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EX-32.1 - CERTIFICATION - ECOSPHERE TECHNOLOGIES INCesph_ex32z1.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ECOSPHERE TECHNOLOGIES INCesph_ex23z1.htm
EX-31.1 - CERTIFICATION - ECOSPHERE TECHNOLOGIES INCesph_ex31z1.htm
EX-31.2 - CERTIFICATION - ECOSPHERE TECHNOLOGIES INCesph_ex31z2.htm


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

þ

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

 

For the fiscal year ended: December 31, 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

(I.R.S. Employer

of Incorporation or Organization)

Identification No.)


3515 S.E. Lionel Terrace, Stuart, Florida

34997

(Address of Principal Executive Office)

(Zip Code)

  

  

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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No þ


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o   No þ


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No o


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

o

Accelerated filer

o

Non-accelerated filer

o

Smaller reporting company

þ

 

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


The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2015, was approximately $15,846,444.


The number of shares outstanding of the registrant’s common stock, as of April 8, 2016, was 166,103,677.

 

 




 


INDEX


 

 

 

Page

 

Part I.

 

 

 

 

 

 

 

 

 

 

 

Item 1.

Business.

 

 

1

 

Item 1A.

Risk Factors.

 

 

9

 

Item 1B.

Unresolved Staff Comments.

 

 

9

 

Item 2.

Properties.

 

 

10

 

Item 3.

Legal Proceedings.

 

 

10

 

Item 4.

Mine Safety Disclosures.

 

 

10

 

 

 

 

 

 

 

Part II.

 

 

 

 

 

 

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

 

11

 

Item 6.

Selected Financial Data.

 

 

11

 

Item 7.

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

 

 

12

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

 

 

29

 

Item 8.

Financial Statements and Supplementary Data.

 

 

29

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

 

29

 

Item 9A.

Controls and Procedures.

 

 

30

 

Item 9B.

Other Information.

 

 

30

 

 

 

 

 

 

 

Part III.

 

 

 

 

 

 

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance.

 

 

31

 

Item 11.

Executive Compensation.

 

 

35

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

 

40

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

 

41

 

Item 14.

Principal Accounting Fees and Services.

 

 

43

 

 

 

 

 

 

 

Part IV.

 

 

 

 

 

 

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules.

 

 

44

 

 

 

 

 

 

SIGNATURES

 

 

46

 

 









 


PART I

 

ITEM 1.

BUSINESS.


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


Business Strategy


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


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.


As a result, the Company has designed, developed, manufactured and commercialized a wide variety of patented technologies that are currently solving some of the world’s most critical water and environmental challenges. Our multi-patented Ozonix® technology is a revolutionary, high volume, Advanced Oxidation Process (“AOP”) designed to treat and recycle industrial wastewater without the use of toxic chemicals, while our patented Ecos PowerCube® is a mobile, solar-powered generator designed to maximize the amount of solar power that can be placed in a standard ISO shipping container footprint. In addition to the Company’s patented Ozonix® and Ecos PowerCube® technologies, the Company has recently announced the launch of the Ecos GrowCube™ technology and product line, which is a state-of-the-art, fully-automated hydroponic growing system for increasing the production, quality and consistency of high-value crops.


These patented technologies and corresponding trademarks can be purchased and licensed for use in large-scale and sustainable applications across industries, nations and ecosystems. Companies that license our patented technologies are able to improve their financial metrics while also reducing their ecological and environmental footprints. Although our other technologies and patents remain a viable part of our long-term technology licensing strategy, the Company is currently focused on licensing its multi-patented Ozonix® and Ecos PowerCube® technologies, while selling and manufacturing Ecos GrowCube™ systems through its subsidiary, Sea of Green Systems, Inc. (“SOGS”).

 

Technologies


OZONIX®


Many water recycling processes use chemicals - chemicals that are costly and harmful to the environment. Ecosphere’s patented Ozonix® water treatment technology offers customers a chemical-free alternative to high-volume water disinfection and recycling for a diverse range of industries and applications ranging from the oil and natural gas industry and mining to agriculture and municipal wastewater treatment.


Description


Ozonix® technology combines multiple forms of AOP’s into one broad-spectrum water treatment technology to oxidize and destroy organic matter, bacteria, biofilms, heavy metals, hydrocarbons and sulfides that are typically found in industrial wastewaters. Ozonix® eliminates the need for conventional liquid chemical biocides and scale-inhibitors that are typically required to control bacteria growth and scale deposition in a wide variety of wastewater treatment and disinfection applications. The patented Ozonix® process can also be used to produce an environmentally safe oxidant that can be used as a leaching agent or for further disinfection.



1



 


The patented Ozonix® process, in summary, saturates contaminated water with ozone (O3) and uses hydrodynamic cavitation, acoustical cavitation and electrochemical oxidation to oxidize and destroy micro-organisms. As water cycles through an Ozonix® reactor, bacteria cell walls are destroyed and contaminates are oxidized, returning clean water that is ready for use, re-use and/or final treatment for discharge applications.


Although Ecosphere has recently begun to license Ozonix® outside of the energy sector as described later in this Report, it has primarily been used in the U.S. oil and gas industry where its effectiveness and competitive advantages have been proven. The globaly energy field-of-use is licensed to Fidelity National Environmental Solutions, LLC (“FNES”), a company organized by Ecosphere, of which Ecosphere currently owns a 30.6% interest.


Awards and Accolades


Ecospheres numerous awards and accolades evidence the importance and quality of its multi-patented Ozonix® technology. For example:


·

Ecosphere and FNES were named Water Management Company of the Year in the Midcontinent Oil & Gas Awards in 2013. The Midcontinent Oil and Gas Awards is a platform for the oil and gas industry to demonstrate and celebrate the advances made in the key areas of environmental stewardship, efficiency, innovation, corporate social responsibility and health & safety. 


·

Ecosphere was named the winner in the Clean Tech/Green Tech category for the 2013 TechAmerica Foundation American Technology Awards. This award crosses the technology industry, recognizing products and services like Ecospheres patented Ozonix® technology for the treatment and recycling of water.


·

Ecosphere was chosen by Bloomberg New Energy Finance as a 2013 New Energy Pioneer. The awards program, now in its fourth year, selects 10 New Energy Pioneers each year. An independent panel of industry experts selected the winners from more than 200 candidates from around the world, assessing them against three criteria: innovation, demonstrated momentum and potential global scale.


·

Ecosphere was selected by IHS CERAWeek (an annual energy executive gathering hosted by IHS) as a 2013 Energy Innovation Pioneer. The Energy Innovation Pioneers program, held annually in conjunction with IHS CERAWeek, aims to identify the most innovative and distinctive new technologies in the energy spectrum. Criteria include creativity, feasibility of plan, scalability of technology and leadership team.


·

Ecosphere was selected as a finalist for the 2013 World Technology Awards in the Corporate Environment category. The World Technology Awards have been presented since 2000 as a way to honor those in 20 different categories doing the innovative work of the greatest likely long-term significance.” Nominees for the 2013 World Technology Awards were selected by the WTN Fellows (winners and finalists from previous annual award cycles in the individual categories) through an intensive, global process lasting many months.


·

Ecosphere was awarded the 2012 Frost & Sullivan North American Product Leadership Award in the Disinfection Equipment for Shale Oil and Gas Wastewater Treatment category. The 2012 Product Leadership Award recognizes Ecospheres leadership in the field of advanced water treatment, specifically in providing energy exploration and production companies with a non-chemical solution that allows them to recycle flowback and produced water with an ozone-based advanced oxidation process.


·

Ecosphere was chosen by the Artemis Project for the Artemis Top 50 Water Tech listing for three consecutive years beginning in 2010. The Artemis Water Tech Review brings together an elite group of water users that are seeking new solutions. An international network of hundreds of industry experts recommends promising companies, and Artemis guides the jury through a rigorous evaluation process. From a diverse pool of hundreds of applicants, the jury scores build a listing of 50 leaders in water tech.


Market Opportunities


The global water market — comprised of numerous activities — is estimated at $425 billion. Its growth is being driven by macro political, financial, social and ecological considerations.




2



 


The Ozonix® technology has the potential to be applied across numerous market sectors and industries. The potential applications are numerous and some exemplary target markets and sub-markets include, but are not limited to:


·

Agriculture (Grain Growing and Processing, Livestock Farms and Feedlots, Aquaculture, Fish Farming, Irrigation)


·

Energy (Onshore and Offshore Oil and Gas Exploration and Production, Power Generation, Refineries, Coal)


·

Food and Beverage (Drinking Water, Breweries, Dairy, Livestock Processing, Fruits and Vegetables, Sugar)


·

Industrial (Automotive, Biotechnology, Manufacturing, Metals, Microelectronics, Pharmaceutical, Textiles)


·

Marine (Ballast Water, Marine Process Water, Onboard Grey Water)


·

Mining (Acid Mine Drainage, Metals, Minerals, Process Water Treatment, Tailing, Leachate, Lixiviation and Recovery)


·

Municipal (Municipal Drinking Water, Sewage, Storm and Drainage Water Treatment)


Intellectual Property Protection


Ecosphere is a leader in the development of emerging AOP technologies and has a portfolio of intellectual property that includes fourteen (14) approved United States patents, as well as numerous foreign patents, trademarks and pending patent applications associated with the Ozonix® process. In addition to the patent protection, as with most process technologies, trade secrets and know-how are also important assets providing Ecosphere with a competitive advantage.


Ozonix® is protected by 23 approved and pending United States patents including but not limited to the 14 approved U.S. Patent No's. 7,699,994; 7,699,988; 7,785,470; 7,943,087; 8,318,027; 8,721,898; 8,858,064; 8,936,392; 8,906,242; 8,968,577; 8,999,154; 9,034,180; 9,169,146; 9,266,752; and Numerous Patents Pending.


ECOS POWERCUBE®


Description


Most recently featured by FAST COMPANY and named One of the Top 100 Innovations of 2014 by POPULAR SCIENCE; the patented Ecos PowerCube® is a mobile, solar powered generator. Designed to meet the growing demand for off-grid energy, with a unique, patented array of stacked solar panels, the Ecos PowerCube® maximizes the total amount of solar power generation possible in 10’-53' ISO shipping container footprints - providing users with approximately 400% more solar power in a given footprint and the ability to power a wide variety of technologies ranging from satellite communications and solar-powered Internet to atmospheric water generation and mobile water treatment.


With solar power generation capabilities up to approximately 15 kW on the 40’ model, the Ecos PowerCube® can be transported by land, air or sea and is ideally suited to support off-grid agricultural, military, emergency/disaster relief, humanitarian and wireless communication efforts for remote applications around the world.


The Ecos PowerCube® is protected by U.S. Patent No. 8,593,102.


Market Opportunities


The Ecos PowerCube®’s ability to provide off-grid micro utility needs has applicability in numerous global markets and sub markets including, but not limited to:


·

Industrial Remote Utilities

·

Off-Grid Telecommunication Base Stations / Cell Tower Support

·

Military Base stations / Remote Utilities

·

Humanitarian Relief and Emergency / Disaster Preparedness

·

Remote Habitation

·

And More (i.e. Solar Powered Wi-Fi, Survivalists & Preppers, Infrastructure & Construction, Remote Mining Camps, Temporary Entertainment Events & Venues, Off-grid Research Stations, Equipment Rental & Leasing, Portable Power Generation, etc.)




3



 


The Company began its web based marketing campaign shortly after the U.S. patent was awarded in Q4 2013. During 2014, the first Ecos PowerCube® prototype was manufactured. The Company has met with several potential licensees since the completion of the first Ecos PowerCube® and as of the date of this report, no sales have been initiated and the Company has not entered into a Licensing Agreement for this technology.


Awards and Accolades


Ecosphere’s patented Ecos PowerCube® technology was recently recognized as a winner in the 2014 Best of What's New Awards from Popular Science and named one of the Top 100 Innovations of 2014. Featured in the Green category of the December 2014 special "Best of What's New" issue.


Intellectual Property Protection


After approximately seven years under review in the United States Patent office, Ecosphere received issuance of a U.S. patent for the Ecos PowerCube® in November 2013.


The U.S. patent expires in December 2027.


This patent relates to a portable, self-sustaining solar power station.


ECOS GROWCUBE™


The Ecos GrowCube™ is a turn-key, fully-automated hydroponic growing system that is Made in the USA and fabricated out of aircraft-grade aluminum. An Ecos GrowCube™ utilizes hydroponic growing techniques in order to maximize the amount of crop production possible in a given footprint and optimizes the “Limiting Factors” of plant cultivation. Limiting Factors  include, but are not limited to Temperature, Lighting, Humidity, CO2, Dissolved Oxygen, Electro Conductivity (EC), pH and Oxygen Reduction Potential (ORP) and when automated, enable growers to enhance crop production, quality and yield. The Ecos GrowCube™ technology also incorporates Ecosphere’s multi-patented Ozonix® technology to condition water and reduce nutrient and fertilizer particle sizes for maximum uptake into the plant.


Market Opportunities


The Ecos GrowCube™ offers commercial and residential farmers the opportunity to grow a wide range of crops in a fully automated and controlled environment virtually anywhere in the world. It is a turn-key solution for the small to medium sized, highly focused hydroponic growers producing high-value crops. Potential market opportunities include, but are not limited to:


·

Marijuana cultivation in states where growing is legal under state law

·

High-value crop cultivation, such as essential oils

·

Urban farming / On-site cultivation for hotels, restaurants, universities and large personnel bases

·

Nutrient & fertilizer production


In lieu of the complexities and “low-tech” alternative of creating a traditional grow site through, for example, renovating a warehouse or using low-end, renovated shipping containers, the Ecos GrowCube™ provides a “plug-and-play” state-of-the-art solution that provides the highest quality conditions under which the most premium plants can be cultivated.


The initial path to market for the Ecos GrowCube ™ is planned unit sales to legally, licensed medical and recreational marijuana growers, co-ops and medical collectives in those states where medical and recreational marijuana cultivation has been approved. The Ecos GrowCube ™ will enable licensed medical marijuana growers to produce the highest quality medical-grade marijuana product and capture the greatest yield per plant in a state-of-the-art, fully automated, safe and secure growing environment. In addition to selling Ecos GrowCube™ systems to legal, licensed growers, the Company plans to sell a premium line of nano-sized nutrients and fertilizers to growers in order to increase its value-add and further enable increased quality, yield & production results.


The Company has formed SOGS, a majority owned subsidiary of Ecosphere, to serve as its exclusive, global marketing and sales division for the Ecos GrowCube™ technology and product line as well as all agricultural related nutrients, products and solutions. The Company has also formed Ecosphere Development Company, LLC (“EDC”) to serve as a development arm of the Company to acquire legally zoned properties and develop turnkey growing facilities using the Ecos GrowCube™ technology to rent to licensed growers in those states that marijuana cultivation is legal. EDC will serve as a landlord who will also supply precision agriculture equipment to licensed growers and will not be involved in receiving any percentages and/or profits of a legally licensed grower’s revenue.




4



 


Intellectual Property Portfolio


Ecosphere has an extensive portfolio of Patents and Trademarks that have been filed and are pending and approved in various locations around the world, including fourteen (14) approved United States Patents related to Ozonix®, approximately nine (9) United States and International Ozonix ® Patents Pending and one (1) United States Patent related to the Ecos PowerCube®. Also, to ensure the highest water quality and increase plant yield, the recently announced Ecos GrowCube™ incorporates Ecosphere’s multi-patented Ozonix ® water treatment technology, which is fully patented, proven and protected by the twenty-three (23) approved and pending patents listed above. Ozonix® is used to not only treat and recycle water in the Ecos GrowCube™ but to structure the water and allow better nutrient mixing for maximum respiration of nutrients to the plants.


Ecosphere’s patented technologies can be licensed for specific industries and applications in the United States and throughout the world.


Historical Intellectual Property Monetization


Ecosphere has a history and track record of successfully monetizing its intellectual property and technology. Ecosphere’s first successful intellectual property commercialization project was a patented coatings removal process that removed paint from ships in the heavy marine industry using a patented ultra-high pressure robotic coatings removal technology that magnetically attached to the surface of a ship and was controlled wirelessly by an operator. Ecosphere’s robotic coatings removal technology was sold in 2007. At this point, Ecosphere began to focus all of its efforts on its proprietary water and wastewater treatment technology that was developed to support the robotic coatings removal process.


In 2009, Ecosphere formed FNES, to license its patented Ozonix® water treatment technology across the global energy sector. Since 2008, Ecosphere’s patented Ozonix® technology has enabled oil and gas customers to treat, recycle and reuse over six (6) billion gallons of water on more than 1,600 oil and natural gas wells, protecting over $6 billion worth of well assets, and generating over $70 million in revenue.


From a technical standpoint, Ecosphere has proven the Ozonix® process in the most technologically challenging treatment market sector, the oil and gas segment of the energy industry; therefore, Ecosphere believes that the technological risks faced when entering the other target sectors and industries are significantly diminished. From a business standpoint, Ecosphere has successfully created a subsidiary to target the energy industry (one of numerous target markets) and a transaction in 2013 valued just this one subsidiary at $50 million, at which Fidelity National Financial, Inc. [NYSE:FNF] (“FNF”) invested $10 million. It is important for shareholders to note that in 2009 when FNES was initially established and the technology was not yet commercially or technologically proven, FNF invested $7.5 million in FNES at a $37.5 million valuation to build Ozonix® equipment.


Ecosphere’s strategy is to further leverage its multi-patented Ozonix®, Ecos PowerCube®, Ecos GrowCube™ and SOGS technology portfolios via widespread partnering and licensing to achieve substantial technology deployment and the corresponding revenue and profit growth.


Active Subsidiaries and Investments


Fidelity National Environmental Solutions, LLC or FNES


FNES, a leading water treatment provider to the energy services sector, has an exclusive field-of-use license for Ecosphere's multi-patented Ozonix® technology for global energy applications including, but not limited to, onshore and offshore oil and natural gas exploration and production, power generation, refineries and coal. FNES provided licensing partners and energy exploration companies with patented Ozonix® mobile wastewater treatment equipment to eliminate harmful chemicals from hydraulic fracturing operations around the United States and Canada. It is presently inactive due to the downturn in the oil and gas industry.


Ecosphere currently owns 30.6% of FNES and was the exclusive manufacturer of all Ozonix® related products. Its exclusive manufacturing rights expired in May 2015.




5



 


Sea of Green Systems, Inc.


SOGS is a subsidiary of ETI that has been formed to monetize Ecosphere’s recently announced Ecos GrowCube™ technology and Ozonix® product lines in the Precision-Agriculture markets. The subsidiary has received a royalty-free, global field-of-use license for Ecosphere patents including Ecosphere’s multi-patented Ozonix® water treatment technology and related growing technologies and automated software for all agriculture related applications globally. Ecosphere has spent much of 2014 and 2015 to date concentrating on designing, developing and more recently, manufacturing the first Ecos GrowCube™ systems. During this process Ecosphere has gained invaluable knowledge of being able to implement its Ozonix® process and its automation software for growers considering any size grow operation. As of Q1 2016, SOGS has developed a comprehensive line of growing systems that cater to different customers’ needs and price points as well as a complementary line of premium nutrients that will be sold to Ecos GrowCube™ customers.  


The initial focus will be the legal medical and recreational marijuana markets in the 24 states where local law permits the use medically and/or recreationally.


Additionally, due to its hydroponic functionality, the Ecos GrowCube™ can be used across numerous precision agriculture markets.


Ecosphere currently owns 69.49% of SOGS and is the exclusive manufacturer of all Ozonix® and Ecos GrowCube™ related products at a price of 80% of SOGS selling prices.


Proposed SOGS Reverse Merger and Financing


In December 2015, we began to meet with certain hedge funds and reached an oral agreement to merge SOGS into a public company effectively taking it public through a reverse merger.  An integral part of the transaction was receipt of bridge financing and a $2 million private placement, which later funding would occur simultaneously with the merger. We received $266,667 of bridge financing on January 5, 2016; although our senior management has had a number of meetings with proposed investors, we have not closed the private placement. As of the date of this Report, we are uncertain whether we will close the private placement. While the transaction has taken far longer than Ecosphere anticipated, and it has not received any draft term sheet, Ecosphere still expects the reverse merger and financing to occur this Spring. The lead investor invested $100,000 into SOGS in April 2015.  In November 2015, it amended its Convertible Note and SOGS issued the lead investor a Convertible Note in the sum of $106,250 (the “New Note”) (which included the accrued interest).  The New Note is due July 5, 2016.  In January 2016, the lead investor invested an additional $33,334, along with two additional hedge funds that each invested $133,333 into SOGS evidenced by Convertible Note with the same conversion price as the New Note.  The $300,000 Convertible Notes are due with 12.5% interest on July 5, 2016.  The Convertible Notes convert at an 85% discount of the financing price in connection with the reverse merger or alternatively into Ecosphere’s common stock at price of $0.115 per share.  In connection with the $400,000 Convertible Notes, Ecosphere has issued the three lenders each warrants to purchase 3,000,000 shares of common stock exercisable at $0.115 cents a share over a 5-year period.


