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EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - ECOSPHERE TECHNOLOGIES INCesph_ex31z2.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - ECOSPHERE TECHNOLOGIES INCesph_ex31z1.htm
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - ECOSPHERE TECHNOLOGIES INCesph_ex32z1.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 September 30, 2015

 

 

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 November 19, 2015

Common Stock, $0.01 par value per share

 

165,168,894 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

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

Item 1A.

Risk Factors

34

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

 

Item 3.

Defaults Upon Senior Securities

34

 

 

 

Item 4.

Mine Safety Disclosures

34

 

 

 

Item 5.

Other Information

34

 

 

 

Item 6.

Exhibits

34


SIGNATURES

35







 




PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

Assets

  

                            

  

  

                            

  

Current assets

 

 

 

 

 

 

Cash

 

$

4,822

 

 

$

31,800

 

Restricted cash

 

 

50,050

 

 

 

50,050

 

Accounts receivable

 

 

90

 

 

 

2,400

 

Accounts receivable-related party, net

 

 

 

 

 

52,740

 

Inventory

 

 

1,557,607

 

 

 

559,150

 

Prepaid expenses and other current assets

 

 

60,739

 

 

 

55,109

 

Total current assets

 

 

1,673,308

 

 

 

751,249

 

Investment in unconsolidated investee

 

 

 

 

 

12,668,298

 

Property and equipment, net

 

 

1,090,177

 

 

 

1,356,628

 

Slow moving inventory, net

 

 

71,401

 

 

 

71,401

 

Patents, net

 

 

182,582

 

 

 

189,303

 

Deposits

 

 

14,840

 

 

 

14,840

 

Total assets

 

$

3,032,308

 

 

$

15,051,719

 

 

 

 

 

 

 

 

 

 

Liabilities, Redeemable Convertible Cumulative Preferred Stock and Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,165,872

 

 

$

417,721

 

Accrued liabilities

 

 

1,380,126

 

 

 

981,012

 

Customer deposit

 

 

1,451,380

 

 

 

1,209

 

Current portion of deferred revenue

 

 

25,000

 

 

 

 

Current portion of convertible notes payable, net of discounts

 

 

3,493,784

 

 

 

2,038,116

 

Notes payable

 

 

252,149

 

 

 

102,149

 

Related party note payable

 

 

50,000

 

 

 

 

Current portion of financing obligations

 

 

55,168

 

 

 

56,215

 

Current portion of capital lease obligation

 

 

16,762

 

 

 

16,141

 

Total current liabilities

 

 

7,890,241

 

 

 

3,612,563

 

Deferred revenue, net of current portion

 

 

457,292

 

 

 

 

Convertible notes payable, net of discounts and current portion

 

 

2,000,000

 

 

 

123,526

 

Financing obligations, net of current portion

 

 

32,022

 

 

 

63,594

 

Capital lease obligation, net of current portion

 

 

13,138

 

 

 

25,788

 

Total liabilities

 

 

10,392,693

 

 

 

3,825,471

 

 

 

 

 

 

 

 

 

 

Redeemable convertible cumulative preferred stock

 

 

 

 

 

 

 

 

Series A - 11 shares authorized; 6 shares issued and outstanding at September 30, 2015 and December 31, 2014; $25,000 per share redemption amount plus dividends in arrears

 

 

1,242,869

 

 

 

1,225,994

 

Series B - 484 shares authorized; 241 shares issued and outstanding at September 30, 2015 and December 31, 2014; $2,500 per share redemption amount plus dividends in arrears

 

 

2,622,474

 

 

 

2,577,285

 

Total redeemable convertible cumulative preferred stock

 

 

3,865,343

 

 

 

3,803,279

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

 

 

 

Ecosphere Technologies, Inc. stockholders' (deficit) equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 300,000,000 shares authorized; 165,168,894 and 164,734,112 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively

 

 

1,651,689

 

 

 

1,647,341

 

Additional paid-in capital

 

 

117,939,442

 

 

 

115,252,710

 

Accumulated deficit

 

 

(130,728,802

)

 

 

(109,463,965

)

Total Ecosphere Technologies, Inc. stockholders' (deficit) equity

 

 

(11,137,671)

 

 

 

7,436,086

 

Noncontrolling interest in consolidated subsidiary

 

 

(88,057

)

 

 

(13,117

)

Total (deficit) equity

 

 

(11,225,728)

 

 

 

7,422,969

 

Total liabilities, redeemable convertible cumulative preferred stock and equity (deficit)

 

$

3,032,308

 

 

$

15,051,719

 


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



1



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenues

     

 

                       

     

 

                       

     

 

                       

     

 

                       

 

Equipment sales and licensing

 

$

6,250

 

$

530,550

 

$

17,708

 

$

530,550

 

Equipment sales and licensing, related party

 

 

 

 

 

 

 

 

107,925

 

Aftermarket part sales

 

 

8,990

 

 

13,708

 

 

8,990

 

 

17,279

 

Aftermarket part sales, related party

 

 

 

 

6,374

 

 

8,506

 

 

32,698

 

Total revenues

 

 

15,240

 

 

550,632

 

 

35,204

 

 

688,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales and licensing costs (exclusive of depreciation shown below)

 

 

 

 

338,700

 

 

18,772

 

 

372,625

 

Aftermarket part costs (exclusive of depreciation shown below)

 

 

9,938

 

 

18,624

 

 

19,466

 

 

45,673

 

Selling, general and administrative

 

 

1,217,852

 

 

999,939

 

 

3,402,471

 

 

4,082,400

 

Depreciation and amortization

 

 

91,337

 

 

113,272

 

 

277,435

 

 

323,253

 

Loss on sale of notes receivable

 

 

 

 

 

 

 

 

985,085

 

Bad debt

 

 

162,240

 

 

 

 

162,240

 

 

 

Total costs and expenses

 

 

1,481,367

 

 

1,470,535

 

 

3,880,384

 

 

5,809,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(1,466,127

)

 

(919,903)

 

 

(3,845,180

)

 

(5,120,584

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and impairment on investment in unconsolidated investee

 

 

(12,177,415

)

 

(503,847)

 

 

(12,668,298

)

 

(1,246,849

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

45,089

 

Interest expense

 

 

(1,069,448

)

 

(457,693

)

 

(3,132,067

)

 

(1,370,989

)

Loss on debt extinguishment

 

 

(1,515,320

)

 

(61,051

)

 

(1,696,007

)

 

(61,051

)

Gain on change in fair value of derivative instruments

 

 

 

 

 

 

 

 

3,671

 

Other, net

 

 

643

 

 

1,249

 

 

1,775

 

 

5,679

 

Total other expense, net

 

 

(2,584,125

)

 

(517,495

)

 

(4,826,299

)

 

(1,377,601

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(16,227,667

)

 

(1,941,245

)

 

(21,339,777

)

 

(7,745,034

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

(20,688

)

 

(20,688

)

 

(62,064

)

 

(62,064

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stock before allocation to non controlling interest

 

 

(16,248,355

)

 

(1,961,933

)

 

(21,401,841

)

 

(7,807,098

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: net loss applicable to non-controlling interest in consolidated subsidiary

 

 

71,998

 

 

618

 

 

74,940

 

 

10,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to Ecosphere Technologies, Inc. common stock

 

$

(16,176,357

)

$

(1,961,315

)

$

(21,326,901

)

$

(7,796,799

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share applicable to common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

$

(0.01

)

$

(0.13

)

$

(0.05

)

Diluted

 

$

(0.10

)

$

(0.01

)

$

(0.13

)

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

165,168,894

 

 

164,147,155

 

 

165,090,568

 

 

164,145,744

 

Diluted

 

 

165,168,894

 

 

164,147,155

 

 

165,090,568

 

 

164,145,744

 


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



2



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

For the Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

  

                          

  

  

                          

  

Operating Activities:

 

 

 

 

 

 

Net loss applicable to Ecosphere Technologies, Inc. common stock

 

$

(21,326,901

)

 

$

(7,796,799

)

Adjustments to reconcile net loss applicable to Ecosphere Technologies, Inc. common stock to net cash used in operating activities:

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

62,064

 

 

 

62,064

 

Depreciation and amortization

 

 

277,435

 

 

 

323,253

 

Non-controlling interest in loss of consolidated subsidiary

 

 

(74,940

)

 

 

(10,299

)

Amortization of debt issue costs

 

 

 

 

 

24,279

 

Amortization of discount on notes payable

 

 

2,624,803

 

 

 

1,108,934

 

Bad debt expense

 

 

162,240

 

 

 

 

Stock-based compensation expense

 

 

349,948

 

 

 

397,878

 

Income from change in fair value of warrant derivative liability

 

 

 

 

 

(3,671

)

Loss and impairment on investment in unconsolidated investee

 

 

12,668,298

 

 

 

1,246,849

 

Loss on sale of notes receivable

 

 

 

 

 

985,085

 

Modification of warrants and options

 

 

41,701

 

 

 

115,826

 

Shares issued for note extension

 

 

47,826

 

 

 

 

Loss on debt extinguishment

 

 

1,696,007

 

 

 

61,051

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable

 

 

(107,190

)

 

 

227,252

 

Decrease in prepaid expenses and other current assets

 

 

63,955

 

 

 

137,489

 

Increase in inventory

 

 

(998,457

)

 

 

(518,693

)

Increase in accounts payable

 

 

778,153

 

 

 

290,356

 

Increase (decrease) in accrued liabilities

 

 

399,114

 

 

 

