
shares of common stock. In addition, the holders received
229,340 shares of common stock in payment of accrued interest resulting in
a loss on conversion of $62,545. As of December 31, 2009, the
Company owes accrued interest of $47,643 on these
debentures.
|
$
|
—
|
$
|
648,221
|
||
Unsecured
notes payable, interest at prime plus 2% (5.25% at December 31,
2008), due as follows: $1,297,870 on July 13, 2008. The
principal amount of these notes as of December 31, 2008 and 2007 was
$504,652 and $772,870, respectively. On February 13, 2007
the maturity date was extended to July 13, 2007 in exchange for a
principal payment of $50,000, payment of accrued interest of $38,684 and
payment of an extension fee and expenses totaling $51,500 which has been
expensed as of September 30, 2007. On July 13, 2007, the Company
entered into a second extension agreement with the lender in which, it
paid the lender $525,000 in principal, accrued interest from
February 22, 2007, a $50,000 extension fee (one-half in cash and
one-half in common stock) and $3,500 of the lender’s attorney fees. In
July 2008, the maturity date was extended until October 2008 with the
payment of $100,000 of principal, $15,510 of accrued interest and $25,000
of extension fees (50% in cash and 50% in stock) and expenses of
$2,500. In October 2008, the due date was further extended
until January 2009 by the payment of $168,218 of principal and $14,275 of
accrued interest. The remaining principal balance is currently due. As of
December 31, 2008, the Company owes accrued interest of $6,444 on this
note. During the year ended December 31, 2009, the Company
repaid the full amount of this loan and no further obligations remain as
of December 31, 2009.
|
—
|
504,652
|
F-25
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
December 31,
2009
|
December 31,
2008
|
|||||
Unsecured
convertible notes in the principal amount of $355,000, convertible into
common stock at the rate of $0.15 per share. In addition, holders received
two warrants for each $1 of principal, net of unamortized discount of
$161,880 at December 31, 2007. The warrants expire in 2012 and have
an exercise price of $0.15 and $0.20. A beneficial conversion feature,
related to the conversion feature of the notes, was recorded in the amount
of $73,861. In March 2008, the notes were exchanged for secured
convertible line of credit agreements bearing interest of 12%, changing
the $0.20 warrant exercise price to $0.15 and securing the agreements with
the Company’s Water Filtration Truck demonstration unit. In
2008, $325,000 of these notes were reclassified to related party
debt. As of December 31, 2008, the Company owes accrued
interest of $3,381 on this note. During the year ended December
31, 2009, the holder converted this note into 200,000 shares of common
stock. In addition, the holder received 36,000 shares of common
stock in exchange for accrued interest of $5,400 resulting in a loss on
conversion of $11,160.
|
—
|
30,000
|
||||
Secured
12% convertible notes in the principal amount of $1,350,000, convertible
into common stock at the rate of $0.15 per share. In addition, holders
received two warrants for each $1 of principal. The warrants
expire in 2012 and have an exercise price of $0.15 per share. A
debt discount of $1,283,203 was recorded related to the relative fair
value of the warrants and the beneficial conversion feature of the
notes. Unamortized discount as of December 31, 2008 was
$293,919. These notes are secured with Company’s Water
Filtration Truck demonstration unit and are due in varying amounts from
March 2009 to June 2009. As of December 31, 2009 and 2008
accrued interest under these notes amounted to $6,000 and $194,060,
respectively. During the year ended December 31, 2009, the
holders converted these notes into 9,000,000 shares of common
stock. In addition, the holders received 1,080,000 shares of
common stock in exchange for accrued interest of $156,000 resulting in a
loss on conversion of $269,600.
|
|
—
|
1,056,081
|
Secured
$1 million, one year line of credit agreement bearing interest of 10% and
secured by the initial pilot project Ozonix unit. The Company issued
warrants to purchase 1,000,000 shares of the Company’s common stock at an
exercise price of $0.15 per share expiring in five years. The
Company recorded a debt discount for the relative fair market value of the
warrants, $182,567 and is amortizing the discount over the term of the
notes. As of December 31, 2008, the balance of unamortized
discount was $54,168. Principal and interest are due
under this agreement on May 21, 2009. Accrued interest as of
December 31, 2008 amounted to $61,507. This note was
reclassified to related party debt in 2009.
|
—
|
945,832
|
||||
Secured
$2 million, notes payable bearing interest of 15% and secured by the
Newfield and Williams project Ozonix units. Amounts under this
agreement are due in November and December 2009. The Company issued
warrants to purchase 666,667 shares of the Company’s common stock at an
exercise price of $0.38 per share expiring in five years. The
Company recorded a debt discount for the relative fair market value of the
warrants, $190,076 and is amortizing the discount over the term of the
notes. As of December 31, 2008, the balance of unamortized
discount was $166,316. Accrued interest as of December 31, 2008 amounted
to $25,274. This note was reclassified to related party debt in
2009.
|
—
|
1,833,684
|
F-26
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
December 31,
2009
|
December 31,
2008
|
|||||
Secured
one year original issue discount notes convertible at $0.36 per share of
common stock payable to various holders with a principal amount of
$1,428,889. The holders funded $1,286,000 to the
Company. As such the Company recognized an original issue
discount of $142,889 which is being amortized over the term of the
note. In addition, the Company recorded a note discount related
to the beneficial conversion feature of $737,856 which is being amortized
over the life of the notes. As of December 31, 2008 the
unamortized amount of these discounts is $629,993. The notes
are due in various amounts from September through December
2009. During the year ended December 31, 2009, the
Company issued additional one year original issue discount notes
convertible at $0.36 per share in the amount of $763,889, plus five year
warrants to purchase 462,500 shares of common stock at an exercise price
of $0.25 per share in exchange for $687,500. The Company
recorded an original issue discount of $76,389 and a discount related to
the warrants in the amount of $284,394, a discount related to the
beneficial conversion option of the notes of $408,092 and recorded
interest expense of $121,708 related to the excess of the fair value of
the beneficial conversion options, warrants and original issue discounts
over the aggregate face value of the notes. The discounts are
being amortized over the term of the notes. During the year
ended December 31, 2009, the Company issued five year warrants to purchase
1,228,550 shares of the Company’s common stock in exchange for extending
the terms of notes with an aggregate principal amount of $1,365,000 for an
additional six months. The Company recorded a note discount in
the amount of $547,885 related to the warrants which is being amortized
over the remaining term of the notes. During the year ended
December 31, 2009 notes with an aggregate principal amount of $91,667 were
repaid and notes with an aggregate principal amount of $90,000 were
converted into 250,000 shares of commons stock. As of December
31, 2009. the balance of unamortized discount amounted to
$502,930.
|
1,508,181
|
798,896
|
||||
Unsecured
convertible notes payable, convertible into common stock at a fixed rate
equal to the closing price of the Company’s common stock the day before
the investment was made which was $0.56. Interest at 12%, due 12 months
from the respective issues dates through August 2007. As of December
31, 2008, the due date of the note has been extended until December
2009. As of December 31, 2008, the Company owes accrued
interest of $3,025 on this note. During the year ended December
31, 2009, the Company repaid this note in full.
|
—
|
100,000
|
||||
Secured
original issue discount note in the principal amount of $50,000 with a
term of six months in exchange for receipt of $45,000. The note
was secured by the EcosFrac prototype unit. The Company
recorded an original issue discount of $5,000 which was amortized over the
term of the note. In September 2009, the holder exchanged the
note for a new one year secured convertible original issue discount note
in the amount of $55,556, convertible at $0.36 per share plus the holder
received 50,000 warrants to purchase shares of the Company’s common stock
at an exercise price of $0.25 per share. The Company recorded
an original issue discount of $5,556, a note discount of $15,761 related
to the warrants issued and a discount of $9,428 related to the beneficial
conversion option. These discounts are being amortized over the
term of the note. As of December 31,2009, the unamortized
discount amounted to $23,058.
|
32,498
|
—
|
||||
Unsecured
note payable of $50,000 at December 31, 2009 and 2008 issued with one
restricted common share for each dollar invested interest at 8%, due 12
months from the issue date through November 2007. At
December 31, 2009 and 2008, $50,000 was in default with a resultant
interest rate of 18%. As of December 31, 2009, the Company owes accrued
interest of $13,238 on this note.
|
50,000
|
50,000
|
||||
Unsecured
notes payable to a group of shareholders with original principal of
$156,882, originally requiring 58 monthly payments of $15,067 at an
interest rate of 26%, payable through
September 2010. During 2008 two note holders converted the
balance of principal and accrued interest into new unsecured convertible
notes bearing interest of 10%. As of December 31, 2009, only
one note holder remains outstanding.
|
25,399
|
52,469
|
||||
Total
|
1,616,078
|
6,019,835
|
||||
Less
current portion
|
1,616,078
|
5,994,435
|
||||
Long-term
debt
|
$
|
—
|
$
|
25,400
|
F-27
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
A summary
of notes payable and the related discounts as of December 31, 2009 is as
follows:
Principal
|
Unamortized
Discount
|
Debt,
Net of Discount
|
||||||||||
Unrelated
parties
|
||||||||||||
Convertible
& non-convertible notes payable
|
$
|
2,142,066
|
$
|
(525,988
|
)
|
$
|
1,616,078
|
|||||
Less
current portion
|
2,142,066
|
(525,988
|
)
|
1,616,078
|
||||||||
Convertible
& non-convertible notes payable, net of current
portion
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
Related
parties
|
||||||||||||
Convertible
& non-convertible notes payable
|
$
|
3,823,471
|
$
|
(28,095
|
)
|
$
|
3,795,376
|
|||||
Less
current portion
|
1,823,471
|
(28,095
|
)
|
1,795,376
|
||||||||
Convertible
& non-convertible notes payable, net of current
portion
|
$
|
2,000,000
|
$
|
—
|
$
|
2,000,000
|
As of
December 31, 2009, the Company was in default on certain of the above
mentioned notes payable totaling $272,222 for failure to make payments as
agreed.