Ecosphere Mining, LLC


Ecosphere Mining, LLC is a subsidiary of Ecosphere that has been granted an exclusive field-of-use license for Ecosphere’s patented Ozonix® technology for the global hard rock mining industry. In the hard rock mining industry, Ozonix® can be used to treat ores to increase ore recovery rates and reduce the amount of cyanide required for hydrometallurgical extraction and also mitigate environmental effects associated with conventional cyanide leaching techniques.


Ecosphere’s Ozonix® water treatment technology is a clean, cost-effective solution for reducing and reusing the residual wastewater streams produced in the mining industry – which we believe can help customers increase profitability, decrease production costs and reduce overall chemical consumption, while protecting the environment and surrounding water resources of large heritage lands.


Description of Business Over Five Years


Over the past two years, we have concentrated on developing our Precision Agriculture technology product line that features the Ecos GrowCube™ and Ozonix® technologies. Prior to focusing on Precision Agriculture related technologies, the Company focused on improving our multi-patented Ozonix® technology and the equipment through which we deliver services to oil and gas exploration and production companies. Since 2008, Ecosphere’s Ozonix® technology has been used to treat, recycle and reuse over six (6) billion gallons of water on more than 1,600 oil and natural gas wells, protecting $6+ billion worth of well assets, and generating over $70 million in revenue.




6



 


In March 2011, Ecosphere and FNES entered into a 20-year definitive agreement with Hydrozonix, LLC (“Hydrozonix”). That agreement granted an exclusive technology license agreement with Hydrozonix to deploy the Ozonix® technology in the United States for the on-shore oil and gas industry. Hydrozonix agreed to purchase two units per quarter over a two-year period. In the third quarter of 2011, we manufactured and delivered the initial two units and followed with an additional two units late in the fourth quarter of 2011. The bulk of our efforts in 2011 were focused on the design and manufacturing of Ozonix® EF80 units for Hydrozonix. Meanwhile, 2011 was a record year at that time. We generated $21.1 million of revenue.


In 2012, we continued the manufacturing and delivery of Ozonix® EF80 units to Hydrozonix. FNES continued its services to its energy customers. In 2012, we generated record revenues of $31.1 million, again with the increase due to the sale of 12 Ozonix® EF80 units to Hydrozonix.


In 2013, we experienced a change in a relationship with Hydrozonix. During the first quarter as required by our agreement, we manufactured units 13 and 14. However, Hydrozonix was unable to pay for the units and in mid-April 2013, lost its exclusive license. We ultimately sold units 13 and 14 later in the year to FNES in exchange for cash and monthly payments over a three-year period. The Company has since sold the Notes Receivable for the two Ozonix® EF80 units in exchange for $2.4 million, FNES makes monthly payments to the note holders, but in January 2015, FNES entered into a forbearance agreement with the note holders which waives monthly payments through June 30, 2015. FNES will pay $15,000 per month per note payable beginning July 1, 2015 through the notes due dates. In May and July, Fidelity National Financial, Inc. [NYSE:FNF], a Fortune 500 company, increased its investment in FNES by paying Ecosphere $10 million for 20% of that subsidiary. Ecosphere’s management team estimates that this sale represents approximately 2% of the estimated value of Ecosphere’s global Ozonix® intellectual property portfolio. Once we fell below the 50% ownership threshold, we ceased to be the managing member. FNF also obtained an option to purchase an additional 12% for $6 million by December 31, 2013 and that option lapsed.


In June 2013, Ecosphere announced its newest product for the oil and gas hydraulic fracturing market, the Ozonix® EF10M. The Ozonix® EF10M was an addition to Ecosphere’s highly successful line of Ecos-Frac® mobile water treatment products that have been used to treat and recycle over six billion gallons of water for more than 1,600 oil and natural gas wells around the United States.


In November 2013, the Company sold its first Ozonix® EF10M to FNES, which was later sold to Hydrosphere Energy Solutions (“Hydrosphere”), a Canadian sub-licensee of FNES in January 2014.


In December 2013, Ecosphere announced completion of its first Ozonix® O.R.E Recovery Equipment system for Ecosphere Mining, LLC, a wholly-owned subsidiary of Ecosphere and a new Mobile Operations Vehicle that is designed to remain on location for extended periods of time when Ecosphere is demonstrating its Ozonix® system for customers around the United States. In November 2014, Ecosphere sold the Mobile Operations Vehicle due to the depressed status of the mining & minerals market.


Late in 2013, the United States Patent Office (“USPTO”), after seven years, issued a patent for our Ecos PowerCube®. As a result, we spent a significant portion of 2014 designing and manufacturing multiple prototypes and have begun to seek a financial or strategic partner to license the Ecos PowerCube® for numerous industries and applications globally.


In January 2014, Ecosphere announced that FNES signed an exclusive technology licensing and equipment purchase agreement with Hydrosphere, a Canadian corporation, to deploy its patented Ozonix® water treatment technology in Alberta and the Northeast part of British Columbia, Canada. Under the terms of the agreement, Hydrosphere Energy Solutions is required to purchase: one Ozonix® EF10M unit for immediate delivery, eight Ozonix® EF10 units within the first 12 months, one Ozonix® EF80 unit within the first 12 months and a minimum of two Ozonix® EF80's within 24 months following the delivery of the first purchased Ozonix® units. Hydrosphere has also agreed to pay on-going royalty payments to FNES on all water processed in the licensed territory. So long as the commitments are met, Hydrosphere shall remain the exclusive sub-licensed partner of FNES in the Alberta and Northeast British Columbia, Canada for all hydraulic fracturing applications. Hydrosphere has not met the criteria listed above to maintain its exclusivity.




7



 


In July 2014, Ecosphere announced an exclusive technology licensing and equipment purchase agreement with Brasil Clean Energy ("BCE"), a Brazilian environmental services company, to deploy its patented Ozonix® water treatment technology across the food and beverage industry in Brazil. BCE was required to purchase a minimum of $5 million worth of Ozonix® equipment over two years, plus a royalty payment based on usage or revenue, with a minimum amount earned per machine. BCE did not meet its purchase requirements in order to maintain its exclusive license. As of the date of this Report, BCE has purchased $0.5 million worth of Ozonix® equipment. In September 2014, the Company completed manufacturing, testing and delivery of BCE's first piece of equipment, an Ozonix® EF10M mobile water treatment system capable of treating approximately 420 gallons-per-minute in a 10x12 footprint.


In November 2014, Ecosphere formed SOGS to begin to execute on its monetization strategy for the recently announced Ecos GrowCube™ technology and SOGS product lines. The subsidiary has received a royalty-free, global field of use license for the Ecos GrowCube™ technology as well as Ecosphere’s multi-patented Ozonix® water treatment technology for all agriculture related applications globally. SOGS will immediately deploy its Ecos GrowCube™ technology into the legal, medical and recreational marijuana industries by selling Ecos GrowCube™ units to licensed medical marijuana growers in legalized states. It should be noted that SOGS will strictly sell state-of-the-art hydroponic growing systems to growers; it will not partake in any part of the growing process and or take ownership positions in customers’ crops.


In January 2015, Ecosphere signed an exclusive technology licensing agreement with US H20, Inc. (“USH20”), 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. Under the terms of the license agreement, USH20 paid Ecosphere an upfront technology licensing fee in addition to ongoing royalty payments on all Ozonix® related gross revenue for the life of the patents.


In April 2015, Ecosphere announced the receipt of a purchase order for an OZONIX® EF10M water treatment system by Kualiti Alam SDN BHD, a Malaysian waste management and renewable energy solutions provider, for industrial wastewater treatment applications in Malaysia. Ecosphere completed manufacturing, delivery and installation of the Ozonix® EF10M system in Malaysia in Q4 2015.


In April 2015, Ecosphere received approval from the USPTO for patent no. 8,999,154. This patent teaches a method for Ecosphere’s patented Ozonix® water treatment technology to increase and maintain desired oxygen levels in the C-44 Canal (St. Lucie Canal) that feeds the St. Lucie Estuary and Indian River Lagoon. The contaminated water is introduced into the St. Lucie Canal from the polluted waters of Lake Okeechobee. The St. Lucie Estuary and Indian River Lagoon are one of the most bio diverse ecosystems in North America, with more than 4,000 plant and animal species, including 36 endangered and threatened species.


In July 2015, SOGS received its first equipment purchase order of Ecos GrowCube™ equipment to Waveseer Properties, LLC (“Waveseer”) for approximately $1.3 million. The Company is currently manufacturing this indoor line of Ecos GrowCube™ equipment and plans to deliver the order in Q2 2016. For a discussion of our ability to complete this equipment order, please see Risk Factors. In addition, the Company delivered its first self-contained Ecos GrowCube™ unit during Q3 2015, currently in the Company’s inventory as finished goods, for a trial period to this customer’s facility in Las Vegas, NV to successfully demonstrate the technology’s competitive advantages and growing capabilities. 


In November 2015, Ecosphere announced that it and its majority owned subsidiary, SOGS signed a Strategic Partnership Agreement with Jim Fazio Golf Design, LLC. ("FAZIO"), a leading designer of premier golf courses, to develop and market an exclusive line of SOGS fertilizers for the golf course industry worldwide.


In December 2015, Ecosphere announced that it signed a Letter of Intent with Abandoned Mine Cleanup LLC. ("AMC"), a Company formed by current Ecosphere Board Member Dean Becker, to deploy its multi-patented Ozonix® water treatment technology on an exclusive basis in the Mining Industries of North and South America. The Letter of Intent required AMC to make a significant payment by March 31, 2016, which did not occur. Discussions are continuing subject to AMC paying for a pilot to be completed by July 2016.


Ecosphere has directly and through a new subsidiary, named Ecosphere Development Company, LLC. (“EDC”), very recently entered into a long-term land lease to lease six (6) acres of I-502 heavy industrial agricultural land in Benton County, Washington, zoned for legal marijuana cultivation and processing. Ecosphere owns 100% of the EDC subsidiary and intends to develop the 6 acres of land and build state-of-the-art, turn-key growing facilities which it will rent to legal, licensed growers in Washington. These turnkey, high-tech growing facilities will incorporate automated growing systems, as well as Ecosphere’s patented water treatment technology purchased exclusively from SOGS, in order to maximize quality and yield for EDC’s tenants, who will pay monthly rent and licensing fees to EDC in exchange for using its turnkey growing facilities.




8



 


Ecosphere has spent the last two years locating and acquiring the property as well as designing the facilities it plans to build in WA. This new business segment will require infrastructure and equipment financing between $2 – 5 million, to develop the entire 6 acres, of which EDC will build in phases. Ecosphere is presently in discussions with a lender to finance its Washington landlord/tenant business model.


In 2015, Ecosphere received a total of 7 additional, approved United States Patents for its Ozonix® technology, bringing the total count to 14 approved U.S. Patents with Numerous Patents always pending. Approved Ozonix® Patents include U.S. Patent No's. 7,699,994; 7,699,988; 7,785,470; 7,943,087; 8,318,027; 8,721,898; 8,858,064; 8,936,392; 8,906,242; 8,968,577; 8,999,154; 9,034,180; 9,169,146; and 9,266,752.


Sales and Marketing


We rely on our officers and employees for the coordination of our sales and marketing efforts. Management uses our website, www.ecospheretech.com, and organic and search engine optimization marketing programs as well as inbound marketing techniques to bring potential customers to our website to learn about our unique technologies and product offerings. We have developed a comprehensive marketing and communications strategy with our creative advertising agency to market our patented technologies. Current marketing opportunities include attendance at key trade shows, award outreach and presentations to industry groups as appropriate.


Manufacturing


Ecosphere designs, develops and manufactures all of its technologies and equipment at our Company headquarters in Stuart, Florida using our in-house production facilities and a network of selected original equipment manufacturers to supply components. Our design engineering and manufacturing teams continue to improve our products at this manufacturing and production facility.


We have invested in proven development techniques including CAD/CAM, finite element analysis and 3D modeling. In addition, during 2010, Ecosphere secured an adjacent building to provide for expansion of our manufacturing capabilities, and we have continued to invest in additional machining tools and equipment to bring more fabrication in-house. This reduces both our cost and time to completion for units being built in this facility. We also believe that there is a benefit in increased quality. We have also expanded our manufacturing staff capabilities through training or specialized hires. We expect to continue this investment, as we believe this will produce significant benefits in terms of higher quality, faster completion and lower costs. Certain processes and components will continue to be fabricated offsite. We also continue to invest in maintaining our ISO 9000 certification.


Research and Development


During the year ended December 31, 2015, Ecosphere spent approximately $640,000 on research and development.


Intangible Assets


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


Employees


At April 8, 2016 we had 23 total employees. None of our employees are covered by a collective bargaining agreement. We believe that our relationships with our employees are good.


ITEM 1A.

RISK FACTORS.


Not applicable to smaller reporting companies.


ITEM 1B.

UNRESOLVED STAFF COMMENTS.

 

None.



9



 


ITEM 2.

PROPERTIES.


In March 2016, the Company entered into a lease agreement for a 6 acre property in Washington state. The term of this lease will commence in May 2016 and will terminate on a date five years from the commencement date. The Company will have the option to renew the lease for five additional five year terms. The Company will be required to make a security deposit in the amount of $81,675 by May 2016 and the aggregate monthly rent will be phased in over one year. From May 2016 through August 2016 the aggregate monthly rent is $5,445, from September 2016 through December 2016 the aggregate monthly rent is $13,068, from January 2017 through April 2017 the aggregate monthly rent is $16,335 and from May 2017 going forward the aggregate monthly rent is $27,225.


Ecosphere rents three contiguous buildings in Stuart, Florida comprising an aggregate of 21,100 square feet of space. Our aggregate monthly rent is $16,744. The first building houses the corporate offices, the second building provides warehouse, manufacturing and testing space and the third building provides additional warehouse and machine shop space. All of these buildings are rented on a month-to-month basis.


Ecosphere leases offices in Park City, UT, comprising approximately 2,172 square feet of space. The aggregate monthly rent for 2016, 2017 and 2018 is $3,792, $3,906 and $4,024, respectively.


ITEM 3.

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.


ITEM 4.

MINE SAFETY DISCLOSURES.


None.



10



 


PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

MARKET FOR COMMON STOCK


Our stock trades on the Bulletin Board, under the symbol “ESPH.” The last reported sale price of our common stock as reported by the Bulletin Board on April 8, 2016 was $0.0499. As of that date, we had approximately 1,278 record holders of our common stock and we believe that there are substantially more beneficial owners than record holders.


The following table provides the high and low bid price information for our common stock for the periods our stock was quoted on the Bulletin Board. For the period our stock was quoted on the Bulletin Board, the prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and does not necessarily represent actual transactions.


 

 

 

 

Prices

 

Year

 

Period Ended

 

High

 

 

Low

 

 

 

 

 

 

 

 

 

 

2015

 

December 31

 

$

0.09

 

 

$

0.05

 

 

 

September 30

 

$

0.11

 

 

$

0.05

 

 

 

June 30

 

$

0.15

 

 

$

0.10

 

 

 

March 31

 

$

0.15

 

 

$

0.07

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

December 31

 

$

0.19

 

 

$

0.08

 

 

 

September 30

 

$

0.18

 

 

$

0.07

 

 

 

June 30

 

$

0.22

 

 

$

0.15

 

 

 

March 31

 

$

0.30

 

 

$

0.19

 


Dividend Policy


We do not plan to pay additional dividends in the foreseeable future. Our Board will determine our future dividend policy on the basis of many factors, including results of operations, capital requirements, and general business conditions. Earnings, if any, will be retained to finance our growth.


Recent Sales of Unregistered Securities


None.


ITEM 6.

SELECTED FINANCIAL DATA.


None.



11



 


ITEM 7.

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

 

This discussion should be read in conjunction with the other sections contained herein, including the risk factors and the consolidated financial statements and the related exhibits contained herein. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing as well as other matters over which we have no control. 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 herein. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”


Recent Highlights and Success


·

In January 2015, Ecosphere signed an exclusive technology licensing agreement with US H20, Inc. (USH20), 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. Under the terms of the license agreement, USH20 was required to pay Ecosphere an upfront technology licensing fee in addition to ongoing royalty payments on all Ozonix ® related gross revenue for the life of the patents.

·

In April 2015, Ecosphere announced the receipt of a purchase order for an Ozonix® EF10M water treatment system by Kualiti Alam SDN BHD, a Malaysian waste management and renewable energy solutions provider, for industrial wastewater treatment applications in Malaysia. Ecosphere completed manufacturing, delivery and installation of the Ozonix® EF10M system in Malaysia in Q4 2015.

·

In April 2015, Ecosphere announced receipt of a U.S. Patent to use Ozonix® to treat lakes, rivers & streams, in particular, to Florida's Lake Okeechobee, the C44 Canal and the Indian River Lagoon. In September 2013, Ecosphere began researching and developing a water treatment apparatus to treat the heavily contaminated waters being released from Lake Okeechobee. As part of a demonstration for world-renowned Environmentalist Jean-Michel Cousteau and State and Local Officials, the Company demonstrated its ability to treat actual, contaminated C-44 Canal water through our patented Ozonix® technology and as a result, developed a comprehensive plan to use custom engineered Ozonix® barges and vessels to address the problem.

·

In June 2015, Ecosphere introduced the Ozonix Sentinel line of water treatment vessels to be able to treat high-volumes of water in rivers, lakes, lagoons and estuaries that have been contaminated as a result of depleted oxygen levels and industrial pollutants.

·

In July 2015, SOGS received its first equipment purchase order of Ecos GrowCube equipment to Waveseer Properties, LLC (Waveseer) for approximately $1.3 million. The Company is currently manufacturing this indoor line of Ecos GrowCube equipment and plans to deliver the order in Q2 2016. For a discussion of our ability to complete this equipment order, please see Risk Factors. In addition, the Company delivered its first self-contained Ecos GrowCube™ unit, currently in the Company’s inventory as finished goods, for a trial period to this customer’s facility in Las Vegas, NV to successfully demonstrate the technology’s competitive advantages and growing capabilities. This unit has since been moved from Waveseer’s facility in Las Vegas and is currently in Washington state for another demonstration.

·

In September 2015, Ecosphere signed an exclusive agreement with Brasil Clean Energy ("BCE"), its Ozonix® Licensing partner in Brasil. Additionally, Ecosphere has expanded the geographic area for BCE's representation of the Company's patented technologies and products in Brasil to include all of Central and South America. The new agreement calls for Ecosphere and BCE to form a Joint Venture to manufacture Ecosphere's patented technologies in Brasil, as well as other South American countries.

·

In November 2015, Ecosphere announced that it and its majority owned subsidiary, SOGS signed a Strategic Partnership Agreement with Jim Fazio Golf Design, LLC, a leading designer of premier golf courses, to develop and market an exclusive line of Ozonix® water treatment products for the golf course industry worldwide.

·

In 2015, Ecosphere received a total of 7 additional, approved United States Patents for its Ozonix® technology, bringing the total count to 14 approved U.S. Patents with Numerous Patents always pending. Approved Ozonix® Patents include U.S. Patent No's. 7,699,994; 7,699,988; 7,785,470; 7,943,087; 8,318,027; 8,721,898; 8,858,064; 8,936,392; 8,906,242; 8,968,577; 8,999,154; 9,034,180; 9,169,146; and 9,266,752.

·

In Q1 2016, SOGS received equipment purchase orders for various Ecos GrowCube units; the Company plans to complete the orders in Q2 2016.

·

In Q2 2016, the Company plans to spin off SOGS as another public company that will be controlled by the Company.




12



 


Intellectual Property Portfolio


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


History of Product and Application Development


Since 2008, the Company has incurred in excess of $5.5 million in developing its current line of products and industry specific applications utilizing its intellectual property.  Such costs are exclusive of amounts paid to executive officers or our chief technology officer, who spends a significant portion of his time on research and development, and indirect general and administrative tasks. Included in these development costs are engineering salaries and benefits, direct research and development costs, and costs related to the Company’s manufacturing and engineering facilities in Stuart, Florida.  These efforts, along with costs incurred directly related to the generation of over $70 million in revenue from the use of the Company’s intellectual property within the oil and gas industry, have resulted in the Company’s current intellectual property portfolio being available for license for various industries and applications as follows.