(157,839

)

Increase in customer deposits

 

 

1,450,171

 

 

 

291,620

 

Increase in deferred revenue

 

 

482,292

 

 

 

 

Net cash used in operating activities

 

 

(1,403,481

)

 

 

(3,215,365

)

Investing Activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,396

)

 

 

(175,930

)

Transfer to restricted cash

 

 

 

 

 

(25,050

)

Payment of patent costs

 

 

(1,865

)

 

 

(52,704

)

Net cash used in investing activities

 

 

(4,261

)

 

 

(253,684

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible notes payable and warrants

 

 

1,225,000

 

 

 

1,245,000

 

Proceeds from issuance of note payable

 

 

150,000

 

 

 

 

Proceeds from issuance of related party note payable

 

 

50,000

 

 

 

 

Proceeds from warrant and option modifications

 

 

 

 

 

60,000

 

Proceeds from sale of stock in consolidated subsidiary

 

 

100,000

 

 

 

 

Proceeds from sale of notes receivable

 

 

 

 

 

2,171,277

 

Repayments of notes payable and insurance financing

 

 

(88,309

)

 

 

(153,118

)

Repayments of capital lease obligation

 

 

(12,029

)

 

 

(11,438

)

Repayments of vehicle and equipment financing

 

 

(43,898

)

 

 

(115,786

)

Net cash provided by financing activities

 

 

1,380,764

 

 

 

3,195,935

 

Net decrease in cash

 

 

(26,978

)

 

 

(273,114

)

Cash at beginning of period

 

 

31,800

 

 

 

1,059,651

 

Cash at end of period

 

$

4,822

 

 

$

786,537

 


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



3



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

For the Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

Supplemental disclosures of cash flow information:

  

                          

  

  

                          

  

Cash paid for interest

 

$

67,097

 

 

$

62,881

 

Cash paid for income taxes

 

$

 

 

$

6,665

 

 

 

 

 

 

 

 

 

 

Schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued preferred stock dividends

 

$

62,064

 

 

$

62,064

 

Cashless exercise of options and warrants

 

$

 

 

$

88

 

Beneficial conversion feature on convertible debt and convertible debt modifications charged to additional paid in capital

 

$

1,231,669

 

 

$

1,536,871

 

Modification of warrants and options

 

$

41,701

 

 

$

115,826

 

Insurance premium finance contract recorded as a prepaid asset

 

$

99,588

 

 

$

104,299

 


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






4



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



1.

DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION


Description of the Business


Ecosphere Technologies, Inc. (“Ecosphere,” “ETI” or the “Company”) is a technology development and intellectual property licensing company that develops environmental solutions for global water, agricultural, energy and industrial markets.  The Company helps clients increase production, reduce costs and protect the environment through a portfolio of more than 35 patented and patent-pending technologies:  Technologies like Ozonix® and the Ecos GrowCube™, which are available for exclusive and nonexclusive licensing opportunities across a wide range of industries and applications throughout the world.


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 selling and manufacturing its products to the agricultural market and licensing applications for its patented Ozonix technology to industrial customers in the United States and overseas.  


These technologies using the Ozonix® technology have generated more than $70 million in equipment sales, field service and technology licensing revenue to date through ETI and our equity method investee. In July 2015, Sea of Green Systems, Inc. (“SOGS”), a majority owned subsidiary of ETI, took receipt of a $1.3 million equipment order that the Company is anticipating to deliver in December 2015. This equipment is currently being manufactured by ETI. As the oil and gas market plummeted, ETI began focusing on the Ecos GrowCube™ technology, another key technology, while continuing to license its OzonixÒ technology. This resulted in its development of an innovative indoor and outdoor growing technology using OzonixÒ to deliver clean water to enhance the products grown. This innovative product led to the equipment order referred to above and ETI expects that the initial results of the first crops grown in the Ecos GrowCube™ will lead to additional business.


Business Model


The Company’s management team executes on a business strategy that is driven by open innovation and innovative manufacturing. 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:


1.

Identify a major environmental challenge,

2.

Invent new technologies and file patents,

3.

Partner with industry leaders,

4.

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

5.

License the patented, commercialized technologies to well capitalized partners that are geographically located, and

6.

Create recurring revenues and increase shareholder value.


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, 2014.



5



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



Going Concern


As of November 17, 2015, Ecosphere had cash on hand of approximately $16,644. Due to the nature of its technology licensing business model, Ecosphere presently does not have any regularly recurring revenue. The Company reported a net loss of $16,227,667 and $21,339,777, for the three and nine months ended September 30, 2015, respectively and cash used in operating activities of $1,403,481 for the nine months ended September 30, 2015.  At September 30, 2015, the Company had a working capital deficit and accumulated deficit of $6,216,933 and $130,728,802, respectively. 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 is described below.


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:



·

Ecosphere is actively marketing exclusive and non-exclusive licensing opportunities for sale to strategic, well positioned partners that wish to bring our patented Ozonix® technology to specific industries in their respective countries and regions of the world. Management expects this will result in similar realization of the revenues that were recognize from the development and sale of the global energy rights for its Ozonix® technology. Ecosphere is actively pursuing and executing licensing agreements for non-energy related water treatment 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.   

·

Ecospheres 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® technology globally, the Company’s 30.6% interest in its energy investment is also available for sale to strategic buyers.

·

In November 2014, Ecosphere launched its Ecos GrowCube technology and corresponding product line for the global Precision Agriculture and Agri-Technology markets. SOGS, a subsidiary of Ecosphere and the entity that owns the rights to the Ecos GrowCube™ technology, has begun to execute on its equipment sales and marketing strategy, as evidenced by its first $1.3 million equipment order in July 2015. SOGS’ business model is to sell Ecos GrowCube™ systems to customers with ETI manufacturing the systems and if the Company can sell the products at acceptable margins it should provide a more consistent revenue stream for the Company as opposed to its core strategy of licensing its patented Ozonix® technology, which is less consistent.

·

SOGS is seeking to raise $500,000 in bridge capital from the sale of SOGS common stock to provide working capital and permit it to pay the funds it owes ETI. To eliminate dilution to SOGSs minority shareholders, ETI will cancel an equal number of shares as they are sold. As of the date of this Report the Company has raised $345,000 and has a binding agreement from an investor for another $100,000 but the funds have not been received as of the date of this Report. See Note 14.


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 $3,700,000 in convertible notes payable due over the next 12 months from the date of this filing. This consists of $200,000 due in December 2015, $295,000 due in January 2016, $645,000 due in February 2016, $295,000 due in March 2016, $112,500 due in April 2016 and $2,125,000 due in September 2016. See Note 6.



6



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



2.

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. The Company accounts for its 30.6% investment in FNES under the equity method (See Note 3). All intercompany account balances and transactions have been eliminated.


Noncontrolling Interest


In October 2013, the Company’s subsidiary, Ecosphere Mining, LLC, granted to its directors an aggregate of 5% ownership in Ecosphere Mining, LLC. Further in June 2015, the Company granted a note holder a 2.5% ownership interest 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 based on its 92.5% ownership.


Through August 13, 2015, the Company owned 100% of SOGS. On August 14, 2015, the Company’s ownership in SOGS reduced to approximately 97.3% in connection with the sale and issuance of shares of SOGS common stock. The Company further reduced its ownership in late August 2015 to approximately 76.9% in connection with the issuance of shares of common stock as consideration for debt extensions. 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 based on its 76.9% ownership.


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 unaudited condensed 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 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. The Company had no cash equivalents at September 30, 2015.


Restricted Cash


Restricted cash as of September 30, 2015, 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. No allowance was deemed necessary at December 31, 2014. At September 30, 2015 the Company recorded an allowance for doubtful accounts of $162,240 in connection with its related party accounts receivable.




7



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



Inventory


Inventory is primarily comprised of raw materials to manufacture water treatment equipment, finished goods representing one Ozonix® water treatment system for future sale to an existing customer, one Ecos PowerCube® being held at the corporate offices in Stuart, FL and one self-contained, outdoor Ecos GrowCube™ that is being used in Las Vegas, NV on a test basis. Both the Ecos PowerCube® and Ecos GrowCube™ have been completed for future sale and demonstration purposes where no binding sales contract exists. In addition, the Company has work-in-process representing modifications to the Ecos PowerCube® and one indoor Ecos GrowCube™ being manufactured for the equipment order received in July 2015. 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 and see Note 6 for security interest in inventory.


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 September 30, 2015 and December 31, 2014 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.


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.




8



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



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.


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.


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.




9



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



Royalties


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


Licensing Revenue


The Company typically amortizes licensing revenue over the life of a licensing agreement in accordance with SAB Topic 13f and the unamortized portion is recorded as deferred revenue. See Note 7.


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


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 September 30, 2015, tax years since 2012 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.




10



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



For the nine months ended September 30, 2015 and 2014, no potential common shares were included in the calculation of diluted loss per share because they were anti-dilutive.


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 Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

 

2014

 

Convertible debt

 

 

48,007,246

 

 

 

22,112,138

 

Convertible preferred stock

 

 

362,497

 

 

 

362,497

 

Options and warrants to purchase common stock

 

 

108,452,437

 

 

 

84,345,731

 

Total Anti-Dilutive Potential Common Stock

 

 

156,822,180

 

 

 

106,820,366

 


New Accounting Standards


In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires management of the Company to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company does not expect this standard to have an impact on the Company’s consolidated financial statements upon adoption.