As of
December 31, 2009 the weighted average interest rate on the Company’s short term
debt was 11.1%.
Future
cash payment obligations for notes payable are as follows:
Year
ending December 31,
|
||||
2010
|
$ | 3,965,537 | ||
2011
|
2,000,000 | |||
2012
and later
|
— | |||
Total
|
$ | 5,965,537 |
8.
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 employees were entitled to receive one month’s salary in the
aggregate amount of $17,860 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.
F-28
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
As of
December 31, 2009, the restructuring reserve liability of $123,436 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 of security
deposit held by the landlord, $41,656, less the amount of rents paid since the
office closed, $74, 340, less the realtor commission paid for the sublease,
$60,468, plus the amount of deferred rent previously recorded by the Company,
$7,220 and the security deposit received in connection with the sublease,
$27,900. The Company entered into a sublease agreement with a
tenant that provides for monthly sublease payments of approximately
$10,300 through April 2013, which are being offset against the
reserve.
The
following table summarizes the activity in the restructuring reserve during the
year ended December 31, 2009:
Restructuring
reserve
|
||||
Balance
June 1, 2009
|
$ | 548,090 | ||
Severance
paid
|
(283,310 | ) | ||
Rents
paid
|
(74,340 | ) | ||
Sublease
commission paid
|
(60,468 | ) | ||
Sublease
deposit
|
27,900 | |||
Offset
agianst security deposit
|
(41,656 | ) | ||
Reversal
of deferred rent
|
7,220 | |||
Balance
December 31, 2009
|
$ | 123,436 |
9.
REDEEMABLE
CONVERTIBLE CUMULATIVE PREFERRED STOCK
Series A
As of
December 31, 2009 and 2008, there were seven shares of
Series A Redeemable Convertible Cumulative 15% 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
are convertible each into 24,000 common shares. Accrued dividends totaled
$962,556 and $936,306 on December 31, 2009 and 2008, respectively. During
the year ended December 31, 2009, no holders converted shares of
Series A preferred stock into common stock.
Series B
As of
December 31, 2009 and 2008, there were 355 and 424 shares of Series B
Redeemable Convertible Cumulative 10% 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
are convertible each into 835 common shares. Accrued dividends totaled
$1,854,739 and $1,762,239 on December 31, 2009 and 2008,
respectively. During the year ended December 31, 2009, two
holders converted a total of 69 shares of Series B preferred stock into
shares of common stock.
In
February 2009, the Board approved a correction to the Preferred Stock
designations to adjust the conversion rate of Series A and B for any stock
splits or other recapitalizations. The Board also ratified the past
actions whereby management issued common stock upon conversion of Series A
Preferred shares at a 24,000 to 1 ratio.
F-29
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
10.
COMMON
STOCK
The
Company is authorized to issue up to 300,000,000 shares of its $0.01 par value
common stock as of December 31, 2009.
Shares
issued
Issuances
of the Company’s common stock during the years ended December 31, 2009 and
2008, respectively, included the following:
Shares
Issued for Cash
2009
2,000,635
shares of common stock were issued for $466,057 in cash through the exercise of
warrants with strike prices between $0.10 and $0.45 per share.
2008
1,285,000
shares of common stock were issued for $189,300 cash through the exercise of
warrants with strike prices between $0.10 and $0.28 per share.
Shares
Issued for Services and Finders fees
2008
Of a
total of 450,000 shares issuable to our then Chairman and CEO as a finder’s fee
for arranging $1,750,000 of financing, with a fair market value of $288,000
based on the quoted market price of the stock on the date of grant, $0.64.
250,000 shares of common stock were issued in 2008. The fee was
earned prior to the person becoming an officer and director. The
Company recognized a loss on conversion of $200,500 representing the difference
between the finder’s fee of $87,500 and the fair value of the total shares of
common stock to be issued. 250,000 shares were issuable as of
December 31, 2008.
359,524
shares of common stock with a fair market value of $96,000 based on the quoted
market prices of the stock on the dates of grant of between $0.23 and $0.42 per
share, were issued to various parties for services valued at
$88,000. As such, the Company recognized a loss on conversion of
$8,000.
Shares Issued as
Compensation
2009
The
Company issued 207,456 shares of common stock out of a total grant of 260,000 in
2008. The shares were issued upon vesting in 2009, as compensation to
the Company’s Chief Executive Officer, Chief Operating Officer and Senior Vice
President of Engineering. The Company recognized the compensation
expense related to these shares over the vesting period, in the amount of
$96,200 based upon the quoted trading price of the shares on the date of the
grant, $0.37.
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 then Chairman and CEO in
lieu of salary. The amount owed our former Chairman and CEO was
$59,177.
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 then Executive Vice President of
Business Development in lieu of salary. The amount owed was
$19,137.
61,696
shares of common stock were issued to Directors in connection with their vesting
on August 10, 2009. The Company recognized compensation expense of
$33,316 in 2009 related to these shares based on the quoted trading
price of $0.81 on the date of grant, August 10, 2006.
F-30
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2008
100,000
shares of common stock granted in 2007 were issued, upon vesting in 2008, as
compensation to an employee. The expense was recognized over the
requisite service period. The Company recognized compensation expense of $31,000
in 2008 related to these shares based on the quoted trading price of $0.31 per
share, on the date of grant, February 12, 2007.
833,333
shares of common stock were issued as compensation to Directors for their
service in 2007 and were vested immediately. The Company recognized
compensation expense of $150,000 related to these shares based on the quoted
trading price of $0.18 on the date of grant, April 30, 2008.
143,716
shares of common stock were issued to Directors in connection with their vesting
on August 10, 2008. The Company recognized compensation expense of
$116,410 in 2008 related to these shares based on the quoted trading price of
$0.81 on the date of grant, August 10, 2006.
16,000
shares of common stock vested and were issued to an Advisory Board Member in
connection with the vesting on August 23, 2008. The Company
recognized compensation expense of $4,000 in 2008 related to these shares based
on the quoted trading price of $0.25 on the date of grant, August 23,
2007. As of December 31. 2008, 36,000 shares remain unvested related
to this grant.
Shares
Issued in Conversion of Preferred Stock
2009
57,615
common shares were issued upon conversion of 69 shares of Series B
Preferred Stock. The total value of the preferred shares converted was
$172,500.
2008
48,000
common shares were issuable upon conversion of 2 shares of Series A
Preferred Stock and 4,175 shares of common stock were issued upon conversion of
5 shares of Series B Preferred Stock. As of December 31, 2008,
36,000 shares remained issuable. The total value of the preferred shares
converted was $62,500.
Shares
Issued in Payment of Interest
2009
229,340
shares of common stock with a value of $99,163 based on quoted trading prices of
between $0.19 and $0.49 per share, were issued as payment for interest to the
holders of the December 2006 debentures, resulting in an aggregate loss on
conversion of $61,563 which is included in loss on conversion in the
accompanying consolidated statement of operations.
2,158,000
shares of common stock, with a value of $975,720, based on a quoted trading
price of between $0.42 and $0.49 per share were issued as payment for interest,
resulting in an aggregate loss on conversion of $655,220 which is included in
loss on conversion in the accompanying consolidated statement of
operations.
F-31
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2008
376,999
shares of common stock with a value of $145,559 based on quoted trading prices
of between $0.17 and $0.71 per share, were issued as payment for interest of
$103,892 to the holders of the December 2006 debentures, resulting in an
aggregate loss on conversion of $41,667 which is included in loss on conversion
in the accompanying consolidated statement of operations.