Critical Accounting Estimates


Use of Estimates


The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the allowance for doubtful accounts receivable, valuation of inventory, estimates of depreciable lives and valuation of property and equipment, estimates of amortization periods for intangible assets, valuation of beneficial conversion features in convertible debt, valuation of equity based instruments issued for other than cash, valuation of derivatives, valuation of remaining interest in FNES and the valuation allowance on deferred tax assets.


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.




13



 


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.


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.


Product Sales


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


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


Stock-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. Stock based compensation granted to non-employees is accounted for in accordance with the measurement and recognition criteria of ASC Topic 505-50, Equity Based Payments to Non-Employees.




14



 


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.


Results of Operations


Comparison of the Year ended December 31, 2015 with the Year ended December 31, 2014

 

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


RESULTS OF OPERATIONS


 

 

For the Years Ended

December 31,

 

 

 

 

 

 

2015

 

 

2014

 

 

Change

 

Revenues

 

 

 

 

 

 

 

 

 

Equipment sales and licensing

 

$

573,958

 

 

$

530,550

 

 

$

43,408

 

Equipment sales and licensing, related party

 

 

 

 

 

524,525

 

 

 

(524,525

)

Aftermarket part sales

 

 

138,715

 

 

 

24,549

 

 

 

114,166

 

Aftermarket part sales, related party

 

 

8,506

 

 

 

40,255

 

 

 

(31,749

)

Total revenues

 

 

721,179

 

 

 

1,119,879

 

 

 

(398,700

)

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

465,099

 

 

 

813,005

 

 

 

(347,906

)

Aftermarket part costs (exclusive of depreciation shown below)

 

 

77,381

 

 

 

56,486

 

 

 

20,895

 

Salaries and employee benefits

 

 

2,485,996

 

 

 

3,233,352

 

 

 

(747,356

)

Administrative and selling

 

 

1,071,256

 

 

 

954,274

 

 

 

116,982

 

Professional fees

 

 

461,121

 

 

 

1,045,492

 

 

 

(584,371

)

Depreciation and amortization

 

 

367,299

 

 

 

429,599

 

 

 

(62,300

)

Research and development

 

 

638,866

 

 

 

241,192

 

 

 

397,674

 

Bad debt

 

 

285,170

 

 

 

 

 

 

285,170

 

Loss on sale of notes receivable

 

 

 

 

 

985,085

 

 

 

(985,085

)

Total costs and expenses

 

 

5,852,188

 

 

 

7,758,485

 

 

 

(1,906,297

)

Loss from operations

 

 

(5,131,009

)

 

 

(6,638,606

)

 

 

1,507,597

 

Loss and impairment on investment in unconsolidated investee

 

 

(12,668,298

)

 

 

(1,701,140

)

 

 

(10,967,158

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

45,089

 

 

 

(45,089

)

Interest expense

 

 

(3,368,061

)

 

 

(2,225,386

)

 

 

(1,141,168

)

Loss on sale/disposal of fixed assets, net

 

 

 

 

 

(98,043

)

 

 

98,043

 

Loss on impairment of fixed assets

 

 

(207,912

)

 

 

 

 

 

(207,912

)

Loss on debt extinguishment

 

 

(1,696,007

)

 

 

(880,774

)

 

 

(815,233

)

Change in fair value of derivative instruments

 

 

 

 

 

3,671

 

 

 

(3,671

)

Other income (expense), net

 

 

3,526

 

 

 

(1,274

)

 

 

4,800

 

Total other income (expense), net

 

 

(5,268,454

)

 

 

(3,156,717

)

 

 

(2,111,737

)

Net income (loss)

 

 

(23,067,761

)

 

 

(11,496,463

)

 

 

(11,571,298

)

Preferred stock dividends

 

 

(82,752

)

 

 

(82,752

)

 

 

 

Net income (loss) applicable to common stock before allocation to non-controlling interest

 

 

(23,150,513

)

 

 

(11,579,215

)

 

 

(11,571,298

)

Net loss applicable to noncontrolling interest of consolidated subsidiary

 

 

133,936

 

 

 

13,117

 

 

 

120,819

 

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

 

$

(23,016,577

)

 

$

(11,566,098

)

 

$

(11,450,479

)



15



 


Comparison of the Year Ended December 31, 2015 to the Year Ended December 31, 2014


The Company reported net loss applicable to Ecosphere common stock on $23 million during the year ended December 31, 2015 (the “2015 Period”) as compared to net income applicable to Ecosphere common stock of $11.6 million during the year ended December 31, 2014 (the "2014 Period"). The driver of the variance of $11.5 million is the $11.9 million write-off of FNES as oil and gas companies wrote down assets due to the downturn in that industry along with other factors including operating results as 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 unit 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, Ecosphere 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 field-of-use. During the 2015 Period, $500,000 in licensing fees has been paid by USH2O, 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. Additionally in 2015, the Company sold one Ozonix® EF10M unit to a customer in Malaysia, resulting in equipment sales of $0.6 million and the Company sold aftermarket parts and products to various customers and one related party customer, FNES.


Costs and Expenses


Equipment Sales and Licensing Costs (exclusive of depreciation)


The equipment sales and licensing costs for the 2015 Period were $0.5 million in connection with the sale of one Ozonix® EF10M unit to a company in Malaysia as compared to $0.8 million for the 2014 Period in connection with the sale of an Ozonix® EF10M unit to FNES which was subsequently resold and the sale of one Ozonix® EF10M to BCE.


Aftermarket Part Costs (exclusive of depreciation)


The costs associated with the sale of aftermarket parts for Ozonix® water treatment equipment were $77,381 for the 2015 Period as compared to $56,486 for the 2014 Period.


Salaries and Employee Benefits


For the 2015 Period, salaries and employee benefits amounted to $2.5 million. The decrease in salaries and employee benefits of $0.7 million was primarily the result of a $0.4 million decrease in equity-based compensation and $0.3 million decrease in salaries, wages and related taxes and benefits.


Professional Fees


For the 2015 Period, professional fees amounted to $0.5 million. The $0.6 million decrease in professional fees for the 2015 Period was driven by a $0.3 million decrease in consulting fees and legal fees relating to the arbitration.


Research and Development


Research and development increased $0.4 million during the 2015 Period. This is related to the development of the Company’s first Ecos GrowCube™ and Ecos PowerCube™ units built during 2015 and 2014. The Company sold the Ecos GrowCube™ to SOGS for $250,000 and the costs in excess were recorded as research and development costs.


Bad Debt


The Company recorded bad debt expense of $0.3 million in connection to the allowance of doubtful accounts for a related party accounts receivable balance.



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Loss on Sale of Notes Receivable


For the 2014 Period, the Company had a loss on sale of notes receivable of approximately $1.0 million in connection with the sale of the two Ozonix® EF80 notes receivable. In March 2014, Ecosphere sold the FNES note payable for the Unit sold in July 2013 in exchange for $1 million in cash. The buyer of the note is an FNES member and director. The Company also sold 50% of the FNES note payable for the Unit sold in November 2013 in exchange for $0.6 million in cash during the three months ended March 31, 2014. During the three months ended June 30, 2014, the Company sold the remaining 50% of the FNES note payable for the Unit sold in November 2013 in exchange for $0.6 million. The buyer of 50% of the $0.6 million note receivable sold in June 2014 is an employee of the Company. As of December 31, 2014, the Company had no accounts receivable balance in connection with the notes payable for the Ozonix® EF80 units sold to FNES in July and November 2013.


Income (Loss) From Operations

 

Loss from operations 2015 Period was $5.1 million compared to loss of $6.6 million for the 2014 Period. See discussion above under "Revenues" and "Costs and Expenses" for further details.


Loss and Impairment on Investment in Unconsolidated Investee


The change in the loss on investment in unconsolidated investee was approximately $0.8 million for the 2015 Period. 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 during 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 for which FNES owns an exclusive license.


Loss on Sale/Disposal of Fixed Assets, Net


In November 2014, the Company sold a mobile operations vehicle that had been part of its fixed assets since 2013. The net book value of such unit was written off and the Company recognized a loss of $0.1 million on the transaction.  


Interest Expense

 

Interest expense for the 2015 Period increased $1.1 million which was primarily due to the borrowing of approximately $1.5 million through the sale of convertible notes and warrants along with non-cash interest related charges. In addition, the Company had some modifications to previously issued convertible notes and warrants that resulted in some non-cash interest related charges.

 

Net Loss Applicable to Noncontrolling Interest of Consolidated Subsidiary


Net loss applicable to noncontrolling interest in our Ecosphere Mining, LLC and SOGS consolidated majority-owned subsidiaries was $133,936 for the 2015 Period.

 

Net (Loss) Income Applicable to Common Stock of Ecosphere Technologies, Inc.

 

Net loss applicable to common stock of Ecosphere was $23 million for the 2015 Period as compared to a net loss applicable to common stock of $11.6 million for the 2014 Period. Basic and diluted net loss per common share was $0.14 for the year ended December 31, 2015 as compared to a basic and diluted net loss per common share was $0.07 for the year ended December 31, 2014. The weighted average number of shares outstanding was 165,294,921 and 164,294,045 for the years ended December 31, 2015 and 2014, respectively. Fully diluted weighted average shares outstanding were 165,294,921 and 164,294,045 for the years ended December 31, 2015 and 2014, respectively.




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LIQUIDITY AND CAPITAL RESOURCES


A summary of our cash flow is as follows:


 

 

For the Year Ended

December 31,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(1,761,946

)

 

 

(4,550,454

)

Net cash used in investing activities

 

 

(10,864

)

 

 

(102,988

)

Net cash provided by financing activities

 

 

1,741,104

 

 

 

3,625,591

 


Cash Flows from Operating Activities:


The Company’s net cash used in operating activities was $1.8 million during the 2015 Period compared to cash used in operating activities of $4.6 million during the 2014 Period, respectively.


2015 Period


Net cash used in operating activities was $1.8 million for the year ended December 31, 2015. Cash used in operating activities for 2015 resulted primarily from the net loss applicable to Ecosphere Technologies, Inc. common stock of $23 million which was offset by (i) $12.7 million in the loss and impairment on investment in unconsolidated investee, or FNES, the Company had to take a full impairment of the investment in FNES due to the recent downturn in the oil and gas industry along with other factors, (ii) $3.8 million in non-cash expenses, (iii) $1.3 million addition to customer deposits for Ecos GrowCube™ units currently being manufactured, (iv) $0.5 million in stock-based compensation expense.


2014 Period


Net cash used in operating activities was $4.6 million for the year ended December 31, 2014. Cash used in operating activities for 2014 resulted primarily from the net loss applicable to Ecosphere Technologies, Inc. common stock of $11.6 million which was partially offset by (i) $3.2 million in non-cash expenses, (ii) $1.7 million in connection with the Company’s ownership interest share of FNES’ net loss, (iii) $1.0 million in connection with the loss on sale of the Company’s notes receivable for the Ozonix® EF80 units and (iv) $0.7 in stock-based compensation expense.


Cash Flows from Investing Activities:


The Company’s net cash used in investing activities was approximately $11,000 during the 2015 Period compared to net cash used in investing activities was $0.1 million during the 2014 Period, respectively.


2015 Period


Net cash used in investing activities was approximately $11,000 for the year ended December 31, 2015. This consisted primarily of additions to property and equipment to the Company’s machine shop equipment. The payment of patent costs were minimal.


2014 Period


Net cash used in investing activities of $0.1 million was primarily from addition to property and equipment of $0.2 million and payment of patent costs of $0.1 million. The additions to property and equipment 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, which was later sold in the fourth quarter of 2014 resulting in proceeds to the Company of $160,000.


Cash Flows from Financing Activities:


The Company’s net cash provided by financing activities was $1.7 million in the 2015 Period compared to net cashed provided by financing activities of $3.6 million in the 2014 Period.




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2015 Period


The Company’s net cash provided by financing activities of $1.7 million consisted primarily of proceeds from the issuance of convertible notes payable and warrants of $1.4 million, the sale of stock in the Company’s consolidated subsidiary, SOGS, which provided proceeds of $0.4 million and proceeds from the sale of notes receivable of $0.2 million. This was partially offset by the repayment of notes receivable, insurance financing and vehicle and equipment financing of $0.3 million.

 

2014 Period


The Company’s net cash provided by financing activities of $3.6 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 $1.7 million.


Liquidity


As of April 8, 2015, Ecosphere had cash on hand of approximately $0.1 million. Due to the nature of its technology licensing business model, Ecosphere presently does not have any regularly recurring revenue. These factors raise substantial doubt about the Company’s ability to continue as a going concern. To support its operations, the Company has a number of plans to monetize its intellectual property, which is described below.


In order to stay operational, the Company’s principal lender has continued to advance funds to the Company on an as needed basis.  During 2015, he has lent the Company $1,400,000 represented by convertible notes which are convertible at $0.115 per share and due in September 2016, these notes are secured by a variety of security interests on intellectual property and other assets of the Company.  In addition, the Company’s principal lender had lent the Company $354,000 during 2016. Until the Company can generate sufficient working capital to begin to repay this indebtedness and other indebtedness, this lender has rights which are superior to the Company’s shareholders as well as other creditors.  As of the date of this Report, $890,000 in past due Notes are outstanding.


The Company is working on a number of initiatives which, if consummated can provide liquidity.  Assuming that SOGS is able to raise the $2 million and close the planned reverse merger, it will pay Ecosphere $604,000 of proceeds.  In addition, Ecosphere will receive $25,000 monthly management fees from SOGS.


The proposed Washington state venture through EDC is another source of potential future liquidity.


Management is uncertain whether it will have 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® and Ecos PowerCube® technologies to specific industries in their respective countries and regions of the world. Ecosphere is providing a pilot to a customer that if successful has the ability to provide significant cash to Ecosphere. 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 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® and Ecos PowerCube® technologies globally, the Company’s 30.6% interest in FNES is also available for sale to strategic buyers.




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Management believes that the realization of any of the above events will provide sufficient liquidity for the foreseeable future. Historically in the 18 years since inception, Ecosphere often has had liquidity problems but it has always found financing and new business to support its operations. Management believes that it will do so again although no assurances can be given. The 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 100% of its convertible notes payable, notes payable and related party notes payable due within the next 12 months, $890,000 of which is past due as of the date of this Report. The Company’s counsel is currently in discussions with note holders in the aggregate principal amount of $595,000 regarding extension terms.  Please see Risk Factors concerning our ability to continue as a going concern and complete present equipment orders.


Related Party Transactions


For information on related party transactions and their financial impact, see Note 19 to the consolidated financial statements contained herein. In addition, Ecosphere owes its senior management approximately $220,000 representing unpaid salaries and royalties.


Research and Development


Research and development costs were $0.6 million and $0.2 million for the years ended December 31, 2015 and December 31, 2014.


Recently Issues Accounting Pronouncements


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


CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This report includes forward-looking statements including opportunities for Ozonix® and the Ecos PowerCube® in other markets, our liquidity and closing of the SOGS reverse merger.


All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements.


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 are contained in the risk factors in this Report.


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.




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RISK FACTORS


Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors before deciding whether to invest in Ecosphere. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations or our financial condition. If any of the events discussed in the risk factors below occur, our business, consolidated financial condition, results of operations or prospects could be materially and adversely affected. In such case, the value and marketability of the common stock could decline, and you may lose all or part of your investment.


Risk Factors Relating to Our Company


Our ability to continue as going concern is in doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.

 

We incurred a net loss of approximately $23 million in 2015, in contrast to only $1.8 million in net cash used in operations. We anticipate that we will continue to lose money for the foreseeable future. Additionally, we have negative cash flows from operations. Our continued existence is dependent upon generating sufficient working capital and obtaining adequate new debt or equity financing and selling interests in our subsidiaries and intellectual property. Because of our continuing losses, we may have to continue to reduce our expenditures, without improvements in our cash flow from operations or new financing. Working capital limitations continue to impinge on our day-to-day operations, including our ability to fulfill current equipment orders, thus contributing to continued operating losses.


Because we do not generate positive cash flow from operations, we will be required to engage in a future financing.


We continue to seek working capital from a variety of sources including licensing of our intellectual property, sale and leasing of equipment using our patented technology and other intellectual property, and seeking additional financing primarily through the issuance of notes and warrants. We also are seeking to sell minority interests in our subsidiaries. Because licensing and the related sale of equipment usually have a long sales cycle, we expect to meet most of our short-term working capital through the sale of securities.


However, we cannot assure you that we will be successful in raising sufficient capital to run our operations.


Because of the difficulties which microcap companies have in raising capital, the lack of available credit for companies like us and the level of our stock price, we may be hampered in our ability to raise the necessary working capital. Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments may dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. In addition, new debt securities issued by us to obtain financing could have rights, preferences and privileges senior to our common stock. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us. In such event, our ability to continue as a going concern is in doubt and we may not be able to remain in business.


Because we have substantial debt due beginning in July 2016, we must find a liquidity event or extend most or all of our debt in order to remain operational.


We have $6,395,250 of convertible debt coming due from July through January 2017, including $2,604,000 owed to the principal lender. We do not have the present ability to pay this debt when it comes due. If we are unable to raise the funds from the sale and licensing of our intellectual property or extend the debt, we may not remain operational.


Because the Company expects to generate substantial future revenues through the business of its majority-owned subsidiary, Sea of Green Systems, Inc. (“SOGS”), you should also carefully consider the following risk factors specifically related to SOGS. In the following risk factors, “we,” “our,” and “us” refer to SOGS.


If we do not receive a re-order of Ecos GrowCube™ equipment from our initial customer, it will negatively affect our results of operations and ability to raise additional capital.


Our initial sale of Ecos GrowCube™ equipment was a significant milestone and we anticipate our initial customer will place a significantly larger order in the future, although, we presently have no binding agreement for such a future order.  However, any re-order is subject to a number of factors including:


·

our ability to complete the manufacturing and meet the customers needs;



21



 


·

the customers receiving local regulatory approval;

·

whether the results of the customers initial crops demonstrate significantly improved yield to justify the cost of our Ecos GrowCube products;

·

whether the costs for the Companys premium equipment meet the customers needs; and

·

whether the customer has sufficient working capital.


For further discussion of our working capital limitations, please see Risk Factors above related to our ability to continue as a going concern and our cash flow from operations.


Because we face intense competition in the hydroponics industry and many of our competitors have greater resources, we may be unable to compete effectively.


The industry in which we operate in general is subject to intense and increasing competition. Our competitors may have greater capital resources, facilities and diversity of product lines, which may enable them to compete more effectively in this market. Our competitors may have greater resources for marketing than we do, and devote their marketing efforts at products that directly compete with ours. Our competitors may also introduce new hydroponic growing equipment, which could increase competition and decrease demand for our hydroponic growing equipment product and turnkey growing facilities.


Additionally, if demand for hydroponic growing equipment and/or growing facilities continues to increase, we expect many new competitors to enter the market as there are no significant barriers to hydroponic growing equipment and growing facility production. Due to this competition, there is no assurance that we will not encounter difficulties in obtaining revenues and market share or in the positioning of our products. There are no assurances that competition in the industry will not lead to reduced prices for our hydroponic growing equipment. If we are unable to successfully compete with existing companies and new entrants to the market, this will have a negative impact on our business and financial condition.


Finally, if marijuana-related activities are de-regulated at the federal level or a widespread belief develops that risk of enforcement is unlikely, many companies that are currently unwilling to enter into marijuana-affiliated lines of business due to the perceived risks may enter the industry and compete with us or our customers. To the extent these companies are larger, more established and/or better financed, our operating results could suffer.


Our success depends on the adoption of our hydroponic equipment product and growing facilities by several communities, including marijuana cultivators operating within the confines of state law, local urban farmers and greenhouse growers, and if these communities do not adopt our product or services, then our revenue will be limited.


The major groups to whom we believe our hydroponic equipment product and growing facilities will appeal may not embrace our product and/or services. Acceptance of our products and services will depend on several factors, including cost, ease of use, familiarity of use, convenience, timeliness, strategic partnerships, and reliability. If we fail to meet our customers’ needs and expectations adequately, our product offerings may not be competitive and our ability to continue generating revenues could be reduced. We also cannot ensure that our business model will gain wide acceptance among all targeted groups. If the market fails to continue to develop, or develops more slowly than we expect, our ability to commence or continue generating revenues could be reduced.


Because commodities prices are subject to fluctuation and cycles, a drop in the retail price of commercially grown produce may negatively impact our business.


The demand for hydroponically grown produce depends in part on the price of commercially grown produce. Fluctuations in economic and market conditions that impact the prices of commercially grown produce, such as increases in the supply of such produce and the decrease in the price of commercially grown produce, could cause the demand for hydroponically grown produce to decline, which would have a negative impact on our business.  Commodities prices are subject to fluctuation.  In times of downward pressures our customers may turn to competitive growing methods and products.  Moreover, our first customers are engaged in the cannabis business where prices presently are very high.  We cannot assure you that the high prices will continue.  If prices do plunge, our future revenues may be materially and adversely affected.




