ECOSPHERE TECHNOLOGIES INC - FORM 10-Q

Attached files

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EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - ECOSPHERE TECHNOLOGIES INC	esph_ex32z1.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - ECOSPHERE TECHNOLOGIES INC	esph_ex31z1.htm
EXCEL - IDEA: XBRL DOCUMENT - ECOSPHERE TECHNOLOGIES INC	Financial_Report.xls
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - ECOSPHERE TECHNOLOGIES INC	esph_ex31z2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 10-Q

____________


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

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
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3515 S.E. Lionel Terrace, Stuart, Florida		34997
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (772) 287-4846

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 þ No 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 (Do not check if a smaller reporting company)	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ


Class		Outstanding at August 8, 2014
Common Stock, $0.01 par value per share		164,147,155 shares

TABLE OF CONTENTS


		Page

	PART I – FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)	1

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Operations (unaudited)	2

	Condensed Consolidated Statements of Cash Flows (unaudited)	3

	Notes to Condensed Consolidated Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	34

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	35


SIGNATURES	36

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30, 2014			December 31, 2013
	(Unaudited)
Assets
Current assets
Cash	$	342,353		$	1,059,651
Restricted cash		50,050			25,000
Accounts receivable		3,172			—
Current portion of accounts receivable-related party		48,859			1,210,445
Inventory		512,282			219,278
Prepaid expenses and other current assets		125,140			121,480
Total current assets		1,081,856			2,635,854
Investment in unconsolidated investee		13,626,437			14,369,439
Accounts receivable-related party, net of current portion		—			2,268,406
Property and equipment, net		1,822,278			1,857,601
Debt issuance costs, net		20,821			37,007
Patents, net		163,520			138,034
Deposits		14,840			14,840
Total assets	$	16,729,752		$	21,321,181

Liabilities, Redeemable Convertible Cumulative Preferred Stock and Equity
Current liabilities
Accounts payable	$	414,192		$	410,402
Accrued liabilities		643,385			843,893
Current portion of convertible notes payable, net of discounts		981,465			271,176
Current portion of note payable		85,125			85,125
Warrant derivatives fair value		—			3,671
Current portion of financing obligations		151,033			163,746
Current portion of capital lease obligation		15,739			15,347
Total current liabilities		2,290,939			1,793,360
Convertible note payable, net of discounts and current portion		516,649			510,984
Note payable, net of current portion		34,049			68,099
Financing obligations, net of current portion		88,254			108,265
Capital lease obligation, net of current portion		33,960			41,929
Total liabilities		2,963,851			2,522,637

Redeemable convertible cumulative preferred stock
Series A - 11 shares authorized; 6 shares issued and outstanding at June 30, 2014 and December 31, 2013; $25,000 per share redemption amount plus dividends in arrears		1,214,744			1,203,494
Series B - 484 shares authorized; 241 shares issued and outstanding at June 30, 2014 and December 31, 2013; $2,500 per share redemption amount plus dividends in arrears		2,547,159			2,517,033
Total redeemable convertible cumulative preferred stock		3,761,903			3,720,527

Commitments and contingencies (Note 12)

Equity
Ecosphere Technologies, Inc. stockholders’ equity
Common stock, $0.01 par value; 300,000,000 shares authorized; 164,147,155 and 164,033,139 shares issued and outstanding at June 30, 2014, and December 31, 2013, respectively		1,641,471			1,640,330
Common stock issuable, $0.01 par value; 0 and 105,263 issuable at June 30, 2014, and December 31, 2013, respectively		—			1,053
Additional paid-in capital		112,146,935			111,417,253
Accumulated deficit		(103,774,727	)		(97,980,619	)
Total Ecosphere Technologies, Inc. stockholders’ equity		10,013,679			15,078,017
Noncontrolling interest in consolidated subsidiary		(9,681	)		—
Total equity		10,003,998			15,078,017
Total liabilities, redeemable convertible cumulative preferred stock and equity	$	16,729,752		$	21,321,181

The accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Revenues
Equipment sales and licensing, related party	$	—		$	—		$	107,925		$	—
Field services		—			796,102			—			1,547,786
Aftermarket part sales		3,571			180,016			3,571			289,951
Aftermarket part sales, related party		—			—			26,324			—
Total revenues		3,571			976,118			137,820			1,837,737

Costs and expenses
Equipment sales and licensing costs (exclusive of depreciation shown below)		—			—			33,925			—
Field services costs (exclusive of depreciation shown below)		—			274,618			—			721,214
Aftermarket part costs (exclusive of depreciation shown below)		5,133			116,930			27,049			226,473
Selling, general and administrative		1,317,341			2,429,232			3,082,461			4,507,685
Restructuring charge		—			(9,661	)		—			(3,170	)
Depreciation and amortization		106,032			331,240			209,981			876,251
Loss on sale of notes receivable		254,825			—			985,085			—
Total costs and expenses		1,683,331			3,142,359			4,338,501			6,328,453

Loss from operations		(1,679,760	)		(2,166,241	)		(4,200,681	)		(4,490,716	)

Loss on investment in unconsolidated investee		(426,678	)		(46,004	)		(743,002	)		(46,004	)

Other income (expense)
Gain on deconsolidation		—			29,474,609			—			29,474,609
Interest income		8,517			—			45,089			—
Interest expense		(336,256	)		(145,724	)		(913,296	)		(238,229	)
Gain on change in fair value of derivative instruments		1,764			174,647			3,671			88,679
Other, net		4,430			—			4,430			—
Total other income (expense), net		(321,545	)		29,503,532			(860,106	)		29,325,059

Net income (loss)		(2,427,983	)		27,291,287			(5,803,789	)		24,788,339

Preferred stock dividends		(20,688	)		(20,688	)		(41,376	)		(41,376	)

Net income (loss) applicable to common stock before allocation to non controlling interest		(2,448,671	)		27,270,599			(5,845,165	)		24,746,963

Less: net loss applicable to non-controlling interest in consolidated subsidiary		9,681			17,310			9,681			187,806

Net income (loss) applicable to Ecosphere Technologies, Inc. common stock	$	(2,438,990	)	$	27,287,909		$	(5,835,484	)	$	24,934,769

Net income (loss) per common share applicable to common stock
Basic	$	(0.02	)	$	0.17		$	(0.04	)	$	0.15
Diluted	$	(0.02	)	$	0.17		$	(0.04	)	$	0.15

Weighted average number of common shares outstanding
Basic		164,147,155			163,299,184			164,145,027			162,413,593
Diluted		164,147,155			163,730,359			164,145,027			164,728,122

The accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended June 30,
	2014			2013

Operating Activities:
Net income (loss) applicable to Ecosphere Technologies, Inc. common stock	$	(5,835,484	)	$	24,934,769
Adjustments to reconcile net income (loss) applicable to Ecosphere Technologies, Inc. common stock to net cash provided by (used in) operating activities:
Gain on deconsolidation		—			(29,474,609	)
Preferred stock dividends		41,376			41,376
Depreciation and amortization		209,981			876,251
Non-controlling interest in loss of consolidated subsidiary		(9,681	)		(187,806	)
Amortization of debt issue costs		16,186			11,550
Amortization of discount on notes payable		742,597			118,679
Stock-based compensation expense		324,442			759,809
Income from change in fair value of warrant derivative liability		(3,671	)		(88,679	)
Loss on investment in unconsolidated investee		743,002			46,004
Loss on sale of notes receivable		985,085			—
Modification of warrants and options		115,061			—
Changes in operating assets and liabilities:
Decrease in accounts receivable		270,457			587,615
Decrease (increase) in prepaid expenses and other current assets		100,640			(95,338	)
Increase in inventory		(293,004	)		(3,299,401	)
Increase in accounts payable		3,789			158,602
Decrease in accrued liabilities		(200,508	)		(273,879	)
Decrease in restructuring reserve		—			(5,909	)
Decrease in customer deposits		—			113,404
Net cash used in operating activities		(2,789,732	)		(5,777,562	)
Investing Activities:
Net proceeds from sale of interest in subsidiary		—			5,850,000
Repayment of amounts due to unconsolidated investee		—			(1,385,139	)
Cash held by deconsolidated subsidiary		—			(247,636	)
Purchase of property and equipment		(170,048	)		(545,254	)
Transfer from (to) restricted cash		(25,000	)		35,168
Interest on restricted cash		(50	)		—
Payment of patent costs		(30,095	)		—
Net cash provided by (used in) investing activities		(225,193	)		3,707,139
Financing Activities:
Proceeds from issuance of convertible notes payable and warrants, net of debt issue costs		245,000			706,647
Proceeds from warrant and option modifications		60,000			133,188
Proceeds from sale of notes receivable		2,171,277			—
Repayments of notes payable and insurance financing		(91,554	)		(947,205	)
Repayments of capital lease obligations		(7,577	)		(7,204	)
Repayments of vehicle and equipment financing		(79,519	)		(58,103	)
Net cash provided by (used in) financing activities		2,297,627			(172,677	)
Net decrease in cash		(717,298	)		(2,243,100	)
Cash at beginning of period		1,059,651			2,464,911
Cash at end of period	$	342,353		$	221,811

The accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended June 30,
	2014		2013
Supplemental disclosures of cash flow information:
Cash paid for interest	$	41,358	$	34,046
Cash paid for income taxes	$	—	$	—

Non-cash investing and financing activities
Accrued preferred stock dividends	$	41,376	$	41,376
Reduction of derivative liability for warrant derivative instruments from warrant exercises, expirations and modifications	$	—	$	102,807
Common stock issued as settlement of note and accrued interest	$	—	$	6,000
Cashless exercise of options and warrants	$	88	$	14,957
Beneficial conversion feature on convertible debt charged to additional paid in capital	$	234,211	$	391,771
Modification of warrants and options	$	115,061	$	—
Warrants issued as debt issue cost	$	—	$	21,211
Insurance premium finance contract recorded as a prepaid asset	$	104,299	$	168,859
Modification of convertible debt and issuance of common stock warrants for extension of maturity dates	$	—	$	111,738
Extension of term of stock options in settlement of accrued interest on convertible debt	$	—	$	26,532

The accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business

Ecosphere Technologies, Inc. (“Ecosphere,” “ETI” or the “Company”), is a U.S. technology licensing and innovative manufacturing company that develops environmental solutions for global markets. We help industry increase production, reduce costs and protect the environment through a portfolio of more than 35 patented and patent-pending technologies: technologies like Ozonix® and Ecos PowerCube®, which are licensable across a wide range of industries and applications throughout the world via ICAP Patent Brokerage (“ICAP”), the world’s largest intellectual property brokerage firm.

The Company is a leader in emerging Advanced Oxidation Processes (“AOP”) and has an extensive portfolio of intellectual property that includes six approved United States patents and numerous patents pending for its patented Ecosphere Ozonix® technology. Ozonix® is a revolutionary AOP that offers customers a chemical-free alternative to high-volume water treatment, disinfection and recycling for a wide variety of industries and applications, including but not limited to agriculture, energy, food and beverage, industrial, marine, mining and municipal wastewater treatment.