In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which changes the presentation of debt issuance costs in financial statements. Under this guidance such costs would be presented as a direct deduction from the related debt liability rather than as an asset. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact this guidance will have on its Consolidated Balance Sheet, but expects that as of September 30, 2015 this guidance would not have a material effect on the consolidated balances current presentation.


On May 8, 2015, the FASB issued ASU 2015-08, “Business Combinations (Topic 805) Pushdown Accounting” which conforms the FASB’s guidance on pushdown accounting with the SEC’s guidance. ASU 2015-08 is effective for annual periods beginning after December 15, 2015. The Company does not expect this ASU to have a material impact on its consolidated financial statements.


In July 2015, the FASB issued Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory.” This standard changes the inventory valuation method from the lower of cost or market to the lower of cost or net realizable value for inventory valued under the first-in, first-out or average cost methods. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods and requires prospective adoption with early adoption permitted. We do not anticipate a material impact on our financial condition, results of operations or cash flows as a result of adopting this standard.




11



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



3.

INVESTMENT IN UNCONSOLIDATED INVESTEE


The Company accounts for its 30.6% investment in FNES using the equity method of accounting. Condensed unaudited summary financial information for FNES as of September 30, 2015 and for the three and nine months ended September 30, 2015 is as follows:


 

 

September 30,

2015

 

 

 

(Unaudited)

  

ASSETS

 

 

 

 

Cash

     

$

198,793

 

Accounts receivable, net

 

 

212,241

 

Property and equipment

 

 

2,951,490

 

Inventory

 

 

97,075

 

Prepaid expenses

 

 

38,708

 

Intangible assets

 

 

1,631,945

 

Slow moving inventory, net

 

 

24,864

 

Deposits

 

 

6,796

 

 

 

 

 

 

Total assets

 

$

5,161,912

 

 

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

Accounts payable and accrued expenses

 

$

315,279

 

Accounts payable, related party

 

 

162,240

 

Financing obligations

 

 

13,077

 

Debt

 

 

1,306,613

 

Debt, related party

 

 

2,674,793

 

Members' equity

 

 

689,910

 

 

 

 

 

 

Total liabilities and members' equity

 

$

5,161,912

 



 

For the three

months ended

September 30, 2015

 

For the nine

months ended

September 30, 2015

 

 

(Unaudited)

 

(Unaudited)

 

STATEMENT OF OPERATIONS

 

 

 

 

 

 

Revenues

$

185,016

 

$

1,135,220

 

Cost of sales

 

307,105

 

 

1,178,915

 

Gross loss

 

(122,089

)

 

(43,695

)

Operating expenses

 

944,435

 

 

2,792,089

 

Operating loss

 

(1,066,524

)

 

(2,835,784

)

Interest expense

 

(51,213

)

 

(138,555

)

Gain on sale of fixed assets

 

250,000

 

 

500,000

 

Other income

 

 

 

2,008

 

Net loss

$

(867,737

)

$

(2,472,331

)

Ownership interest (rounded)

 

31

%

 

31

%

Share of net loss

$

(265,460

)

$

(756,343

)

Investment

$

11,911,955

 

$

11,911,955

 

Investment impairment

$

(11,911,955

)

$

(11,911,955

)

Investment value at September 30, 2015

$

 

$

 


Impairment on Investment


As of September 30, 2015, the Company has reduced its investment in FNES to zero. The Company has taken an impairment of its investment due to the market conditions, including the recent downturn in the oil and gas industry along with results of operations which includes negative working capital, cash used in operations and a net loss.




12



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



4.

INVENTORY


Inventory consists of the following at September 30, 2015 and December 31, 2014:


 

 

September 30,

2015

 

 

December 31,

2014

 

Raw materials

 

$

68,259

 

 

$

46,804

 

Work in process

 

 

347,009

 

 

 

210,948

 

Finished goods

 

 

1,142,339

 

 

 

301,398

 

 

 

$

1,557,607

 

 

$

559,150

 


At December 31, 2014, the Company recorded an inventory reserve for slow moving parts that have not moved in or out of the Company’s inventory in over one year; the value of these parts is $142,802. The majority of these parts are related to the manufacturing of Ozonix® EF80 units that the Company has not been manufacturing within the last year. Since the slow moving inventory is not obsolete and may have a future use, the Company then wrote down the slow moving inventory by 50%. This is the best estimate taking into consideration that the parts are only slow moving not obsolete. The balance of the slow moving inventory is $71,401 and is included as a long-term asset in the accompanying unaudited condensed consolidated balance sheet.


5.

PROPERTY AND EQUIPMENT


Property and equipment consists of the following at September 30, 2015, and December 31, 2014:


 

 

Estimated Useful

 

 

September 30,

 

 

December 31,

 

 

 

Lives in Years

 

 

2015

 

 

2014

 

Machinery and equipment

 

5

 

 

$

2,061,914

 

 

$

2,061,914

 

Furniture and fixtures

 

5 to 7

 

 

 

358,974

 

 

 

358,974

 

Automobiles and trucks

 

3 to 5

 

 

 

142,141

 

 

 

142,141

 

Leasehold improvements

 

5

 

 

 

526,659

 

 

 

524,263

 

Office equipment

 

5

 

 

 

620,858

 

 

 

620,858

 

 

 

 

 

 

 

 

3,710,546

 

 

 

3,708,150

 

Less total accumulated depreciation

 

 

 

 

 

 

(2,620,369

)

 

 

(2,351,522

)

Property and equipment, net

 

 

 

 

 

$

1,090,177

 

 

$

1,356,628

 


Depreciation expense amounted to approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2015.


6.

CONVERTIBLE NOTES PAYABLE, NOTES PAYABLE AND OTHER DEBT

Debt consists of the following at September 30, 2015, and December 31, 2014:

Convertible Notes Payable

 

 

September 30,

 2015

 

 

December 31,

 2014

 

In July 2015, the Company issued a convertible note in the aggregate principal amount of $125,000. The note accrues interest at an annual rate of 10%, matures in September 2016 and is convertible into common stock at a conversion rate of $0.115 per share. The Holder and the Company agree that in lieu of any shares of common stock deliverable upon conversion of this Note, the Company may, to the extent that it lacks sufficient authorized common stock, issue the Holder an equivalent number of shares of the Company’s preferred stock, which will convert on the basis of 1,000,000 shares of common stock to one share of preferred stock, which amended articles and designations have not yet been filed with the state as of the date of this filing. In connection with the issuance of the note, the Company issued to the investor five-year warrants to purchase 2,173,913 shares of common stock at an exercise price of $0.115 per share (or alternatively preferred stock). The Company recorded a discount related to the warrants and beneficial conversion feature of $112,481 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 65.53%, an expected term of five years, a risk-free discount rate of 1.58% and no dividends. As of September 30, 2015, the unamortized amount of the discount was $91,031 and accrued interest was $5,625. *

$

 

33,969

 

 

$

 




















13



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)




 

 

September 30,

2015

 

 

December 31,

2014

 

In June 2015, the Company issued a convertible note in the aggregate principal amount of $250,000. The note accrues interest at an annual rate of 10%, matures in September 2015 and is convertible into common stock at a conversion rate of $0.115 per share. The Holder and the Company agree that in lieu of any shares of common stock deliverable upon conversion of this Note, the Company may, to the extent that it lacks sufficient authorized common stock, issue the Holder an equivalent number of shares of the Company’s preferred stock, which will convert on the basis of 1,000,000 shares of common stock to one share of preferred stock, which amended articles and designations have not yet been filed with the state as of the date of this filing. In connection with the issuance of the note, the Company issued to the investor five-year warrants to purchase 4,347,826 shares of common stock at an exercise price of $0.115 per share (or alternatively preferred stock). The Company recorded a discount related to the warrants and beneficial conversion feature of $250,000 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 64.96%, an expected term of five years, a risk-free discount rate of 1.65% and no dividends. In August 2015, the note holder agreed to extend the convertible note to September 2016. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $44,118 which included discounts associated with the old debt, no additional debt discount was recorded. Additional amounts were charged to loss on debt extinguishment related to consideration paid to the lender (shares of SOGS). As of September 30, 2015, there was no unamortized discount and accrued interest was $7,014. *

 

 

250,000

 

 

 

 

In May 2015, the Company issued a convertible note in the aggregate principal amount of $250,000. The note accrues interest at an annual rate of 10%, matures in September 2015 and is convertible into common stock at a conversion rate of $0.115 per share. In connection with the issuance of the note, the Company issued to the investor five-year warrants to purchase 4,347,826 shares of common stock at an exercise price of $0.115 per share. The Company recorded a discount related to the warrants and beneficial conversion feature of $250,000 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 70.10%, an expected term of five years, a risk-free discount rate of 1.55% and no dividends. In August 2015, the note holder agreed to extend the convertible note to September 2016. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $29,527 which included discounts associated with the old debt, no additional debt discount was recorded. Additional amounts were charged to loss on debt extinguishment related to consideration paid to the lender (shares of SOGS). As of September 30, 2015, there was no unamortized discount and accrued interest was $9,931. *

 

 

250,000

 

 

 

 

In April 2015, the Company issued a convertible note in the aggregate principal amount of $100,000. The note accrues interest at an annual rate of 12.50%, matures in October 2015 and is convertible into common stock at a conversion rate of $0.115 per share. In connection with the issuance of the note, the Company issued to the investor five-year warrants to purchase 1,000,000 shares of common stock at an exercise price of $0.115 per share. The Company recorded a discount related to the warrants and beneficial conversion feature of $100,000 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 69.94%, an expected term of five years, a risk-free discount rate of 1.38% and no dividends. As of September 30, 2015, the unamortized term of the discount was $7,650 and accrued interest was $5,762. (See Note 14)