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Competing forms of specialized agricultural equipment may be more desirable to consumers or make our product obsolete.


There are currently several different specialized agricultural equipment technologies being deployed in urban vertical farming operations other than hydroponics, such as aquaponics and aeroponics. Further development of any of these competitive technologies may lead to advancements in vertical farming techniques that will make our products obsolete. Consumers may prefer alternative technologies and products. Any developments that contribute to the obsolescence of our products may substantially impact our business, reducing our ability to generate revenues.


Federal regulation and enforcement may adversely affect the implementation of marijuana laws and regulations may negatively impact our revenues and profits.


Currently, 24 states plus the District of Columbia have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Many other states are considering similar legislation. Conversely, under the Controlled Substance Act (the “CSA”), the position underlying the policies and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited. Unless and until Congress amends the CSA with respect to marijuana, there is a risk that federal authorities may enforce current federal law.  In such event, our potential customers engaged in marijuana cultivation may be deemed to be producing, cultivating or dispensing marijuana in violation of federal law, and/or we may be deemed to be facilitating the selling or distribution of drug paraphernalia in violation of federal law with respect to our business operations. There can be no assurance as to the timing or scope of any such potential amendments.  Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect our revenues and profits. The risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings and stated federal policy remains uncertain.


The United States Department of Justice (the “DOJ”) has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits.


Our potential customers could, and we could, be found to be violating laws related to cannabis.


As described above, while 23 states plus the District of Columbia have laws and/or regulations that recognize, in one form or another, legitimate medical and consumer uses for cannabis, cannabis use remains prohibited under federal law and the risk of strict enforcement of the CSA in light of Congressional activity, judicial holdings and stated federal policy remains uncertain. Because we do not currently cultivate, produce, sell or distribute any marijuana, we believe that we have no risk that we will be deemed to facilitate the selling or distribution of marijuana in violation of federal law. However, our proposed Washington State business opportunity involves us leasing land and subleasing it to and developing it for licensed growers of cannabis in accordance with Washington State laws.  Should it be determined under the CSA that our products, equipment or facilities are deemed to fall under the definition of drug paraphernalia because our products could be determined to be primarily intended or designed for use in producing cannabis, there is a risk we could be found to be in violation of federal drug paraphernalia laws and there may be a direct and materially adverse effect on our business and our revenues and profits.


Variations in state and local regulation and enforcement activities in states that have legalized cannabis may restrict or deter marijuana-related activities and negatively impact our revenues and profits.


Individual state laws vary. A number of states have decriminalized marijuana to varying degrees, other states have created exemptions specifically for medical cannabis, and several plus the District of Columbia have both decriminalization and medical laws. In addition to legalizing medicinal use, a small number of states have also legalized the recreational use of cannabis. Variations exist among states that have legalized, decriminalized or created medical marijuana exemptions. In most states, the cultivation of marijuana for personal use continues to be prohibited. Because state laws vary so much, in even states where cannabis is lawful, growers and seller may inadvertently violate local laws and incur penalties.  This in turn may reduce commercialization. Active enforcement of state laws therefore indirectly and adversely affect our business and our revenue and profits.




23



 


Because marijuana remains illegal under federal law, future enforcement activities by the federal government may adversely affect our future business and revenues.  


Marijuana is a schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law.  While the Obama Administration has not enforced these laws against those who have complied with state and local laws, there will be a new President in January 2017.  We cannot assure you that the new Administration will take the same “hand off” approach. Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana could discourage the activities of some of our potential customers, which could result in our inability to proceed with our business plan.


Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations, which could require us, or our customers, to incur substantial costs associated with compliance or alter certain aspects of our business plan. The consequences of such laws may be far-reaching and unexpected. For example, media broadcasters may decline to air advertisements for marijuana-affiliated businesses out of concern for violating the Federal Communications Commission’s mandate to operate in the public interest. As another example, individuals with prescriptions for medical marijuana use may nonetheless find they can be fired by their employers for violating federal law. Fear of actual or alleged violation of the many, sometimes contradictory, laws regulating marijuana could deter the activities of our potential customers, reduce their revenues, disrupt our business plan and result in a material adverse effect on certain aspects of our planned operations.


Further, it is possible that regulations may be enacted in the future that will be directly applicable to our sales of equipment to customers engaged in the legal marijuana cultivation business. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.


Some of our potential customers may have difficulty accessing the service of banks, which may make it difficult for them to operate, which could reduce our sales and negatively impact our business.


Since the use of marijuana is illegal under federal law, some banks have taken the position that they are prohibited from accepting for deposit funds from businesses involved with the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing to accept their business. The inability to open bank accounts may make it difficult for our potential customers involved in the marijuana business to operate, which could negatively affect our sales and operations and have an adverse material impact on your investment. Further, although we do not produce, distribute or market marijuana our association with businesses that engage in such activities may result in certain financing institutions and entities being unwilling to provide services to us, which could negatively affect our ability to grow our business and operations.


Because the SEC may subject our regulatory filings to increased scrutiny, and stock exchanges will not presently list a business which generates revenue from cannabis, Ecosphere will encounter delay in connection with its filings and more cost.


On at least one prior occasion, the SEC declined to accelerate the effectiveness of a registration statement of a company affiliated with marijuana-cultivation activities. Although the SEC did allow the registration statement to become effective after the required 21day period, failure to be grant acceleration results in a slower, and therefore less attractive, path to financing for a company and its potential investors. Moreover, it seems likely that he SEC’s comment letter process may have been more vigorous due to the cannabis business and regulatory hostility.  Although we are not involved in cultivating marijuana, it is possible the SEC could treat our future filings with enhanced scrutiny and delay acceleration of our future registration statements as well. This possibility may deter involvement in our future financings and make it more difficult for us to meet our liquidity needs. The same risks apply to Ecosphere.  The failure to be listed on NYSE or Nasdaq, even if in the future we were to meet their listing standards -- which we do not meet presently—may act as a depressant to Ecosphere’s stock price.




24



 


Because our Ozonix® products are designed to provide a solution which competes with existing methods; we are likely to face resistance to change, which could impede our ability to commercialize this business.


Our Ozonix® products are designed to provide a solution to replacing traditional chemicals that are used in the treatment of bacteria and scaling in industrial water processes. Specifically, we believe it can provide a cost effective and environmentally friendly solution in the oil and gas, mining, food and beverage, agriculture, marine and other industries that consume large amounts of water in their industrial processes. Currently, large and well-capitalized service companies provide traditional chemical equipment and services in these areas. These competitors have strong relationships with their customers’ personnel, and there is a natural reluctance for businesses to change to new technologies. This reluctance is increased when potential customers make significant capital investments in competing technologies. Because of these obstacles, we may face substantial barriers to commercializing our business.


If we do not achieve broad market acceptance of our clean technology products, we may not be successful.


Although all of our products and services serve existing needs, our delivery of these products and services is unique and subject to broad market acceptance. As is typical of any new product or service, the demand for, and market acceptance of, these products and services are highly uncertain. We cannot assure you that any of our products and services will be commercialized on a widespread basis.


If we are unable to sell or license all or part of our Ecos PowerCube®, or if our efforts are delayed, our business and future results of operations could be adversely effected.


Our most recently patented technology is the Ecos PowerCube®, a self-contained micro-utility that uses solar power to provide electricity in remote, off-grid locations. Although we believe that the Ecos PowerCube® serves an existing need and can provide many benefits to the military and disaster relief efforts, there is no guarantee that it will receive market acceptance in the time frame as we expect it will. If the markets for our products and services fail to develop on a meaningful basis, if they develop more slowly than we anticipate or if our products and services fail to achieve sufficient market acceptance, our business and future results of operations could be adversely affected.


Our growth strategy reflected in our business plan may not be achievable or may not result in profitability.


Our growth strategy reflected in our business plan may not be able to be implemented at all or rapidly enough for us to achieve profitability. Our growth strategy is dependent on several factors, such as our ability to respond to the technological needs of our customers and others in the markets in which we compete and a degree of market acceptance of our products and services. We cannot assure you the potential customers we intend to target will purchase our products or services in the future or that if they do, our revenues and profit margins will be sufficient to achieve profitability.


Because our operating results have and may continue to fluctuate dramatically, particularly from quarter to quarter, investors should not rely upon our results in any given quarter as being part of a trend.


In the past, our quarterly operating results fluctuated and may continue to do so in the future as a result of a number of factors, including the following:


·

SOGS success in obtaining financing and closing the reverse merger;

·

Our receipt of orders;

·

The availability of components from our suppliers for Ecosphere Ozonix® systems;

·

Operating results from our Ecosphere Ozonix® units and the announcement of future agreements for our Ecosphere Ozonix® units;

·

Our raising necessary working capital and any associated costs which will be charged as expenses to our future results of operations;

·

Our continuing to develop new technologies;

·

Pricing pressures;

·

General economic and political conditions;

·

Our ability, or our subsidiaries ability, to finance new verticals and develop commercial relationships for those verticals;

·

Our sales or licensing of our technologies.




25



 


As a result of these and other factors, we have experienced, and may continue to experience, fluctuations in revenues and operating results. As a consequence, it is possible that fluctuations in our future operating results may cause the price of our common stock to fall.


If we cannot manage our growth effectively, we may not become profitable.


Businesses which grow rapidly often have difficulty managing their growth. We have been growing rapidly. If this growth continues, we will need to expand our management by recruiting and employing experienced executives and key employees capable of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively or successfully. Our failure to meet these challenges could cause us to lose money, and your investment could be lost.


Because our business model is centered on sales and licensing our technologies to third parties, we may not be able to control key aspects of the timing of the commercialization of our business, which can adversely affect our future results of operations.


Our business model is to invent and develop environmentally responsible technologies and once we prove that they are commercially viable, we sell and license these patented technologies to financially stable companies to service their customers. Thus our ability to commercialize our future business will be dependent upon third parties, which we will not be in a position to control and, as a result, we could be adversely affected if the third parties do not perform on their agreements with us in the manner we anticipate.


If we are unable to protect our patented technologies, our business could be harmed.


Our intellectual property including our patents is our key asset. In addition to our existing patents, we have filed United States patent applications covering certain technologies. Competitors may also be able to design around our patents and to compete effectively with us. The cost to prosecute infringements of our intellectual property or the cost to defend our products against patent infringement or other intellectual property litigation by others could be substantial. We cannot assure you that:


·

Pending and future patent applications will result in issued patents;

·

Patents we own or which are licensed by us will not be challenged by competitors;

·

The patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage; and

·

We will be successful in defending against future patent infringement claims asserted against our products.


Both the patent application process and the process of managing patent disputes can be time consuming and expensive. In addition, changes in U.S. patent laws could prevent or limit us from filing patent applications or patent claims to protect our products and/or technologies or limit the exclusivity periods that are available to patent holders. In September 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was recently signed into law and includes a number of significant changes to U.S. patent law, including the transition from a "first-to-invent" system to a "first-to-file" system and changes to the way issued patents are challenged. These changes may favor larger and more established companies that have more resources than we do to devote to patent application filing and prosecution. The U.S. Patent and Trademark Office recently issued new Regulations effective March 16, 2013 to administer the Leahy-Smith Act. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will ultimately have on the cost of prosecuting our patent applications, our ability to obtain patents based on our discoveries and our ability to enforce or defend our issued patents. However, it is possible that in order to adequately protect our patents under the "first-to-file" system, we will have to allocate significant additional resources to the establishment and maintenance of a new patent application process designed to be more streamlined and competitive in the context of the new "first-to-file" system, which would divert valuable resources from other areas of our business. In addition to pursuing patents on our technology, we have taken steps to protect our intellectual property and proprietary technology by entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate.




26



 


If we are subject to intellectual property infringement claims, it could cause us to incur significant expenses and pay substantial damages.


Third parties may claim that our equipment or services infringe or violate their intellectual property rights. Any such claims could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages and prevent us from using licensed technology that may be fundamental to our business service delivery. Even if we were to prevail, any litigation regarding its intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. We may also be obligated to indemnify our business partners in any such litigation, which could further exhaust our resources. Furthermore, as a result of an intellectual property challenge, we may be prevented from providing some of our services unless we enter into royalty, license or other agreements. We may not be able to obtain such agreements at all or on terms acceptable to us, and as a result, we may be precluded from offering some of our equipment and services.


 Risks Related to Our Common Stock


Because we are subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock which adversely affects its liquidity and market price.


The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the Bulletin Board has been substantially less than $5.00 per share and therefore we are currently considered a “penny stock” according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities.


These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.


Due to factors beyond our control, our stock price may be volatile.


Any of the following factors could affect the market price of our common stock: 


·

Our announcements about completing any financings;

·

Discovery of our working capital;

·

Our announcements of and progress with commercialization in other business besides U.S. onshore oil and gas;

·

Our failure to generate increasing revenues through the sale of our intellectual property;

·

Short selling activities;

·

The loss of key personnel;

·

Our failure to achieve and maintain profitability;

·

Actual or anticipated variations in our quarterly results of operations;

·

Announcements by us or our competitors of significant contracts, new products, acquisitions, commercial relationships, joint ventures or capital commitments;

·

The loss of major customers or product or component suppliers;

·

The loss of significant business relationships;

·

Our failure to meet financial analysts performance expectations;

·

Changes in earnings estimates and recommendations by financial analysts; or

·

Changes in market valuations of similar companies.


In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert our management’s time and attention, which would otherwise be used to benefit our business.




27



 


We may issue preferred stock without the approval of our shareholders, which could make it more difficult for a third party to acquire us and could depress our stock price.


Our Board may issue, without a vote of our shareholders, one or more additional series of preferred stock that have more than one vote per share. This could permit our Board to issue preferred stock to investors who support our management and give effective control of our business to our management. Additionally, issuance of preferred stock could block an acquisition resulting in both a drop in our stock price and a decline in interest of our common stock. This could make it more difficult for shareholders to sell their common stock. This could also cause the market price of our common stock shares to drop significantly, even if our business is performing well.


If the holders of our outstanding securities exercise or convert their securities into common stock, we will issue a substantial number of shares, which will materially dilute the voting power of our currently outstanding common stock.


As of April 8, 2016, we had approximately 166 million shares of our common stock outstanding, 65 million shares underlying warrants, 49 million shares underlying outstanding convertible notes and 35 million shares underlying stock options. If the holders of the securities described in this risk factor exercise or convert their securities, it will materially dilute the voting power of our outstanding common stock.


An investment in Ecosphere will be diluted in the future as a result of the issuance of additional securities, the exercise of options or warrants or the conversion of outstanding preferred stock.


In order to raise additional capital to fund our strategic plan, we may sell (and currently are engaged in the sale of) additional shares of common stock or securities convertible, exchangeable or exercisable into common stock from time to time, which could result in substantial dilution to investors. However, our ability to sell common stock and equivalents will require shareholder approval. We cannot assure you that we will be successful in raising additional capital.


Because our management and employees do not solely by virtue of their ownership of our common stock control Ecosphere, it is possible that third parties could obtain control and change the direction of our business.


Our officers and directors own approximately 1.7 million shares of our common stock or approximately 1.1% of the shares actually outstanding. By including shares of common stock which are issuable upon exercise of outstanding vested options held by them, they beneficially own approximately 12.5 million shares or 7%. If all of our equity equivalents outstanding as of April 8, 2016 were exercised, we would have 300 million shares outstanding (our Chief Executive Officer, Chief Operating Officer and Corporate Secretary agreed to defer the exercise of shares which are not included). For that reason, a third party could obtain control of Ecosphere and change the direction of our business.



Further, as of April 8, 2016, our principal lender beneficially owned equity equivalents (meaning, under the rules of the SEC, that he and his affiliates could acquire the underlying common stock within 60 days) which, if exercised, would amount to 28.8% of our outstanding common stock. In addition, our principal lender presently holds over $2.6 million of the Company’s debt, which is scheduled to mature in September 2016. If this debt is not repaid or extended at that time, the lender will effectively acquire control of our Company. While our principal lender has been extremely helpful to date in supporting the Company by providing operating capital and has not attempted to change the direction of our business, the possibility that he could do so in the future is a risk investors should consider.




28



 


Because of our capital structure, we may be required to provide preferences to investors until such time as we are able to increase our authorized common stock which may adversely affect holders of our common stock.


As of April 8, 2016, we had issued approximately 166 million shares of common stock and reserved 135 million for issuance upon exercise and conversion of our derivative securities which does not include 11 million shares underlying options that our Chief Executive Officer, Chief Operating Officer and Corporate Secretary agreed to postpone exercise until such time as we increased our authorized capital. Our current authorized common stock is 300 million shares. Because of our need to raise capital, we may have to issue preferred stock with special rights and preferences which may adversely affect our common stockholders. Since our officers and directors only own 1.1% of our outstanding common stock, we may face obstacles in obtaining shareholder approval in increasing our authorized common stock.


Since we intend to retain any earnings for development of our business for the foreseeable future, you will likely not receive any dividends for the foreseeable future.


We have not and do not intend to pay any cash dividends in the foreseeable future, as we intend to retain any earnings for development and expansion of our business operations. As a result, you will not receive any dividends on your investment for an indefinite period of time.


Because almost all of our outstanding shares are freely tradable, sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well.


As of April 8, 2016, we had approximately 166 million shares of common stock outstanding of which our directors and executive officers own approximately 1.7 million shares which are subject to the limitations of Rule 144 under the Securities Act. Most of the remaining outstanding shares, including a substantial amount of shares issuable upon exercise of options, are and will be freely tradable.


In general, Rule 144 provides that any non-affiliate of Ecosphere, who has held restricted common stock for at least six months, is entitled to sell their restricted stock freely, provided that we stay current in our SEC filings. After one year, a non-affiliate may sell without any restrictions.


An affiliate of Ecosphere may sell after six months with the following restrictions:


(i)

we are current in our filings, 

(ii)

certain manner of sale provisions, and 

(iii)

filing of Form 144. 


Because almost all of our outstanding shares are freely tradable and a number of shares held by our affiliates may be freely sold (subject to Rule 144 limitation), sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well.


Because we may not be able to attract the attention of major brokerage firms, it could have a material impact upon the price of our common stock.


It is not likely that securities analysts of major brokerage firms will provide research coverage for our common stock since the firm itself cannot recommend the purchase of our common stock under the penny stock rules referenced in an earlier risk factor. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It may also make it more difficult for us to attract new investors at times when we require additional capital.


ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.


ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

See pages beginning at F-1.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.




29



 


ITEM 9A.

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, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (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 December 31, 2015.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of the end of the period covered by this report. In making this assessment, our management used the criteria set forth by the Committee of Sponsor Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework as issued in 2013.  Based on that evaluation, our management concluded that our internal control over financial reporting was effective based on that criteria.

 

Our internal control over financial reporting is a process designed under the supervision of our Principal Executive Officer and Principal Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.


ITEM 9B.

OTHER INFORMATION.

 

None




30



 


PART III


ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.


The following table sets forth certain information with respect to directors and executive officers of Ecosphere:


Name

 

Age

 

Positions with Ecosphere

Directors:

 

 

 

 

Dennis McGuire

 

65

 

Chairman of the Board

Dean Becker

 

61

 

Director

Michael Donn, Sr.

 

67

 

Director

Charles Vinick

 

68

 

Director

David Brooks

 

45

 

Director

 

 

 

 

 

 

 

 

 

 

Executive Officers:

 

 

 

 

Dennis McGuire

 

65

 

Chief Executive Officer and Chief Technology Officer

Michael Donn, Sr.

 

67

 

Chief Operating Officer

David Brooks

 

45

 

Chief Financial Officer

Jacqueline McGuire

 

52

 

Senior Vice President of Administration and Secretary


Board of Directors


Dennis McGuire is our Chairman of the Board, Chief Executive Officer and Chief Technology Officer. Mr. McGuire was appointed Chairman of the Board and Chief Executive Officer on March 14, 2013. On January 18, 2011, Mr. McGuire was appointed Chief Technology Officer. From November 12, 2008 until August 1, 2009, Mr. McGuire was the Chief Technology Officer of Ecosphere until he became President and Chief Executive Officer. Mr. McGuire was selected as a director because he is the founder of Ecosphere and is the inventor of all our intellectual property.