Ecosphere’s patented Ozonix® technology has been commercially proven in the oil and gas hydraulic fracturing industry and is currently being used by Fidelity National Environmental Solutions (“FNES”), formerly Ecosphere Energy Services (“EES”), and its sub-licensing partners around the United States and Canada. FNES has an exclusive field-of-use license for Ecosphere's patented Ozonix® technology for global energy applications including, but not limited to, onshore and offshore oil and natural gas exploration and production, power generation, refineries and coal. In addition to its current operations, FNES has two sub-licensing partners, which include Hydrozonix, LLC in the United States and Hydrosphere Energy Solutions, LLC in the territory of Alberta and North East British Columbia, Canada. Since 2009, FNES and its sub-licensing partners have enabled oil and gas customers to treat, recycle and reuse over 4.5 billion gallons of water for more than 1,000 oil and natural gas wells around the United States; protecting $5 billion worth of well assets and generating over $70 million in revenue.

Ecosphere and FNES have received numerous awards and accolades for its patented and proven Ozonix® water treatment solutions for the energy sector, including but not limited to:

2013 Oil and Gas Awards - Water Management Company of the Year Award, Midcontinent Region;

2013 Bloomberg New Energy Finance Awards - New Energy Pioneer;

2013 IHS CERAWeek - Energy Innovation Pioneer Award;

2013 American Technology Awards - "Clean Tech/Green Tech" Winner;

2013 World Technology Awards - Corporate "Environment" Category Winner;

2013 Governor’s Innovators in Business Awards by Enterprise Florida – Rising Star;

2012 Frost & Sullivan North American Product Leadership Award in Disinfection Equipment for Shale Oil and Gas Wastewater Treatment; and

2010, 2011, 2012 Artemis "Top 50 Water Technologies" Winner.

Outside of the energy industry, Ecosphere has recently signed an exclusive technology licensing and equipment purchase agreement with Brasil Clean Energy, a Brazilian environmental services company, to deploy its patented Ozonix® water treatment technology for the Food and Beverage industry in Brazil.

In addition to Ozonix®, Ecosphere has recently received a patent from the United States Patent Office for the world’s largest, mobile solar-powered generator. The Ecos PowerCube® is a portable, self-contained micro-utility that uses the power of the sun to provide electricity in the most remote, off-grid locations. Designed to meet the growing demand for off-grid energy, with a unique, patented array of stacked solar panels, the Ecos PowerCube® maximizes the total amount of solar power generation possible in 10', 20' and 40' standard ISO shipping container footprints - providing users with approximately 400% more solar power in a given footprint. With power generation capabilities up to 15 kW, the Ecos PowerCube® can be transported by land, air, or sea and is ideally suited to support off-grid agricultural, military, emergency/disaster relief, humanitarian and wireless communication efforts for remote applications around the world.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

In 2013, Ecosphere retained Navigant Consulting, Inc. (NYSE:NCI), a leading company in the field of intellectual property valuation, to perform an analysis to value the Company’s patented Ozonix® and Ecos PowerCube® technology portfolios. The valuation was delivered in November 2013, which includes all of the potential industries and applications where Ozonix® can be used and licensed, including the global energy field-of-use, of which the shareholders of Ecosphere Technologies currently own 30.6% of through its interest in FNES. The valuation also includes an extensive review of all of the potential industries and applications where the Ecos Powercube® can be used and licensed throughout the world. While this valuation is subject to a number of assumptions, the Company believes that it helps to illustrate the Company’s hidden value and opportunity that is not recognized on our Balance Sheet or by the investment community. During 2013, Ecosphere received $10 million in gross proceeds from FNF for the sale of the Company’s 20% interest in FNES. Ecosphere’s management team estimates that this sale represents approximately 2% of the estimated value of the Company’s global Ozonix® intellectual property portfolio.

Accordingly, in June 2014, the Company engaged ICAP to monetize its patented Ozonix® and Ecos PowerCube® technology portfolios and to serve as its exclusive licensing agent. ICAP is now the Company’s exclusive broker, tasked with successfully licensing both technologies across a wide variety of industries and applications on a global basis. ICAP Patent Brokerage’s veteran brokers have more than 35 years of experience in monetizing and leveraging intellectual property assets, drawing on an extensive knowledge of the marketplace across multiple sectors throughout the United States, Asia, and Europe. ICAP brings credibility, stability and liquidity to the IP marketplace and is quickly becoming the intellectual property brokerage of choice for IP assets in both the primary and secondary markets. With the growing pressure on global water resources and the need for clean, renewable energy, we expect Ecosphere’s patented technology portfolio to continue to expand. The Chief Executive Officer of ICAP is a director of and consultant to the Company.

In addition to Ozonix® and Ecos PowerCube®, the Company has developed an extensive portfolio of intellectual property that can be purchased and licensed for use in large-scale and sustainable applications across industries, nations and ecosystems. Companies that license Ecosphere’s patented technologies are able to improve their financial metrics while also reducing their ecological and environmental footprints. The Company is currently focused on licensing its patented Ozonix® and Ecos PowerCube® technologies, although its other technologies and patents remain a viable part of Ecosphere’s long-term technology licensing strategy.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) in the United States of America (“U.S.”) as promulgated by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and with the rules and regulations of the U.S Securities and Exchange Commission (“SEC”) for interim financial information. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods shown. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Going Concern

As of August 6, 2014, Ecosphere had cash on hand of approximately $0.3 million. Due to the nature of its technology licensing business model, Ecosphere presently does not have any regularly recurring revenue. These factors raise substantial doubt about the Company’s ability to continue as a going concern. To support its operations, the Company has a number of plans to monetize its intellectual property, which are described below.

In August 2014, the Company received a purchase order from FNES for a second Ozonix® EF10M and a deposit of approximately $0.2 million that is for an existing sub-licensing customer, Hydrosphere Energy Solutions, whose licensed territory consists of Alberta and North East British Columbia, Canada. The manufacturing of this Unit has begun.

In July 2014, The Company signed an exclusive technology licensing and equipment purchase agreement with Brasil Clean Energy (“BCE”), a Brazilian environmental services company, to deploy its patented Ozonix® water treatment technology for the Food and Beverage industry in Brazil. Under the terms of the agreement in order to maintain exclusivity, BCE is required to purchase a minimum of $5 million worth of Ozonix® equipment over the next two years, plus a royalty payment based on usage or revenue, with a minimum amount earned per machine. BCE has ordered its first Ozonix® EF10M and the manufacturing of this Unit has begun.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

Management believes that its current plans will provide sufficient liquidity for the next 12 months. Ecosphere plans to continue monetizing its intellectual property, and has identified the following liquidity sources that it expects to realize over the next three years:

The Company is seeking to raise additional capital through the sale of Convertible Notes and Warrants.

Ecosphere is actively marketing exclusive and non-exclusive licensing opportunities for sale to strategic, well positioned partners that wish to bring our patented Ozonix® and Ecos PowerCube® technologies to specific industries in their respective countries and regions of the world. Management expects this will result in similar realization of the value that has been realized by the development and sale of the global energy rights for its Ozonix® technology to FNES. Ecosphere owns 100% of the global rights to its patented Ozonix® technology for all non-energy related applications, including but not limited to agriculture, food and beverage, industrial, marine and municipal wastewater treatment, and any other industry in which water is treated with conventional liquid chemicals. Ecosphere also owns 100% of the global right to its patented Ecos PowerCube® technology for all industries and applications worldwide.

Ecosphere’s business model revolves upon the licensing of its intellectual property to strategic customers and partners around the world that are well-positioned and capitalized to bring Ecosphere’s patented technologies to their respective industries and countries. Additionally, Ecosphere has its own in-house design, engineering and manufacturing facilities to support customers and licensees that choose to not manufacture Ecosphere’s patented technologies themselves. In addition to the various licensing opportunities that are available for its patented Ozonix® and Ecos PowerCube® technologies globally, the Company’s 30.6% interest in FNES is also available for sale.

Management believes that the realization of any of the above events will provide sufficient liquidity for the foreseeable future. However, Ecosphere cannot provide any assurance that these plans will be successful. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

In addition to needing capital to support its operations, Ecosphere has $1,007,500 in convertible notes payable due over the next 12 months. This consists of $50,000 due in September 2014 and $245,000 due in March 2015. In July 2014, the Company also received notice of a partial redemption request due in August 2014 and shall pay the Holders $242,625 of principal plus $8,243 of accrued interest in accordance with the convertible notes dated February 19, 2013. The $469,875 remaining principal balance of the note is due in February 2015. See Note 6.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Ecosphere, it’s wholly and majority owned subsidiaries and through May 23, 2013, Ecosphere Energy Services, LLC (“EES”), now Fidelity National Environmental Solutions LLC (“FNES”). On May 24, 2013, the Company sold a 12% interest in FNES and transferred an additional 1.5% interest to a board member of FNES, reducing the Company’s ownership in FNES from 52.6% to 39.1%. Since May 24, 2013, the Company accounts for its investment in FNES under the equity method. On July 31, 2013, the Company sold an additional 8% interest in FNES and transferred an additional 0.5% interest to a board member of FNES, reducing the Company’s ownership in FNES from 39.1% to 30.6% (See Note 3). The Company continues to account for its investment in FNES under the equity method. All intercompany account balances and transactions have been eliminated.

Noncontrolling Interest

Prior to May 24, 2013, the Company accounted for its less than 100% interest in FNES in accordance with ASC Topic 810, Consolidation, and accordingly the Company presented noncontrolling interests as a component of equity on its consolidated balance sheets and reported noncontrolling interest net income or loss under the heading “Net (income) loss applicable to noncontrolling interest in consolidated subsidiary” in the unaudited condensed consolidated statements of operations.

In October 2013, the Company’s subsidiary, Ecosphere Mining, LLC, granted to its directors an aggregate of 5% ownership in Ecosphere Mining, LLC. Accordingly the Company is presenting noncontrolling interests as a component of equity on its consolidated balance sheets and reported noncontrolling interest net income or loss under the heading “Net (income) loss applicable to noncontrolling interest in consolidated subsidiary” in the unaudited condensed consolidated statements of operations.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent 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 inventory, estimates of depreciable lives and valuation of property and equipment, estimates of amortization periods for intangible assets, valuation of beneficial conversion features in convertible debt, valuation of equity based instruments issued for other than cash, valuation of derivatives, valuation of remaining interest in FNES upon deconsolidation and the valuation allowance on deferred tax assets.

Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.