 

 

92,350

 

 

 

 

In March 2015, the Company issued a convertible note in the aggregate principal amount of $250,000. The note accrues interest at an annual rate of 10%, matures in September 2015 and is convertible into common stock at a conversion rate of $0.115 per share. In connection with the issuance of the note, the Company issued to the investor five-year warrants to purchase 4,347,826 shares of common stock at an exercise price of $0.115 per share. The Company recorded a discount related to the warrants and beneficial conversion feature of $250,000 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 69.92%, an expected term of five years, a risk-free discount rate of 1.41% and no dividends. In August 2015, the note holder agreed to extend the convertible note to September 2016. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $21,187 which included discounts associated with the old debt, no additional debt discount was recorded. Additional amounts were charged to loss on debt extinguishment related to consideration paid to the lender (shares of SOGS). As of September 30, 2015, there was no unamortized discount and accrued interest was $13,333. *

 

 

250,000

 

 

 

 




















14



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)




 

 

September 30,

2015

 

 

December 31,

2014

 

In November 2014, the Company issued convertible notes in the aggregate principal amount of $500,000. The note accrues interest at an annual rate of 10%, matures in December 2015 and is convertible into common stock at a conversion rate of $0.12 per share. In connection with the issuance of the note, the Company issued to the investor five-year warrants to purchase 8,333,333 shares of common stock at an exercise price of $0.12 per share. The Company recorded a discount related to the warrants and beneficial conversion feature of $500,000 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 72.69%, an expected term of five years, a risk-free discount rate of 1.56% and no dividends. In August 2015, the note holder agreed to extend the convertible notes to December 2016. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $122,222 which included discounts associated with the old debt, no additional debt discount was recorded. Additional amounts were charged to loss on debt extinguishment related to consideration paid to the lender (shares of SOGS). As of September 30, 2015, there was no unamortized discount and accrued interest was $42,222. **

 

 

500,000

 

 

 

47,172

 

In September 2014, the Company issued a convertible note in the aggregate principal amount of $1,000,000. The note accrues interest at an annual rate of 10%, matures in September 2015 and is convertible into common stock at a conversion rate of $0.115 per share. In connection with the issuance of the note, the Company issued to the investor five-year warrants to purchase 17,391,304 shares of common stock at an exercise price of $0.115 per share. The Company also reduced the exercise price of the investor’s existing 562,500 warrants to $0.115 and extended the term of the warrants to five-years from the date of the convertible note agreement. The fair value of the extended warrants totaled $28,043 and is to be amortized over the one year debt term. The Company recorded a discount related to the warrants and beneficial conversion feature of $1,000,000 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 70.11%, an expected term of five years, a risk-free discount rate of 1.83% and no dividends. In February 2015, the Company amended the Note, increasing the aggregate principal amount to $1,250,000. In connection with the issuance of the note, the Company issued to the investor five-year warrants to purchase 4,347,826 shares of common stock at an exercise price of $0.115 per share. The Company recorded a discount related to the warrants and beneficial conversion feature of $214,620 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 71.56%, an expected term of five years, a risk-free discount rate of 1.49% and no dividends. In August 2015, the note holder agreed to extend the convertible notes to September 2016. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $53,932 which included discounts associated with the old debt, no additional debt discount was recorded. Additional amounts were charged to loss on debt extinguishment related to consideration paid to the lender (shares of SOGS). As of September 30, 2015, there was no unamortized discount and accrued interest was $120,000. *

 

 

1,250,000

 

 

 

300,000

 

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. In January 2015, the Company reduced the conversion rates and warrant exercise prices to $0.12 per share of note holders of an aggregate principal amount of $245,000. As a result of the modification, the Company recorded a debt discount of $33,889. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40 and reissuance of the existing debt, resulting in a loss on debt extinguishment of $112,624 which included discounts associated with the old debt. As of September 30, 2015, the unamortized amount of the discount was $10,165 and accrued interest was $41,986.

 

 

234,835

 

 

 

123,526

 




















15



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)




 

 

September 30,

2015

 

 

December 31,

2014

 

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. In November and December 2014, the Company reduced three of the note holders conversion rates and warrant exercise prices to $0.12 per share. As a result of the modification, the Company recorded a debt discount of $915,273. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40 and reissuance of the existing debt, resulting in a loss on debt extinguishment of $819,723 which included discounts associated with the old debt. In January 2015, the Company reduced the conversion rates and warrant exercise prices to $0.12 per share of note holders of an aggregate principal amount of $150,000. As a result of the modification, the Company recorded a debt discount of $20,679. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40 and reissuance of the existing debt, resulting in a loss on debt extinguishment of $68,063 which included discounts associated with the old debt. In August 2015, two note holders with an aggregate principal amount of $1,500,000 agreed to extend the convertible notes to December 2016. The modifications were accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $262,335 which included discounts associated with the old debt, no additional debt discount was recorded. Additional amounts were charged to loss on debt extinguishment related to consideration paid to the lender (shares of SOGS). As of September 30, 2015, the unamortized amount of the discount was $7,370 and accrued interest was $303,125. **

 

 

1,692,630

 

 

 

793,406

 

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. 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. The Company received notice of a partial redemption request of $250,868 in August 2014, which is comprised of 32.35% of the original principal amount together with any and all accrued but unpaid interest. In August 2014, the holders agreed to waive their right to the early partial redemption and the Company paid the holders $24,263 plus $3,500 in lawyer’s fees. In addition to the payment, the Company reduced the conversion price under the Notes and the exercise price under the Warrants to $0.115 per share. As a result of the modification, the Company recorded a debt discount of $302,660. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40 and reissuance of the existing debt, resulting in a loss on debt extinguishment of $61,051 which included discounts associated with the old debt and extension fees paid to the lender. In November 2014, the holders elected to convert $67,500 of the convertible notes into 586,957 shares of the Company’s common stock. In February 2015, the note holders agreed to extend an aggregate principal amount of $645,000 for an additional six months. The Company agreed to pay the holders an extension fee equal to an aggregate of $50,000 that was payable in 434,782 shares of common stock. In addition, the Company granted the holders five-year warrants to purchase 312,000 shares of common stock at an exercise price of $0.115 per share. In August 2015, the note holders agreed to extend their notes for no consideration for an additional six months or until February 2016. As of September 30, 2015, there was no unamortized discount and accrued interest was $55,618.

 

 

645,000

 

 

 

602,538

 



















16



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)




 

 

September 30,

2015

 

 

December 31,

2014

 

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, totaling $295,000. The note holders agreed to further extend in March 2015, this extends the maturity dates to September 2015 for $50,000 of principal and March 2016 for $245,000 of principal, totaling $295,000. As of September 30, 2015, there was no unamortized amount of the discounts. Accrued interest at September 30, 2015 was $140,839.

 

 

295,000

 

 

 

295,000

 

 

 

 

 

 

 

 

 

 

Total

 

$

5,493,784

 

 

$

2,161,642

 

Less Current Portion, net of discounts

 

 

(3,493,784

)

 

 

(2,038,116

)

Convertible notes payable, long term, net of discounts

 

$

2,000,000

 

 

$

123,526

 

———————

*

In connection with the issuance of the June 2015 $250,000, 10% secured convertible promissory note (the “Note”) due September 12, 2015 convertible at $0.115 per share, the Company issued to the note holder a 2.5% of the limited liability company interests held by the Company in Ecosphere Mining, LLC, a Delaware limited liability company and the Company’s subsidiary. The Note is secured by a first lien on 25% of the limited liability company interests held by the Company in Ecosphere Mining, LLC. In addition, the Note is secured by collateral the Lender previously had on other notes evidencing prior loans totaling $1,750,000, consisting of the Company’s Ecos PowerCube® unit, the Company’s Ecos GrowCube™ unit, the Company’s patent on the Ecos PowerCube® unit, the Company’s patent pertaining to the Company’s technology related to treating the waters of Lake Okeechobee, a patent pending on the Company’s Ecos GrowCube™ unit, and the right to proceeds from any sale of the Company’s interest in Fidelity National Environmental Solutions, LLC (collectively, the security interests are the “Collateral”). In the event of any sale of the Collateral upon a default under the Note or any of the Company’s prior notes held by the Lender, which are also secured by the Collateral, the Company would be entitled to any proceeds remaining after satisfaction of any amounts outstanding under the Note, the prior notes held by the Lender, and related costs. The holder agreed to extend their notes until September 2016 in exchange for 10,440,000 shares of common stock in Sea of Green Systems, Inc. as noted above.


**

The Notes are secured by a security interest equal to 10% of the Company’s shares of common stock of Sea of Green Systems, Inc. The holders of an aggregate principal amount of $2.5 million agreed to extend their notes until December 2016 in exchange for 10,822,800 shares of common stock in Sea of Green Systems, Inc. as noted above.