Dean Becker has served as a director since January 1, 2013. Mr. Becker is an entrepreneur engaged in the business of acquiring and licensing intellectual property. From June 2009 through November 2015, Mr. Becker served as the Chief Executive Officer of ICAP Patent Brokerage and ICAP Ocean Tomo Auctions (collectively, “ICAP”), a leader in selling intellectual property. Mr. Becker is a frequent global speaker on intellectual property rights and the use of patents to include or exclude competition through licensing and enforcement of government issued rights. Mr. Becker was selected as a director because he is one of the world’s leading experts on monetizing intellectual property.


David Brooks was appointed interim Chief Financial Officer on February 5, 2013 and was elected as a director on December 13, 2013. Since November 2009, Mr. Brooks has been the Managing Shareholder of D. Brooks and Associates CPAs, P.A., which provides Chief Financial Officer and related services to businesses on a consulting basis. From August 2008 through October 2009, Mr. Brooks was an audit director and consultant for McGladrey & Pullen, LLP (now McGladrey LLP), a large assurance, tax and consulting services company. Mr. Brooks is a Certified Public Accountant in Florida. Mr. Brooks was selected as a director due to his financial and auditing expertise.


Michael Donn, Sr. was appointed a director in March 2005 and was appointed our Chief Operating Officer on March 27, 2008. Mr. Donn has held a number of senior executive positions with us since January 2000. As part of his duties, Mr. Donn set up and coordinated our relief effort in Waveland, Mississippi following Hurricane Katrina. Mr. Donn was the Project Manager for Ecosphere’s EPA Verification testing of its Water Filtration System. From November 2006 until January 29, 2010, Mr. Donn was a director of GelTech Solutions, Inc. From 1994 to 2000, he served as President of the Miami-Dade County Fire Fighters Association, a 1,700-member employee association for which he previously served as President, Vice President and Treasurer beginning in 1982. His responsibilities included negotiating, lobbying at the local, state and national levels and heading the business operations for the Association. He was also Chairman of the Insurance Trust. Following Hurricane Andrew, Mr. Donn coordinated the fire fighter relief efforts for the Miami-Dade fire fighters. He is the brother of our Senior Vice President of Administration, Jacqueline McGuire, and the brother-in-law of our Chairman of the Board and Chief Executive Officer, Dennis McGuire. Mr. Donn was selected as a director because of his years of experience with all aspects of Ecosphere’s business and his administrative experience in directing the firefighters union. He has remained as a director as a representative of management.




31



 


Charles Vinick has served as a director since August 2006. From January 18, 2011 until January 8, 2013, Mr. Vinick served as Chief Executive Officer and as consultant to Ecosphere through 2013. Prior to becoming Chief Executive Officer, Mr. Vinick was Executive Chairman effective August 1, 2010. From December 22, 2009 until January 8, 2013, Mr. Vinick served as the Chairman of the Board. Since January 2013, Mr. Vinick has served as the Chief Executive Officer of Aquantis, Inc., a renewable energy company that designs, manufactures and deploys tidal and ocean current turbines. Until December 2010, Mr. Vinick served as Director of Business Development and Government Relations for Dehlsen Associates, a renewable energy technology development firm in Carpentaria, California. Mr. Vinick has more than 25 years of experience directing and managing non-profit organizations and programs. Mr. Vinick previously held executive positions for over 20 years with organizations headed by Jacques or Jean-Michel Cousteau. Mr. Vinick was selected as a director due to his knowledge of, and commitment to, the environmental mission of Ecosphere, his understanding of the business applications for the Ecosphere technology, and his business experience and judgment. Mr. Vinick was also selected due to his 25 years of experience in global water quality and policy issues.


Executive Officers


See above for Messrs. McGuire’s, Brooks’ and Donn’s biography.


Jacqueline McGuire has been our Senior Vice President of Administration and Corporate Secretary since January 2001 and Secretary since our founding in 1998. She and her husband Dennis, our Chairman of the Board and Chief Executive Officer, were two of our founders.


With the exception of Michael Donn, Sr., Dennis McGuire and Jacqueline McGuire as disclosed above, there are no family relationships between any of our directors and/or executive officers


Key Employees


Two of Dennis and Jacqueline McGuire’s children, Dennis and Corey McGuire, have been employed by Ecosphere since 2009 and 2010, respectively. Dennis McGuire, Jr. is Ecosphere’s Director of Manufacturing and Corey McGuire is Ecosphere’s Director of Marketing and Chief Executive Officer of SOGS.


Corporate Governance


Board Responsibilities


The Board oversees, counsels, and directs management in the long-term interest of Ecosphere and its shareholders. The Board’s responsibilities include establishing broad corporate policies and reviewing the overall performance of Ecosphere. The Board is not, however, involved in the operating details on a day-to-day basis.


Board Committees and Charters


The Board and its Committees meet throughout the year and act by written consent from time-to-time as appropriate. The Board delegates various responsibilities and authority to different Board Committees. Committees regularly report on their activities and actions to the Board. The Board currently has and appoints the members of: the Audit Committee and the Compensation Committee.




32



 


The following table identifies the independent and non-independent Board and Committee members:


Name

 

Independent

 

 

Audit

 

 

Compensation

 

Dennis McGuire

 

 

 

 

 

 

 

 

 

Dean Becker

 

 

 

 

 

 

 

 

 

Michael Donn, Sr.

 

 

 

 

 

 

 

 

 

Charles Vinick

 

 

 

 

ü

 

 

 

 

David Brooks

 

 

 

 

 

 

 

 

 


Independence


Our Board has determined that none of our directors are independent in accordance with standards under the NYSE MKT rules.


Committees of the Board of Directors


Our Board has established two standing committees to assist it in discharging its responsibilities: the Audit Committee and the Compensation Committee.


Audit Committee


The Audit Committee’s primary role is to review our accounting policies and any issues which may arise in the course of the audit of our financial statements. The Audit Committee selects our independent registered public accounting firm, approves all audit and non-audit services, and reviews the independence of our independent registered public accounting firm. The Audit Committee also reviews the audit and non-audit fees of the auditors. Our Audit Committee is also responsible for certain corporate governance and legal compliance matters. Our Audit Committee Charter is posted on our website at ir.stockpr.com/ecospheretech/board-committees. Our website is not incorporated herein.


The member of the Audit Committee is Charles Vinick. Our Board has determined that Mr. Vinick is qualified as an Audit Committee Financial Expert, as that term is defined by the rules of the SEC and in compliance with the Sarbanes-Oxley Act of 2002. Mr. Vinick is not independent in accordance with the NYSE MKT independence standards for audit committees.


Compensation Committee


The function of the Compensation Committee is to review and recommend the compensation and benefits payable to our officers, review general policies relating to employee compensation and benefits and administer our various stock option plans, including the 2006 Equity Incentive Plan, which we refer to as the “Plan.” Our Chief Executive Officer recommends executive compensation to the Compensation Committee and the Compensation Committee considers his recommendation prior to recommending compensation to our Board. The Compensation Committee has no authority with respect to setting compensation. However, its recommendations have always been followed. There are presently no members of the Board serving on the Compensation Committee. The Company expects to appoint a member to serve on the Compensation Committee in the near future.


Nominating Committee


Ecosphere does not have a Nominating Committee. Due to the size of our Board, each director participates in the consideration of director nominees. Our Board does not have a policy, or procedures to follow, with regard to the consideration of any director candidates recommended by our shareholders. We have never received any recommendations from shareholders and for that reason have not considered adopting any policy.


Board Diversity


While we do not have a formal policy on diversity, the Board considers as one of the factors the diversity of the composition of our Board and the skill set, background, reputation, type and length of business experience of our Board members as well as a particular nominee’s contributions to that mix. Although there are many other factors, the Board seeks to attract individuals with knowledge of water recycling, environmental solutions, and accounting and finance.




33



 


Board Leadership Structure


Ecosphere has chosen to combine the Chief Executive Officer and Board Chairman positions. We believe that this Board leadership structure is appropriate for Ecosphere at this time. Because we are a small company, it is more efficient to have the leadership of the Board in the same hands as the Chief Executive Officer of Ecosphere.


Role of Board in Risk Oversight


Our risk management function is overseen by our Board. Through our policies, our Code of Ethics and our Board committees’ review of financial and other risks, our management keeps our Board apprised of material risks and provides our directors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect Ecosphere, and how management addresses those risks. Mr. McGuire, our Chief Executive Officer, works closely together with the Board once material risks are identified on how to best address such risk. If the identified risk poses an actual or potential conflict with management, our independent directors may conduct the assessment. The Board focuses on key risks and interfaces with management on seeking solutions.


Code of Ethics


Our Board has adopted a Code of Ethics that applies to all of our employees, including our Chief Executive Officer and Chief Financial Officer. Although not required, the Code of Ethics also applies to our Board. The Code provides written standards that we believe are reasonably designed to deter wrongdoing and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, full, fair, accurate, timely and understandable disclosure and compliance with laws, rules and regulations, including insider trading, corporate opportunities and whistle-blowing or the prompt reporting of illegal or unethical behavior. We will provide a copy of the Code of Ethics to any person without charge, upon request. The request for a copy can be made in writing to Ecosphere Technologies, Inc., 3515 S.E. Lionel Terrace, Stuart, Florida 34997, Attention: Corporate Secretary.


Communication with our Board of Directors


Although we do not have a formal policy regarding communications with our Board, shareholders may communicate with the Board by writing to us at Ecosphere Technologies, Inc., 3515 S.E. Lionel Terrace, Stuart, Florida 34997, Attention: Corporate Secretary, or by facsimile (772) 781-4778. Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.




34



 


ITEM 11.

EXECUTIVE COMPENSATION.


Summary Compensation Table for 2015


The following information is related to the compensation paid, distributed or accrued by us for the last two fiscal years to our Chief Executive Officer (principal executive officer) and the two other most highly compensated executive officers serving at the end of the last fiscal year whose compensation exceeded $100,000, which we refer to as our “Named Executive Officers.”


Name and
Principal Position
(a)

 

Year
(b)

 

 

Salary
($)(c)(1)

 

 

Bonus
($)(d)(2)

 

 

Stock

Awards
($)(e)(3)

 

 

Option
Awards
($)(f)(3)

 

 

Non-Equity Inventive Plan Compen-
sation

($)(g)

 

 

Non-Qualified Deferred Compen-
sation Earnings

($)(h)

 

 

All Other
Compen-
sation
($)(i)(4)

 

 

Total
($)(j)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dennis McGuire

 

2015

 

 

 

450,000

 

 

 

52,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72,796

 

 

 

574,796

 

Chief Executive Officer

 

2014

 

 

 

450,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,660

 

 

 

481,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael Donn, Sr.

 

2015

 

 

 

192,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,418

 

 

 

218,918

 

Chief Operating Officer

 

2014

 

 

 

175,000

 

 

 

 

 

 

 

 

 

201,263

 

 

 

 

 

 

 

 

 

6,112

 

 

 

382,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jacqueline McGuire

 

2015

 

 

 

123,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,859

 

 

 

141,359

 

Senior VP of Administration and Corporate Secretary

 

2014

 

 

 

112,200

 

 

 

 

 

 

 

 

 

145,058

 

 

 

 

 

 

 

 

 

3,918

 

 

 

261,176

 

———————

(1)

This column represents salaries paid and accrued salaries that will be paid when the Company has the cash available. In 2015, each of Mr. McGuire and Mr. Donn had accrued approximately $34,000 of their salaries. As of the date of this Report, the Company has accrued $211,081 in salaries for Mr.McGuire and Mr. Donn.

(2)

The amount in the bonus column represents cash bonuses.

(3)

The amounts in this column represent the fair value of the award as of the grant date as computed in accordance with FASB ASC Topic 718 and the SEC disclosure rules. These amounts represent awards that are paid in options to purchase shares of our common stock and do not reflect the actual amounts that may be realized by the Named Executive Officers. Please note that the total compensation listed for any officer in a particular year does not necessarily represent what the executive may realize in cash earnings during that period. Equity compensation is variable and depends on both the stock price and the exercise price of options. In some cases the executive may receive no compensation where options are either "under water" or expire "under water". The amounts listed for options are estimates of the value based on a number of inputs to the BSM model and are purely for the basis of accounting for the expense of the equity.

(4)

For Mr. McGuire, the amounts in this column represent 401(K) contributions, stock granted in subsidiary and life insurance premiums paid by Ecosphere for life insurance that is for the benefit of Mr. McGuire’s beneficiaries.  For Mr. Donn and Mrs. McGuire, the amounts in this column represent 401(K) contributions.   Also includes shares of SOGS common stock which were transferred to the Named Executive Officers as 2015 bonuses.  See below for further description.  


Named Executive Officer Compensation Arrangements


Executive Officers and management. The compensation arrangements were approved by our Board based upon the recommendation of our Compensation Committee, which conducted a thorough review over an extensive period of time.


Dennis McGuire


In April 2013, Mr. McGuire signed a three-year Employment Agreement (the “2013 Employment Agreement”) and a Royalty Agreement, each of which were in effect through December 31, 2015 and were replaced or amended effective January 1, 2016 as described below. Under the 2013 Employment Agreement, Mr. McGuire received a base salary of $450,000 per year. He was also granted 6,300,000 five-year stock options, exercisable at $0.34 per share with one-third vesting upon his acceptance of the grant and the balance in equal increments on January 1, 2014 and 2015, subject to continued employment on each applicable vesting date (all of which have vested).


In July 2015, following the sale of $1.3 million worth of Ecos GrowCube™ equipment by SOGS, the Company’s Board of Directors awarded Mr. McGuire, who is the inventor of the Ecos GrowCube™ technology, a discretionary bonus of $52,000.




35



 


In April 2016, Mr. McGuire signed a three-year Employment Agreement (the “2016 Employment Agreement”) and an Amended and Restated Royalty Agreement (the “Royalty Agreement”), each effective January 1, 2016. See the section titled “Certain Relationships and Related Transactions, and Direct Independence” below for a description of the Royalty Agreement. Under the 2016 Employment Agreement, Mr. McGuire is entitled to receive a base salary of $450,000 per year, which is identical to the 2013 Employment Agreement.  Because of the liquidity issues, Mr. McGuire often has not regularly received installments of his salary. He was also granted 6,300,000 ten-year stock appreciation rights (“SARs”), exercisable at $0.115 per share with one-third vesting upon his acceptance of the grant and the balance vesting in equal increments on December 31, 2016 and December 31, 2017, subject to continued employment as of each applicable vesting date.  The option value is $114,770 and the will be recognized over the vesting term. The SARs are settleable in cash or common stock of Ecosphere or any subsidiary. If the SARs are settled in shares of SOGS, the exercise price shall be fixed at $0.046 per share.


In January 2016, the Company issued Mr. McGuire 875,000 shares of the Company’s SOGS common stock.


In February 2016, SOGS granted ten-year options to purchase 7,500,000 to Mr. McGuire at an exercise price of $0.0468 per share. The options will vest quarterly in equal amounts over a three-year period with the first vesting date March 31, 2016, subject to performing services for the Company or publicly reported (“Pubco”) which acquires the Company by way of merger, share exchange or otherwise (“Pubco Transaction”).  The options are not exercisable until and unless the Pubco Transaction has occurred.  If the Pubco Transaction does not occur, the options will not be exercisable.


As of the date of this Report, Ecosphere owes Mr. McGuire and Mr. Donn $218,961 representing unpaid salaries and royalties.


Michael Donn, Sr.


On December 1, 2014, the Company entered into employment renewal agreement with Mr. Donn.  The two-year agreement provides for: (i) an annual salary of $192,500 effective January 1, 2015, (ii) 2,591,438 five-year stock options exercisable at $0.17 per share, with 25% vesting immediately and the remainder vesting semi-annually in four approximately equal increments over a two-year period, subject to continued employment on each applicable vesting date, and (iii) a discretionary performance-based annual bonus with terms to be set by the Company’s Compensation Committee.  


In January 2016, the Company issued Mr. Donn 450,000 shares of the Company’s SOGS common stock.


Jacqueline McGuire


On December 1, 2014, the Company entered into employment renewal agreement with Jacqueline McGuire, the Company’s Senior Vice President of Administration and Corporate Secretary.  The two-year agreement provides for: (i) an annual salary of $123,500 effective January 1, 2015, (ii) 1,867,746 five-year stock options exercisable at $0.17 per share, with 25% vesting immediately and the remainder vesting semi-annually in four approximately equal increments over a two-year period, subject to continued employment on each applicable vesting date, and (iii) a discretionary performance-based annual bonus with terms to be set by the Company’s Compensation Committee.  


In January 2016, the Company issued Mrs. McGuire 300,000 shares of the Company’s SOGS common stock.  


Key Employees


Dennis McGuire, Jr.


Dennis McGuire, Jr. is Ecosphere's Director of Manufacturing where he supervises nine employees, supervised the successful manufacturing and completion of 43 Ozonix® units and the first Ecos PowerCube® and Ecos GrowCube™. Mr. McGuire’s responsibilities are to continually improve the manufacturing process and the Company’s fabrication capabilities. In 2015, Mr. McGuire, Jr. received compensation consisting of base salary of $165,000. This compensation arrangement was approved by Ecosphere’s Board of Directors. In addition, the Company issued Mr. McGuire 300,000 shares of the Company’s SOGS common stock in January 2016.  




36



 


Corey McGuire


Corey McGuire has been Ecosphere’s Director of Marketing since 2010 and was recently appointed as Chief Executive Officer of SOGS. Mr. McGuire works closely with Senior Management and manages all of the Company’s marketing, advertising, branding, communication and public relation activities. In 2015, Mr. McGuire received compensation consisting of base salary of $121,000, $96,462 of which was paid and accrued salary of $24,538. This compensation arrangement was approved by Ecosphere’s Board of Directors. In addition, the Company issued Mr. McGuire 200,000 shares of the Company’s Sea of Green common stock in January 2016.


In February 2016, SOGS granted ten-year options to purchase 10,000,000 to Mr. McGuire at an exercise price of $0.0468 per share. The options will vest quarterly in equal amounts over a three-year period with the first vesting date March 31, 2016, subject to performing services for the Company or publicly reported (“Pubco”) which acquires the Company by way of merger, share exchange or otherwise (“Pubco Transaction”).  The options are not exercisable until and unless the Pubco Transaction has occurred.  If the Pubco Transaction does not occur, the options will not be exercisable.


Insurance Benefits


Ecosphere pays a portion of the premiums on a $5 million term life insurance policy owned by Mr. Dennis McGuire, Sr. with the beneficiaries selected by Mr. McGuire.


Discretionary Bonuses


Each of our executive officers is eligible for discretionary bonuses as determined by the Board.


Potential Payments upon Termination


Except for Mr. McGuire, our executive officers are not subject to any employment agreements which provide for any termination payments. Under his Employment Agreement, Mr. McGuire is entitled to severance payments if his employment is terminated upon death, disability, for Good Reason and upon a Change of Control of Ecosphere.


If Mr. McGuire’s employment is terminated as a result of death or disability, he (or his personal representative or guardian, if applicable) will be entitled to: (i) 12 months base salary, (ii) all stock options and restricted stock previously granted to him will become fully vested and (iii) if terminated due to disability, life insurance premiums will continue to be reimbursed.


If Mr. McGuire’s employment is terminated by him as a result of:


 

(i)

a material breach by Ecosphere of the Employment Agreement;

 

(ii)

the sale of all, or substantially all of the assets of Ecosphere or any of its affiliates or any division thereof which utilizes his inventions;

 

(iii)

the sale or license of any significant portion of his inventions without the prior written consent of Mr. McGuire;

 

(iv)

an event occurs which triggers the issuance of rights pursuant to the terms and conditions of any Rights Agreement adopted by Ecosphere;

 

(v)

a Change of Control (as described below);

 

(vi)

a business combination; or

 

(vii)

a separation from service for Good Reason as defined as set forth in Section 409 of the Internal Revenue Code of 1986, he will be entitled to: (i) receive the balance of his base salary remaining under the three-year term, (ii) all stock options and restricted stock previously granted to him will become fully vested and (iii) his health insurance and life insurance premiums will continue to be paid for the balance of the term of the Agreement.


Change of Control generally means (i) any person becomes the beneficial owner of 50% or more of the total voting power or fair market value of Ecosphere, (ii) within a 12 month period, any person becomes the beneficial owner of 30% or more of Ecosphere’s voting power, (iii) the incumbent directors cease to be a majority of the directors serving on the Board within any 12 month period, (iv) Ecosphere sells substantially all of its assets, or (v) a business combination transaction which results in Ecosphere’s current shareholders owning less than 50% of the surviving entity’s voting power.