54,849
shares of common stock, with a value of $14,333, based on a quoted trading price
of $0.26 per share were issued as payment for interest, resulting in an
aggregate loss on conversion of $6,106 which is included in loss on conversion
in the accompanying consolidated statement of operations.
Shares
Issued in Conversion of Debt and other liabilities
2009
16,100,006 shares of common stock were issued to
lenders upon conversion of 12% convertible notes in the amount of $2,415,000 at
a conversion rate of $0.15 per share.
7,679,166
shares of common stock were issued upon conversion of December 2006 convertible
debentures in the amount of $1,151,879 at a conversion rate of $0.15 per
share.
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 to repay an advance of
$250,000.
250,000 shares of common stock were issued to
lenders upon conversion of secured convertible original issue discount notes in
the amount of $90,000 at a conversion rate of $0.36 per share.
2008
9,741,399
shares of common stock were issued to lenders upon conversion of 10% convertible
notes in the amount of $1,451,389 at a conversion rate of $0.15 per
share.
2,857,713
shares of common stock were issued upon conversion of December 2006 convertible
debentures in the amount of $428,657 at a conversion rate of $0.15 per
share.
Shares
Issued in Conversion of Debt to New Debt or Extension of Maturity
Dates
2008
583,859
shares of common stock were issued as inducement for the conversion or extension
of notes in default. The shares were issued with fair market values of between
$0.20 and $0.47 per share based upon the quoted trading price at the conversion
or extension dates. The value of the shares $119,105 was recorded as
a discount on notes of $106,605 which was amortized to interest
expense when all the notes converted to common stock in 2008 and a direct charge
to interest expense of $12,500. In addition, 297,763 previously
issuable shares were issued in 2008.
Shares
Issued in Cashless Warrant Exercise
2009
3,080,714
shares of common stock were issued for 5,007,728 warrants upon the cashless
exercise of the warrants.
2008
6,000
shares of common stock were issued for 6,000 warrants, at no cost per warrant.
These warrants were issued prior to the December 2006 issuance of the
Company’s senior convertible debentures; and the exercise price was lowered to
zero with no accounting effect.
F-32
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2,992,413
shares of common stock were issued for 4,209,833 warrants upon the cashless
exercise of the warrants.
The
Company recognized share-based compensation expense related to stock grants,
issued per the terms of the 2006 Equity Incentive Plan, as amended, of $884,417
and $221,863 for the years ended December 31, 2009 and 2008, respectively.
The following table summarizes non-vested restricted stock and the related
activity as of December 31, 2009:
Shares
|
Weighted
Average
Grant-Date
Fair-Value
|
|||||||
Non-vested
at January 1, 2009
|
742,506 | $ | 0.40 | |||||
Granted
|
656,559 | $ | 0.44 | |||||
Vested
|
(851,506 | ) | $ | 0.40 | ||||
Forfeited
|
— | $ | 0.82 | |||||
Non-vested
at December 31, 2009
|
547,559 | $ | 0.47 |
Total
unrecognized share-based compensation expense from unvested restricted stock as
of December 31, 2009 was $161,928 which is expected to be recognized over a
weighted average 1.65 years. No restricted stock grants were issued
prior to May 2006, the initiation of the plan.
11.
NET
LOSS PER SHARE
Basic net
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.
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
89,006,430 and 112,516,134 shares of common stock at December 31, 2009 and
2008, respectively) 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.
F-33
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
12.
STOCK
OPTIONS AND WARRANTS
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 issued in the following periods:
For
the Year Ended
December 31,
|
|||||
2009
|
2008
|
||||
Expected
volatility
|
104.6 – 137.1%
|
92.5
– 148.3%
|
|||
Expected
lives
|
2.5
- 5 yrs
|
2.5
- 5 yrs.
|
|||
Risk-free
interest rate
|
1.22
– 2.95%
|
1.22
-3.35%
|
|||
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 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. The expected terms of
the options and warrants are estimated using either the option term, for
non-employee options and warrants, or the simplified method for employee and
director grants.
F-34
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Stock-based compensation expense for the years ended December 31,
2009 and 2008 was $3,590,459 and $1,599,650, respectively. As of
December 31, 2009 and 2008, there was $3,847,155 and $3,354,073,
respectively, of total unrecognized compensation cost related to unvested
options granted under the Company’s option plans. This unrecognized compensation
cost is expected to be recognized over the next two years.
EMPLOYEE
FIXED STOCK OPTION PLANS:
On
August 18, 2000, the Company adopted a Long Term Incentive Program, which
provides for the granting of 4,000,000 stock options and stock appreciation
rights (SARs) to key employees. Options granted may be either "incentive stock
options," pursuant to provisions of the Internal Revenue Code, non-qualified
options, or restricted stock awards. The stock options are exercisable for a
period no longer than ten years after the date they are granted. Pursuant to the
terms of the Plan, no new awards may be granted under the Plan after
September 1, 2002. As of December 31, 2009 and 2008, options to
purchase 40,000 shares of common stock at $0.28 per share were outstanding under
the plan. No further grants will be made under this
Plan.
On
November 17, 2003, the Company adopted the 2003 Equity Incentive Program,
which provides for the granting of 4,000,000 stock options and stock
appreciation rights (SARs) to key employees. Options granted may be either
"incentive stock options," pursuant to provisions of the Internal Revenue Code,
non-qualified options, or restricted stock awards. Exercise prices of stock
options are generally not less than the fair market value of common stock on the
grant date. Options vest at a rate of at least 20% per year over five years from
the date the option is granted. Stock options are exercisable for a period no
longer than ten years after the Date they are granted. The Plan shall terminate
November 17, 2013. As of December 31, 2009 and 2008, options to
purchase 135,500 shares of common stock at $1.10 per share are outstanding under
this Plan.
On
November 17, 2003, the Company adopted the 2003 Stock Option Plan for
Outside Directors (Directors) and Advisory Board Members (Director Advisors),
which provided for the granting of 2,000,000, and increased on August 2,
2005 to 4,500,000, stock options to members of these Boards who are not full or
part time employees of the Company. As of December 31, 2009 and 2008
options to purchase 1,803,000 shares of common stock at exercise prices ranging
from $0.28 to $1.43 per share are outstanding under this Plan. The Plan shall
continue in existence for a term of ten years unless terminated by the
Company.
In
May 2006, the Board approved the 2006 Equity Incentive Plan, and as part of
that approval, agreed to not issue any awards under the 2003 Equity Incentive
Plan and 2003 Stock Option Plan for Outside Directors (Directors) and Advisory
Board Members (Director Advisors) from any additional grants. This plan
provided for the Company to issue up to 10,000,000 stock options, stock
appreciation rights, restricted stock or restricted stock units to our
directors, employees and consultants.
F-35
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Under the
2006 Equity Incentive Plan, all of our directors who are not employees or 10%
shareholders and all director advisors shall automatically receive a grant of
restricted stock with the number of shares based upon market price at the time
of grant. In September 2008, our Board approved changes to
these automatic grants which now include stock options. The changes
were approved by a vote of the Company’s shareholders in November
2008. The number of shares of restricted stock or options and the
exercise price of options will be based on fair market value at the time of
grant.
|
CURRENT
|
FORMER
|
||||||||||
Qualifying
Event
|
Options(1)
|
Restricted
Stock(1)(2)(3)
|
Restricted
Stock(3)
|
|||||||||
Initial
appointment as Chairman of the Board
|
$
|
75,000
|
$
|
75,000
|
$
|
150,000
|
||||||
Initial
election or appointment of non-employee director
|
$
|
40,000
|
$
|
40,000
|
$
|
40,000
|
||||||
Initial
appointment as an Advisory Board member
|
$
|
15,000
|
$
|
10,000
|
$
|
12,000
|
||||||
Annual
grant to Chairman of the Board
|
$
|
40,000
|
$
|
40,000
|
$
|
75,000
|
||||||
Annual
grant to non-employee director
|
$
|
25,000
|
$
|
25,000
|
$
|
15,000
|
||||||
Annual
grant to Advisory Board Member
|
$
|
10,000
|
$
|
5,000
|
$
|
3,000
|
||||||
Initial
appointment and annual grant of and to a non-employee director as Lead
Director(4) or Chairman of a member of the following: Audit Committee,
Compensation Committee and other committees at the discretion of
the Compensation Committee
|
$
|
15,000
|
$
|
15,000
|
$
|
10,000
|
||||||
Initial
appointment of and annual grant to a non-employee director to the
following: Audit Committee, Compensation Committee and other
committees at the discretion of the Compensation Committee
|
$
|
10,000
|
$
|
10,000
|
$
|
5,000
|
(1)
|
In
the event that the Company does not have authorized capital, these persons
will receive grants of cash settled SARs
.
|
(2)
|
The
director or director advisor may elect options instead of restricted stock
in order to defer income taxes.
|
(3)
|
The
director or director advisor may at their option receive restricted stock
units in lieu of restricted stock.
|
(4)
|
The
Board may, when the Chairman is an employee, appoint a director to act as
Lead Director who will have all of the authority customarily associated
with such a position. Our board has appointed a Lead
Director.
|
The
Company also changed the vesting of these automatic grants. Previously,
all awards vested in three equal installments one, two and three years following
the date of each grant, subject to continued service as a director Advisory
Board Member on the applicable vesting date. Now, the initial grants to a
Chairman of the Board, Board member and Advisory Board member shall vest in
annual installments over three years and all other grants shall vest annually,
all subject to the person’s continued service in the same capacity on the
applicable vesting date. The Company also have added a provision generally
prohibiting sales of common stock by our directors for six months after
resignation.