A summary of convertible notes payable and the related discounts as of September 30, 2015, and December 31, 2014 is as follows:


 

 

September 30,

2015

 

 

December 31,

2014

 

Principal amount of convertible notes payable

 

$

5,610,000

 

 

$

4,385,000

 

Unamortized discount

 

 

(116,216

)

 

 

(2,223,358

)

Convertible notes payable, net of discount

 

 

5,493,784

 

 

 

2,161,642

 

Less: current portion

 

 

(3,493,784

)

 

 

(2,038,116

)

Convertible notes payable, net of discount, less current portion

 

$

2,000,000

 

 

$

123,526

 




17



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



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 $102,149 were outstanding at September 30, 2015 and December 31, 2014, respectively. The note is payable in quarterly payments of $17,025 with the last payment due December 2015. The Company’s last quarterly payment was October 2014. Accordingly, $102,149 is included as a current liability in the accompanying unaudited consolidated financial statements.  In addition, the Company began accruing 7% default interest beginning April 1, 2015, in accordance with the default terms outlined in the note payable agreement. As of September 30, 2015 the Company has accrued $4,826 and will continue to accrue 7% interest until the Company brings the note holder payments current.


Loan Arrangement


In August 2015, the Company entered into a loan arrangement pursuant to which the holder advanced the Company $150,000 (the “Advance”) in exchange for a fixed interest amount of $10,000. The Advance shall be due and payable upon the earlier of (i) receipt by the Company of $150,000 from a customer and (ii) 30 days from the date of issuance. The Advance is secured by a security interest in a $150,000 customer account receivable, and a security interest in a water treatment system being manufactured for such customer. As of the date of this filing, the Company has paid the holder the principal amount of the loan plus interest.


Related Party Note Payable


In January 2015, the Company issued a promissory note to an employee of the Company in the aggregate principal amount of $50,000. The note accrues interest an annual rate of 10% and matured in April 2015. The employee has since agreed to extend on two different occasions and now the note matures in January 2016. Accrued interest at September 30, 2015 was $1,000 and the Company paid $2,500 of interest during the nine months ended September 30, 2015.


Financing Obligations


 

 

September 30,

2015

 

 

December 31,

2014

 

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%

 

$

33,030

 

 

$

61,212

 

 

     

 

 

 

 

 

 

 

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%.

 

 

40,546

 

 

 

46,777

 

 

 

 

 

 

 

 

 

 

Financing for insurance premiums payable in nine monthly installments of $11,810 accruing interest at 4.56%. The final payment is due in October 2015. (The Company has included July and September payments in accounts payable at September 30, 2015)

 

 

11,279

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

8,326

 

 

 

 

 

 

 

 

 

 

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.

 

 

2,335

 

 

 

3,494

 

 

 

 

 

 

 

 

 

 

Total

 

 

87,190

 

 

 

119,809

 

Less Current Portion

 

 

(55,168

)

 

 

(56,215

)

Financing obligations, long-term portion

 

$

32,022

 

 

$

63,594

 


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.



18



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



Future minimum lease payments under this capital lease obligation as of September 30, 2015, by year, are as follows:


For the year ended December 31,

 

Payment

 

2015

 

$

4,472

 

2016

 

 

17,888

 

2017

 

 

8,946

 

Total

 

 

31,306

 

Less implied interest

 

 

(1,406

)

Capital lease obligation

 

 

29,900

 

Less current potion

 

 

(16,762

)

Long-term portion

 

$

13,138

 


Third Party Debt


Aggregate annual maturities of third party debt are as follows as of September 30, 2015:


For the year ended December 31,

 

Amount

 

2015

 

$

579,857

 

2016

 

 

5,411,459

 

2017

 

 

19,005

 

2018

 

 

11,219

 

2019

 

 

7,701

 

Total debt- face value

 

 

6,029,241

 

Less: unamortized discount

 

 

(116,216

)

Net debt

 

$

5,913,025

 


7.

DEFERRED REVENUE


In January 2015, the Company received an upfront, non-refundable licensing fee and in accordance with SAB Topic 13f, the Company will be recognizing it ratably over the 20-year term of the licensing agreement. For the three and nine months ended September 30, 2015, the Company recorded $6,250 and $17,708 as equipment sales and licensing revenue, respectively. The remaining $482,292 of the licensing fee is recorded as deferred revenue with $25,000 in current and $457,292 to be recognized ratably over the 20-year period.


8.

REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK

Series A

At September 30, 2015 and December 31, 2014 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 24,000 common shares. Our Series A preferred stock provides for annual cash dividends at the rate of $3,750 per share. Accrued dividends totaled $1,092,869 and $1,075,994 on September 30, 2015 and December 31, 2014, respectively.


Series B

At September 30, 2015 and December 31, 2014 there were 241, respectively, 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 (“CoC”) event at $2,500 per share plus accrued dividends. The shares are convertible each into 835 common shares. Our Series B preferred stock provides for annual cash dividends at the rate of $250 per share. Accrued dividends totaled $2,019,954 and $1,974,785 on September 30, 2015 and December 31, 2014, respectively.


9.

COMMON STOCK


Shares issued and issuable during the nine months ended September 30, 2015 are summarized below.


Shares outstanding and issuable at December 31, 2014

 

 

164,734,112

 

Shares issued for extension fee (a)

 

 

434,782

 

Total common shares outstanding at September 30, 2015

 

 

165,168,894

 

———————

(a)

issued in lieu of a $50,000 payment as an extension fee to two convertible note holders. See Note 6.




19



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



10.

STOCK OPTIONS AND WARRANTS


Convertible Note Issuances


In February 2015, the Company issued five-year warrants to purchase 4,347,826 shares of common stock at an exercise price of $0.115 per share in connection with an amendment to a previously issued convertible note in the aggregate principal amount of $1,000,000. The Company increased the aggregate principal amount to $1,250,000 for the additional $250,000 cash loan. See Note 6.


In March 2015, the Company issued five-year warrants to purchase 4,347,826 shares of common stock at an exercise price of $0.115 per share in connection with a $250,000 convertible note. See Note 6.


In April 2015, the Company issued five-year warrants to purchase 1,000,000 shares of common stock at an exercise price of $0.115 per share in connection with a $100,000 convertible note. See Notes 6 and 14.


In May 2015, the Company issued five-year warrants to purchase 4,347,826 shares of common stock at an exercise price of $0.115 per share in connection with a $250,000 convertible note. See Note 6.


In June 2015, the Company issued five-year warrants to purchase 4,347,826 shares of common stock at an exercise price of $0.115 per share in connection with a $250,000 convertible note. See Note 6.


In July 2015, the Company issued five-year warrants to purchase 2,173,913 shares of common stock at an exercise price of $0.115 per share in connection with a $125,000 convertible note. See Note 6.


Convertible Note Extensions and Amendments


In March 2015, two convertible note holders agreed to extend an aggregate principal amount of $645,000 for an additional six months. The Company agreed to pay the holders an extension fee equal to an aggregate of $50,000 that shall be payable in 434,782 shares of common stock. The Company also issued the note holders five-year warrants to purchase 312,500 shares of common stock at an exercise price of $0.115 per share.

 

Stock Option Grant


In January 2015, the Company granted one of its Board members 666,667 non-qualified stock options, exercisable over a five-year period at $0.12 per share, vesting one year after the grant date, subject to continued service as a Director. The Director previously declined an automatic grant of options and restricted stock in July 2014.


The fair value of each option and warrant is estimated on the date of grant using the Black Scholes option-pricing model (“BSM”). The Company used the following assumptions for options and warrants issued or valued during the nine months ended September 30, 2015:


Risk-free interest rate

0. 71% to 1.65%

Expected remaining option life in years

2.25 to 5 years

Expected stock price volatility

63.20% to 72.42%

Expected dividend yield

None


Stock-based compensation expense related to options for the nine months ended September 30, 2015 was $0.3 million. At September 30, 2015, total unrecognized compensation cost related to unvested options granted under the Company’s option plans totaled $168,995. This unrecognized compensation cost is expected to be recognized over the next 15 months.


11.

RELATED PARTY TRANSACTIONS


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 former Chief Executive Officer of ICAP Patent Brokerage is also one of the Company’s board members and consultants. The Company paid $50,000 related to the January 2015 licensing agreement. In April 2015, the Company amended the Private Licensing Engagement Agreement. Under the amended terms, the commission was reduced to 3% and the term was extended another year, expiring in June 2016. In November 2015, the Company terminated this agreement.




20



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



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 a Company board member (who is also the former Chief Executive Officer of ICAP Patent Brokerage). As of September 30, 2015, the Company has accrued $187,500 in connection with this consulting agreement. In November 2015, the Company amended the consulting agreement. Under the amended terms, the Company agrees to pay a 10% commission on revenues generated by the consultant.


Related Party Service and Manufacturing Fees


The Company has been receiving a service fee for its continued accounting, executive, administrative and other miscellaneous services to Fidelity National Environmental Solutions, LLC. 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. All costs relating to the services fee are offset against various expense accounts on the statement of operations. At September 30, 2015 the Company recorded an allowance for doubtful accounts for the full amount of the related party accounts receivable balance which nets the accounts receivable balance to zero.


The Company is accruing a monthly management fee of $25,000 retroactive from January 1, 2015, for the Company’s executive, marketing, accounting, administrative and other miscellaneous services in supporting SOGS operations. In addition, the Company will manufacture all Ecos GrowCube™ products at 80% of the selling prices, subject to the Company’s approval.


Related Party Accounts Receivable


At September 30, 2015 the Company recorded an allowance for doubtful accounts for the full amount of the related party accounts receivable balance which nets the accounts receivable balance to zero.


Related Party Option Grant


In January 2015, the Company granted one of its Board members 666,667 non-qualified stock options, exercisable over a five-year period at $0.12 per share, vesting one year after the grant date, subject to continued service as a Director. The Director previously declined an automatic grant of options and restricted stock in July 2014.