37



 


Outstanding Awards at Fiscal Year End


Listed below is information with respect to unexercised options that have not vested, and equity incentive plan awards for each named executive officer outstanding as of December 31, 2015:


Outstanding Equity Awards At 2015 Fiscal Year-End


 

 

Option Awards

 

 

Number of

 

Number of

 

 

 

 

 

 

Securities

 

Securities

 

 

 

 

 

 

Underlying

 

Underlying

 

 

 

 

 

 

Unexercised

 

Unexercised

 

Option

 

 

 

 

Options

 

Options

 

Exercise

 

Option

 

 

(#)

 

(#)

 

Price

 

Expiration

 

 

Exercisable

 

Unexercisable

 

($)

 

Date

Name (a)

 

(b)

 

(c)

 

(e)

 

(f)

 

 

 

 

 

 

 

 

 

 

Dennis McGuire

 

9,450,000

 (1)

 

 

 

0.46

 

1/3/16

 

 

6,300,000

 (2)

 

 

 

0.34

 

4/25/18

 

 

 

 

 

 

 

 

 

 

 

Michael Donn, Sr.

 

157,500

 (2)

 

 

 

0.42

 

1/2/2017

 

 

1,619,649

 (2)

 

971,789

 (3)

 

0.17

 

11/26/19

 

 

 

 

 

 

 

 

 

 

 

Jacqueline McGuire

 

157,500

 

 

 

 

0.42

 

1/2/17

 

 

1,167,341

 (1)

 

700,405

 (3)

 

0.17

 

11/26/19

———————

(1)

These options have expired.  

 

 

(2)

Mr. McGuire, Mr. Donn and Mrs. McGuire have agreed not to exercise these options pending an increase in authorized capital.

 

 

(3)

These unvested options vest in two equal increments on May 26, 2016 and November 26, 2016, subject to continued employment on each applicable vesting date.


The vesting of the unvested options described in the table above is subject to continued service or employment, as applicable, on the remaining vesting dates.


Compensation of Directors


We do not pay cash compensation to our directors for service on our Board of Directors. Non-employee members of our Board of Directors were compensated for service in 2015 as follows:


Name
(a)

 

Fees Earned or

Paid in

Cash

($)(b)

 

 

Stock

Awards

($)(c)(1)

 

 

Option

Awards

($)(d)(1)

 

 

Non-Equity

Incentive

Plan

Compensation

($)(e)

 

 

Change in

Pension

Value and

Nonqualified

Deferred

Compen-
sation

Earnings

($)(f)

 

 

All

Other

Compen-
sation

($)(g)

 

 

Total

($)(j)

 

Charles Vinick (2)

 

 

 

 

 

 

 

 

25,491

 

 

 

 

 

 

 

 

 

 

 

 

25,491

 

Jimmac Lofton (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

———————

(1)

Amounts reported represent the aggregate grant date fair value of awards granted without regards to forfeitures granted to our independent directors during 2015, computed in accordance with ASC 718. This amount does not reflect the actual economic value realized by the director.

(2)

Represents a total of 666,667 five-year options exercisable at $0.12 per share. The options vested on January 8, 2016.

(3)

Mr. Lofton resigned on December 15, 2015.




38



 


Automatic Board Grants


Effective 10 days from the date on which a non-employee director is first elected or appointed, whether elected by the shareholders of Ecosphere or appointed by the Board to fill a Board vacancy, he or she shall receive an automatic grant of restricted stock (or restricted stock units or RSUs if selected by the director with such delivery deferral as the director may select) and options with the number of shares, RSUs and options based upon Fair Market Value as defined in the Plan.


Initial Grants

 

Options

 

 

Restricted

Stock

 

 

 

 

 

 

 

 

Initial appointment as Chairman of the Board

 

$

75,000

 

 

$

75,000

 

Initial election or appointment of a non-employee director

 

$

40,000

 

 

$

40,000

 

Initial appointment as a Director Advisor

 

$

15,000

 

 

$

10,000

 


Annual Grants and Other Grants


On July 1st of each year, each non-employee director (or director advisor) receives an automatic grant of restricted stock and options with the number of shares and options based upon Fair Market Value (as defined in the Plan).


 

 

Options

 

 

Restricted

Stock

 

 

 

 

 

 

 

 

Chairman of the Board

 

$

40,000

 

 

$

40,000

 

Non-employee director

 

$

25,000

 

 

$

25,000

 

Director advisor

 

$

10,000

 

 

$

5,000

 

Initial appointment of and annual grant to a non-employee director serving as lead director or chairman of the following: Audit Committee, Compensation Committee and other committees at the discretion of the Compensation Committee

 

$

15,000

 

 

$

15,000

 

Initial appointment of and annual grant to a non-employee director serving on the following: Audit Committee, Compensation Committee and other committees at the discretion of the Compensation Committee

 

$

10,000

 

 

$

10,000

 


In 2015, Mr. Charles Vinick and Mr. Jimmac Lofton, a then director, were the only directors eligible for an automatic grant. Mr. Vinick and Mr. Lofton chose not to accept his right to the automatic annual grant. Mr. Lofton resigned on December 15, 2015.






39



 


ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.


The following table sets forth the number of shares of Ecosphere’s common stock beneficially owned as of April 8, 2016 by (i) those persons known by Ecosphere to be owners of more than 5% of our common stock, (ii) each director, (iii) each Named Executive Officer and (iv) all executive officers and directors as a group. Unless otherwise noted in the footnotes below, the address of the shareholder is c/o Ecosphere Technologies, Inc. 3515 S.E. Lionel Terrace, Stuart, FL 34997.


 

 

 

 

 

Amount

 

 

 

 

 

Name of

 

 

Beneficially

 

 

Percent of

Title of Class

 

Beneficial Owner

 

 

Owned (1)

 

 

Class (1)

 

   

 

  

 

 

  

 

 

 

Common Stock

 

Dennis and Jacqueline McGuire (2)

 

 

 

8,248,219

 

 

 

4.7

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Michael Donn, Sr. (3)

 

 

 

2,186,493

 

 

 

1.3

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

David Brooks (4)

 

 

 

0

 

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Charles Vinick (5)

 

 

 

2,676,261

 

 

 

1.6

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Dean Becker (6)

 

 

 

3,150,000

 

 

 

1.9

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

All directors and executive officers as a group (6 persons) 

 

 

 

16,260,973

 

 

 

9.8

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Ronald Heller (8)

 

 

 

23,324,998

 

 

 

12.4

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

David Nagelberg (9)

 

 

 

11,675,000

 

 

 

6.6

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

William O. Brisben (10)

 

 

 

67,327,450

 

 

 

29.5

%

———————

* Less than 1%


(1)

Applicable percentages are based on 166,103,677 shares outstanding on April 8, 2016, adjusted as required by rules of the SEC. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock underlying options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. These shares are also included in the shareholders beneficial ownership. The table does not include unvested options. Unless otherwise indicated in the footnotes to this table, Ecosphere believes that each of the shareholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by them.

 

 

(2)

McGuire: Includes 6,300,000 shares issuable upon the exercise of vested options owned by Mr. McGuire and 1,324,472 shares issuable upon the exercise of vested options owned by Mrs. McGuire. Mr. McGuire disclaims beneficial ownership of the securities held solely in Mrs. McGuire’s name and Mrs. McGuire disclaims beneficial ownership of the securities held solely in Mr. McGuire’s name, and this disclosure shall not be deemed an admission that either is the beneficial owner of the other’s securities solely held in that person’s name for any purpose. Does not include 18,889,500 vested options that Mr. McGuire has agreed not to exercise until such time as the Company increases its authorized capital which will not take place within 60 days of the filing of this report.  Both Mr. and Mrs. McGuire are executive officers and Mr. McGuire is a director.

 

 

(3)

Donn: Mr. Donn is a director and an executive officer. Includes 1,619,649 shares of common stock issuable upon the exercise of vested options.

 

 

(4)

Brooks: Mr. Brooks is a director and executive officer.

 

 

(5)

Vinick: Mr. Vinick is a director and a former executive officer. Includes 2,083,503 shares of common stock issuable upon the exercise of vested options.

 

 



40



 





(6)

Becker: Mr. Becker is a director. Represents shares of common stock issuable upon the exercise of vested options that are beneficially owned by an entity controlled by Mr. Becker.

 

 

(7)

Heller: Mr. Ronald Heller has voting and dispositive control over the reported securities. Represents (i) 11,108,333 shares of common stock underlying convertible notes and (ii) 12,216,665 shares issuable upon the exercise of warrants. Address is: 700 East Palisades Avenue, Englewood, NJ 07632.

 

 

(8)

Nagelberg: Mr. David Nagelberg has voting and dispositive control over the reported securities. Represents (i) 5,558,333 shares of common stock underlying convertible notes and (ii) 6,116,666 shares issuable upon the exercise of warrants. Address is: 939 Coast Blvd., Unit 21 DE, La Jolla, CA 92037.

 

 

(9)

Brisben: Mr. William O. Brisben has voting and dispositive control over the reported securities.  Includes the following securities held by William O. Brisben: (i) 4,921,472 shares of common stock and (ii) 562,500 shares issuable upon the exercise of warrants. Also includes the following securities held by Brisben Water Solutions, LLC of which William O. Brisben is manager: (i) 36,956,521 shares issuable upon the exercise of warrants and (ii) 22,643,478 shares of common stock underlying convertible notes. Address is: 23 N. Beach Road, Jupiter Island, FL 33455.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

On January 8, 2013, Ecosphere and Dean Becker, a director of Ecosphere, entered into a Business Consulting Services Agreement. Under the Consulting Agreement, Mr. Becker’s role is to assist Ecosphere in monetizing its intellectual property through sales or licenses. In consideration for his services, Mr. Becker received a fee of $250,000 per year. Additionally, Mr. Becker was granted 3,150,000 five-year stock options exercisable at $0.35 per share. As additional compensation, Mr. Becker would receive 2% of all revenues generated from the sale or license of Ecosphere’s intellectual property that was consummated as a result of introductions from Mr. Becker or negotiation assistance from him. This Consulting Agreement was terminated in December 2015.


On January 22, 2016, the Board cancelled $146,624 of the $166,624 the Company owed Mr. Becker. In exchange for the cancellation, the Company issued Mr. Becker an option to purchase 2,000,000 fully vested three-year stock options of SOGS exercisable at $0.046 per share subject to the execution of certain agreements.  On March 3, 2016, the number of options were increased from 2,000,000 to 3,132,991 shares.


On February 26, 2016, the Board agreed to pay Mr. Charles Vinick, a director of the Company, options of SOGS in cancellation of $80,000 in company stock option owed to Mr. Vinick as an automatic grant under the Equity Incentive Plan.  Mr. Vinick received 1,709,401 5-year stock options of SOGS exercisable at $.0.0468 per share which shall vest on June 1, 2016 subject to Mr. Vinick’s continued service as a director and execution of the Company’s standard Stock Option Agreement.


Effective January 1, 2016, Ecosphere entered into a Second Amended and Restated Royalty Agreement (the “Royalty Agreement”) with Mr. Dennis McGuire. Under the Royalty Agreement, Mr. McGuire is entitled to receive royalties equal to 4% of cash and other property received by the Ecosphere and any wholly-owned subsidiary derived from the patents and inventions which were created by him (the “Inventions”). In addition to the royalties paid on such cash and property, 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 and sales of Ecosphere’s equity securities. As additional consideration, the Royalty Agreement provides that Mr. McGuire will receive 5% of the equity of any wholly-owned subsidiary formed by Ecosphere in the future.


Royalty payments will be paid for the life of all Inventions regardless of whether Mr. McGuire remains an employee of Ecosphere. Under the Royalty Agreement, Ecosphere granted Mr. McGuire a perfected security interest (subordinate to all creditors and shareholders of Company) in all of the Inventions and all cash and other property generated from the Inventions to secure payments owed to him under the Royalty Agreement. Provided that Ecosphere is not in default of the Royalty Agreement, Mr. McGuire will assign his rights to any technology invented by him during the term of his Employment Agreement. Unless the Company has undergone a change of control, Ecosphere will be in default for non-payment only if it has the liquidity to pay Mr. McGuire or if it defrauds him regarding its ability to pay him. In 2014 and 2015, Mr. McGuire received no royalties.




41



 


Jacqueline McGuire and Michael Donn, Sr., are the wife and brother-in-law of Mr. Dennis McGuire, our Chairman of the Board and Chief Executive Officer. We also employ four other members of their families including two of Mr. and Mrs. McGuire's children including Dennis McGuire, Jr., Ecosphere’s Director of Manufacturing and Corey McGuire, Director of Marketing and Chief Executive Officer of SOGS. See “Executive Compensation” for further information.


In September 2014, the Company entered into a $1,000,000 one-year bridge loan transaction with Brisben Water Solutions, LLC (“Brisben”) under which Brisben acquired a $1,000,000 convertible promissory note from the Company maturing September 15, 2015, bearing interest at 10% per annum, and convertible into common stock of the Company at $0.115 per share.   Brisben also acquired 17,391,304 five-year warrants to purchase shares of the Company’s common stock at a price per share of $0.115, and the terms of approximately 536,000 warrants held by Brisben were reset to match the terms of the warrants.


During 2015, Brisben loaned the Company an additional $1,400,000 at 10% annual interest –with the exception of a $150,000 advance bearing fixed interest of $10,000, which advance has since been repaid and $125,000 bearing fixed interest of $12,500 that was loaned in December 2015 (“December 2015 Note”)— and extended the maturity of the prior loans to September 12, 2016 (with the exception of the December 2015 Note maturing in April 2016, unless unpaid). Brisben was issued an amended note convertible into common stock of the Company at $0.115 per share and warrants to purchase an additional  21,739,130 shares of the Company’s common stock exercisable at $0.115 per share.


In January 2016, Brisben loaned the Company $25,000. The note has a fixed interest rate of $2,500 and is convertible into common stock at a conversion rate of $0.115 per share maturing in April 2016. If $25,000 of this convertible note, $125,000 of the December 2015 Note and the fixed interest of $15,000 are not paid by April 2016 then the maturity date will be extended until September 2016. In addition, the Company will be required to pay the investor additional interest in the fixed amount of $15,000 due in September 2016 and the Company will need to issue warrants to purchase 2,608,695 shares of common stock or if the Company lacks the authorized common stock, shares of Series C Convertible Preferred Stock.


In February and March 2016, Brisben made an additional loan to the Company of $200,000 convertible into common stock of the Company at $0.115 per share, maturing May 2016 and bearing fixed interest of $20,000. However, if the December 2015, January 2016 and February 2016 loans are not repaid in April 2016 and May 2016, respectively, their maturities will be extended to September 12, 2016 and the Company will issue Brisben warrants to purchase an additional 6,086,955 five-year warrants to purchase shares of the Company’s common stock at a price per share of $0.115 or if the Company lacks the authorized common stock, shares of Series C Convertible Preferred Stock.


In March 2016, Brisben made a loan to the Company of $29,000 convertible into common stock of the Company at $0.115 per share, maturing in September 2016 and bearing 10% annual interest. In April 2016, Brisben made an additional loan to the Company of $100,000 convertible into common stock of the Company at $0.115 per share, maturing in September 2016 and bearing 10% annual interest. The Company will issue Brisben five-year warrants to purchase an additional 2,243,478 of the Company common stock at an exercisable at $0.115 per share or if the Company lacks the authorized common stock, shares of Series C Convertible Preferred Stock.


The Amended and Restated Note is secured by first liens on the Company’s Ecos PowerCube®, the Company’s patent related to the Ecos PowerCube®, the right to a portion of the proceeds from the sale of the Company’s interest in Fidelity National Environmental Solutions, LLC, the Company’s Ecos GrowCube™ unit, the Company’s patent on technology related to treating the waters of Lake Okeechobee, 25% of the limited liability company interests in the Company’s subsidiary, Ecosphere Mining, LLC, and proceeds from the Company’s Ozonix® intellectual properties in the mining field of use. In addition, the Amended and Restated Note is secured by proceeds from the Company’s Ozonix® intellectual properties in the municipal water treatment field of use and industrial water treatment field of use, but only until such time as the $329,000 advanced under the February, March and April 2016 loans is repaid. In the event of any sale of the foregoing collateral upon a default under the Amended and Restated Note, the Company would be entitled to any proceeds remaining after satisfaction of any amounts outstanding under the note and related costs.




42



 


In November 2014, the Company sold $500,000 of convertible notes to three accredited investors including Messrs. Ronald Heller and David Nagelberg (or entities they control), each of whom were or became 5% beneficial owners of the Company’s securities. The notes: (i) are convertible at $0.12 per share, (ii) mature on December 18, 2015, and (iii) pay 10% interest per annum on the earlier of (x) the maturity date or (y) conversion. Additionally, the Company issued to Messrs. Heller and Nagelberg a total of 8,333,333 five-year warrants exercisable at $0.12 per share. The notes are secured by a security interest in 10%, or 18,000,000, of the Company’s shares of common stock of Sea of Green Systems, Inc. In consideration for the investment the Company amended the terms of $1,500,000 of convertible notes (the “Amended Notes”) and 9,999,998 warrants (the “Amended Warrants”) purchased by Messrs. Heller and Nagelberg (or entities they control) in the Company’s December 2013 private placement offering. The Amended Notes and Amended Warrants have identical terms to the Notes and Warrants described in this paragraph above. The Amended Notes were previously convertible at $0.30 per share and the Amended Warrants were previously exercisable at $0.35 per share.


ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES.


All of the services provided and fees charged by Salberg & Company, P.A., or Salberg, were approved by our Audit Committee. The following table shows the fees paid to Salberg, our principal accountant for the fiscal years ended December 31, 2015 and 2014.


 

 

2015

 

 

2014

 

Audit Fees (1)

 

$

108,000

 

 

$

108,000

 

Audit Related Fees (2)

 

 

 

 

 

800

 

Tax Fees

 

 

 

 

 

 

All Other Fees

 

 

 

 

 

 

Total

 

$

108,000

 

 

$

108,800

 

———————

(1)

Audit fees – these fees relate to the audit of our annual financial statements and the review of our interim quarterly financial statements.

(2)

Audit related fees – these fees relate primarily to the auditors review of our registration statements.





43



 


PART IV

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

(a)

Documents filed as part of the report.

 

(1)

Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item.


(2)

Financial Statements Schedules. Financial statements of subsidiary not consolidated see index on page F-1. No other financial statement schedules are required.

 

(3)

Exhibits


Exhibit

 

 

 

Incorporated by Reference

 

Filed or

Furnished

No.