In April
2008, the Company amended our 2006 Plan to eliminate tying the annual grants to
an annual shareholders meeting and provided that the grants for 2007 occurred on
April 30, 2008. This amendment has been superseded by the August
amendment.
Because
the Company did not hold an Annual Meeting of Shareholders in 2007 and therefore
there were no new appointments or re-appointments and the Company did not grant
or have any automatic grants of restricted stock to Board, Board Committee or
Advisory Board members, except for persons who joined us in 2007. In
April 2008, the Company amended the Plan to eliminate tying the annual grants to
an annual shareholders meeting and provided that the grants for 2007 occurred on
April 30, 2008. This amendment has been superseded by the September
amendment.
F-36
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Limitation on
Awards
The
exercise price of options or SARs granted under the 2006 Plan shall not be less
than the fair market value of the underlying common stock at the time of grant.
In the case of ISOs, the exercise price may not be less than 110% of
the fair market value in the case of 10% shareholders. Options and SARs granted
under the 2006 Plan shall expire no later than five years after the date of
grant. The option price may be paid in United States dollars by check or wire
transfer or, at the discretion of the Board or Compensation Committee, by
delivery of shares of our common stock having fair market value equal as of the
date of exercise to the cash exercise price, or a combination
thereof.
A maximum
of 10,000,000 shares are available for grant under the 2006 Equity Incentive
Plan. The identification of individuals entitled to receive awards, the terms of
the awards, and the number of shares subject to individual awards, are
determined by our Board of Directors or the Compensation Committee, in their
sole discretion. The aggregate number of shares with respect to which options or
stock awards may be granted under the Equity Incentive Plan and the purchase
price per share, if applicable, shall be adjusted for any increase or decrease
in the number of issued shares resulting from a stock dividend, stock split,
reverse stock split, recapitalization or similar event. As of
December 31, 2009 and 2008, respectively, options to purchase 9,490,236 and
4,983,046 shares of common stock at exercise prices ranging from $0.21 to $0.83
per share are outstanding under this Plan.
Expired
options relate to options that have terminated because the expiration date has
passed or have expired because the employee’s employment has been terminated,
and the relevant expiration period has passed. Forfeited options in
2008 relate to options retired in connection with the Option / Warrant exchange
program.
Employee
Fixed Plan Options
For
the Year Ended December 31, 2009
|
For
the Year Ended December 31, 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
|
4,726,939 | $ | 0.45 | 2,400,920 | $ | 0.39 | ||||||||||
Exercised
|
- | $ | - | - | $ | - | ||||||||||
Forfeited
|
- | $ | - | (3,224,749 | ) | $ | 1.05 | |||||||||
Expired
|
- | $ | - | - | $ | - | ||||||||||
Outstanding
at end of year
|
11,468,735 | $ | 0.58 | 6,741,796 | $ | 0.69 | ||||||||||
Exercisable
at end of year
|
6,741,796 | $ | 0.69 | 5,913,669 | $ | 0.72 | ||||||||||
Outstanding
|
||||||||||||||||
Weighted
average remaining contractual term
|
3.93 | 4.77 | ||||||||||||||
Aggregate
intrinsic value
|
$ | 434,178 | $ | 70,620 | ||||||||||||
Weighted
average grant date fair value
|
$ | 0.27 | $ | 0.20 | ||||||||||||
Exercisable
|
||||||||||||||||
Weighted
average remaining contractual term
|
3.27 | 4.22 | ||||||||||||||
Aggregate
intrinsic value
|
$ | 283,978 | $ | 70,620 |
In March
2008, the Company issued 1,078,000 options under the Option/Warrant exchange
program. These options have a three year term, vest immediately and
have an exercise price of $0.28 per share.
In August
2008 in conjunction with the appointment of three new directors, the Board of
Directors issued 854,168 five year options, exercisable at $0.48 per share, the
fair value on the date of the grant, and vesting over a three year period,
subject to continued service on the board. In addition the Board
granted existing members 312,500 options, and granted Advisory Board members
156,250 options, all exercisable at $0.48 and vesting on June 30, 2009, subject
to continued service.
In a
March 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.
F-37
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
In July
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.
In
December 2009, the Company granted five year options to purchase 1,500,000,
250,000 and 250,000 shares of common stock to the Company’s Chief
Executive Officer, Chief Financial Officer and Vice President of Operations,
respectively, at an exercise price of $0.43 per share, the fair market value on
the date of the grant. The options vest in six months.
In
December 2009, the Company granted additional five year options to purchase
1,755,000 share of common stock to non-executive employees of the
Company. The options vest in six months and are exercisable at $0.43
per share.
In
accordance with the Plan, the Company granted five year options to purchase
174,418 shares of common stock to the newly appointed Chairman of the Board of
Directors (the Chairman). The options vest over three years and are
exercisable at $0.43 per, the fair market value on the date of the
grant. In addition the newly appointed Chairman was granted 174,418
shares of restricted stock, valued at $75,000 based upon the market value of the
stock on the date of the grant. The restricted shares will vest over
a three year period, subject to the Chairman continuing to serve as the
Company’s Chairman.
Expired
options relate to options that have terminated because the expiration date has
passed or have expired because the employee’s employment has been terminated,
and the relevant expiration period has passed. Forfeited options in
2008 relate to options retired in connection with the Option/ Warrant exchange
program.
Employee
Fixed Non-Plan Options
For
the Year Ended December 31, 2009
|
For
the Year Ended December 31, 2008
|
|||||||||||||||
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
|||||||||||||
Outstanding
at beginning of year
|
33,216,667 | $ | 0.45 | 11,316,667 | $ | 0.69 | ||||||||||
Granted
|
6,950,000 | $ | 0.48 | 24,400,000 | $ | 0.44 | ||||||||||
Exercised
|
(551,253 | ) | $ | 0.15 | - | $ | - | |||||||||
Forfeited
|
(6,500,000 | ) | $ | 0.57 | (2,500,000 | ) | $ | 1.07 | ||||||||
Expired
|
- | $ | - | - | $ | - | ||||||||||
Outstanding
at end of year
|
33,115,414 | $ | 0.45 | 33,216,667 | $ | 0.47 | ||||||||||
Exercisable
at end of year
|
23,458,746 | $ | 0.44 | 14,625,000 | $ | 0.48 | ||||||||||
Outstanding
|
||||||||||||||||
Weighted
average remaining contractual term
|
3.65 | 4.77 | ||||||||||||||
Aggregate
intrinsic value
|
$ | 3,210,732 | $ | 1,093,433 | ||||||||||||
Weighted
average grant date fair value
|
$ | 0.32 | $ | 0.31 | ||||||||||||
Exercisable
|
||||||||||||||||
Weighted
average remaining contractual term
|
3.57 | 4.47 | ||||||||||||||
Aggregate
intrinsic value
|
$ | 1,726,315 | $ | 998,433 |
In March
2008, the Company issued 920,000 options under the Option/Warrant exchange
program. These options have a three year term, vest immediately and
have an exercise price of $0.28 per share.
F-38
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
In April
2008 the Board of Directors granted options to purchase shares of the Company’s
common stock to its Founder and Co-Chief Executive Officer
(Co-CEO). Options were granted to purchase 7,000,000 shares at an
exercise price of $0.30 per share, the fair market value on the date of the
grant, over a five year term. Of the options granted, 2,000,000
vested immediately, 2,000,000 will vest over a three year period subject to
continued employment on the applicable vesting date and 3,000,000 will vest over
a three year term, subject to meeting specified milestones. The performance
vesting occurred in 2009.
Additionally, in June
2008, the Board of Directors issued the Founder and Co-CEO options to
purchase 3,300,000 shares of common stock at an exercise price of $0.50, the
fair market value on the date of the grant, over a five year period. The options
vest subject to meeting a specific milestone and also vest over a three year
period also subject to continued employment on each applicable vesting
date.