Related Party Note Payable


In January 2015, the Company issued a promissory note to an employee of the Company in the aggregate principal amount of $50,000. The note accrues interest at an annual rate of 10%, maturing in April 2015. The Company has extended this note twice and it now matures in January 2016.


Related Party Bonus


Following the equipment order in July 2015, the Company’s Board of Directors awarded the Company’s Chief Executive Officer, who is the inventor of the Ecos GrowCube™ technology, a 4% discretionary bonus of $52,000.


12.

COMMITMENTS AND CONTINGENCIES


Leases


The Company makes monthly rent payments of $16,744 under a month-to-month agreement for the Company’s Stuart, Florida corporate offices, manufacturing location and machine shop buildings. For the nine months ended September 30, 2015 the Company recognized rent expense amount of $150,696 for all four buildings in Stuart, FL.


In September 2013, the Company entered into a five year lease agreement for an office located in Park City, UT to begin developing the Ozonix® 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, 2018. The Company has an obligation of $151,703 as of September 30, 2015, 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.




21



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



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 September 30, 2015, the Company had an accrued balance of $70,833 which is comprised of the $150,000 obligation less $79,167 in payments. Upon final payment in accordance with the settlement, the Company may 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 September 30, 2015 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 Chief Executive Officer 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 its Chief Executive Officer remains an employee of Ecosphere. Under the Royalty Agreement, Ecosphere granted its Chief Executive Officer 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, its Chief Executive Officer 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 its Chief Executive Officer 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 Patent Brokerage (“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 former Chief Executive Officer of ICAP is also one of the Company’s board members and consultants. In April 2015, the Company amended the Private Licensing Engagement Agreement. Under the amended terms, the commission was reduced to 3% and the term was extended another year, expiring in June 2016. In November 2015, this agreement was terminated.


In July 2015, Sea of Green Systems, Inc. (“SOGS”) entered into a non-exclusive sales representative agreement with DWC Equipment Sales, LLC (“DWC”). DWC is to act as a non-exclusive sales representative for SOGS on a worldwide basis to sell the Company’s Ecos GrowCube™ technology and related Agri-Technology products to its customers. The term of the agreement commenced in July 2015 and shall continue in perpetuity. In consideration of the services to be rendered by DWC, the Company agrees to pay DWC 10% of gross revenues received by SOGS from sales of the Ecos GrowCube™ technology and related Agri-Technology products to its customers. At September 30, 2015 the Company has paid DWC $88,298 and accrued $12,640 related to the SOGS equipment order.


In October 2015, SOGS entered into a consulting agreement with an agronomist on a month-to-month basis at the rate of $4,000 per month that may be terminated by the Consultant with 90 days’ notice and assist SOGS in finding a replacement consultant or employee. SOGS agrees to provide the Consultant with 30 days’ notice of termination. In addition, the Consultant received 1,000,000, five-year cashless stock options with an exercise price of $0.0468 per share, vesting quarterly over one year. The options were issued by ETI from its ownership of SOGS.


13.

CONCENTRATIONS OF RISK


Concentration of Accounts Receivable and Revenues


At September 30, 2015, accounts receivable of $90 comprised of one customer. Miscellaneous customers accounted for 50% of revenues and the remaining 50% of revenues is in connection with the $0.5 million licensing fee the Company received in January 2015 that is being amortized over the 20-year term of the licensing agreement.



22



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(UNAUDITED)



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 September 30, 2015. As of September 30, 2015, the Company had no 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


Consulting Agreement


In October 2015, SOGS entered into a consulting agreement with an agronomist on a month-to-month basis at the rate of $4,000 per month. In connection with the consulting agreement, the Consultant received 1,000,000, five-year cashless stock options with an exercise price of $0.0468 per share, vesting quarterly over one year. The options were issued by ETI from its ownership of SOGS.


Note Payable Issuance


In October 2015, ETI issued a promissory note in the aggregate principal amount of $50,000. The note accrues interest at an annual rate of 10%, maturing in November 2015. In connection with the promissory note, the investor was granted 250,000 SOGS stock options, exercisable over a two-year period at $0.046 per share. These options also will upon exercise be provided by ETI.


SOGS Capital Raise


Subsequent to September 30, 2015, SOGS received $245,000 and $100,000 in cash is due from 4 investors.


Convertible Note Extension


A $100,000 convertible note issued in April 2015 was extended for six months now maturing in April 2016. Accrued interest of $6,250 was added to the principal.








23



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, 2014.


Company Overview


Ecosphere is a technology development and intellectual property licensing company that develops environmental solutions for global markets. The Company helps customers 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 our most recently announced Ecos GrowCube™, 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.


During the quarter ended September 30, 2015, the Company continued its focus on the Precision Agriculture and Agri-Technology sectors and continued licensing of its multi-patented OzonixÒ technology. Key highlights include:


·

The $1.3 million equipment order for 10 fully-automated, smart Ecos GrowCube systems to a Las Vegas area customer. The equipment is expected to be delivered in December 2015. In addition to this equipment order, SOGS entered into a license agreement with the customer to be the exclusive SOGS licensee/distributor/value added reseller in Nevada, Oregon and Maryland. The customer must meet certain requirements in order to maintain being a licensee/distributor/value added reseller in the specified states;

·

Completion and delivery of a self-contained Ecos GrowCube system to be demonstrated at the Companys Las Vegas customers facility. The Ecos GrowCube has been undergoing extensive testing and validation, demonstrating the full capabilities and advantages of using the Company’s proprietary technologies to enhance the quality and output yield of a high value crop;


CRITICAL ACCOUNTING ESTIMATES


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




24



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



Results of Operations


Comparison of the Three Months ended September 30, 2015 with the Three Months Ended September 30, 2014


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

September 30,

 

 

 

 

 

 

2015

 

 

2014

 

 

Change

 

 

 

(Unaudited)

 

 

 

 

Revenues

 

 

 

 

 

 

Equipment sales and licensing

 

$

6,250

 

 

$

530,550

 

 

$

(524,300

)

Aftermarket part sales

 

 

8,990

 

 

 

13,708

 

 

 

(4,718

)

Aftermarket part sales, related party

 

 

 

 

 

6,374

 

 

 

(6,374

)

Total revenues

 

 

15,240

 

 

 

550,632

 

 

 

(535,392

)

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales and licensing costs (exclusive of depreciation shown below)

 

 

 

 

 

338,700

 

 

 

(338,700

)

Aftermarket part costs (exclusive of depreciation shown below)

 

 

9,938

 

 

 

18,624

 

 

 

(8,686

)

Salaries and employee benefits

 

 

683,368

 

 

 

553,357

 

 

 

130,011

 

Administrative and selling

 

 

147,247

 

 

 

201,840

 

 

 

(54,593

)

Professional fees

 

 

177,139

 

 

 

215,323

 

 

 

(38,184

)

Depreciation and amortization

 

 

91,337

 

 

 

113,272

 

 

 

(21,935

)

Research and development

 

 

210,098

 

 

 

29,419

 

 

 

180,679

 

Bad debt

 

 

162,240

 

 

 

 

 

 

162,240

 

Total costs and expenses

 

 

1,481,367

 

 

 

1,470,535

 

 

 

10,832

 

Loss from operations

 

 

(1,466,127

)

 

 

(919,903

)

 

 

(546,224

)

Loss and impairment on investment in unconsolidated investee

 

 

(12,177,415

)

 

 

(503,847

)

 

 

(11,673,568

)

Other income (expense)

  

 

                       

  

  

 

                       

  

  

 

                       

  

Interest expense

 

 

(1,069,448

)

 

 

(457,693

)

 

 

(611,755

)

Loss on debt extinguishment

 

 

(1,515,320

)

 

 

(61,051

)

 

 

(1,454,269

)

Other, net

 

 

643

 

 

 

1,249

 

 

 

(606

)

Total other expense, net

 

 

(2,584,125

)

 

 

(517,495

)

 

 

(2,066,630

)

Net loss

 

 

(16,227,667

)

 

 

(1,941,245

)

 

 

(14,286,422

)

Preferred stock dividends

 

 

(20,688

)

 

 

(20,688

)

 

 

 

Net loss applicable to common stock

 

 

(16,248,355

)

 

 

(1,961,933

)

 

 

(14,286,422

)

Net loss applicable to noncontrolling interest of consolidated subsidiary

 

 

71,998

 

 

 

618

 

 

 

71,380

 

Net loss applicable to Ecosphere Technologies, Inc. common stock

 

$

(16,176,357

)

 

$

(1,961,315

)

 

$

(14,215,042

)


The Company reported net loss applicable to Ecosphere Technologies, Inc. common stock of $16.2 million during the three months ended September 30, 2015 (the "2015 Quarter") as compared to a net loss applicable to Ecosphere Technologies, Inc. common stock of $2.0 million for the three months ended September 30, 2014 (the "2014 Quarter"). The drivers of the $14.2 million quarter-over-quarter change are discussed below.


Revenues


In January 2015, ETI signed an exclusive technology licensing agreement with US H2O, Inc., to deploy its patented Ozonix® water treatment technology on an exclusive basis in the United States for the Landfill Leachate and Marine Port & Terminal fields-of-use. The Company will recognize the revenues of the $500,000 licensing fees received under this agreement over its 20 year term. During the 2015 Quarter, the Company recorded $6,250 as equipment sales and licensing revenue. During the 2014 Quarter, the Company sold one Ozonix® water treatment system to the Brazilian licensee.  