 

Exhibit Description

 

Form

 

Date

 

Number

 

Herewith

3.1

 

Certificate of Incorporation, as amended

 

10-K

 

5/12/14

 

3.1

 

 

3.2

 

Bylaws, as amended

 

10-K

 

5/12/14

 

3.2

 

 

10.1

 

Form of 8.5% Convertible Note (CIM)

 

10-Q

 

5/21/13

 

10.5

 

 

10.2

 

Form of Warrant (CIM)

 

10-Q

 

5/21/13

 

10.6

 

 

10.3

 

Dennis McGuire Employment Agreement*

 

S-1

 

1/21/14

 

10.35

 

 

10.4

 

Dennis McGuire Royalty Agreement *

 

S-1

 

1/21/14

 

10.36

 

 

10.5

 

Vinick Consulting Agreement*

 

S-1

 

1/21/14

 

10.37

 

 

10.6

 

Becker Consulting Agreement*

 

S-1

 

1/21/14

 

10.38

 

 

10.7

 

Employment Renewal Term Sheet - Donn

 

8-K

 

12/3/14

 

10.1

 

 

10.8

 

Employment Renewal Term Sheet – J. McGuire

 

8-K

 

12/3/14

 

10.2

 

 

10.9

 

Amended and Restated Securities Purchase Agreement, dated as of February 10, 2015

 

8-K

 

2/13/15

 

10.1

 

 

10.10

 

Amended and Restated Convertible Promissory Note due September 12, 2015

 

8-K

 

2/13/15

 

10.2

 

 

10.11

 

Form of Warrant, dated as of February 10, 2015

 

8-K

 

2/13/15

 

10.3

 

 

10.12

 

Form of Amended Convertible Notes

 

8-K

 

12/4/14

 

10.1

 

 

10.13

 

Form of Amended Warrants

 

8-K

 

12/4/14

 

10.2

 

 

10.14

 

Security Agreement, dated as of September 12, 2014

 

8-K

 

9/18/14

 

10.4

 

 

10.15

 

Securities Purchase Agreement, dated as of September 12, 2014

 

8-K

 

9/18/14

 

10.1

 

 

10.16

 

Form of Warrant, dated as of September 12, 2014

 

8-K

 

9/8/14

 

10.3

 

 

10.17

 

Second Amended and Restated EES LLC Agreement

 

10-Q

 

8/9/13

 

10.5

 

 

10.18

 

Fidelity Unit Purchase Agreement dated May 24, 2013

 

10-Q

 

8/9/13

 

10.3

 

 

10.19

 

Fidelity Unit Purchase Agreement dated July 26, 2013

 

S-1

 

1/21/14

 

10.14

 

 

10.20

 

Form of Convertible Note (2013 Offering)

 

10-K

 

3/17/14

 

10.38

 

 

10.21

 

Form of Warrant (2013 Offering)

 

10-K

 

3/17/14

 

10.39

 

 

10.22

 

Form of Registration Rights Agreement (2013 Offering)

 

10-K

 

3/17/14

 

10.40

 

 

10.23

 

Amended and Restated 2006 Equity Incentive Plan*

 

10-K

 

4/15/15

 

10.23

 

 

10.24

 

Form of Securities Purchase Agreement dated March 19, 2015

 

8-K

 

3/26/15

 

10.1

 

 

10.25

 

Form of Convertible Note dated March 19, 2015

 

8-K

 

3/26/15

 

10.2

 

 

10.26

 

Form of Warrant dated March 19, 2015

 

8-K

 

3/26/15

 

10.3

 

 

10.27

 

Form of Warrant

 

8-K

 

3/27/15

 

10.1

 

 

10.28

 

Form of Securities Purchase Agreement dated May 8, 2015

 

8-K

 

5/14/15

 

10.1

 

 

10.29

 

Form of Convertible Note dated May 8, 2015

 

8-K

 

5/14/15

 

10.2

 

 

10.30

 

Form of Warrant dated May 8, 2015

 

8-K

 

5/14/15

 

10.3

 

 

10.31

 

Form of Security Agreement dated May 8, 2015

 

8-K

 

5/14/15

 

10.4

 

 

10.32

 

Form of Securities Purchase Agreement dated June 18, 2015

 

8-K

 

7/15/15

 

10.1

 

 

10.33

 

Form of Convertible Note dated June 18, 2015

 

8-K

 

7/15/15

 

10.2

 

 

10.34

 

Form of Warrant dated June 18, 2015

 

8-K

 

7/15/15

 

10.3

 

 

10.35

 

Form of Security Agreement dated June 18, 2015

 

8-K

 

7/15/15

 

10.4

 

 



44



 





10.36

 

Extension Agreement dated August 25, 2015

 

8-K

 

9/3/15

 

10.1

 

 

10.37

 

Extension Agreement dated August 25, 2015

 

8-K

 

9/3/15

 

10.2

 

 

10.38

 

Form of Securities Purchase Agreement dated January 5, 2016

 

8-K

 

1/12/16

 

10.1

 

 

10.39

 

Form of Convertible Note dated January 5, 2016

 

8-K

 

1/12/16

 

10.2

 

 

10.40

 

Form of Warrant dated January 5, 2016

 

8-K

 

1/12/16

 

10.3

 

 

10.41

 

Form of Amended, Restated and Consolidated Convertible Note dated February 29, 2016

 

8-K

 

3/8/16

 

10.1

 

 

10.42

 

Form of Security Agreement Dated February 29, 2016

 

8-K

 

3/8/16

 

10.2

 

 

21.1

 

List of Subsidiaries

 

10-K

 

4/15/15

 

21,1

 

 

23.1

 

Consent of Salberg & Co. PA

 

 

 

 

 

 

 

Filed

31.1

 

Certification of Principal Executive Officer (302)

 

 

 

 

 

 

 

Filed

31.2

 

Certification of Principal Financial Officer (302)

 

 

 

 

 

 

 

Filed

32.1

 

Certification of Principal Executive and Principal Financial Officer (906)

 

 

 

 

 

 

 

Furnished

101.INS

 

XBRL Taxonomy Extension Instance Document

 

 

 

 

 

 

 

Filed

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

Filed

101.CAL

 

XBRL Taxonomy Extension Calculation 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

———————

* Management compensatory agreement

**Filed pursuant to a confidential treatment request for certain portions of this document.







45



 


SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Ecosphere Technologies, Inc.

 

 

 

 

 

Date: April 14, 2016

By:

/s/ Dennis McGuire

 

 

 

Dennis McGuire

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

/s/ David Brooks

 

Chief Financial Officer

 

April 14, 2016

David Brooks

 

(Principal Financial Officer and Chief Accounting Officer)

 

 

 

 

 

 

 

/s/ Dean Becker

 

Director

 

April 14, 2016

Dean Becker

 

 

 

 

 

 

 

 

 

/s/ Michael Donn, Sr.

 

Director

 

April 14, 2016

Michael Donn, Sr.

 

 

 

 

 

 

 

 

 

/s/ Dennis McGuire

 

Director

 

April 14, 2016

Dennis McGuire

 

 

 

 

 

 

 

 

 

/s/ Charles Vinick

 

Director

 

April 14, 2016

Charles Vinick

 

 

 

 

 

 

 

 

 

/s/ David Brooks

 

Director

 

April 14, 2016

David Brooks

 

 

 

 


 

 



46



 


INDEX TO FINANCIAL STATEMENTS

 

 

 

Page

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

F-2

 

 

 

 

 

 

Consolidated Balance Sheets

 

 

F-3

 

 

 

 

 

 

Consolidated Statements of Operations

 

 

F-4

 

 

 

 

 

 

Consolidated Statements of Changes in Equity (Deficit)

 

 

F-5

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

F-7

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

F-9

 

 

 



F-1



 


[esph_10k002.gif]



Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders of:

Ecosphere Technologies, Inc.


We have audited the accompanying consolidated balance sheets of Ecosphere Technologies, Inc. and its Subsidiaries as of December 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders’ (deficit) equity, and cash flows for each of the two years in the period ended December 31, 2015.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ecosphere Technologies, Inc. and its Subsidiaries as of December 31, 2015 and 2014 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.


The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company reported a net loss of $23,067,761 and $11,496,463 in 2015 and 2014, respectively, and cash used in operating activities of $1,761,946 and $4,550,454 in 2015 and 2014, respectively.  At December 31, 2015, the Company had a working capital deficiency, stockholders' deficit and accumulated deficit of $9,322,066, $12,218,672 and $132,397,790 respectively. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ Salberg & Company, P.A.


SALBERG & COMPANY, P.A.

Boca Raton, Florida

April 14, 2016










2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431-7328

Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920

www.salbergco.com • info@salbergco.com

Member National Association of Certified Valuation Analysts • Registered with the PCAOB

Member CPAConnect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality



F-2



 


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


 

 

December 31,

 

 

 

2015

 

 

2014

 

Assets

  

                         

  

  

                         

  

Current assets

 

 

 

 

 

 

Cash

 

$

94

 

 

$

31,800

 

Restricted cash

 

 

 

 

 

50,050

 

Accounts receivable

 

 

50,806

 

 

 

2,400

 

Accounts receivable-related party, net

 

 

 

 

 

52,740

 

Inventory, net

 

 

799,323

 

 

 

559,150

 

Prepaid expenses and other current assets

 

 

21,295

 

 

 

55,109

 

Total current assets

 

 

871,518

 

 

 

751,249

 

Investment in unconsolidated investee

 

 

 

 

 

12,668,298

 

Property and equipment, net

 

 

846,974

 

 

 

1,356,628

 

Slow moving inventory, net

 

 

215,786

 

 

 

71,401

 

Patents, net

 

 

179,610

 

 

 

189,303

 

Deposits

 

 

21,340

 

 

 

14,840

 

Total assets

 

$

2,135,228

 

 

$

15,051,719

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,323,127

 

 

$

417,721

 

Bank overdraft

 

 

37,319

 

 

 

 

Accrued liabilities

 

 

1,632,310

 

 

 

981,012

 

Customer deposits

 

 

1,301,400

 

 

 

1,209

 

Current portion of deferred revenue

 

 

25,000

 

 

 

 

Current portion of convertible notes payable, net of discounts

 

 

5,662,900

 

 

 

2,038,116

 

Current portion of notes payable

 

 

70,429

 

 

 

102,149

 

Related party notes payable

 

 

54,000

 

 

 

 

Current portion of financing obligations

 

 

70,337

 

 

 

56,215

 

Current portion of capital lease obligation

 

 

16,762

 

 

 

16,141

 

Total current liabilities

 

 

10,193,584

 

 

 

3,612,563

 

Deferred revenue, net of current portion

 

 

451,042

 

 

 

 

Convertible notes payable, net of discounts and current portion

 

 

 

 

 

123,526

 

Notes payable, net of current portion

 

 

81,720

 

 

 

 

Financing obligations, net of current portion

 

 

29,111

 

 

 

63,594

 

Capital lease obligation, net of current portion

 

 

13,852

 

 

 

25,788

 

Total liabilities

 

 

10,769,309

 

 

 

3,825,471

 

 

 

 

 

 

 

 

 

 

Redeemable convertible cumulative preferred stock

 

 

 

 

 

 

 

 

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

 

 

1,248,494

 

 

 

1,225,994

 

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

 

 

2,637,537

 

 

 

2,577,285

 

Total redeemable convertible cumulative preferred stock

 

 

3,886,031

 

 

 

3,803,279

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity (Deficit)

 

 

 

 

 

 

 

 

Ecosphere Technologies, Inc. stockholders' equity (deficit)

 

 

 

 

 

 

 

 

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

 

 

1,651,689

 

 

 

1,647,341

 

Common stock issuable, $0.01 par value; 500,000 and 0 issuable at December 31, 2015 and 2014, respectively

 

 

5,000

 

 

 

 

Additional paid-in capital

 

 

118,522,429

 

 

 

115,252,710

 

Accumulated deficit

 

 

(132,397,790

)

 

 

(109,463,965

)

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

 

 

(12,218,672

)

 

 

7,436,086

 

Noncontrolling interest in consolidated subsidiary

 

 

(301,440

)

 

 

(13,117

)

Total equity (deficit)

 

 

(12,520,112

)

 

 

7,422,969

 

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

 

$

2,135,228

 

 

$

15,051,719

 


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



F-3



 


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


 

 

 

 

For the years ended

December 31,

 

 

 

 

 

2015

 

 

2014

 

Revenues

 

 

  

                         

  

  

                         

  

Equipment sales and licensing

 

 

 

$

573,958

 

 

$

530,550

 

Equipment sales and licensing, related party

 

 

 

 

 

 

 

524,525

 

Aftermarket part and product sales

 

 

 

 

138,715

 

 

 

24,549

 

Aftermarket part and product sales, related party

 

 

 

 

8,506

 

 

 

40,255

 

Total revenues

 

 

 

 

721,179

 

 

 

1,119,879

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

465,099

 

 

 

813,005

 

Aftermarket part and product costs (exclusive of depreciation shown below)

 

 

 

 

77,381

 

 

 

56,486

 

Selling, general and administrative

 

 

 

 

4,657,241

 

 

 

5,474,310

 

Depreciation and amortization

 

 

 

 

367,297

 

 

 

429,599

 

Bad debt

 

 

 

 

285,170

 

 

 

 

Loss on sale of notes receivable

 

 

 

 

 

 

 

985,085

 

Total costs and expenses

 

 

 

 

5,852,188

 

 

 

7,758,485

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

 

 

(5,131,009

)

 

 

(6,638,606

)

 

 

 

 

 

 

 

 

 

 

 

Loss and impairment on investment in unconsolidated investee

 

 

 

 

(12,668,298

)

 

 

(1,701,140

)

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

45,089

 

Interest expense

 

 

 

 

(3,368,061

)

 

 

(2,225,386

)

Gain on change in fair value of derivative instruments

 

 

 

 

 

 

 

3,671

 

Loss on debt extinguishment

 

 

 

 

(1,696,007

)

 

 

(880,774

)

Loss on impairment of fixed assets

 

 

 

 

(207,912

)

 

 

 

Loss on sale/disposal of fixed assets, net

 

 

 

 

 

 

 

(98,043

)

Other, net

 

 

 

 

3,526

 

 

 

(1,274

)

Total other (expense) income, net

 

 

 

 

(5,268,454

)

 

 

(3,156,717

)

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

(23,067,761

)

 

 

(11,496,463

)

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

 

 

(82,752

)

 

 

(82,752

)

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

(23,150,513

)

 

 

(11,579,215

)

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

 

 

 

 

133,936

 

 

 

13,117

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to Ecosphere Technologies, Inc. common stock

 

 

 

$

(23,016,577

)

 

$

(11,566,098

)

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share applicable to common stock

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

$

(0.14

)

 

$

(0.07

)

Diluted

 

 

 

$

(0.14

)

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

165,294,921

 

 

 

164,294,045

 

Diluted

 

 

 

 

165,294,921

 

 

 

164,294,045

 


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



F-4



 


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)

For the Years Ended December 31, 2015 and 2014


 

 

Ecosphere Technologies, Inc. Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

Issued

 

 

Issuable

 

 

Additional

 

 

 

 

 

Non-

 

 

 

 

 

 

Common Stock

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

controlling

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

Total

 

Balance at December 31, 2013

  

 

164,033,139

  

  

$

1,640,330

  

  

 

105,263

  

  

$

1,053

  

  

$

111,417,253

   

  

$

(97,980,619

)

 

$

 

 

$

15,078,017

 

Common stock issued for cashless option and warrant exercises

 

 

8,753

 

 

 

88

 

 

 

 

 

 

 

 

 

(88

)

 

 

 

 

 

 

 

 

 

Common stock issued for conversion of convertible notes

 

 

586,957

 

 

 

5,870

 

 

 

 

 

 

 

 

 

61,630

 

 

 

 

 

 

 

 

 

67,500

 

Issuance of issuable shares

 

 

105,263

 

 

 

1,053

 

 

 

(105,263

)

 

 

(1,053

)

 

 

 

 

 

 

 

 

 

 

 

 

Stock options granted and vested to employees, directors and advisors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

683,650

 

 

 

 

 

 

 

 

 

683,650

 

Note discount from convertible debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,771,643

 

 

 

 

 

 

 

 

 

1,771,643

 

Note discount from convertible debt modifications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,217,933

 

 

 

 

 

 

 

 

 

1,217,933

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(82,752

)

 

 

 

 

 

 

 

 

(82,752

)

Extension of options and warrants in exchange for cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

175,061

 

 

 

 

 

 

 

 

 

175,061

 

Warrant modifications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,380

 

 

 

 

 

 

 

 

 

8,380

 

Net loss, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,483,346

)

 

 

(13,117

)

 

 

(11,496,463

)

Balance at December 31, 2014

 

 

164,734,112

 

 

$

1,647,341

 

 

 

 

 

$

 

 

$

115,252,710

 

 

$

(109,463,965

)

 

$

(13,117

)

 

 

$7,422,969

 




 (Continued)

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




F-5



 


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)

For the Years Ended December 31, 2015 and 2014


 

 

Ecosphere Technologies, Inc. Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

 

Issued

 

 

Issuable

 

 

Additional

 

 

 

 

 

Non-

 

 

 

 

 

 

Common Stock

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

controlling

 

 

 

 

 

 

Shares

 

 

Par Value

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Interest

 

 

Total

 

Balance at December 31, 2014

 

 

164,734,112

 

 

$

1,647,341

 

 

 

 

 

$

 

 

$

115,252,710

 

 

$

(109,463,965

)

 

$

(13,117

)

 

$

7,422,969

 

Common stock issued as extension fee

 

 

434,782

 

 

 

4,348

 

 

 

 

 

 

 

 

 

43,478

 

 

 

 

 

 

 

 

 

47,826

 

Common stock issued as consideration for convertible note extension

 

 

 

 

 

 

 

 

500,000

 

 

 

5,000

 

 

 

220

 

 

 

 

 

 

 

 

 

5,220

 

Common stock issued for sale of subsidiary stock held by Parent company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

599,387

 

 

 

 

 

 

(154,387

)

 

 

445,000

 

Common stock issued in subsidiary owned by Parent company as consideration for convertible notes extension

 

 

 

 

 

 

 

 

 

 

 

 

 

 

981,999

 

 

 

 

 

 

 

 

 

981,999

 

Stock option expense for options granted to consultants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,458

 

 

 

 

 

 

 

 

 

50,458

 

Stock options granted and vested to employees, directors and advisors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

422,511

 

 

 

 

 

 

 

 

 

422,511

 

Note discount from convertible debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,177,101

 

 

 

 

 

 

 

 

 

1,177,101

 

Note discount from convertible debt modifications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54,568

 

 

 

 

 

 

 

 

 

54,568

 

Preferred stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(82,752

)

 

 

 

 

 

 

 

 

(82,752

)

Warrants issued for debt modifications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,150

 

 

 

 

 

 

 

 

 

22,150

 

Warrant modifications

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,550

 

 

 

 

 

 

 

 

 

19,550

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,951

)

 

 

 

 

 

 

 

 

(18,951

)

Net loss, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,933,825

)

 

 

(133,936

)

 

 

(23,067,761

)

Balance at December 31, 2015

 

 

165,168,894

 

 

$

1,651,689

 

 

 

500,000

 

 

$

5,000

 

 

$

118,522,429

 

 

$

(132,397,790

)

 

$

(301,440

)

 

$

(12,520,112

)



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



F-6



 


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


 

 

 

 

For the years ended

December 31,

 

 

 

 

 

2015

 

 

2014

 

Operating Activities:

 

 

  

                         

  

  

                         

  

Net loss applicable to Ecosphere Technologies, Inc. common stock

 

 

 

$

(23,016,577

)

 

$

(11,566,098

)

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

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

 

 

82,752

 

 

 

82,752

 

Depreciation and amortization

 

 

 

 

367,297

 

 

 

429,599

 

Non-controlling interest in loss of consolidated subsidiaries

 

 

 

 

(133,936

)

 

 

(13,117

)

Amortization of debt issue costs

 

 

 

 

-

 

 

 

24,279

 

Amortization of discount on notes payable

 

 

 

 

2,674,139

 

 

 

1,851,275

 

Modification of warrants and options

 

 

 

 

41,700

 

 

 

123,441

 

Loss on debt extinguishment

 

 

 

 

1,696,007

 

 

 

880,774

 

Stock-based compensation expense

 

 

 

 

472,969

 

 

 

683,650

 

Shares issued for note extension

 

 

 

 

47,826

 

 

 

 

Loss on sale of fixed assets, net

 

 

 

 

 

 

 

98,043

 

Gain from change in fair value of warrant derivative liability

 

 

 

 

 

 

 

(3,671

)

Loss and impairment on investment in unconsolidated investee

 

 

 

 

12,668,298

 

 

 

1,701,140

 

Impairment of fixed assets

 

 

 

 

207,912

 

 

 

 

Loss on sale of notes receivable

 

 

 

 

 

 

 

985,085

 

Bad debt expense

 

 

 

 

285,170

 

 

 

 

Write-down of inventory

 

 

 

 

557,553

 

 

 

71,401

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable

 

 

 

 

(280,836

)

 

 

267,349

 

Decrease in prepaid expenses and other current assets

 

 

 

 

133,401

 

 

 

170,670

 

Increase in inventory

 

 

 

 

(942,111

)

 

 

(482,674

)

Increase in accounts payable

 

 

 

 

905,408

 

 

 

7,318

 

Increase in accrued liabilities

 

 

 

 

651,299

 

 

 

137,121

 

Decrease in restricted cash

 

 

 

 

50,050

 

 

 

 

Increase in deposits

 

 

 

 

(6,500

)

 

 

 

Increase in deferred revenue

 

 

 

 

476,042

 

 

 

 

Increase in customer deposits

 

 

 

 

1,300,191

 

 

 

1,209

 

Net cash used in operating activities

 

 

 

 

(1,761,946

)

 

 

(4,550,454

)

Investing Activities:

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of fixed asset

 

 

 

 

 

 

 

161,942

 

Transfers to restricted cash

 

 

 

 

 

 

 

(25,050

)

Purchase of property and equipment

 

 

 

 

(8,999

)

 

 

(178,721

)

Payment of patent costs

 

 

 

 

(1,865

)

 

 

(61,159

)

Net used in investing activities

 

 

 

 

(10,864

)

 

 

(102,988

)

Financing Activities:

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible notes payable and warrants, net of debt issuance costs

 

 

 

 

1,400,000

 

 

 

1,745,000

 

Proceeds from stock purchase in consolidated subsidiary

 

 

 

 

445,000

 

 

 

 

Proceeds from notes payable

 

 

 

 

150,000

 

 

 

 

Proceeds from related party notes payable

 

 

 

 

54,000

 

 

 

 

Proceeds from warrant modification

 

 

 

 

 

 

 

60,000

 

Proceeds from sale of notes receivable

 

 

 

 

 

 

 

2,171,277

 

Payment of offering costs

 

 

 

 

(18,951

)

 

 

 

Bank overdraft fee

 

 

 

 

37,319

 

 

 

 

Cash payment for note modification

 

 

 

 

 

 

 

(27,763

)

Repayments of notes payable and insurance financing

 

 

 

 

(249,588

)

 

 

(104,299

)

Repayments of notes payable to related parties

 

 

 

 

 

 

 

(51,075

)

Repayments of vehicle and equipment financing

 

 

 

 

(65,361

)

 

 

(152,202

)

Principal payments on capital leases

 

 

 

 

(11,315

)

 

 

(15,347

)

Net cash provided by financing activities

 

 

 

 

1,741,104

 

 

 

3,625,591

 

Net decrease in cash

 

 

 

 

(31,706

)

 

 

(1,027,851

)

Cash at beginning of year

 

 

 

 

31,800

 

 

 

1,059,651

 

Cash at end of year

 

 

 

$

94

 

 

$

31,800

 


 (Continued)

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



F-7



 


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

 

 

 

For the years ended

December 31,

 

 

 

2015

 

 

2014

 

Supplemental Cash Flow Information:

  

                         

  

  

                         

  

 

 

 

 

 

 

 

Cash paid for interest

 

$

89,555

 

 

$

299,083

 

Cash paid for taxes

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued preferred stock dividends

 

$

82,752

 

 

$

82,752

 

Conversion of convertible notes to common stock

 

$

 

 

$

67,500

 

Modification of warrants and options

 

$

41,701

 

 

$

 

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

 

 

$

2,989,576

 

Insurance premium finance contract recorded as prepaid asset

 

$

99,588

 

 

$

104,299

 

Equipment financing

 

$

45,000

 

 

$

 

 

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






F-8



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



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 patented solutions for the global water, agriculture, energy and industrial markets. The Company helps customers increase production, reduce costs and protect the environment through a portfolio of more than 35 patented and patent-pending technologies:  technologies like Ozonix®, the Ecos PowerCube® and the Ecos GrowCube™, which are licensable across a wide range of industries and applications throughout the world.