In May
2008, the Company granted options to purchase 1,000,000 shares of common stock
to its Senior Vice President of Engineering. These options are
exercisable for five years at an exercise price of $0.30 per share, the fair
market value on the date of the grant. The options vested 50% on date
of grant and 50% will vest upon meeting a specified milestone. In
June 2008, the Company also issued the Senior Vice President of Engineering
options to purchase 330,000 shares of common stock exercisable at $0.50 per
share, the fair market value on the date of the grant, and with a five year
term. These options vest over three year period subject to continued
employment on each applicable vesting date.
In June
2008, the Board of Directors also issued options to purchase 8,250,000 shares of
common stock to the Company’s other Co-CEO exercisable at $0.50 per share, the
fair market value on the date of the grant, over a five year
term. Of the options and SARS, 2/3 will vest over a three year
period subject to continued employment on the applicable vesting date, and the
balance vest over a three year period upon meeting a specified milestone
approved by the Board of Directors. The options will vest 2/3 over a
three year period and 1/3 will begin vesting over a three year term upon the
signing of a long term agreement with a major energy company or another
significant milestone approved by the Board of Directors. The
performance vesting occurred in 2009. In connection with
his resignation in 2009, 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.
In June
2008, the Company issued its Chief Operating Officer and Senior Vice President
of Administration options to purchase 500,000 and 300,000 shares of common
stock, respectively, exercisable at $0.47 per share, the fair market value on
the date of the grant, over a five year term. Of these options,
200,000 and 100,000, respectively, vest immediately, with the remainder vesting
in equal installments over two years, subject to continued employment on each
applicable vesting date.
In June
2008, the Company issued an employee options to purchase 300,000 shares of
common stock exercisable at $0.47 per share, the fair market value on the date
of the grant, over a five year term. Of these options, 100,000 vested
immediately, with the remainder vesting in equal installments over two years,
subject to continued employment on each applicable vesting date. The
employee resigned in December 2008 and as such 200,000 options were
forfeited.
F-39
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
In July
2008, the Company issued an employee options to purchase 300,000 shares of
common stock, exercisable at $0.47 per share, the fair market value on the date
of the grant, over a five year term. Of these options, 100,000 vested
immediately, with the remainder vesting in equal installments over two years,
subject to continued employment on each applicable vesting date.
In August
2008, the Company’s Executive Vice President of Business Development was granted
options to purchase 1,500,000 shares of the Company’s common
stock. The options vest over three years, subject to continued
employment and are exercisable 500,000 at $0.42 per share, 500,000 at $0.85 per
share and 500,000 at $1.10. The options expire in five
years. The fair market value of the Company’s stock on the date of
grant was $0.42 per share.
In
November 2008, the Company issued its Vice President of Field Operations options
to purchase 300,000 shares of common stock, exercisable at $0.38 per
share, the fair market value on the date of the grant, over a five year
term. Of these options, 100,000 vested immediately, with the
remainder vesting in equal installments over two years, subject to continued
employment on each applicable vesting date.
In
December 2008, the Company issued its Chief Financial Officer options to
purchase 400,000 shares of common stock, exercisable at $0.27 per share, the
fair market value on the date of the grant, over a five year
term. These options vest in equal installments over three years,
subject to continued employment on each applicable vesting date.
Expired
options relate to options that have terminated because the expiration date has
passed or have expired because the employee’s employment has been terminated,
and the relevant expiration period has passed. Forfeited options in
2008 relate to options retired in connection with the Option/Warrant exchange
program and options granted in May 2006 which did not vest based upon
performance criteria.
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 the table at the beginning of this note. 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 included 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 vested
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.
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.
F-40
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
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.
In
December 2009, the Company granted five year options to purchase 50,000 shares
of common stock at an exercise price of $0.43, the fair market value
on the date of the grant, to the Company’s outgoing
Chairman. In addition, the Company granted the former Chairman
166,279 shares of common stock with a value of $50,000 based upon the market
value of the stock on the date of the grant. These options and shares
vested immediately.
Non-Employee
Fixed Non-Plan Options
For
the Year Ended December 31, 2009
|
For
the Year Ended December 31, 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 | 2,353,741 | $ | 0.32 | ||||||||||
Exercised
|
- | $ | - | - | $ | - | ||||||||||
Forfeited
|
(500,000 | ) | $ | 0.42 | (4,045,000 | ) | $ | 1.23 | ||||||||
Expired
|
- | $ | - | - | $ | - | ||||||||||
Outstanding
at end of year
|
3,803,741 | $ | 0.59 | 3,803,741 | $ | 0.59 | ||||||||||
Exercisable
at end of year
|
3,532,880 | $ | 0.60 | 3,242,000 | $ | 0.62 | ||||||||||
Outstanding
|
||||||||||||||||
Weighted
average remaining contractual term
|
1.44 | 2.37 | ||||||||||||||
Aggregate
intrinsic value
|
$ | 334,206 | $ | 64,720 | ||||||||||||
Weighted
average grant date fair value
|
$ | 0.39 | $ | 0.38 | ||||||||||||
Exercisable
|
||||||||||||||||
Weighted
average remaining contractual term
|
1.22 | 1.94 | ||||||||||||||
Aggregate
intrinsic value
|
$ | 325,664 | $ | 64,720 |
In March
2008, the Company issued 1,618,000 options under the Option/Warrant exchange
program. These options have a three year term, vest immediately and
have an exercise price of $0.28 per share.
In
October 2008, the Company issued options to purchase 735,714 of common stock at
an exercise price $0.42, the fair market value on the date of the grant, to two
consultants for their current and future assistance in the development and
application of the Ozonix technology to the oil and gas industry. The
options vest 700,000 over a one year and 35,714 over three years and expire in
five years.
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. Of the options, 125,000 vested immediately,
with the remainder vesting in equal installments every 120 days
thereafter.
Expired
options relate to options that have terminated because the expiration date has
passed or have expired because the employee’s employment has been terminated,
and the relevant expiration period has passed. Forfeited options in
2008 relate to options retired in connection with the Option/Warrant exchange
program.
The
following table summarizes warrant activity for the year ended December 31,
2009:
Warrants
|
For
the Year December 31, 2009
|
For
the Year December 31, 2008
|
||||||||||||||
Shares
|
Weighted
Average Exercise Price
|
Shares
|
Weighted
Average Exercise Price
|
|||||||||||||
Outstanding
at beginning of year
|
39,132,197 | $ | 0.51 | 39,956,744 | $ | 0.61 | ||||||||||
Granted
|
2,807,445 | $ | 0.23 | 11,616,367 | $ | 0.22 | ||||||||||
Exercised
|
(4,530,096 | ) | $ | 0.19 | (5,500,833 | ) | $ | 0.15 | ||||||||
Forfeited
|
(1,927,014 | ) | $ | 0.15 | (6,251,501 | ) | $ | 1.12 | ||||||||
Expired
|
(2,894,325 | ) | $ | 0.86 | (688,580 | ) | $ | - | ||||||||
Outstanding
at end of year
|
32,588,207 | $ | 0.51 | 39,132,197 | $ | 0.51 | ||||||||||
Exercisable
at end of year
|
32,588,207 | $ | 0.52 | 39,132,197 | $ | 0.51 | ||||||||||
Outstanding
and exercisable
|
||||||||||||||||
Weighted
average remaining contractual term
|
2.29 | 2.89 | ||||||||||||||
Aggregate
intrinsic value
|
$ | 5,786,842 | $ | 3,752,420 |
F-41
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Warrant
Grants in Connection with New Debt
In March
2008, warrants to purchase 510,000 shares of common stock with an exercise price
of $0.15 per share and a five year term were issued in connection with new
convertible notes. The fair market value of these new warrants was calculated
with the Black-Scholes method using a volatility of 92.5% to 94.9% , an expected
term of 5 years and a discount rate of 2.23% to 2.49% resulting in a debt
discount of $28,665.
In
addition, the exercise price of 365,000 warrants, issued in connection with a
previous financing, were modified from $0.20 per share to $0.15 per
share. The fair market value of the modified warrants was calculated
with the Black-Scholes method using a volatility of 117.95%, an expected term of
5 years and a discount rate of 3.45% resulting in an additional debt discount of
$979.
In March 2008, warrants to purchase
610,000 shares of common stock with an exercise price of $0.15 per share and a
five year term were issued to an individual as a finder’s fee in connection with
the $355,000 convertible notes issued in 2007 and the $255,000 of convertible
notes issued during the three months ended March 31, 2008. The fair
market value of the warrants was calculated with the Black-Scholes method using
a volatility of 94.9%, an expected term of 5 years and a discount rate of 2.365.