Cost and Expenses

 

Equipment Sales and Licensing Costs (exclusive of depreciation)


There were no equipment sales and licensing costs for the 2015 Quarter as compared to approximately $300,000 for the 2014 Quarter from the sale of an Ozonix® water treatment system.




25



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



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 2015 and 2014 Quarter.


Salaries and Employee Benefits


The increase in salaries and employee benefits of approximately $100,000 for the 2015 Quarter was primarily driven by a bonus awarded to the Company’s Chief Executive Officer of approximately $50,000 and an increase of approximately $45,000 in payrolls taxes and fees.


Bad Debt


The Company recorded bad debt expense of approximately $200,000 in connection to the allowance of doubtful accounts for a related party accounts receivable balance.


Loss from Operations


Loss from operations for the 2015 Quarter was $1.5 million compared to loss from operations of approximately $900,000 for the 2014 Quarter. See discussion above under "Revenues," "Cost and Expenses" for details.


Loss and Impairment on Investment in Unconsolidated Investee


The change in the loss on investment in unconsolidated investee was approximately $300,000 for the 2015 Quarter. The Company recorded an impairment of $11.9 million of its FNES investment due to the recent downturn in the oil and gas industry and recognized a non-cash charge for this amount as of September 30, 2015. The Company expects to assist FNES as it transitions from an oil and gas service company in the U.S. to a global energy and equipment sales company that FNES owns an exclusive license.


Interest Expense


Interest expense for the 2015 Quarter increased approximately $600,000 which was due to increase in accrued interest in connection with convertible note issuances along with non-cash interest related charges.


Net Loss Applicable to Noncontrolling Interest in Consolidated Subsidiary


Net loss applicable to noncontrolling interest in our Ecosphere Mining, LLC and SOGS consolidated majority-owned subsidiaries was approximately $100,000 for the 2015 Quarter.



26



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



Comparison of the Nine Months ended September 30, 2015 with the Nine Months Ended September 30, 2014


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 Nine Months Ended

September 30,

 

 

 

 

 

 

2015

 

 

2014

 

 

Change

 

 

 

(Unaudited)

 

 

 

 

Revenues

 

 

 

 

 

 

Equipment sales and licensing

 

$

17,708

 

 

$

530,550

 

 

$

(512,842

)

Equipment sales and licensing, related party

 

 

 

 

 

107,925

 

 

 

(107,925

)

Aftermarket part sales

 

 

8,990

 

 

 

17,279

 

 

 

(8,289

)

Aftermarket part sales, related party

 

 

8,506

 

 

 

32,698

 

 

 

(24,192

)

Total revenues

 

 

35,204

 

 

 

688,452

 

 

 

(653,248

)

Costs and expenses

  

 

                       

  

  

 

                       

  

  

 

                       

  

Equipment sales and licensing (exclusive of depreciation shown below)

 

 

18,772

 

 

 

372,625

 

 

 

(353,853

)

Aftermarket part costs (exclusive of depreciation shown below)

 

 

19,466

 

 

 

45,673

 

 

 

(26,207

)

Salaries and employee benefits

 

 

1,959,115

 

 

 

2,294,386

 

 

 

(335,271

)

Administrative and selling

 

 

591,634

 

 

 

619,600

 

 

 

(27,966

)

Professional fees

 

 

615,170

 

 

 

938,970

 

 

 

(323,800

)

Depreciation and amortization

 

 

277,435

 

 

 

323,253

 

 

 

(45,818

)

Research and development

 

 

236,552

 

 

 

229,444

 

 

 

7,108

 

Bad debt

 

 

162,240

 

 

 

 

 

 

162,240

 

Loss on sale of notes

 

 

 

 

 

985,085

 

 

 

(985,085

)

Total costs and expenses

 

 

3,880,384

 

 

 

5,809,036

 

 

 

(1,928,652

)

Loss from operations

 

 

(3,845,180

)

 

 

(5,120,584

)

 

 

1,275,404

 

Loss and impairment on investment in unconsolidated investee

 

 

 (12,668,298

)

 

 

(1,246,849

)

 

 

(11,421,449

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

45,089

 

 

 

(45,089

)

Interest expense

 

 

(3,132,067

)

 

 

(1,370,989

)

 

 

(1,761,078

)

Change in fair value of derivative instruments

 

 

 

 

 

3,671

 

 

 

(3,671

)

Loss on debt extinguishment

 

 

(1,696,007

)

 

 

(61,051

)

 

 

(1,634,956

)

Other, net

 

 

1,775

 

 

 

5,679

 

 

 

(3,904

)

Total other expense, net

 

 

(4,826,299

)

 

 

(1,377,601

)

 

 

(3,448,698

)

Net loss

 

 

(21,339,777

)

 

 

(7,745,034

)

 

 

(13,594,743

)

Preferred stock dividends

 

 

(62,064

)

 

 

(62,064

)

 

 

 

Net loss applicable to common stock

 

 

(21,401,841

)

 

 

(7,807,098

)

 

 

(13,594,743

)

Net loss applicable to noncontrolling interest of consolidated subsidiary

 

 

74,940

 

 

 

10,299

 

 

 

64,641

 

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

 

$

(21,326,901

)

 

$

(7,796,799

)

 

$

(13,530,102

)


The Company reported net loss applicable to Ecosphere Technologies, Inc. common stock of $21.3 million during the nine months ended September 30, 2015 (the "2015 Period") as compared to a net loss applicable to Ecosphere Technologies, Inc. common stock of $7.8 million for the nine months ended September 30, 2014 (the "2014 Period"). The drivers of the $13.5 million change are discussed below.


Revenues


During the 2014 Period, FNES sold its Ozonix® EF10M to Hydrosphere Energy Solutions, LLC, resulting in equipment sales of $0.1 million. In addition during the 2014 Period, the Company sold one Ozonix® EF10M to Brasil Clean Energy (“BCE”) who is in the food and beverage industry, resulting in equipment sales of $0.5 million. During the 2015 Period, ETI signed an exclusive technology licensing agreement with US H2O, Inc., to deploy its patented Ozonix® water treatment technology on an exclusive basis in the United States for the Landfill Leachate and Marine Port & Terminal fields-of-use. During the 2015 Period, $500,000 in licensing fees has been paid by US H20, Inc. to Ecosphere. Notwithstanding the receipt of $500,000 in cash in 2015, the Company is required to recognize these revenues of the licensing fees received under this agreement over its 20-year term.




27



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 approximately $400,000 in connection with the build out and sale of one Ozonix® EF10M. The equipment sales and licensing costs for the 2015 Period were de minimis.


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 2015 and 2014 Period.


Salaries and Employee Benefits


The decrease in salaries and employee benefits of approximately $300,000 was primarily the result of an approximate $200,000 decrease in equity-based compensation.


Professional Fees


The $0.3 million decrease in professional fees was driven by approximately $100,000 decrease in consulting fees and approximately $100,000 decrease in legal fees relating to the Halliburton arbitration.


Bad Debt


The Company recorded bad debt expense of approximately $200,000 in connection to the allowance of doubtful accounts for a related party accounts receivable balance.


Loss from Operations


Loss from operations for the 2015 Period was $3.8 million compared to loss from operations of $5.1 million for the 2014 Period. See discussion above under "Revenues," "Cost and Expenses" for details.


Loss and Impairment on investment in unconsolidated investee


During the 2015 Period, the loss on investment in unconsolidated investee was approximately $800,000. The Company recorded an impairment charge of $11.9 million relating to FNES due to the recent downturn in the oil and gas industry.


Interest Expense


Interest expense for the 2015 Period increased $1.8 million which was primarily due to the increase in accrued interest in connection with convertible note issuances along with non-cash interest related charges.


Net Loss Applicable to Noncontrolling Interest in Consolidated Subsidiary


Net loss applicable to noncontrolling interest in our Ecosphere Mining, LLC and SOGS consolidated majority-owned subsidiaries was $0.1 million for the 2015 Period.


Non-GAAP – Financial Measures


The following discussion and analysis includes both financial measures in accordance with Generally Accepted Accounting Principles, or GAAP, as well as non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to net income, operating income, and cash flow from operating activities, liquidity or any other financial measures. They may not be indicative of the historical operating results of Ecosphere nor are they intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP.




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ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



Our management uses and relies on Adjusted Revenues and Adjusted EBITDA, which are non-GAAP financial measures. We believe that both management and shareholders benefit from referring to the following non-GAAP financial measures in planning, forecasting and analyzing future periods. Our management uses these non-GAAP financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparison. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the described excluded items.


Ecosphere defines Adjusted Revenues as GAAP revenues plus deferred licensing revenue which under GAAP is being amortized over the term of a license along with a customer deposit for an equipment purchase order which will be recognized as revenue once the equipment is completed and accepted. Adjusted Revenues permit our management to understand if our business model is working in contrast to GAAP revenues.


Our managements uses and relies on Adjusted Revenues because it believes that requiring a long term deferral of revenues from a licensing transactions which hopefully will result in additional revenues or sales royalties is confusing to investors.  The Company’s business model is to license intellectual property and the upfront licensing fees are a fundamental portion of that business model.  Deferring revenues does not permit management to focus on how successful it has been while Adjusted Revenues more accurately reflects the Company’s success in implementing its business model. Similarly, large customer deposits cannot be revenues until the equipment is delivered.  Reflecting the large deposits as Adjusted Revenues more accurately permits our management to measure the performance of our business.