Restricted Cash

Restricted cash as of June 30, 2014, represents a $50,050 compensating balance held pursuant to certain of the Company's short-term financing arrangements.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at their estimated net realizable value. The Company reviews its accounts to estimate losses resulting from the inability of its customers to make required payments. Any required allowance is based on specific analysis of past due accounts and also considers historical trends of write-offs. Past due status is based on how recently payments have been received from customers. The Company’s collection experience has been favorable reflecting a limited number of customers. No allowance was deemed necessary at June 30, 2014 and December 31, 2013.

Inventory

Inventory is primarily comprised of raw materials to manufacture water treatment equipment, finished goods representing one Ecos PowerCube® completed for future sale and demonstration purposes where no binding sales contract exists and work-in-process representing water treatment equipment being manufactured and assembled for future sale where no binding sale. Inventory on hand at each respective balance sheet date is stated at the lower of cost or market with cost determined using a weighted average methodology. See Note 4.

Property, Equipment and Capitalized Leases

Property and equipment is stated at cost. For equipment manufactured for use by the Company, cost includes direct component parts plus direct labor. Depreciation is computed using the straight-line method based on the estimated useful lives generally ranging from three to seven years. Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the asset or the remaining term of the lease. Expenditures for maintenance and repairs are expensed as incurred.

Debt Issuance Cost

The Company accounts for debt issuance cost in accordance with ASC 470, Debt. The costs associated with the issuance of debt are capitalized and amortized over the life of the underlying debt instrument.

Patents

Patents are stated at cost and are being amortized on a straight-line basis over the estimated future periods to be benefited. All patents at June 30, 2014 and December 31, 2013 have either been acquired from a related company or assigned to the Company by the Company's founder. Patents are recorded at the historical cost basis.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

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.

Investment in Unconsolidated Investee

The Company accounts for investments in which the Company owns more than 20% of the investee, using the equity method in accordance with ASC Topic 323, Investments—Equity Method and Joint Ventures. Under the equity method, an investor initially records an investment in the stock of an investee at cost, and adjusts the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of acquisition. The amount of the adjustment is included in the determination of net income by the investor, and such amount reflects adjustments similar to those made in preparing consolidated statements including adjustments to eliminate intercompany gains and losses, and to amortize, if appropriate, any difference between investor cost and underlying equity in net assets of the investee at the date of investment. The investment of an investor is also adjusted to reflect the investor's share of changes in the investee's capital. Dividends received from an investee reduce the carrying amount of the investment. A series of operating losses of an investee or other factors may indicate that a decrease in value of the investment has occurred which is other than temporary and which should be recognized even though the decrease in value is in excess of what would otherwise be recognized by application of the equity method.

Derivative Instruments

ASC Topic 815, Derivatives and Hedging (“ASC Topic 815”), establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income (loss) depending on the purpose of the derivatives and whether they qualify and have been designated for hedge accounting treatment. The Company does not have any derivative instruments for which it has applied hedge accounting treatment.

Fair Value of Financial Instruments and Fair Value Measurements

The Company measures its financial and non-financial assets and liabilities, as well as makes related disclosures, in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). 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 the Company for debt with similar terms and maturities are substantially the same.

ASC Topic 820 provides guidance with respect to valuation techniques to be utilized in the determination of fair value of assets and liabilities. Approaches include, (i) the market approach (comparable market prices), (ii) the income approach (present value of future income or cash flow), and (iii) the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC Topic 820 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.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

Revenue Recognition

For each of our revenue sources we have the following policies:

Equipment and Component Sales

Revenues and related costs on production type contracts are recognized using the “percentage of completion method” of accounting in accordance with ASC 605-35, Accounting for Performance of Construction-Type and Certain Production Type Contracts (“ASC 605-35”). Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs. All unallocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined. Contract costs plus recognized profits are accumulated as deferred assets, and billings and/or cash received are recorded to a deferred revenue liability account. The net of these two accounts for any individual project is presented as "Costs and estimated earnings in excess of billings on uncompleted contracts," an asset account, or "Billings in excess of costs and estimated earnings on uncompleted contracts," a liability account.

Production type contracts that do not qualify for use of the percentage of completion method, the Company accounts for these contracts using the “completed contract method” of accounting in accordance with ASC 605-35-25-57. Under this method, contract costs are accumulated as deferred assets, and billings and/or cash received is recorded to a deferred revenue liability account, during the periods of construction, but no revenues, costs, or profits are recognized in operations until the period within which completion of the contract occurs. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs. All unallocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss as it is determined. The deferred asset (accumulated contract costs) in excess of the deferred liability (billings and/or cash received) is classified as a current asset under "Costs in excess of billings on uncompleted contracts". The deferred liability (billings and/or cash received) in excess of the deferred asset (accumulated contract costs) is classified under current liabilities as "Billings in excess of costs on uncompleted contracts".

A contract is considered complete when all costs except insignificant items have been incurred; the equipment is operating according to specifications and has been accepted by the customer.

The Company may manufacture products in anticipation of a future contract. Since there are no binding contracts relating to the purchase of these products, ASC 605-35 is not applicable. Accordingly, revenue 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.

Field Services (See Note 3)

Revenue from water treatment 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.

Some projects the Company undertakes 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.

After Market Part Sales

The Company recognizes revenue from the sale of aftermarket parts during the period in which the parts are delivered to the buyer.

Royalties

Revenue from technology license royalties will be recorded if and as the royalties are earned. No royalty revenue has been earned to date.

The Company includes shipping and handling fees billed to customers in revenues and shipping and handling costs in cost of revenues.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

Equity-based Compensation

Compensation expense for all stock-based employee and director compensation awards granted is based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718, Stock Compensation (“ASC Topic 718”). The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Vesting terms vary based on the individual grant terms.

The Company estimates the fair value of stock-based compensation awards on the date of grant using the Black-Scholes-Merton (“BSM”) option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The BSM option pricing model considers, among other factors, the expected term of the award and the expected volatility of the Company’s stock price. Expected terms are calculated using the Simplified Method, volatility is determined based on the Company's historical stock price trends and the discount rate is based upon treasury rates with instruments of similar expected terms. Warrants granted to non-employees are accounted for in accordance with the measurement and recognition criteria of ASC Topic 505-50, Equity Based Payments to Non-Employees.

Income Taxes

The Company uses the asset and liability method in accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 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.

Accounting for Uncertainty in Income Taxes

The Company applies the provisions of ASC Topic 740-10-25, Income Taxes – Overall – Recognition (“ASC Topic 740-10-25”) with respect to the accounting for uncertainty of income tax positions. ASC Topic 740-10-25 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740-10-25 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of June 30, 2014, tax years since 2011 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.

Net Loss Per Share

The Company displays earnings per share in accordance with ASC 260, Earnings Per Share (“ASC 260”). ASC 260 requires dual presentation of basic and diluted earnings per share (“EPS”). Basic earnings per share is computed by dividing net (loss) income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

For the three and six months ended June 30, 2014, no potential common shares were included in the calculation of diluted loss per share because they were anti-dilutive.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

Basic and diluted net income per share for the three and six months ended June 30, 2013, were calculated as follows:


	For the Three Months Ended June 30, 2013				For the Six Months Ended June 30, 2013
	Basic		Diluted		Basic		Diluted
Numerator
Net income applicable to common stock	$	27,287,909	$	27,287,909	$	24,934,769	$	24,934,769
Interest on convertible debt		—		—		—		23,055
	$	27,287,909	$	27,287,909	$	24,934,769	$	24,957,824
Denominator
Weighted average common shares outstanding		163,299,184		163,299,184		162,413,593		162,413,593
Restricted stock		—		—		—		—
Preferred stock		—		—		—		—
Convertible debt		—		—		—		204,288
Warrants and options		—		431,175		—		2,110,241
		163,299,184		163,730,359		162,413,593		164,728,122
Net income per share	$	0.17	$	0.17	$	0.15	$	0.15

Securities that could potentially dilute basic EPS in the future, that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented, consist of the following:

Anti-Dilutive Potential Common Stock


	For the Six Months Ended
	June 30,
	2014		2013
Convertible debt		9,958,330		608,631
Convertible preferred stock		362,497		362,497
Options and warrants to purchase common stock		72,288,528		56,810,147
Unvested stock grants		—		84,000
Total Anti-Dilutive Potential Common Stock		82,609,355		57,865,275

New Accounting Standards

Management does not believe that any recently issued, but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated financial statements.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

INVESTMENT IN UNCONSOLIDATED INVESTEE

As a result of its sale of a 12% interest in FNES on May 24, 2013, the Company deconsolidated FNES and accounts for its investment using the equity method of accounting. The Company sold an additional 8% interest in FNES in July 2013, reducing its ownership interest in FNES to 30.6% as of December 31, 2013 and June 30, 2014. Condensed unaudited summary financial information for FNES as of June 30, 2014 and for the six months ended June 30, 2014 is as follows:


	June 30, 2014
	(Unaudited)
ASSETS
Cash	$	1,229,791
Accounts receivable		15,000
Property and equipment		5,235,073
Inventory		271,443
Prepaid Expenses		100,674
Intangible Assets		1,805,556
Deposits		4,200

Total Assets	$	8,661,737

LIABILITIES AND MEMBERS' EQUITY
Accounts payable and accrued expenses	$	101,183
Accounts payable, related party		48,859
Debt		1,716,067
Debt, related party		1,249,916
Members' equity		5,545,712

Total liabilities and members' equity	$	8,661,737


	For the three months ended June 30, 2014			For the six months ended June 30, 2014
	(Unaudited)			(Unaudited)
STATEMENT OF OPERATIONS
Revenues	$	511,230		$	2,233,762
Cost of sales		294,755			1,262,616
Gross profit		216,475			971,146
Operating expenses		1,636,475			3,425,143
Operating loss		(1,420,000	)		(2,453,997	)
Other income		25,000			25,000
Net loss		(1,395,000	)		(2,428,997	)
Ownership interest (average)		31	%		31	%
Share of net loss	$	(426,678	)	$	(743,002	)
Total equity interest loss recorded	$	(426,678	)	$	(743,002	)
Investment	$	13,626,437		$	13,626,437

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

INVENTORY

Inventory consists of the following at June 30, 2014 and December 31, 2013:


	2014		2013
Raw materials	$	183,132	$	178,982
Finished goods		301,398		—
Work in process		27,752		40,296
	$	512,282	$	219,278

PROPERTY AND EQUIPMENT

Property and equipment consists of the following at June 30, 2014, and December 31, 2013:


	Estimated Useful
	Lives in Years	2014			2013
Machinery and equipment	5	$	2,381,205		$	2,329,731
Furniture and fixtures	5 to 7		354,342			303,026
Automobiles and trucks	3 to 5		142,141			142,141
Leasehold improvements	5		524,263			469,230
Office equipment	5		620,860			608,633
			4,022,811			3,852,761
Less total accumulated depreciation			(2,200,533	)		(1,995,160	)
Property and equipment, net		$	1,822,278		$	1,857,601