The fair market value, $50,946 was recorded as debt issuance cost and will be
amortized to interest expense over the life of the convertible
notes.
From
April 2008 through June 2008, warrants to purchase 110,000 shares of common
stock with an exercise price of $0.15 per share and a five year term were issued
in connection with $55,000 of new convertible notes. In addition,
warrants to purchase 1,900,000 shares of common stock with an exercise price of
$0.15 per share and a five year term, plus warrants to purchase 1,750,000 shares
of common stock with an exercise price of $0.20 per share and a five year term
were issued in connection with the issuance of $1,750,000 of new convertible
notes. The fair market value of the warrants was calculated with the
Black-Scholes method using a volatility of 113.59% to 139.42%, an expected term
of 5 years and a discount rate of 2.75% to 3.73%. The relative fair
market value of the warrants, $601,127 was recorded as additional debt discount
and will be amortized over the life of the convertible notes.
In June
2008, the Company issued an additional 1,805,000 warrants to an individual as a
finder’s fee in connection with the additional $1,805,000 received from these
investors. The fair market value of these warrants was calculated
with the Black-Scholes method using volatility of 113.59% to 139.42%, an
expected term of 5 years and a discount rate of 2.75% to 3.73%. The
fair market value of these additional warrants, $472,971 was recorded as debt
issuance cost and will be amortized to interest expense over the life of the
convertible notes.
In May
2008, warrants to purchase 1,000,000 shares of common stock with an exercise
price of $0.15 per share and a three year term were issued in connection with a
new $1,000,000 note. The relative fair market value of these warrants was
calculated with the Black-Scholes method using a volatility of 133.63% , an
expected term of 3 years and a discount rate of 2.71% resulting in a debt
discount of $182,576 which will be amortized to interest expense over the life
of the note.
In July
2008, the Board granted the consulting company that provided CFO services to the
Company, 650,000 warrants and cash settled SARS, exercisable at $0.45 per share
and vesting over a three year period. All of the warrants vest each
June 30 and December 31, subject to the Consulting Agreement remaining in effect
on each applicable vesting date. Additionally, one-half of the
options and SARS are subject to further vesting based upon the Company meeting a
specified milestone. The fair market value of these new warrants was
calculated with the Black-Scholes method using a volatility of 137.8% , an
expected term of 5 years and a discount rate of 3.33% . The fair
value of the warrants, $259,350 will be recognized over the vesting
period.
In
December 2008, warrants to purchase 666,667 shares of common stock, 500,000 with
an exercise price of $0.38 per share and 166,667 at $0.40 per share, and all
with a three year term were issued in connection with two new
$1,000,000 notes. The relative fair market value of these warrants was
calculated with the Black-Scholes method using a volatility from 130.2 to 140.56
% , an expected term of 3 years and discount rates from 1.15% to 1.6% of
resulting in a debt discount of $190,076 which will be amortized to interest
expense over the life of the note.
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
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.
F-42
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Warrant
Grants in Connection with Extending Existing Debt
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
recorded 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 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.
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 to 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.
F-43
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Warrants
Issued to Consultants
In February 2008, warrants to purchase
100,000 shares of common stock with an exercise price of $0.25 per share and a
five year term were issued to a consultant. The warrants are
exercisable 50% immediately and the remainder are exercisable on July 31,
2008. The fair market value of the warrants was calculated with the
Black-Scholes method using a volatility of 98.3%, an expected term of 5 years
and a discount rate of 2.69%. The fair market value, $7,161 was
recorded as a prepaid expense and expensed in the first quarter
of 2008.
In
December 2009, the Company issued five year warrants to purchase 50,000
shares, each, of common stock to two consultants of the
Company. The warrants vest in six months and are exercisable at
$0.43 per share, the fair market value on the date of the grant.
A summary
of the outstanding warrants previously issued for financing and services as of
December 31, 2009 is presented below:
Shares
|
||||
Warrants
issued for financing
|
28,823,207
|
|||
Warrants
issued for services
|
3,765,000
|
|||
Outstanding
at December 31, 2009
|
32,588,207
|
13.
INCOME
TAXES
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. At December 31, 2009, the Company
has a net operating loss carryforward (NOL) of approximately $58,673,000. The
NOL expires during the years 2013 to 2029. In the event that a significant
change in ownership of the Company occurs as a result of the Company’s issuance
of common stock, the utilization of the NOL carry forward will be subject to
limitation under certain provisions of the Internal Revenue Code. Management
does not presently believe that such a change has occurred. Realization of any
portion of the $27,486,712 of net deferred tax assets at December 31, 2009
is not considered more likely than not by management; accordingly, a valuation
allowance has been established for the full amount.
The
reconciliation of income tax benefit computed at the United States federal tax
rate of 34% to income tax benefit is as follows:
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Tax
benefit at the United States statutory rate
|
$ | 4,935,991 | $ | 3,870,438 | ||||
State
income tax and other
|
844,941 | 662,540 | ||||||
Change
in valuation allowance
|
(5,780,932 | ) | (4,532,978 | ) | ||||
Income
tax benefits
|
$ | — | $ | — |
Significant
components of the Company’s deferred tax assets are as follow:
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Organizational
costs, accrued liabilities, and other
|
$ | 391,601 | $ | 460,668 | ||||
Net
operating loss carry forwards
|
22,078,703 | 18,545,724 | ||||||
Losses
on extinguishment of debt
|
1,037,660 | 1,037,660 | ||||||
Compensation
related to equity instruments issued for services
|
3,978,748 | 1,661,728 | ||||||
Valuation
allowance
|
(27,486,712 | ) | (21,705,780 | ) | ||||
Net
deferred tax asset
|
$ | — | $ | — |
F-44
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Reconciliation
of the differences between income tax benefit computed at the federal and state
statutory tax rates and the provision for income tax benefit for the years ended
December 31, 2009 and 2008 is as follows:
2009
|
2008
|
|||||
Income
tax loss at federal statutory rate
|
|
(34.00
|
)%
|
(34.00
|
)%
|
|
State
taxes, net of federal benefit
|
(2.81
|
)
|
(3.63
|
)
|
||
Nondeductible
items
|
6.47
|
(1.14
|
)
|
|||
Change
in valuation allowance
|
30.34
|
|
38.77
|
|||
—
|
%
|
—
|
%
|
F-45
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
14.
COMMITMENT AND CONTINGENCIES
Legal
From time
to time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business.
To our
knowledge, except as described below, no legal proceedings, government actions,
administrative actions, investigations or claims are currently pending against
us or involve us that, in the opinion of our management, could reasonably be
expected to have a material adverse effect on our business and financial
condition.
The
Company had a long term relationship with Kamimura International Associates
(KIA), a Washington D.C. based organization, whereby the principals at KIA
agreed to assist the Company in developing the coating removal market in the Far
East. The relationship resulted in the establishment of UltraStrip Japan, Ltd.
(USJ), a company whose purpose was to market and deliver ship stripping services
in Japan. The agreement with KIA was never formalized. In February 2007,
KIA filed a lawsuit against the Company. In March 2007, the Company filed a
Motion to Dismiss, Motion to Strike, and Motion for More Definite Statement. The
Company intends to vigorously defend itself in this litigation; the Company
believes that the plaintiff will not prevail. In 2008, the Company filed a
counter claim to which KIA responded by filing a motion to dismiss. The motion
to dismiss was rejected by the court. The Company has expensed and accrued an
amount it reasonably estimates may be required to resolve any outstanding issues
between the Company and KIA.
On
August 3, 2007, Mr. Gordon Goodman, then President of ESI, the
Company’s 90%-owned subsidiary, terminated his employment agreement for “good
reason.” Under this agreement, he was to receive an annual salary of $165,000
per year. The agreement was entered into in May 2007 and was for a two-year
term. After investigation of the circumstances, including the exchange of
documents and Mr. Goodman’s deposition, the company determined that Mr. Goodman
did not materially breach his employment agreement and the matter was amicably
resolved. In July 2008, the Company entered into an arbitrated settlement
agreement with Mr. Goodman resulting in a payment by the Company of
$157,750.
Leases
The
Company makes monthly lease payments of $12,354 under a month to month agreement
for the Company’s Stuart, Florida location. The Company recognized
rent expense of $148,248 related to this lease in 2009 and 2008.
In August
2008, the Company entered into a lease agreement for the Company’s offices in
New York. The lease agreement expires in May
2013. During the years ended December 31, 2009 and 2008, the Company
recognized rent expense of $83,041 and $59,668, respectively, related to this
lease resulting in a balance of deferred rent of $-0- and $4,126 as of December
31, 2009 and 2008, respectively.