Ecosphere defines Adjusted EBITDA as earnings (or loss) from continuing operations before the items in the table below. Adjusted EBITDA is an important measure of our operating performance because it allows management and investors to evaluate and assess our core operating results from period-to-period after removing the impact of items of a non-operational and/or non-cash nature that affect comparability.


We have included a reconciliation of our non-GAAP financial measures to the most comparable financial measure calculated in accordance with GAAP. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between Ecosphere and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definition being used and to the reconciliation between such measure and the corresponding GAAP measure provided by each company under applicable SEC rules.


The following table presents a reconciliation of Adjusted Revenues:


 

 

For the

Nine Months

Ended

September 30,

 

 

 

2015

  

 

 

 

 

 

Revenues per GAAP

     

$

35,204

 

Customer deposit for equipment purchase orders

 

 

1,451,380

 

Revenues recognized over remaining term of license

 

 

482,292

 

Adjusted non-GAAP revenues

 

$

1,968,876

 


While actual revenues were limited for the nine months ended September 30, 2015 that is solely because GAAP does not permit us to reflect the $500,000 we received as an initial license fee and the $1,451,380 deposits as delivery criteria was not yet met on the finished good that is in transit to our Malaysian customer and an equipment order is still in process and being manufactured by ETI. Because of this clear distortion of our operating results, our management uses Adjusted Revenues, a non-GAAP financial measure.




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ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



The following table presents a reconciliation of Adjusted EBITDA (Loss) to Net loss allocable to common shareholders, a GAAP financial measure:


 

 

For the

Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

 

 2014

 

 

 

 

 

Net loss

 

$

(21,339,777

)

 

$

(7,745,034

)

Interest expense, net of interest income

 

 

3,132,067

 

 

 

1,369,919

 

Depreciation and amortization

 

 

277,435

 

 

 

314,343

 

ETI’s share of unconsolidated investee depreciation and amortization

 

 

323,094

 

 

 

719,815

 

Impairment on investment in unconsolidated investee

 

 

11,911,955

 

 

 

 

Loss of sale of notes receivable

 

 

 

 

 

985,085

 

Loss on debt extinguishment

 

 

1,696,007

 

 

 

 

Stock-based compensation

 

 

349,948

 

 

 

397,878

 

ETI’s share of unconsolidated investee stock-based compensation

 

 

94,412

 

 

 

252,948

 

Adjusted EBITDA (Loss)  

 

$

(3,554,859

)

 

$

(3,705,046

)


LIQUIDITY AND CAPITAL RESOURCES


A summary of our cash flows is as follows:


 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

 

 2014

 

 

 

(Unaudited)

 

Net cash used in operating activities

 

$

(1,403,481

)

 

$

(3,215,365

)

Net cash used in investing activities

 

$

(4,261

)

 

$

(253,684

)

Net cash provided by financing activities

 

$

1,380,764

 

 

$

3,195,935

 


2015 Period


Operating Activities


Net cash used in operating activities was $1.4 million for the 2015 Period. For the 2015 Period, cash used in operating activities of $1.4 million resulted from the net loss applicable to Ecosphere common stock of $21.3 million and was offset by $12.7 million resulting from the FNES impairment charge and the Company’s loss on investment in FNES, the accretion of discounts on notes payable of $2.6 million, the increase in customer deposits of $1.4 million in connection with an order received for one indoor Ecos GrowCube™ and one Ozonix® EF10M, stock sold in SOGS issued as consideration for debt extension of $1.0 million, the increase in accounts payable of approximately $800,000, loss on debt extinguishment of approximately $700,000 in connection with convertible debt and warrants amended in the 2015 Period and an increase in deferred revenue of approximately $500,000 in connection with a licensing agreement entered into in January 2015.


Investing Activities


Net cash used in investing activities was de minimis for the 2015 Period. The Company had minimal additions to property, plant and equipment as well as patent additions during the 2015 Period.


Financing Activities


The Company’s net cash provided by financing activities of $1.4 million consisted of proceeds from the issuance of convertible notes payable of $1.2 million, proceeds from issuance of a note payable of $150,000, proceeds from issuance of stock sold in consolidated subsidiary, or SOGS, of $100,000 and proceeds from the issuance of a related party note payable of $50,000, which was partially offset by repayments of insurance financing, capital lease obligations and vehicle and equipment financing of approximately $0.1 million.




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ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



2014 Period


Operating Activities


Net cash used in operating activities was $3.2 million for the 2014 Period. For the 2014 Period, cash used in operating activities of $3.2 million resulted from the net loss applicable to Ecosphere common stock of $7.8 million and was offset by the Company’s loss on investment in unconsolidated investee, or FNES of $1.2 million, an accretion of discounts of Notes payable of $1.1 million and the loss on sale of notes receivable of $1.0 million in connection with the two Ozonix® EF80 units sold in 2013 to FNES.


Investing Activities


Net cash used in investing activities of approximately $300,000 was primarily from additions to property and equipment of approximately $200,000. 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. The Company also had payments of patent costs of $52,704.


Financing Activities


The Company’s net cash provided by financing activities of $3.2 million consisted primarily of proceeds from the sale of notes receivable of $2.2 million, which a portion was to a related party, as well as proceeds from the issuance of convertible notes payable and warrants of $1.2 million.


Liquidity


As of November 17, 2015, Ecosphere had cash on hand of approximately $16,644. 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 is described below.


If successful, 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:


·

Ecosphere is actively marketing exclusive and non-exclusive licensing opportunities for sale to strategic, well positioned partners that wish to bring our patented Ozonix® technology 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 food and beverage, industrial, marine and municipal wastewater treatment, and any other industry in which water is treated with conventional liquid chemicals. Ecosphere controls SOGS which has an exclusive license to the agricultural market in the United States. Ecosphere also owns 100% of the global right to its patented Ecos PowerCube® technology for all industries and applications worldwide.

·

Ecospheres 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 Ecospheres 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® technology globally, the Company’s 30.6% interest in FNES is also available for sale to strategic buyers.

·

In November 2014, Ecosphere launched its Ecos GrowCube technology and corresponding product line for the global Precision Agriculture and Agri-Technology markets. SOGS, a subsidiary of Ecosphere and the entity that owns the rights to the Ecos GrowCube technology, has begun to execute on its equipment sales and marketing strategy, as evidenced by its first $1.3M equipment order to Waveseer in July 2015. SOGS expects that future orders will provide liquidity. SOGS’ business model is to sell and manufacture Ecos GrowCube™ systems in addition to a custom line of nutrients for customers and should provide a more consistent income stream for the Company as opposed to its core strategy of licensing its patented Ozonix® and Ecos PowerCube® technologies, which is less consistent.



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ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



·

SOGS is seeking to close the balance of a $500,000 private placement in to provide working capital and permit it to pay the funds it owes ETI. To date, it has received $345,000 since July 2016 and has a binding agreement from an investor for another $100,000 due by November 30, 2105. To eliminate dilution to SOGS’s Founding shareholders, ETI will supply the number of shares as they are sold.


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 a $50,000 related party note payable due in January 2015 (proceeds of three month note received in January 2015) and $3,600,000 in convertible notes payable due over the next 12 months from the date of this Report. If ETI is able to close several significant licensing opportunities it presently has and receive additional orders from SOGS, it may have sufficient liquidity for the next 12 months.

 

RELATED PARTY TRANSACTIONS

 

For information on related party transactions and their financial impact, see Note 11 to the unaudited condensed consolidated financial statements. Additionally, the Company pays a non-employee director, the former Chief Executive Officer of ICAP, a consulting fee of $250,000 per year. In November 2015, this consulting agreement was amended and the consultant will no longer receive a consulting fee of $250,000 per year, instead a 10% commissions will be paid on all revenue the consultant generated.

 

RESEARCH AND DEVELOPMENT

 

Research and development costs were $0.2 million for the three months ended September 30, 2014 and 2015.


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 our resolving our liquidity issues, sales of our Ecos GrowCube™ units and closing on licensing opportunities. Forward looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.


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 acceptance of our Ecos GrowCube™ technology, the condition of the credit and financial markets, our ability to raise short-term and long-term working capital and future legislation and regulations which affect the global Agri-Technology industry including the legal medical and recreational marijuana markets in the U.S. and all agriculture markets in the U.S. and globally, the ability to continue to find licensees for our various patented technologies, FNES’ ability with Ecosphere’s assistance to market our Ozonix® technology to global energy companies and sell units to third parties, USH20’s continued success marketing or using in the landfill and marine port industries 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, 2014. 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.


Not applicable to smaller reporting companies.




32



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



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. 






33



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS.

 

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.


 

 



34



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.

 

 

 

 

 

November 23, 2015

 

/s/ Dennis McGuire

 

 

 

Dennis McGuire

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

November 23, 2015

 

/s/ David Brooks

 

 

 

David Brooks

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)

 









35



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



EXHIBIT INDEX


Exhibit

 

 

 

Incorporated by Reference

 

Filed or Furnished

No.

 

Exhibit Description

 

Form

 

Date

 

Number

 

Herewith

 

 

 

 

 

 

 

 

 

 

 

10.1

 

Form of Securities Purchase Agreement

 

8-K

 

7/15/15

 

10.1

 

 

10.2

 

Form of Convertible Promissory Note

 

8-K

 

7/15/15

 

10.2

 

 

10.3

 

Form of Warrant

 

8-K

 

7/15/15

 

10.3

 

 

10.4

 

Security Agreement, dated as of June 18, 2015

 

8-K

 

7/15/15

 

10.4

 

 

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.SCH

 

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.