The Company had additions to furniture and fixtures and office equipment relating to the build out of the mining office in Park City, UT. Depreciation expense amounted to approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2014.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

NOTES PAYABLE AND OTHER DEBT

Long-term debt consists of the following at June 30, 2014, and December 31, 2013:

Convertible Notes Payable


	June 30, 2014		December 31, 2013
In January 2014, the Company issued convertible notes in the aggregate principal amount of $245,000. The notes accrue interest at an annual rate of 10%, mature in January 2016 and are convertible into common stock at a conversion rate of $0.30 per share. In connection with the issuance of the notes, the Company issued to the investors five-year warrants to purchase 1,633,328 shares of common stock at an exercise price of $0.35 per share. The Company recorded a discount related to the warrants and beneficial conversion feature of $234,211 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility ranging between 78.01% and 78.26%, an expected term of five years, a risk-free discount rate ranging between 1.61% and 1.77% and no dividends. As of June 30, 2014, the unamortized amount of the discount was $180,508 and accrued interest was $11,361.	$	64,492	$	—

In December 2013, the Company issued convertible notes in the aggregate principal amount of $1,700,000. The notes accrue interest at an annual rate of 10%, mature in December 2015 and are convertible into common stock at a conversion rate of $0.30 per share. In connection with the issuance of the notes, the Company issued to the investors five-year warrants to purchase 11,333,328 shares of common stock at an exercise price of $0.35 per share. The Company recorded a discount related to the warrants and beneficial conversion feature of $1,700,000 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility ranging between 78.23% and 78.47%, an expected term of five years, a risk-free discount rate ranging between 1.55% and 1.71% and no dividends. As of June 30, 2014, the unamortized amount of the discount was $1,247,843 and accrued interest was $90,625.		452,157		11,096

In February 2013, the Company issued convertible notes in the aggregate principal amount of $750,000. The notes accrue interest at an annual rate of 8.5%, mature in February 2015 and were convertible into common stock at a conversion rate of $0.381 per share. Additionally, the note holders may elect to have up to 32.35% of the original principal amount of this Note repaid 18 months following the issuance date. The Company received notice of a partial redemption request due in August 2014 and shall pay the Holders $250,868 which is comprised of 32.35% of the original principal amount together with any and all accrued but unpaid interest. In connection with the issuance of the notes, the Company issued to the investors five-year warrants to purchase 984,375 shares of common stock at an exercise price of $0.381 per share. The Company recorded a discount related to the warrants and beneficial conversion feature of $391,771 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 92.82%, an expected term of five years, a risk-free discount rate of 0.86%, and no dividends. In December 2013, the holder elected to covert $37,500 of the convertible note into 98,425 shares of the Company’s common stock. As a result of the December 2013 financing, the Company was in violation of certain covenants included in the securities purchase agreements with the investors. In March 2014, the investors agreed to waive their rights under securities purchase agreements in exchange for a reduction in the conversion price of the notes and exercise price of the warrants to $0.30 per share. The Company also agreed to issue additional warrants to acquire 265,625 shares of common stock at an exercise price of $0.30 per share. As a result of the modification, the Company recorded an additional debt discount of $37,432 for the increase in the fair value of the warrants. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40 and reissuance of the existing debt, resulting in the immediate expensing of the remaining discount of $164,503. There was no beneficial conversion feature on the exchanged debt. As of June 30, 2014, the unamortized amount of the discount was $26,035 and accrued interest was $15,141. The Company began making quarterly interest payments on October 1, 2013, for accrued interest on these convertible notes.		686,465		499,888

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)


	June 30, 2014			December 31, 2013
In 2010 and 2011, the Company issued convertible notes in the aggregate principal amount of $1,225,000. The notes accrue interest at an annual rate of 10%, matured in the quarter ended March 31, 2013 and were convertible into common stock at a conversion rate of $0.70 per share. In connection with the issuance of the notes, the Company issued to the investors five-year warrants to purchase 875,000 shares of common stock at an exercise price of $0.70 per share. The Company recorded a discount related to the warrants of $302,387 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 100.73% to 112.55%, an expected term of five years, a risk-free discount rates of 1.74% to 2.06%, and no dividends. During the second quarter of 2013, the Company repaid an aggregate of approximately $1.1 million of principal and interest on the notes. Holders of an aggregate of $295,000 of principal agreed to extend the maturity of their notes to March 2014. As consideration of the extensions the Company reduced the conversion price of the extended notes to $0.42 and issued warrants to purchase 368,467 shares of common stock for $0.42 per share over five years. As a result of extending the notes, the Company recorded additional discounts for beneficial conversion feature and relative fair value of the warrants totaling $111,738, which was being amortized through the extended maturity of the notes. Subsequent to March 31, 2014, the holders of the notes due in March 2014 agreed to extend the maturity dates of the notes to September 2014 for $50,000 of principal and March 2015 for $245,000 of principal. As of June 30, 2014, there was no unamortized amount of the discounts. Accrued interest at June 30, 2014 was $103,964.	$	295,000		$	271,176

Total		1,498,114			782,160
Less Current Portion, net of discounts		(981,465	)		(271,176	)
Convertible notes payable, long term, net of discounts	$	516,649		$	510,984

A summary of convertible notes payable and the related discounts as of June 30, 2014, and December 31, 2013 is as follows:


	June 30, 2014			December 31, 2013
Principal amount of convertible notes payable	$	2,952,500		$	2,707,500
Unamortized discount		(1,454,386	)		(1,925,340	)
Convertible notes payable, net of discount		1,498,114			782,160
Less: current portion		(981,465	)		(271,176	)
Convertible notes payable, net of discount, less current portion	$	516,649		$	510,984

Note Payable

On January 1, 2012, the Company reclassified a non-interest bearing unsecured note payable to a former director totaling $272,399 of which $119,174 and $153,224 was outstanding at June 30, 2014, and December 31, 2013, respectively, from related party debt due to lack of on-going affiliation with the lender. The note is non-interest bearing and payable in quarterly payments of $17,025. Accordingly, $85,125 is included as a current liability in the accompanying unaudited condensed consolidated financial statements.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

Financing Obligations


	June 30, 2014			December 31, 2013
Secured equipment notes payable in monthly installments of $3,406 over 60 months, maturing in July 2016 and accruing interest at an annual rate of 6.75%	$	79,226		$	102,321

Secured vehicle notes payable in monthly installments of $1,046 over 72 months, maturing in September 2019 and accruing interest at an annual rate of 9.65%.		50,756			54,690

Financing for insurance premiums payable in nine monthly installments of $11,810 accruing interest at 4.56%. The final payment is due in October 2014.		46,795			—

Secured non-interest bearing, equipment notes payable in monthly installments of $8,333 over 12 months, maturing in December 2014.		58,330			115,000

Secured non-interest bearing, software notes payable in monthly installments totaling $176 plus applicable taxes and fees over 36 months with a $1 purchase option at the end of the lease agreement in April 2017.		4,180			—

Total		239,287			272,011
Less Current Portion		(151,033	)		(163,746	)
Financing obligations, long-term portion	$	88,254		$	108,265

Capital Lease Obligation

The Company entered into a capital lease to purchase a forklift costing $78,896 in July of 2012. The lease is payable in 60 monthly installments of $1,491 including interest at an implied rate of 5.05% through July 2017. The Company is entitled to buy the equipment for a bargain purchase price of $1 at the end of the lease.

Future minimum lease payments under this capital lease obligation as of June 30, 2014, by fiscal year, are as follows:


For the year ended December 31,	Payment
2014	$	8,941
2015		17,888
2016		17,888
2017		8,946
Total		53,663
Less implied interest		(3,964	)
Capital lease obligation		49,699
Less current potion		(15,739	)
Long-term portion	$	33,960

Third Party Debt

Aggregate annual maturities of third party debt are as follows as of June 30, 2014:


For the year ended December 31,	Amount
2014	$	236,581
2015		2,789,628
2016		296,458
2017		19,005
2018		11,219
2019		7,769
Total debt- face value		3,360,660
Less: unamortized discount		(1,454,386	)
Net debt	$	1,906,274

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

DERIVATIVE FINANCIAL INSTRUMENTS

The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity (“ASC Topic 815-40”), under which convertible instruments and warrants, which contain terms that protect holders from declines in the stock price (reset provisions), may not be exempt from derivative accounting treatment. As a result, warrants are recorded as a liability and are revalued at fair value at each reporting date. Further, under derivative accounting, the warrants are recorded at their 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 in operations on the issuance date. During the three month period ended June 30, 2014, upon the expiration of the warrants, the fair value decreased to zero resulting in a gain from change in fair value of derivative instruments of $1,764. The Company has no warrants with repricing options outstanding at June 30, 2014.

The following is a roll forward for the six months ended June 30, 2014 of the fair value liability of price adjustable warrant derivative instruments:


	Fair Value of
	Liability for
	Warrant
	Derivative
	Instruments

Balance at December 31, 2013	$	3,671
Fair value of warrants exercised or expired		(1,764	)
Change in fair value included in statement of operations		(1,907	)
Balance at June 30, 2014	$	—

REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK

Series A

At June 30, 2014, and December 31, 2013, there were 6 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 or redeemable at the option of the holder upon a change of control event at $25,000 per share plus accrued dividends. A Change of Control (“CoC”) event means a transfer of greater than fifty percent of the shares of common stock of the Company. The shares are convertible each into 25,200 common shares. Accrued dividends totaled $1,064,744 and $1,053,494 on June 30, 2014, and December 31, 2013, respectively. There was no Series A Preferred Shares activity during the six months ended June 30, 2014. Annual dividends accrue at a rate of $3,750 per share.

Series B

At June 30, 2014, and December 31, 2013, there were 241 shares of Series B Redeemable Convertible Cumulative 10% Preferred Stock outstanding. The shares are redeemable at the option of the Company at $3,000 per share plus accrued dividends or redeemable at the option of the holder upon a Change of Control event at $2,500 per share plus accrued dividends. The shares are convertible each into 876 common shares. Accrued dividends totaled $1,944,659 and $1,914,533 on June 30, 2014, and December 31, 2013, respectively. There was no Series B Preferred Shares activity during the six months ended June 30, 2014. Annual dividends accrue at a rate of $250 per share.

COMMON STOCK

Shares issued and issuable during the six months ended June 30, 2014 are summarized below.


Shares outstanding and issuable at December 31, 2013			164,138,402
Cashless exercise of options (a)			8,753
Total common shares outstanding at June 30, 2014			164,147,155

———————

(a)

issued upon cashless exercises of 44,546 options by a director at an exercise price of $0.229 per share based upon market prices of the Company’s common stock of $0.285 per share.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

10.

STOCK OPTIONS AND WARRANTS

Issuance of Warrants with Convertible Debt

In January 2014, the Company issued 1,633,328 five-year warrants exercisable at $0.35 per share in connection with the issuance of convertible notes in the aggregate principal amount of $245,000.