In
November 2009, the Company entered into a three year lease for the EES
operations office in Arkansas. During the year ended December 31,
2009, the Company recognized rent expense of $12,600 related to this lease. The
lease expires in October 2012 and provides for monthly rents of
$4,200.
Future
minimum annual rents due under the lease are as follows:
Year
|
Amount
|
|||
2010
|
225,911 | |||
2011
|
232,576 | |||
2012
|
230,742 | |||
2013
|
64,428 | |||
$ | 753,657 |
F-46
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
The
Company also leases a copier under a capital lease which expires in
2010. Future minimum rentals under this lease amount to $10,530 in
2010. During the
years ended December 31, 2009 and 2008, depreciation expense related to this
asset amounted to $21,404.
15.
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® 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®
technology. In July 2009, the assets and liabilities of EES,
Inc. were contributed in the formation of EES. As of December
31, 2009, the Company has a 52.6% ownership position in EES. (See Note
19)
|
Presently,
our only segment is our water processing for the oil and gas industry using the
Ozonix®
technology. This activity is conducted by EES, a 52.6% owned
subsidiary, that is managed by Ecosphere. (See Note 19).
The table
below presents certain financial information by business segment for
the year ended December 31, 2009:
Ecosphere | Ecosphere | Ecosphere | Ecosphere | |||||||||||||||||||||||||
Systems, | Envirobotic | Energy | Energy | Segment | Consolidated | |||||||||||||||||||||||
Inc. | Solutions, Inc. | Services, Inc. | Services LLC | Totals | Corporate | Totals | ||||||||||||||||||||||
Revenue
from external customers
|
$ | - | $ | - | $ | 394,830 | $ | 1,365,299 | $ | 1,760,129 | $ | - | $ | 1,760,129 | ||||||||||||||
Interest
expense and amortization of debt discount
|
$ | - | $ | - | $ | - | $ | (283,066 | ) | $ | (283,066 | ) | $ | (4,901,681 | ) | $ | (5,184,747 | ) | ||||||||||
Change
in fair value of liability for derivative instruments
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | (3,446,612 | ) | (3,446,612 | ) | |||||||||||||
Depreciation
and amortization
|
$ | (85,962 | ) | $ | (808 | ) | $ | (194,455 | ) | $ | (313,286 | ) | $ | (594,511 | ) | $ | (93,666 | ) | $ | (688,177 | ) | |||||||
Income
Tax Expense
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Net
income (loss)
|
$ | (85,962 | ) | $ | (808 | ) | $ | (277,840 | ) | $ | (743,417 | ) | $ | (1,108,027 | ) | $ | (17,942,543 | ) | $ | (19,050,570 | ) | |||||||
Segment
fixed assets & construction in process
|
$ | 865,375 | $ | 25,824 | $ | - | $ | 7,413,962 | $ | 8,305,161 | $ | 1,847,156 | $ | 10,152,317 | ||||||||||||||
Fixed
asset additions (disposals) (net)
|
$ | - | $ | - | $ | (1,256,478 | ) | $ | 7,413,962 | $ | 6,157,484 | $ | 55,292 | $ | 6,212,776 | |||||||||||||
Total
Assets
|
$ | 192,887 | $ | 1,063 | $ | - | $ | 8,527,888 | $ | 8,721,838 | $ | 1,524,299 | $ | 10,246,137 | ||||||||||||||
The table
below presents certain financial information by business segment for the year
ended December 31, 2008:
Ecosphere |
Ecosphere
|
Ecosphere
|
||||||||||||||||||||||
Systems, |
Envirobotic
|
Energy
|
Consolidated | |||||||||||||||||||||
Inc.
|
Solutions, Inc. |
Services,
Inc.
|
Segment Totals
|
Corporate
|
Totals
|
|||||||||||||||||||
Revenue
from external customers
|
$ | — | $ | — | $ | 247,202 | $ | 247,202 | $ | - | $ | 247,202 | ||||||||||||
Interest
expense and amortization of debt discount
|
$ | — | $ | — | $ | (2,271 | ) | $ | (2,271 | ) | $ | (5,417,291 | ) | $ | (5,419,562 | ) | ||||||||
Depreciation
and amortization
|
$ | (111,552 | ) | $ | (5,722 | ) | $ | (104,479 | ) | $ | (221,753 | ) | $ | (37,889 | ) | $ | (259,642 | ) | ||||||
Income
Tax Expense
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Net
Income (loss)
|
$ | (111,552 | ) | $ | (5,722 | ) | $ | (381,438 | ) | $ | (498,712 | ) | $ | (11,194,944 | ) | $ | (11,693,656 | ) | ||||||
Segment
fixed assets & construction in process
|
$ | 865,375 | $ | 25,824 | $ | 1,824,612 | $ | 2,715,811 | $ | 1,010,188 | $ | 3,725,999 | ||||||||||||
Fixed
asset additions (disposals) (net)
|
$ | (112 | ) | $ | 1,880 | $ | 1,504,637 | $ | 1,506,405 | $ | 78,910 | $ | 1,585,315 | |||||||||||
Total
Assets
|
$ | 309,848 | $ | 1,871 | $ | 1,883,508 | $ | 2,195,227 | $ | 1,063,626 | $ | 3,258,853 |
F-47
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
16.
NONCONTROLLING
INTEREST
On
May 10, 2007 the Company’s Board of Directors adopted a resolution
terminating a Representation Agreement with an affiliate of a director of the
Company ($30,000 per month and commissions) and transferred to the director, a
10% ownership of ESI, which as of the transfer date and as of December 31,
2007, had no revenue and a negative net worth. The Company fully funded the
construction of the only asset of ESI, the mobile water filtration truck. The
minority owner will share in any profits in ESI once they occur. Accordingly,
the minority interest was zero at the agreement date. The Company will report on
the results of operations once activity occurs in this entity. ESI is
presently inactive. The truck was returned to Pierce Manufacturing
Co. in 2009.
In July
2009, the Company formed EES and contributed the assets and liabilities of EES
Inc. in exchange for a 67% ownership interest in EES. In November EES
received $7,850,000 in exchange for a 21.5% interest in EES. After
the November transaction, the Company owns 52.6% of EES. EES reported
a net loss of $743,417 during the period from inception, July 16, 2009 through
December 31, 2009, which was allocated to the other EES members in accordance
with the LLC operating agreement.
17. CONCENTRATION
OF RISK
During
the year ended December 31, 2009, the Company’s revenues were 60%, 29% and
11% from three customers A, B and C, respectively, and
from two major revenue sources, 24% from processing water
related to the treatment of water to be used in fracturing of natural gas wells
and 76% from the treatment of frac flowback water for the oil and gas
industry. As of December 31, 2009, 10%, 72% and 18% of our accounts
receivable are from three customers A, B and C, respectively.
During
the year ended December 31, 2008, the Company had 100% of its sales derived
equally from two customers and from one revenue source, processing frac flowback
water for the oil and gas industry. As of December 31, 2008, 100% of
our accounts receivable are due from one customer.
The
Company maintains its cash in bank and financial institution deposits that at
times may exceed federally insured limits. The Company has not experienced any
losses in such accounts through December 31, 2009. As of December 31,
2009, the Company’s bank balances exceeded FDIC amounts by approximately
$728,000.
18.
RELATED
PARTY TRANSACTIONS
In
connection with our organization in 1998, a corporation controlled by our Chief
Executive Officer and Senior Vice President of Administration was owed $40,000.
During the year ended December 31, 2007, we paid $14,000 of principal on
this note payable. During the year ended December 31, 2008, we paid off the
remaining principal balance of $26,000 plus accrued interest of
$18,750.
During
the years ended December 31, 2007 and 2006, the Company received funds from
the issuance of convertible notes to the Chief Executive Officer and the Senior
Vice President of Administration in the cumulative total amount of $620,000. As
of December 31, 2007, $410,000 of such notes have been repaid. During the
year ended December 31, 2008, the Company repaid the remaining
$210,000.
F-48
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
An
unsecured note payable to a director, bearing interest at prime plus 2%, was
modified during 2008. Under the new agreement, the Company
agreed to repay the principal balance of $374,423, plus annual interest of 7%,
by making quarterly payments of $50,000. In connection with the
agreement, the Company paid the director $69,789. The Company made a
payment of $50,000 on the note in 2008 and made two payments of $25,000 each
during 2009. In December 2009, the holder agreed to receive quarterly
payments of $25,000. See Note 7.