As a result of the modification of the February 2013 convertible notes (See Note 6), the Company reduced the exercise price of warrants to acquire 984,375 shares of common stock from $0.381 to $0.30 per share. The company also agreed to issue additional warrants to acquire 265,625 shares of common stock at an exercise price of $0.30 per share.

Option Exercise

Cashless Exercise

In February 2014, the Company issued 8,753 shares of common stock to a director upon the cashless exercise of options to purchase 44,546 shares of common stock with an exercise price of $0.229 per share and based upon a market price of the Company’s common stock of $0.285 per share.

The fair value of each option and warrant is estimated on the date of grant using the BSM option-pricing model. The Company used the following assumptions for options and warrants issued or valued during the three months ended June 30, 2014:


Risk-free interest rate	0.37% to 1.26%
Expected option life in years	2.07 to 3.51
Expected stock price volatility	50.57% to 58.28%
Expected dividend yield	None

Stock-based compensation expense related to options for the six months ended June 30, 2014 was $324,442. At June 30, 2014, total unrecognized compensation cost related to unvested options granted under the Company’s option plans totaled $178,802. This unrecognized compensation cost is expected to be recognized over the next 18 months.

Extension of Options and Warrants in Exchange for Cash

The Company agreed to extend the term of options that expired in June 2014 and December 2014 for an additional two years, in exchange for cash of $50,000. The fair value of the extended options was determined using the BSM method and the following assumptions: volatility ranging from 56.36% to 58.28%, an expected term between 2.11 and 2.59 years, a risk-free discount rate of 0.37% and no dividends, totaling $155,437. The excess of the fair value of the extended options was recorded as additional interest expense of $105,374.

The Company agreed to extend the term of options that expired in June 2014 for an additional two years in exchange for cash of $10,000. The fair value of the extended options was determined using the BSM method and the following assumptions: volatility of 54.82%, an expected term of 2.07 years, a risk-free discount rate of 0.41% and no dividends, totaling $49,300. The excess of the fair value of the extended options was recorded as additional interest expense of $9,687.

11.

RELATED PARTY TRANSACTIONS

Related Party Purchase of FNES Note Receivable

In June 2014, Ecosphere sold the remaining 25% portion of a FNES note payable for the Ozonix® EF80 Unit sold in November 2013 in exchange for $0.3 million in cash. The buyer of the note is an employee of the Company. As a result of the sale of accounts receivable the Company recognized a loss of approximately $0.1 million.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

Related Party Private Licensing Engagement Agreement

In June 2014, the Company entered into a one year Private Licensing Engagement Agreement (the “Agreement”) with ICAP Patent Brokerage LLC (“ICAP”) in efforts to monetize the Company’s patented Ozonix® and Ecos PowerCube® technology portfolios. The Agreement may be terminated by either party with 60 days’ notice. In the event that the Company enters into an Intellectual Property Licensing Agreement, ICAP is entitled to receive a commission equal to 10% of the monies paid to the Company and its affiliates in connection with such transaction. The Chief Executive Officer of ICAP is also one of the Company’s board members and consultants.

Related Party Consulting Agreements

In January 2013, the Company entered into a three year consulting agreement at the rate of $250,000 per year that may be terminated with 30 days’ notice with one of the Company’s board members and who is also the Chief Executive Officer of ICAP. For the six months ended June 30, 2014, the Company has incurred $124,998 pursuant to the consulting agreement.

Related Party Cashless Option Exercise

Related Party Equipment Sales

In January 2014, FNES sold one Ozonix® EF10M to Hydrosphere Energy Solutions that was purchased by FNES from the Company in 2013. The sale to Hydrosphere resulted in equipment sales of approximately $0.1 million to the Company.

Related Party Service Fee

The Company has been receiving a service fee for its continued accounting, executive, administrative and other miscellaneous services to FNES. In April 2014, the monthly service fee was reduced from $56,360 to $44,310. The Company continues to provide the services described above and will continue to do so in a transitional phase. Once this transitional phase is complete and FNES has taken over all functions listed above, FNES will no longer pay a service fee to the Company. All costs relating to the services fee are offset against various expense accounts on the statement of operations. The Company had an accounts receivable balance at June 30, 2014 of $44,310 relating to June 2014 services performed for FNES.

Related Party Accounts Receivable

At December 31, 2013, the Company had an accounts receivable balance of approximately $3.5 million due from FNES. The $3.5 million accounts receivable balance primarily consisted of the $3.5 million remaining balance FNES owed on two Ozonix® EF80 units purchased in July and November 2013. In March 2014, Ecosphere sold the FNES note payable for the Unit sold in July 2013 in exchange for $1 million in cash. The buyer of the note is an FNES member and director. The Company also sold 50% of the FNES note payable for the Unit sold in November 2013 in exchange for $0.6 million in cash during the three months ended March 31, 2014. During the three months ended June 30, 2014, the Company sold an additional 50% of the FNES note payable for the Unit sold in November 2013 in exchange for $0.6 million. As of June 30, 2014, the Company had no accounts receivable balance in connection with the notes payable for the Ozonix® EF80 units sold to FNES in July and November 2013.

As a result of the sale of accounts receivable the Company recognized a loss of $254,825 and $985,085 for the three and six months ended June 30, 2014. At June 30, 2014, the Company had an accounts receivable balance of $48,859 due from FNES. The accounts receivable balance consisted of a $44,310 service fee and $4,549 in miscellaneous charges.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

12.

COMMITMENTS AND CONTINGENCIES

Leases

The Company makes monthly rent payments of $11,789 under a month-to-month agreement for the Company’s Stuart, Florida corporate offices and manufacturing location. The Company has been under a month-to-month agreement for the two buildings adjacent to the Stuart facility that holds the Company’s machining equipment. The lease agreements expired in April and May 2012 and the Company continues to make monthly rent payments of $4,955.

In September 2013, the Company entered into a five year lease agreement for an office located in Park City, UT to begin developing the mining application. The commencement date for this operating lease is January 1, 2014 with the lease expiring on the day immediately prior to the fifth anniversary of the commencement date, December 31, 2019. The Company has an obligation of $206,285 as of June 30, 2014, relating to this five-year lease agreement.

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.

In December 2012, the Company reached a settlement with KIA, who filed a lawsuit against the Company in 2007, amounting to $100,000 to be paid with an initial $25,000 payment and 36 monthly installments for the remainder of the settlement amount. Should the Company default on any of its required payments, the settlement amount will increase to $150,000. The Company had originally accrued $197,500 in liabilities related to this settlement. As a result of the settlement, the Company reduced legal expense by $47,500 (as the original expense was charged to this account) leaving an accrued balance of $125,000 at December 31, 2012, which was comprised of the $150,000 obligation less the initial $25,000 payment. As of June 30, 2014, the Company had an accrued balance of $89,583 which is comprised of the $150,000 obligation less $60,417 in payments. Upon final payment in accordance with the settlement, the Company will record a $50,000 gain.

In March 2011, a former vendor obtained a judgment against the Company for a number of disputed billings. As of June 30, 2014 the Company has accrued $70,000 which is anticipated to be the amount of payment due to the vendor plus attorney’s fees.

Other Commitments

The Company has a Royalty Agreement with its president and founder where he is entitled to receive royalties equal to 4% of Ecosphere’s revenues generated from the patents and inventions which were created by him (the “Inventions”) less any base salary paid to him. In addition to the royalties paid on revenues, the royalties will also be paid on any consideration Ecosphere receives or its shareholders receive from a merger or sale of our assets outside of the ordinary course of business relating to the Inventions plus consideration received by our shareholders from exchange offer or tender offer, as well as proceeds received by Ecosphere from outstanding debt conversions (for all new debt issued beginning January 1, 2013) and sales of Ecosphere’s equity securities. Royalty payments will be paid for the life of all Inventions regardless of whether Mr. McGuire remains an employee of Ecosphere. Under the Royalty Agreement, Ecosphere granted Mr. McGuire a security interest (subordinated to all creditors and shareholders) in all of the Inventions and all revenues generated from the Inventions to secure payments owed to him under the Royalty Agreement. Provided that Ecosphere is not in default of the Royalty Agreement, Mr. McGuire will assign his rights to any technology invented by him during the term of his Employment Agreement. His amended Royalty Agreement provides that the Company will be in default for non-payment only if it has the liquidity to pay Mr. McGuire or if it defrauds him regarding its ability to pay him.

In June 2014, the Company entered into a one year Private Licensing Engagement Agreement (the “Agreement”) with ICAP in efforts to monetize the Company’s patented Ozonix® and Ecos PowerCube® technology portfolios. The Agreement may be terminated by either party with 60 days’ notice. In the event that the Company enters into an Intellectual Property Licensing Agreement, ICAP is entitled to receive a commission equal to 10% of the monies paid to the Company and its affiliates in connection with such transaction. The Chief Executive Officer of ICAP is also one of the Company’s board members and consultants.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014

(UNAUDITED)

13.

CONCENTRATIONS OF RISK

Concentration of Accounts Receivable and Revenues

At June 30, 2014, accounts receivable of $52,031 was comprised of two customer balances amounting to 94% and 6% of the total receivable balance. In addition those same two customers accounted for 97% and 3% of revenues, respectively.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. 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 June 30, 2014. As of June 30, 2014, the Company had $94,286 in cash equivalent balances held in a corporate checking account that were not insured. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. The Company’s payment terms are generally upon receipt or 30 days from delivery of products, but may fluctuate depending on the terms of each specific contract.

14.

SUBSEQUENT EVENTS

Licensing Agreement

In July 2014, the Company signed an exclusive technology licensing and equipment purchase agreement with Brasil Clean Energy (“BCE”), a Brazilian environmental services company, to deploy its patented Ozonix® water treatment technology for the Food and Beverage industry in Brazil. Under the terms of the agreement in order to maintain exclusivity, BCE is required to purchase a minimum of $5 million worth of Ozonix® equipment over the next two years, plus a royalty payment based on usage or revenue, with a minimum amount earned per machine. BCE has ordered its first Ozonix® EF10M and the manufacturing of this Unit has begun.

Partial Redemption Notice of Convertible Notes Payable

In July 2014, the Company received notice of a partial redemption in accordance with the convertible notes dated February 19, 2013. The note holders elected to have 32.35% of the original principal amount together with any and all accrued by unpaid interest repaid eighteen months following the issuance date, August 19, 2014. The Company will pay the Holders $242,625 of principal plus $8,243 of accrued interest. The $469,875 remaining principal balance of the note is due in February 2015.

Equipment Purchase Order

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” in our Form 10-K for the year ended December 31, 2013.

Company Overview

Ecosphere is a U.S. technology licensing and innovative manufacturing company that develops environmental solutions for global markets. We help industry increase production, reduce costs, and protect the environment through a portfolio of more than 35 patented and patent pending clean water and clean energy technologies: Technologies like Ozonix® and the Ecos PowerCube®, which are licensable across a wide range of industries and applications throughout the world via ICAP Patent Brokerage, the world’s largest intellectual property brokerage firm.

Intellectual Property Portfolio

Because of generally accepted accounting principles and SEC accounting rules, Ecosphere’s patents and patents pending are reflected in its unaudited consolidated balance sheet based on the cost it pays its counsel to process and maintain those patents. This type of accounting method does not take in to account the actual fair value of the intellectual property created that can be licensed to customers and industry leaders for the 20 year life of the patents. Ecosphere’s unique patents allow Ecosphere the sole right to exclude others from making, using or selling its proprietary solutions. Ecosphere’s patents also allow Ecosphere to monetize its assets for shareholders by granting local, regional or global field-of-use licenses to industry-specific partners.

Accordingly, in 2013, Ecosphere retained a leading company in the field of intellectual property valuation, to perform an analysis to value the Company’s patented Ozonix® and Ecos PowerCube® technology portfolios. The valuation was delivered in November 2013, which includes all of the potential industries and applications where Ozonix® can be used and licensed, including the global energy field-of-use, of which the shareholders of Ecosphere Technologies currently own 30.6% of through its interest in FNES. The valuation also includes an extensive review of all of the potential industries and applications where the Ecos PowerCube® can be used and licensed throughout the world. While this valuation is subject to a number of assumptions, Ecosphere believes it illustrates the hidden value that is not recognized on our Balance Sheet or by the investment community.

In 2013, Ecosphere received $10 million from Fidelity National Financial, a Fortune 500 company, or FNF, for the sale of our 20% interest in FNES, which reduced our ownership interest in FNES to 30.6%. Ecosphere expects to monetize the remaining balance of its 30.6% ownership in FNES.

In 2013, Ecosphere formed six new subsidiaries as vehicles to grant exclusive and non-exclusive global, industry-specific fields-of-use to its patented Ozonix® technology. Ecosphere has also actively begun to market its patented Ecos PowerCube® technology for a number of industries and applications including but not limited to military, humanitarian, emergency response, disaster relief and remote, off-grid telecommunications. See Note 1 to our unaudited condensed consolidated financial statements contained herein.

History of Product and Application Development

Since 2008, the Company has incurred in excess of $5.5 Million in developing its current line of products and industry specific applications utilizing its intellectual property. Such costs are exclusive of amounts paid to executive officers or our chief technology officer, who spends a significant portion of his time on research and development, and indirect general and administrative charges. Included in these development costs are engineering salaries and benefits, direct research and development costs, and costs related to the Company’s manufacturing and engineering facilities in Stuart, Florida. These efforts, along with costs incurred directly related to the generation of over $60 million in revenue from the use of the Company’s intellectual property within the Oil and Gas industry, have resulted in the Company’s current intellectual property portfolio being available for licensing for various industries and applications as follows:

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Ozonix® Market Opportunities

According to a Frost & Sullivan analysis, the global water market is estimated at $425 billion. Its growth is being driven by macro political, financial, social and ecological considerations. Additionally, according to a United Nations Report, demand for water can be broken down into major water use sectors:

Food & Agricultural (70% of freshwater use);

Energy & Industry (20%) — the percentage of a country’s industrial sector water demand is generally proportional to its average income level; and,

Human settlements (10%) — between 2009 and 2050, the world population is expected to increase by 2.3 billion, and urban areas are expected to absorb essentially all of the population growth.

Within the global water market, the estimated 2013 global water and wastewater treatment market sizes for Agriculture, Food & Beverage, Industrial, Marine, and Municipal are $3.4 billion, $4.3 billion, $10.2 billion, $2.4 billion, $1.5 billion, and $34.1 billion, respectively. This implies significant market opportunities for Ecosphere, as the Company’s patented Ozonix® technology has the potential to be applied across numerous water treatment market sectors and industries around the world including but not limited to:

Agriculture

Grain growing & processing

Irrigation & runoff

Nutrient runoff

Livestock farms & feedlots (dairy, poultry, beef, hog)

Aquaculture & fish farming

Energy

Oil & gas (onshore & offshore)

Cooling & boiler water

Nuclear power generation

Coal-fired power plants

Food & Beverage

Bottled water

Bottled beverages

Breweries

Vineyards & wineries

Dairy (milk, butter, cheese)

Livestock processing (poultry, beef, hog)

Industrial

Automotive

Aerospace & defense

Manufacturing

Marine

Aquaculture & aquariums

Ballast water

Onboard gray water

Onboard process water

Mining & Minerals

Hydrometallurgical extraction

Base metals, precious metals, mineral contamination

Pre-treatment of hard mineral mining ores

Increased ore recovery rates

Acid mine drainage

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Leachate

Tailings

Municipal

Drinking water

Sewage water

Storm & drainage water treatment

Odor control

Sludge treatment

Municipal irrigation

Ecos Powercube® Market Opportunities

Additionally, the Ecos PowerCube®’s ability to provide off-grid micro utility needs has applications in numerous markets and sub markets, including:

Military Remote Utilities: The DOD will spend $1.8 Billion on renewable energy by 2025

Remote Cell Towers: $2.8 Billion in 2014, growing to $10.5 Billion in 2020 (640,000 anticipated off-grid base station installations by the end of 2012)

Remote Habitation: $2.4 Billion in 2014, growing to $4.2 Billion in 2020

Industrial Remote Utilities: $0.5 Billion in 2013, growing to $1.2 Billion in 2020

Others

Agriculture & Ranching

Off-Grid Telecommunications

Solar Powered Wi-Fi

Humanitarian Relief

Emergency / Disaster Preparedness

Survivalists & Preppers

Infrastructure & Construction

Corporate Branding & Advertising

Remote / Temporary Entertainment Events & Venues

Equipment Rental & Leasing

Remote, Off-Grid Research Stations

Business Model

Our management team executes on a business strategy that is driven by open innovation and innovative manufacturing. “Open Innovation” is a concept that was developed by Dr. Henry Chesbrough, the Executive Director of the Center for Open Innovation at the Haas School of Business at the University of California, Berkeley. The Open Innovation concept provides a formula whereby small companies can rapidly develop and deploy new technologies and then license those technologies to larger organizations for rapid market penetration. In response to this concept, we developed the “Open Innovation Network,” our product development lifecycle that can be characterized by the following six stages:

Identify a major environmental challenge,

Invent new technologies and file patents,

Partner with industry leaders,

Commercialize and prove the technology with ongoing services paid for by customers and industry leaders,

License the patented, commercialized technologies to well capitalized partners, and

Create recurring revenues and increase shareholder value.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

As a result, we have designed, developed, manufactured and commercialized technologies that are currently solving some of the world’s most critical water, energy and environmental challenges. Our patented Ozonix® technology is a revolutionary, high volume, Advanced Oxidation Process (AOP) designed to treat and recycle industrial wastewater without the use of conventional liquid chemicals and our Ecos PowerCube® is the world’s largest, mobile, solar-powered generator that can be used across a number of remote, off-grid industries and applications.

In addition to Ozonix® and Ecos PowerCube®, we have developed an extensive portfolio of intellectual property that includes approximately 35 patents have been filed and approved in various locations around the world. These patented technologies and corresponding trademarks can be purchased and licensed for use in large-scale and sustainable applications across industries, nations and ecosystems. Companies that license our patented technologies are able to improve their financial metrics while also reducing their ecological and environmental footprints. Our current focus is on licensing Ecosphere’s patented Ozonix® and Ecos PowerCube® technologies, although our other technologies and patents remain a viable part of our long-term technology licensing strategy.

Recent Success

Ecosphere and FNES have received numerous awards and accolades for its patented and proven Ozonix® water treatment solutions for the energy sector, including but not limited to:

2013 Oil and Gas Awards - Water Management Company of the Year Award, Midcontinent Region;

2013 Bloomberg New Energy Finance Awards - New Energy Pioneer;

2013 IHS CERAWeek - Energy Innovation Pioneer Award;

2013 American Technology Awards - "Clean Tech/Green Tech" Winner;

2013 World Technology Awards - Corporate "Environment" Category Winner;

2013 Governor’s Innovators in Business Awards by Enterprise Florida – Rising Star;

2012 Frost & Sullivan North American Product Leadership Award in Disinfection Equipment for Shale Oil and Gas Wastewater Treatment; and

2010, 2011, 2012 Artemis "Top 50 Water Technologies" Winner.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Growth Strategy

In 2013, Ecosphere retained Navigant Consulting, Inc. (NYSE:NCI), a leading company in the field of intellectual property valuation, to perform an analysis to value the Company’s patented Ozonix® and Ecos PowerCube® technology portfolios. The valuation was delivered in November 2013, which includes all of the potential industries and applications where Ozonix® can be used and licensed, including the global energy field-of-use, of which the shareholders of Ecosphere Technologies currently own 30.6% of through its interest in FNES. The Valuation also includes an extensive review of all of the potential industries and applications where the Ecos PowerCube® can be used and licensed throughout the world. While this valuation is subject to a number of assumptions, the Company believes that it helps to illustrate the Company’s hidden value and opportunity that is not recognized on our Balance Sheet or by the investment community. During 2013, Ecosphere received $10 million in gross proceeds from FNF for the sale of the Company’s 20% interest in FNES. Ecosphere’s management team estimates that this sale represents approximately 2% of the estimated value of the Company’s global Ozonix® intellectual property portfolio.

As a part of the company’s strategy to monetize its intellectual property portfolio, in June 2014, the Company engaged ICAP Patent Brokerage to monetize its patented Ozonix® and Ecos PowerCube® technology portfolios and to serve as its exclusive licensing agent. ICAP is now the Company’s exclusive broker, tasked with successfully licensing both technologies across a wide variety of industries and applications on a global basis. ICAP Patent Brokerage’s veteran brokers have more than 35 years of experience in monetizing and leveraging intellectual property assets, drawing on an extensive knowledge of the marketplace across multiple sectors throughout the United States, Asia, and Europe. ICAP brings credibility, stability and liquidity to the IP marketplace and is quickly becoming the intellectual property brokerage of choice for IP assets in both the primary and secondary markets. With the growing pressure on global water resources and the need for clean, renewable energy, we expect Ecosphere’s patented technology portfolio to continue to expand.

From a technical standpoint, Ecosphere has proven its patented Ozonix® technology in the most challenging treatment market sector, the oil & gas segment of the energy industry; therefore, the technological risks faced when entering other target sectors and industries are significantly diminished. Ecosphere has also designed, engineered and manufactured its very first Ecos PowerCube® that has the ability to deploy its solar panels in approximately 18 seconds. The Ecos PowerCube® has been patented, commercialized and is ready for sale to strategic partners.