Since
January 1, 2008, an investor has advanced the Company $650,000 in exchange for
one year, convertible secured notes, all with a conversion rate of $0.15 per
share. In connection with the financings, the investor was issued
five year warrants to purchase 980,000 and 320,000 shares of the Company’s
common stock at exercise prices of $0.15 and $0.20,
respectively. On June 17, 2008, after the investments had been
made, the investor was appointed Chairman of the Board of Directors and
Co-CEO. In November 2008, the investor became CEO of the
Company. Additionally, the investor is entitled to a finder’s
fee in the amount of $87,500 related to the additional $1,750,000 of convertible
secured notes funded prior to his appointment, during the three months ended
June 30, 2008, which he advised the Company he intended to take in common stock,
once the Company has authorized capital and donate the shares to
charity. In September 2008, the Company granted the issuance
of 450,000 shares of common stock to the CEO, valued at $288,000, in
repayment of the finder’s fees resulting in a loss on conversion of $200,500. As
of December 31, 2008, the Company has issued 200,000 to charities and the
remaining 250,000 shares are included in common stock
issuable. During the time of the original investments of
$665,000 the investor incurred legal fees of approximately $40,000 which were
reimbursed to him by the Company during the year ended December 31,
2008. In August 2008, the CEO loaned the Company an additional
$100,000 in exchange for a one year original issue discount convertible note, in
the amount of $111,11, bearing interest of 11.1% and convertible in to common
stock at the rate of $0.36 per share. During the year ended December
31, 2009, the investor converted all amounts due from the Company into common
stock. (See Note 7.)
In June
2008, the Board of Directors approved the terms of new employment agreements
with its then Co-Chief Executive Officers and Chief Operating
Officer. The Board of Directors approved a compensation package for
the Chairman of the Board and Co-CEO consisting of an annual base salary of
$250,000, increasing to $450,000 upon achievement of a significant milestone.
This individual resigned as Co-CEO in July 2009 and resigned as Chairman
in December 2009.
In
June 2008, the Board also approved a new compensation package for the then
Co-CEO, now CEO since his prior agreement had expired. The new agreement
provided for a base annual salary of $325,000, increasing to $400,000 on January
1, 2009 and includes performance bonuses based upon meeting a number of
milestones. In May 2009, the Board amended the then Co-CEO’s agreement to
provide for a base salary of $250,000 and also provides for him to be eligible
for a commission of 3% of revenues.
In June
2008, the Board of Directors also approved a new compensation package for the
Chief Operating Officer which provides for an annual base salary of
$125,000.
In August
2008, an investor who previously loaned the Company $300,000 in exchange for one
year secured convertible notes and 600,000 warrants was appointed as Executive
Vice President of Business Development. Subsequent to his
appointment, the investor employee loaned the Company an additional $100,000 in
exchange for a one year original issue discount convertible note, in the amount
of $111,111, bearing interest of 11.1% and convertible in to common stock at the
rate of $0.36 per share. In connection with his appointment, the
investor employee was granted options to purchase 1,500,000 shares of the
Company’s common stock. (See Note 11) In August 2009 the
investor resigned as Vice President of Business Development. In
addition the investor converted $300,000 of convertible notes into common
stock. (See Note 7.)
In
September 2008, an investor who previously loaned the Company $50,000 in
exchange for one year secured convertible notes and 100,000 warrants was
appointed to the Board of Directors. Subsequent to his appointment,
the investor director loaned the Company an additional $180,000 in exchange for
a one year original issue discount convertible note bearing interest of 11.1%
and convertible into common stock at the rate of $0.36 per share. In
connection with his appointment, the investor director was granted options to
purchase 229,167 shares of the Company’s common stock at an exercise price of
$0.48 per share. (See Note 12)
F-49
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
On July
3, 2008, the Company amended a Consulting Agreement with a consulting company in
which the Company’s Chief Financial Officer ( the CFO) is president and 50%
owner. Under the new Agreement, the Chief Financial Officer is
devoting substantially all of his time and his company was also supplying the
Company with its accounting services. The consulting fee was
increased to $19,500 per month. Additionally, the Board granted the
consulting company 650,000 options and cash settled SARS, exercisable a $0.45
per share over a three year period. All of the options vest each June
30 and December 31, subject to the Consulting Agreement remaining in effect on
each applicable vesting date. Additionally, one-half of the options
and SARS are subject to further vesting based upon the Company meeting a
specified milestone. In December 2008, the Consulting Agreement was
amended after a co-owner of the consulting company accepted the position of CFO
as a full-time employee of the Company. The Board approved a
compensation package for the new CFO with an annual salary of $150,000 and
granted the CFO options to purchase 400,000 shares of common stock at an
exercise price of $0.27. The options vest over three years and have a
five year term. The consulting company continues to provide accounting and
financial reporting services for the Company at a monthly fee of
$4,000.
In
December 2009, the Company’s Board of Directors approved annual salary increases
for its Chief Financial Officer and Chief Operating Officer to
$168,500 and $140,000, respectively.
19. EES
TRANSACTION
On
July 21, 2009, the Company finalized a series of agreements with Clean
Water Partners, LLC (“CWP”), an affiliate of Bledsoe Capital Group, LLC
("Bledsoe”). Under the agreements CWP became a 33% owner of EES in exchange for
up to $10 million as described below. As the owner of the remaining 67% of
EES, the Company controlled a majority of the Board of Directors of
EES and controls and manages its daily operations. A supermajority vote is
required for major matters including the sale of EES. The transaction is
summarized on a consolidated basis as follows:
Cash
contribution from CWP
|
$
|
2,500,000
|
||
Forgiveness
of loan advances from Bledsoe
|
|
1,000,000
|
||
Future
priority distribution to the Company of EES profits
|
2,500,000
|
|||
Other
possible future priority distributions to the Company
|
4,000,000
|
|||
Total
transaction amount
|
$
|
10,000,000
|
The
Company contributed to EES the assets and liabilities of EES Inc., which
included $3.1 million of debt due to Bledsoe. CWP contributed
$2.5 million in cash plus $1.0 million in loan advances due from the
Company. In exchange for payment of $1.5 million and forgiveness of the
$1.0 million of loan advances, the Company granted EES an exclusive license
for all of its Ozonix technology relating to the recycling of water in the field
of use which is Energy. This includes its core water recycling Ozonix processes
and technology, its EcosFrac technology and its associated Ecos Brine fluid. In
addition, the Company will receive a priority distribution of the first
$2.5 million of CWP’s share of EES profits. An additional
$4 million is due the Company upon achievement of a significant event
relating to EES, such as the sale of EES.
Finally,
amended option agreements entered into on April 14, 2009, which had no
accounting effect, and all previous option agreements between the Company, EES
Inc. and Bledsoe through which Bledsoe had the right to acquire a 50% interest
in the Ozonix technology for the energy business have been
terminated.
On
November 9, 2009, EES received $7.5 million from an investor in exchange for a
19% equity interest in EES. In addition, in October 2009, EES received $350,000
from the Chairman of EES in exchange for a promissory note convertible into a 1%
equity interest in EES. On November 9, 2009, the Chairman converted his note
into a 1% equity interest in EES. EES paid a 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 continues to be the managing member of EES.
For the
year ended December 31, 2009, the Company allocated 100% of the net
loss of EES, $743,417, to the noncontrolling interests of EES as stipulated in
the LLC operating agreement.
F-50
ECOSPHERE
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
20.
SUBSEQUENT
EVENTS
In January 2010, the Company granted
options to purchase 500,000 shares of the Company’s common stock at an exercise
price of $0.43 per share, based upon the fair market value on the date of the
grant, in connection with the employment agreement for the Company’s new Vice
President of Business Development. The options vest over a three year
period and expire in five years.
Since December 31, 2009, the Company
has issued 4,965,904 shares of common stock to convert secured convertible
original issue discount notes in the amount of $1,787,726. These
notes were convertible at $0.36 per share.
From January 1, 2010 through March 29,
2010, the Company has issued 1,281,445shares of common stock in exchange for
cash of $312,561 upon the exercise of options and warrants with exercise prices
of between $0.15 and $0.44 per share.
In January 2010 the Company issued
16,700 shares of common stock upon conversion of 20 shares of Series B
Preferred Stock . The total value of the preferred shares converted
was $50,000.
In February 2010, the Company offered
holders of warrants with exercise prices of $1.00 and $1.25 per share the
opportunity to purchase an equal number of new warrants with exercise prices of
$0.60 and $0.75 per share, respectively in exchange for the old warrants and the
payment of $0.10 per warrant exchanged. The new warrants expire on
March 31, 2012. As of March 29, 2010, the Company has received
$512,768 for the exchange of 5,127,677 warrants.
On March 26, 2010, the Company formed a new subsidiary, Ecosphere Exploration LLC, to be in a position to take advange of opportunities to develop energy reserves on large tracts of environmentally sensitive sites onshore and offshore.
Management
evaluated all activity of the Company through March 31, 2010 (the issue
date of the Company’s consolidated financial statements) and concluded that no
additional subsequent events have occurred that would require recognition in the
consolidated financial statements.
F-51