From a business standpoint, Ecosphere has successfully created a subsidiary to target the Energy industry (one of numerous target market sectors for Ozonix®, and two recent equity sales to FNF, valued just this one subsidiary at $50 million. It is important for shareholders to note: that in 2009 when FNES, formerly EES, was initially established and the technology was not yet commercially or technologically proven FNF invested $7.5 million in FNES at a $37.5 million valuation to build the equipment to service Southwestern Energy.

CRITICAL ACCOUNTING ESTIMATES

There were no changes in the Company’s critical accounting estimates during the period covered by this report.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Results of Operations

Comparison of the Three Months ended June 30, 2014 with the Three Months Ended June 30, 2013

The following table sets forth a modified version of our unaudited Condensed Consolidated Statements of Operations that is used in the following discussions of our results of operations:


	For the Three Months Ended June 30,
	2014			2013			Change
	(Unaudited)
Revenues
Field services	$	—		$	796,102		$	(796,102	)
Aftermarket part sales		3,571			180,016			(176,445	)
Total revenues		3,571			976,118			(972,547	)
Costs and expenses
Field services (exclusive of depreciation shown below)		—			274,618			(274,618	)
Aftermarket part costs (exclusive of depreciation shown below)		5,133			116,930			(111,797	)
Salaries and employee benefits		813,070			1,470,524			(657,454	)
Administrative and selling		195,127			360,980			(165,853	)
Professional fees		189,635			588,006			(398,371	)
Depreciation and amortization		106,032			331,240			(225,208	)
Research and development		119,509			9,722			109,787
Restructuring charge		—			(9,661	)		9,661
Loss on sale of notes		254,825			—			254,825
Total costs and expenses		1,683,331			3,142,359			(1,459,028	)
Loss from operations		(1,679,760	)		(2,166,241	)		486,481
Loss on investment in unconsolidated investee		(426,678	)		(46,004	)		(380,674	)
Other income (expense)
Gain on deconsolidation		—			29,474,609			(29,474,609	)
Interest income		8,517			—			8,517
Interest expense		(336,256	)		(145,724	)		(190,532	)
Change in fair value of derivative instruments		1,764			174,647			(172,883	)
Other, net		4,430			—			4,430
Total other expense, net		(321,545	)		29,503,532			(29,825,077	)
Net income (loss)		(2,427,983	)		27,291,287			(29,719,270	)
Preferred stock dividends		(20,688	)		(20,688	)		—
Net income (loss) applicable to common stock		(2,448,671	)		27,270,599			(29,719,270	)
Net loss applicable to noncontrolling interest of consolidated subsidiary		9,681			17,310			(7,629	)
Net income (loss) applicable to Ecosphere Technologies, Inc. common stock	$	(2,438,990	)	$	27,287,909		$	(29,726,899	)

The Company reported net loss applicable to Ecosphere Technologies, Inc. common stock of $2.4 million during the three months ended June 30, 2014 (the "2014 Quarter") as compared to a net income applicable to Ecosphere Technologies, Inc. common stock of $27.3 million for the three months ended June 30, 2013 (the "2013 Quarter"). The drivers of the $29.7 million quarter-over-quarter change are discussed below.

Revenues

The Company generated record revenues in 2011 and 2012 as its Ozonix® technology was deployed in the Energy sector through a partnership with a then-exclusive licensee, and through its majority owned subsidiary, FNES. In early 2013, the Company began the final phase of its business model by selling a portion of its interest in FNES. As a result of the Company's ownership in FNES declining below 50%, and the granting of managing control to FNF, the Company no longer includes the revenues of FNES in its consolidated financial statements. The Company's reported revenues for the 2013 Quarter of $1.0 million. The Company reported revenues of $3,571 for the 2014 Quarter. The Company and FNES have recently executed agreements with licensees in Brasil and Canada that may result in increased revenues in the near to mid-term, and continues its efforts to secure licensing arrangements in all of its target industries for both, Ozonix® and Ecosphere's patented Ecos PowerCube®.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Cost and Expenses

Field Services Costs (exclusive of depreciation)

Due to the deconsolidation of FNES in May 2013, there were no field services costs for the 2014 Quarter as compared to $0.3 million for the 2013 Quarter. All field services costs are related to the services business of FNES and since deconsolidation, the Company has not included field services costs incurred by FNES in its consolidated financial statements. Included in these costs for the 2013 period are payroll related expenses for field personnel and parts and supplies used in support of the operation of Ozonix® water treatment systems and Ecos-Frac® products.

Aftermarket Part Costs (exclusive of depreciation)

The costs associated with the sale of aftermarket parts for Ozonix® water treatment equipment were de minimis for the 2014 Quarter as compared to $0.1 million for the 2013 Quarter.

Salaries and Employee Benefits

The decrease in salaries and employee benefits of $0.7 million was primarily driven by lower equity-based compensation, a $0.3 million decrease for the 2014 Quarter from the 2013 Quarter. There was also a $0.2 million reduction in salaries and wages for the 2014 Quarter from the 2013 Quarter.

Professional Fees

The $0.4 million decrease in professional fees for the 2014 Quarter was driven by a $0.1 million decrease in consulting fees, $0.2 million decrease in legal fees relating to the Halliburton arbitration and $0.1 million decrease in corporate legal fees.

Loss from Operations

Loss from operations for the 2014 Quarter was $1.7 million compared to loss from operations of $2.2 million for the 2013 Quarter. See discussion above under "Revenues," "Cost and Expenses" for details.

Loss on investment in unconsolidated investee

On May 24, 2013, the Company sold a 12% interest in FNES and transferred an additional 1.5% interest to a board member of FNES, reducing the Company’s ownership in FNES from 52.6% to 39.1%. Since May 24, 2013, the Company accounts for its investment in FNES under the equity method. Furthermore, in July 2013, the Company sold an additional 8% interest in FNES and transferred an additional 0.5% interest in FNES reducing the Company’s ownership in FNES from 39.1% to 30.6%. During the 2014 Quarter, the loss on investment in unconsolidated investee was $0.4 million as compared to a loss on investment in unconsolidated investee of $46,004 for the 2013 Quarter.

Interest Expense

Interest expense for the 2014 Period increased $0.2 million which was primarily due to the recent raise of $1.95 million through the sale of Convertible Notes and Warrants.

Net Loss Applicable to Noncontrolling Interest in Consolidated Subsidiary

Net loss applicable to noncontrolling interest in our Ecosphere Mining, LLC consolidated majority-owned subsidiary was de minimis for the 2014 Quarter.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Comparison of the Six Months ended June 30, 2014 with the Six Months Ended June 30, 2013

The following table sets forth a modified version of our unaudited Condensed Consolidated Statements of Operations that is used in the following discussions of our results of operations:


	For the Six Months Ended June 30,
	2014			2013			Change
	(Unaudited)
Revenues
Equipment sales and licensing, related party	$	107,925		$	—		$	107,925
Field services		—			1,547,786			(1,547,786	)
Aftermarket part sales		3,571			289,951			(286,380	)
Aftermarket part sales, related party		26,324			—			26,324
Total revenues		137,820			1,837,737			(1,699,917	)
Costs and expenses
Equipment sales and licensing (exclusive of depreciation shown below)		33,925			—			33,925
Field services (exclusive of depreciation shown below)		—			721,214			(721,214	)
Aftermarket part costs (exclusive of depreciation shown below)		27,049			226,473			(199,424	)
Salaries and employee benefits		1,741,029			2,603,342			(862,321	)
Administrative and selling		417,760			731,616			(313,856	)
Professional fees		723,647			1,154,521			(430,874	)
Depreciation and amortization		209,981			876,251			(666,270	)
Research and development		200,025			18,206			(181,819	)
Restructuring charge		—			(3,170	)		3,170
Loss on sale of notes		985,085			—			985,085
Total costs and expenses		4,338,501			6,328,453			(1,989,952	)
Loss from operations		(4,200,681	)		(4,490,716	)		290,035
Loss on investment in unconsolidated investee		(743,002	)		(46,004	)		(696,998	)
Other income (expense)
Gain on deconsolidation		—			29,474,609			(29,474,609	)
Interest income		45,089			—			45,089
Interest expense		(913,296	)		(238,229	)		(675,067	)
Change in fair value of derivative instruments		3,671			88,679			(85,008	)
Other, net		4,430			—			4,430
Total other expense, net		(860,106	)		29,325,059			(29,003,514	)
Net income (loss)		(5,803,789	)		24,788,339			(30,592,128	)
Preferred stock dividends		(41,376	)		(41,376	)		—
Net income (loss) applicable to common stock		(5,845,165	)		24,746,963			(30,592,128	)
Net loss applicable to noncontrolling interest of consolidated subsidiary		9,681			187,806			(178,125	)
Net income (loss) applicable to Ecosphere Technologies, Inc. common stock	$	(5,835,484	)	$	24,934,769		$	(30,770,253	)

The Company reported net loss applicable to Ecosphere Technologies, Inc. common stock of $5.8 million during the six months ended June 30, 2014 (the "2014 Period") as compared to a net income applicable to Ecosphere Technologies, Inc. common stock of $24.9 million for the six months ended June 30, 2013 (the "2013 Period"). The drivers of the $30.8 million change are discussed below.

Revenues

The Company generated record revenues in 2011 and 2012 as its Ozonix technology was deployed in the Energy sector through a partnership with a then-exclusive licensee, and through its majority owned subsidiary, FNES. In early 2013, the Company began the final phase of its business model by selling a portion of its interest in FNES. As a result of the Company's ownership in FNES declining below 50%, and the granting of managing control to FNF, the Company no longer includes the revenues of FNES in its consolidated financial statements. The Company's reported revenues for the 2013 Period of $1.8 million. The Company reported revenues of $0.1 million for the 2014 Period. The Company and FNES have recently executed agreements with licensees in Brasil and Canada that may result in increased revenues in the near to mid-term, and continues its efforts to secure licensing arrangements in all of its target industries for both, Ozonix® and Ecosphere's patented Ecos PowerCube®.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Cost and Expenses

Equipment Sales and Licensing Costs (exclusive of depreciation)

The equipment sales and licensing costs for the 2014 Period were $33,925 in connection with FNES’ sale of the Ozonix® EF10M to Hydrosphere Energy Solutions.

Field Services Costs (exclusive of depreciation)

Due to the deconsolidation of FNES in May 2013, there were no field services costs for the 2014 Period as compared to $0.7 million for the 2013 Period. All field services costs are related to the services business of FNES and since deconsolidation, the Company has not incurred field services costs. Included in these costs for the 2013 period are payroll related expenses for field personnel and parts and supplies used in support of the operation of Ozonix® water treatment systems and Ecos-Frac® products.

Aftermarket Part Costs (exclusive of depreciation)

The costs associated with the sale of aftermarket parts for Ozonix® water treatment equipment were de minimis for the 2014 Period as compared to $0.2 million for the 2013 Period.

Salaries and Employee Benefits

The decrease in salaries and employee benefits of $0.9 million was primarily the result of the Company no longer reporting the costs and expenses of FNES on its Statements of Operations since it no longer consolidates FNES operations, a $0.3 million decrease in equity-based compensation and $0.2 million decrease in salaries, wages and related taxes and benefits.

Professional Fees

The $0.4 million decrease in professional fees for the 2014 Period was driven by a $0.1 million decrease in consulting fees, $0.2 million decrease in legal fees relating to the Halliburton arbitration and $0.1 million decrease in corporate legal fees.

Loss from Operations

Loss from operations for the 2014 Period was $4.2 million compared to loss from operations of $4.5 million for the 2013 Period. See discussion above under "Revenues," "Cost and Expenses" for details.

Loss on investment in unconsolidated investee

On May 24, 2013, the Company sold a 12% interest in FNES and transferred an additional 1.5% interest to a board member of FNES, reducing the Company’s ownership in FNES from 52.6% to 39.1%. Since May 24, 2013, the Company accounts for its investment in FNES under the equity method. Furthermore, in July 2013, the Company sold an additional 8% interest in FNES and transferred an additional 0.5% interest in FNES reducing the Company’s ownership in FNES from 39.1% to 30.6%. During the 2014 Period, the loss on investment in unconsolidated investee was $0.7 million.

Interest Expense

Interest expense for the 2014 Period increased $0.7 million which was primarily due to the recent raise of $1.95 million through the sale of Convertible Notes and Warrants.

Net Loss Applicable to Noncontrolling Interest in Consolidated Subsidiary

Net loss applicable to noncontrolling interest in our Ecosphere Mining, LLC consolidated majority-owned subsidiary was de minimis for the 2014 Quarter.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

LIQUIDITY AND CAPITAL RESOURCES

A summary of our cash flows is as follows:


	Six Months Ended
	June 30,
	2014			2013
	(Unaudited)
Net cash used in operating activities	$	(2,789,732	)	$	(5,777,562	)
Net cash used in investing activities	$	(225,193	)	$	3,707,139
Net cash provided by financing activities	$	2,297,627		$	(172,677	)

2014 Period

Operating Activities

Net cash used in operating activities was $2.8 million for the 2014 Period, compared to net cash used in operating activities of $5.8 million for the 2013 Period. For the 2014 Quarter, cash used in operating activities of $2.8 million resulted from the net loss applicable to Ecosphere common stock of $5.8 million and was offset by the loss on sale of notes receivable of $1.0 million in connection with the two Ozonix® EF80 units sold in 2013 to FNES, an accretion of discounts of Notes payable of $0.7 million and the Company’s loss on investment in unconsolidated investee, or FNES of $0.7 million.

Investing Activities

Net cash used in investing activities of $0.2 million was primarily from additions to property and equipment. This included computer equipment and software, a Company manufactured fixture to house the Company’s raw metals inventory and additions to a mobile operations vehicle originally purchased during the fourth quarter of 2013. The Company also had additions to leasehold improvements, furniture and fixtures and office equipment relating to the build out of the mining office in Park City, Utah.

Financing Activities

The Company’s net cash provided by financing activities of $2.3 million consisted primarily of proceeds from the sale of notes receivable, which a portion was to a related party, as well as proceeds from the issuance of convertible notes payable and warrants.

2013 Period

Operating Activities

Net cash used in operating activities was $5.8 million for the six months ended June 30, 2013. Cash used in operating activities for 2013 resulted primarily from the operating loss of $4.5 million and $3.3 million for the build out of the two Ozonix® EF80 units, offset by noncash expenses of approximately $1.9 million.

Investing Activities

The Company’s net cash provided by investing activities of $3.7 million was the result of net proceeds from the sale of a 12% interest in FNES totaling approximately $5.9 million, offset by $0.5 million of construction in process purchases, the repayment of $1.4 million advanced by FNES and $0.25 million of cash held by FNES on the date of deconsolidation.

Financing Activities

The Company’s net cash used in financing activities consisted primarily of the repayment of $1.0 million in notes payable and other financing obligations, offset by $0.8 million of proceeds from the exercise and modification of warrants.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Liquidity

As of August 6, 2014, Ecosphere had cash on hand of approximately $0.3 million. Management believes that its current plans will provide sufficient liquidity for the next 12 months if it is successful in meeting one or more of the targets listed below and generates sufficient funding. The Company needs to pay approximately $250,000 due to a permitted redemption by the holders of convertible notes issued in February 2013. The Company plans to seek an extension and has no alternatives if the holders decline to extend the payment date. In addition, the Company has approximately $45,000 in monthly lease and other mandatory payments, not including payroll and ordinary expenses which must be paid monthly. Ecosphere plans to continue monetizing its intellectual property, and has identified the following liquidity sources that it expects to realize over the next three years:

The Company is seeking to raise additional capital through the sale of Convertible Notes and Warrants.

Ecosphere’s business model revolves upon the licensing of its intellectual property. The Company is actively marketing exclusive and non-exclusive licensing opportunities for sale to strategic, well positioned partners that wish to bring our patented Ozonix® and Ecos PowerCube® technologies to specific industries in their respective countries and regions of the world. Management expects this will result in similar realization of the value that has been realized by the development and sale of the global energy rights for its Ozonix® technology to FNES. Ecosphere owns 100% of the global rights to its patented Ozonix® technology for all non-energy related applications, including but not limited to agriculture, food and beverage, industrial, marine and municipal wastewater treatment, and any other industry in which water is treated with conventional liquid chemicals. Ecosphere also owns 100% of the global right to its patented Ecos PowerCube® technology for all industries and applications worldwide.

Additionally, Ecosphere has its own in-house design, engineering and manufacturing facilities to support customers and licensees ongoing requests. In the event that customers choose not to manufacture Ecosphere’s patented technologies themselves, the Company will charge accordingly.

In addition to the various licensing opportunities that are available for its patented Ozonix® and Ecos PowerCube® technologies globally, the Company’s 30.6% interest in FNES is also available for sale.

However, Ecosphere cannot provide any assurance that these plans will be successful. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

In addition to needing capital to support its operations, Ecosphere has $1,007,500 in convertible notes payable due over the next 12 months. This consists of $50,000 due in September 2014 and $245,000 due in March 2015. As described above, in July 2014, the Company also received notice of a partial redemption request due in August 2014 and shall pay the Holders $242,625 of principal plus $8,243 of accrued interest in accordance with the convertible notes dated February 19, 2013. The $469,875 remaining principal balance of the note is due in February 2015.

RELATED PARTY TRANSACTIONS

For information on related party transactions and their financial impact, see Note 11 to the unaudited condensed consolidated financial statements.

RESEARCH AND DEVELOPMENT

Research and development costs were approximately $0.1 million during the three months ended June 30, 2014 and during the three months ended June 30, 2013 research and development costs were de minimis.

RECENTLY ISSUES ACCOUNTING PRONOUNCEMENTS

For information on recently issued accounting pronouncements, see Note 2 to the unaudited condensed consolidated financial statements.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains forward-looking statements including expanding our technology into other industries, replicating the success of FNES, the value of subsidiaries in other verticals, anticipated and potential revenue, working capital and liquidity. Forward looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the condition of the credit and financial markets, our ability to raise short-term and long-term work capital, the effects of the global recession, the future price of natural gas, future legislation and regulations which affect hydraulic fracturing, the ability to find purchasers and investors for our technologies, FNES’ ability with Ecosphere’s assistance to market our Ozonix® technology to exploration companies and sell units to third parties and the general reluctance of businesses to utilize new technology.

Further information on our risk factors is contained in its filings with the Securities and Exchange Commission (the “SEC”) including our Form 10-K for the year ended December 31, 2013. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. Our cash balances of approximately $0.3 million as of June 30, 2014 were held in insured depository accounts, $94,286 of which exceeded insurance limits.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures. Our management carried out an evaluation, with the participation of our Principal Executive Officer and Principal Financial Officer, required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on their evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under SEC rules and forms and is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

The Company received a ruling on August 8, 2014 after the close of market regarding its arbitration proceeding filed with the American Arbitration Association in February 2013 against Halliburton Energy Services, Inc. (“Halliburton”).

The arbitration claim included a count alleging that Halliburton had breached a 2009 Joint Confidentiality Agreement and converted or misappropriated Ecosphere’s trade secrets related to Ecosphere’s advanced oxidation process of treating and recycling water used in the hydraulic fracturing of oil and natural gas wells. During the term of the Confidentiality Agreement, Halliburton offered to purchase Ecosphere but negotiations broke down and Halliburton subsequently began to advertise an advanced oxidation process of treating and recycling water for use in the hydraulic fracturing of oil and natural gas wells, and filed three) related patent applications with the U.S. Patent Office.

During the arbitration proceeding, Halliburton admitted it had not commercialized a similar advanced oxidation process and had no intentions to commercialize such a process; accordingly Ecosphere voluntarily withdrew that count from the proceeding. The remaining count was directed to the three patent applications filed with the U.S. Patent Office that described a process similar to Ecosphere’s advanced oxidation process of treating and recycling water. Halliburton subsequently expressly abandoned the applications.

The arbitration panel denied Ecosphere’s claims for damages as well as Halliburton’s claims to be reimbursed for attorney’s fees. The panel ruled that both parties pay their own fees, costs and expenses (including fees and expenses of counsel and experts) in connection with the arbitration.

From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. During the period covered by this report, there were no material changes to any pending legal proceedings to which we are a party.

ITEM 1A.

RISK FACTORS.

Not applicable.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.

OTHER INFORMATION.

None

ITEM 6.

EXHIBITS.

See the Exhibit Index.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		ECOSPHERE TECHNOLOGIES, INC.

August 11, 2014		/s/ Dennis McGuire
		Dennis McGuire
		Chief Executive Officer
		(Principal Executive Officer)

August 11, 2014		/s/ David Brooks
		David Brooks
		Chief Financial Officer
		(Principal Financial Officer)

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

EXHIBIT INDEX


Exhibit		Incorporated by Reference			Filed or Furnished
No.	Exhibit Description	Form	Date	Number	Herewith

3.1	Certificate of Incorporation, as amended	10-Q	5/12/14	3.1
3.2	Bylaws, as amended	10-Q	5/12/14	3.2
31.1	Certification of Principal Executive 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**
101.INS	XBRL Instance Document				Filed
101.SCII	XBRL Taxonomy Extension Schema Document				Filed
101.CAL	XBRL; Taxonomy Extension Calculating Linkbase Document				Filed
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document				Filed
101.LAB	XBRL Taxonomy Extension Label Linkbase Document				Filed
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document				Filed

———————

This exhibit is being furnished rather than filed and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

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: Jacqueline McGuire, Corporate Secretary.

ECOSPHERE TECHNOLOGIES INC - FORM 10-Q - August 11, 2014

Attached files

ECOSPHERE TECHNOLOGIES INC Reports