The Company is currently focused on manufacturing and selling its Ecos GrowCube™ related products to the Precision-Agricultural market and granting exclusive field-of-use licenses for its multi-patented Ozonix® and Ecos PowerCube® technologies to industrial customers throughout the world.  To date, Ecosphere’s Ozonix® technology has generated more than $70 million in combined equipment sales, field service and technology licensing revenue and has enabled the treatment and recycling of over 6 billion gallons of water. Ecosphere has also manufactured and deployed approximately 60 mobile Ozonix® water treatment machines to date (ranging from 450 to 3,300 gallons per minute) for its customers and licensing partners in the Oil and Gas, Food & Beverage, Landfill Leachate, Marine Port & Terminal, Agriculture and Industrial Wastewater treatment industries.


As the oil and gas market began to decline, Ecosphere began focusing a significant amount of its efforts on developing its proprietary Ecos GrowCube™ technology and product line, while continuing to grant licenses for its OzonixÒ technology. This has resulted in the development of a comprehensive line of turn-key, fully-automated, indoor and outdoor hydroponic growing systems that utilize Ecosphere’s patented OzonixÒ technology to deliver clean water within growing operations and enhance crop quality, yield and production results. Throughout this 2-year development process, Ecosphere has created a suite of growing systems that cater to different types of customers and price-points while also creating a line of plant fertility nutrients and fertilizers, that will be sold to Ecos GrowCube™ customers. The nutrients are processed using Ecosphere’s patented Ozonix® technology and offer customers a superior product to what is standard in the industry by offering smaller particle sizes for better assimilation and uptake.


In November 2014, Ecosphere formed Sea of Green Systems, Inc. (“SOGS”), a majority owned subsidiary of ETI, to serve as its exclusive, global marketing and sales division for the Ecos GrowCube™ technology and product lines. In July 2015, SOGS took receipt of its first $1.3 million equipment order that SOGS is anticipating to deliver in Q2 2016. This equipment is currently being manufactured by ETI and the Company expects to continue to serve as the exclusive manufacturing and technology development arm for SOGS. The Company plans to publicly announce the SOGS division and begin marketing its product lines to the global Precision Agriculture market in Q2 2016.


Basis of Presentation


The accompanying consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) in the 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 financial information.


Going Concern


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 $23,067,761 in 2015, and cash used in operating activities of $1,761,946 and $4,550,454 in 2015 and 2014, respectively.  At December 31, 2015, the Company had a working capital deficiency and accumulated deficit of $9,322,066 and $132,397,790 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.


As of April 8, 2015, Ecosphere had cash on hand of approximately $0.1 million. Due to the nature of its technology licensing business model, Ecosphere presently does not have any regularly recurring revenue. These factors raise substantial doubt about the Company’s ability to continue as a going concern. To support its operations, the Company has a number of plans to monetize its intellectual property, which is described below.




F-9



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



In order to stay operational, the Company’s principal lender has continued to advance funds to the Company on an as needed basis.  During 2015, he has lent the Company $1,400,000 represented by convertible notes which are convertible at $0.115 per share and due in September 2016, these notes are secured by a variety of security interests on intellectual property and other assets of the Company.  In addition, the Company’s principal lender had lent the Company $354,000 during 2016. Until the Company can generate sufficient working capital to begin to repay this indebtedness and other indebtedness, this lender has rights which are superior to the Company’s shareholders as well as other creditors.  As of the date of this Report, $890,000 in past due Notes are outstanding.


The Company is working on a number of initiatives which, if consummated can provide liquidity.  Assuming that SOGS is able to raise the $2 million and close the planned reverse merger, it will pay Ecosphere $604,000 of proceeds.  In addition, Ecosphere will receive $25,000 monthly managements fees from SOGS.


The proposed Washington state venture is another source of potential future liquidity.


Management is uncertain whether it will have 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® and Ecos PowerCube® technologies to specific industries in their respective countries and regions of the world. Ecosphere is providing a pilot to a customer that if successful has the ability to provide significant cash for to Ecosphere. 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 Fidelity National Environmental Solutions, LLC (“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 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® and Ecos PowerCube® technologies globally, the Company’s 30.6% interest in FNES is also available for sale to strategic buyers.


Management believes that the realization of any of the above events will provide sufficient liquidity for the foreseeable future. Historically in the 18 years since inception, Ecosphere often has had liquidity problems but it has always found financing and new business to support its operations. Management believes that it will do so again although no assurances can be given. The 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 100% of its convertible notes payable, notes payable and related party notes payable due within the next 12 months, $890,000 of which is past due as of the date of this Report (See Note 10). The Company’s counsel is currently in discussions with note holders in the aggregate principal amount of $595,000 regarding extension terms. The Company will also need additional capital for labor, materials and corporate overhead.


2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles of Consolidation


The accompanying consolidated financial statements include the accounts of Ecosphere and its majority owned subsidiaries (Sea of Green Systems, Inc. and Ecosphere Mining, LLC). All other subsidiaries are inactive. The Company accounted for its 30.6% investment in FNES under the equity method (See Note 3) through September 30, 2015. All intercompany account balances and transactions have been eliminated.




F-10



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



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. 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 loss applicable to noncontrolling interest in consolidated subsidiary” in the consolidated statements of operations.


Through August 13, 2015, the Company owned 100% of SOGS. Since August 14, 2015 through December 31, 2015, the Company reduced its ownership in SOGS through the sale and issuance of shares of SOGS common stock and at December 31, 2015, the Company’s ownership in SOGS was approximately 69.49%. 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 loss applicable to noncontrolling interest in consolidated subsidiary” in the consolidated statements of operations based on its 69.49% ownership. As of April 11, 2016, ETI’s ownership in SOGS has been reduced to 59.92%.


The Company’s interest in SOGS may be further diluted by the following:

 

 

 

For the Year Ended

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

Convertible debt

 

 

923,913

 

 

 

 

Options and warrants to purchase common stock

 

 

1,450,000

 

 

 

 

Total Anti-Dilutive Potential Common Stock

 

 

2,373,913

 

 

 

 


Use of Estimates


The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the allowance for doubtful accounts receivable, valuation of inventory, estimates of depreciable lives and valuation of property and equipment, estimates of amortization periods for intangible assets, valuation of beneficial conversion features in convertible debt, valuation of equity based instruments issued for other than cash, valuation of derivatives, valuation of remaining interest in FNES equity method investment 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 December 31, 2015 or 2014.


Restricted Cash


Restricted cash as of December 31, 2015 and 2014 was zero and $50,050, which represented a compensating balance, respectively, 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 December 31, 2015 the Company recorded an allowance for doubtful accounts of $285,170 in connection with its related party accounts receivable.




F-11



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Inventory


Inventory is comprised of raw materials to manufacture Ozonix® and Ecos GrowCube™ equipment, one Ecos PowerCube® being held at the corporate offices in Stuart, FL and one self-contained, outdoor Ecos GrowCube™ that is being used in Washington state for demonstration purposes. 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 indoor Ecos GrowCube™ units being manufactured for the equipment order received in July 2015 from SOGS. 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 6.


Property and Equipment and Capital 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 presented as a direct deduction from the related debt liability 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 December 31, 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. The Company recognized amortization expense of $11,558 and $9,890 for the years ended December 31, 2015 and 2014, respectively.

 

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.




F-12



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Derivative Instruments


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

Fair Value of Financial Instruments and Fair Value Measurements

 

The Company measures its financial and non-financial assets and liabilities, as well as makes related disclosures, in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). For certain of our financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. Amounts recorded for notes payable, net of discount, also approximate fair value because current interest rates available to the Company for debt with similar terms and maturities are substantially the same.


ASC Topic 820 provides guidance with respect to valuation techniques to be utilized in the determination of fair value of assets and liabilities. Approaches include, (i) the market approach (comparable market prices), (ii) the income approach (present value of future income or cash flow), and (iii) the cost approach (cost to replace the service capacity of an asset or replacement cost). ASC Topic 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1:

Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:

Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3:

Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.


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.




F-13



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



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.


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.


Product Sales


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


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



F-14



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Product Warranties


The Company accrues for product warranties when the loss is probable and can be reasonably estimated. At December 31, 2015 and 2014, the Company has no product warranty accrual given its lack of long-term historical warranty experience and the fact that more recent warranty repair experience relates to what we believe are non-recurring issues and are therefore, not indicative of future warranty estimates or material to the Company’s operations. In 2013, the Company sold two Ozonix® EF80 units to Fidelity National Environmental Solutions, LLC and the warranty periods on those units end in July and November 2015. In 2014, the Company sold two Ozonix® EF10M units to a company in Brazil and Fidelity National Environmental Solutions, LLC and the warranty periods on those units ended during 2015. In 2015, the Company sold one Ozonix® EF10M unit to a company in Malaysia and the warrant period ends in Q4 2016.


Research and Development


In accordance with ASC Topic 730-10, Research and Development – Overall, expenditures for research and development of the Company's products are expensed when incurred, and are included in operating expenses. For the years ended December 31, 2015 and 2014, the Company’s research and development costs $638,866 and $241,192, respectively.


Advertising

 

The Company conducts advertising for the promotion of its products and services. In accordance with ASC 720-35, Advertising Costs, are charged to operations when incurred and totaled $110,370 and $112,112 for the years ended December 31, 2015 and 2014, respectively.

 

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. Stock based compensation granted to non-employees is 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 December 31, 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.



F-15



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Segments


The Company follows the guidance of ASC 280-10 for “Disclosures about Segments of an Enterprise and Related Information.” During 2015 and 2014, the Company only operated in one segment; therefore, segment information has not been presented.


Net Loss Per Share


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


The computation of basic and diluted earnings per share is as follows:


 

 

For the year ended

December 31, 2015

 

 

 

Basic

 

 

Diluted

 

Numerator

 

 

 

 

 

  

Net loss applicable to common stock

 

$

(23,016,577

)

 

$

(23,016,577

)

Denominator

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

165,294,921

 

 

 

165,294,921

 

Warrants and options

 

 

 

 

 

 

 

 

 

165,294,921

 

 

 

165,294,921

 

Net loss per share

 

$

(0.14

)

 

$

(0.14

)


 

 

For the year ended

December 31, 2014

 

 

 

Basic

 

 

Diluted

 

Numerator

 

 

 

 

 

  

Net loss applicable to common stock

 

$

(11,566,098

)

 

$

(11,566,098

)

Denominator

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

164,294,045

 

 

 

164,294,045

 

Warrants and options

 

 

 

 

 

 

 

 

 

164,294,045

 

 

 

164,294,045

 

Net loss per share

 

$

(0.07

)

 

$

(0.07

)


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 Shares


Ecosphere Technologies, Inc.


 

 

For the year ended

December 31,

 

 

 

2015

 

 

2014

 

Convertible debt

 

 

48,931,159

 

 

 

33,406,729

 

Convertible preferred stock

 

 

362,497

 

 

 

362,497

 

Options and warrants to purchase common stock

 

 

102,330,763

 

 

 

96,755,199

 

Total Anti-Dilutive Potential Common Shares

 

 

151,624,419

 

 

 

130,524,425

 




F-16



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



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 December 31, 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.


3.

INVESTMENT IN UNCONSOLIDATED INVESTEE


The Company accounted for its 30.6% investment in FNES using the equity method of accounting. Condensed summary financial information for FNES as of September 30, 2015 and December 31, 2014 is as follows:


 

 

September 30,

2015

 

December 31,

2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Cash

 

$

198,793

 

$

196,115

 

Accounts receivable, net

 

 

212,241

 

 

316,945

 

Property and equipment, net

 

 

2,951,490

 

 

3,897,742

 

Inventory, net

 

 

97,075

 

 

108,696

 

Prepaid Expenses and other current assets

 

 

38,708

 

 

21,523

 

Intangible Assets, net

 

 

1,631,945

 

 

1,736,111

 

Slow moving inventory

 

 

24,864

 

 

24,864

 

Deposits

 

 

6,796

 

 

8,200

 

Total Assets

 

$

5,161,912

 

$

6,310,196

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS' EQUITY

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

315,279

 

$

188,162

 

Accounts payable, related party

 

 

162,240

 

 

 

Financing obligations

 

 

13,077

 

 

 

Debt

 

 

1,306,613

 

 

1,306,613

 

Debt, related party

 

 

2,674,793

 

 

1,961,793

 

Members’ equity

 

 

689,910

 

 

2,853,628

 

Total liabilities and members equity

 

$

5,161,912

 

$

6,310,196

 




















F-17



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014




 

 

For the

nine months ended

September 30,

2015

 

For the

year ended

December 31,

2014

 

 

 

 

 

 

 

STATEMENT OF OPERATIONS

 

 

 

 

 

 

 

Revenues

 

$

1,135,220

 

$

3,229,357

 

Cost of sales

 

 

1,178,915

 

 

2,317,024

 

Gross profit (loss)

 

 

(43,695

)

 

912,333

 

Operating expenses

 

 

2,792,089

 

 

6,260,423

 

Operating loss

 

 

(2,835,784

)

 

(5,348,090

)

Other income

 

 

2,008

 

 

25,000

 

Gain on sale of fixed assets

 

 

500,000

 

 

 

Other expense

 

 

(138,555

)

 

(177,287

)

Net loss

 

 

(2,472,331

)

 

(5,500,377

)

Ownership interest (rounded)

 

 

31

%

 

31

%

Share of net loss

 

$

(756,343

)

$

(1,682,501

)

Elimination of intra-entity profit

 

$

 

$

(18,639

)

Total equity interest loss recorded

 

$

(756,343

)

$

(1,701,140

)

Investment

 

$

11,911,955

 

$

12,668,298

 

Investment impairment

 

 

(11,911,955

)

 

 

Investment value

 

$

 

$

12,668,298

 


Transactions with FNES:


The Company sold one Ozonix® EF10M unit to FNES during the year ended December 31, 2014. A portion of the profits from the sale reflects the Company’s ownership share and is eliminated through an adjustment to “Loss and impairment on investment in unconsolidated investee.” The table below sets forth the revenues and gross profits recognized by the Company and the calculation of the amounts eliminated in the “Loss and impairment on investment in unconsolidated investee” line on the Statement of Operations:


Revenue recognized on sales to FNES

 

$

416,600

 

Cost of sales on sales to FNES

 

 

355,673

 

Approximate ownership interest in FNES

 

 

31

%

Elimination of the Company’s share of profits on sales to FNES

 

$

18,639

 


Impairment on Investment


As of September 30, 2015, the Company reduced its investment in FNES to zero. The Company has taken an impairment of its investment due to 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.


In accordance with ASC 323-10-35-20, the Company discontinued applying the equity method at September 30, 2015 as the investment was reduced to zero.

 

4.

ACCOUNTS RECEIVABLE

 

As of December 31, 2015, accounts receivable in the amount of $50,806 consisted primarily of amounts due from two customers, one for revenue related to equipment sales and the other for miscellaneous product sales. The Company recorded an allowance for doubtful accounts of 100% in connection with its related party accounts receivable from FNES of $285,170 as of December 31, 2015.


As of December 31, 2014, accounts receivable in the amount of $55,140 consisted primarily of amounts due from one related party customer, FNES that consisted of a $44,310 service fee and $8,430 in miscellaneous charges.


As a result of the sale of notes receivable the Company recognized a loss of $985,085 for the year ended December 31, 2014.



F-18



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



5.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets are summarized as follows:


 

 

December 31,

 

 

 

2015

 

 

2014

 

Prepaid insurance

 

$

16,549

 

 

$

17,331

 

Vendor advances

 

 

 

 

 

15,494

 

Prepaid professional fees

 

 

2,410

 

 

 

7,500

 

Other

 

 

2,336

 

 

 

14,784

 

Total prepaid expenses and other current assets

 

$

21,295

 

 

$

55,109

 


6.

INVENTORY


Inventory consists of the following:


 

 

December 31,

 

 

 

2015

 

 

2014

 

Raw materials

 

$

79,335

 

 

$

46,804

 

Work in process

 

 

469,988

 

 

 

210,948

 

Finished goods

 

 

250,000

 

 

 

301,398

 

Total

 

$

799,323

 

 

$

559,150

 


At December 31, 2015, the Company had one one Ecos GrowCube™ in finished goods. The Ecos GrowCube™ unit was being held in Nevada for a trial period by customer and is now in Washington state for another trial. The Nevada customer has placed an order for Ecos GrowCube™ units being manufactured by Ecosphere Technologies, Inc. currently represented in work-in-process (see Note 7).


At December 31, 2015, the Company increased the slow moving raw materials inventory by $215,786 for all items that have not moved in or out of the Company’s inventory in over one year. Additionally, the Company wrote down the value of its finished good, the Ecos PowerCube®, and included in slow moving inventory. The Company also set up a reserve of $71,401 against the slow moving inventory.


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 was $71,401 and is included as a long-term asset in the accompanying consolidated balance sheet.


7.

CUSTOMER DEPOSITS AND DEFERRED REVENUE

 

Customer deposits are summarized as follows:


 

December 31,

 

2015

 

2014

Customer A

$

1,261,400

 

$

Customer B

 

40,000

 

 

Customer C

 

 

 

1,209

Total customer deposits

$

1,301,400

 

$

1,209


As of December 31, 2015, the Company had customer deposits of $1.3 million in connection with Ecos GrowCube™ orders received in 2015. The Company had work-in-process inventory related to these deposits of $469,988. In accordance with the sales contracts, 80% of the selling price, or $1,041,120, was advanced by SOGS to Ecosphere, the related party manufacturer.




F-19



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



In January 2015, the Company received an upfront, non-refundable licensing fee and in accordance with SAB Topic 13f, the Company will be amortizing it over the 20-year term of the licensing agreement. For the year ended December 31, 2015, the Company recorded $23,958 as equipment sales and licensing revenue, respectively. The remaining $476,042 of the licensing fee is recorded as deferred revenue with $25,000 in current and $451,042 will be amortized over the 20-year period.


8.

PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:


 

 

Estimated Useful

 

 

December 31,

 

 

 

Lives in Years

 

 

2015

 

 

2014

 

Machinery and equipment

 

5

 

 

$

1,905,603

 

 

$

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

 

 

 

 

 

 

 

3,554,235

 

 

 

3,708,150

 

Less total accumulated depreciation

 

 

 

 

 

(2,707,261

)

 

 

(2,351,522

)

Property and equipment, net

 

 

 

 

$

846,974

 

 

$

1,356,628

 


During the year ended December 31, 2015, additions to property and equipment primarily consisted of a piece of machinery for the Company’s machine shop and manufacturing.


At December 31, 2015, the Company took an impairment of $207,912 to the Company’s mining equipment as this equipment was later sold in Q1 2016 for a lesser value.


During the year ended December 31, 2014, additions to property and equipment 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 and office equipment relating to the build out of the Ecosphere Mining office in Park City, Utah.


In November 2014, the Company sold a mobile operations vehicle that had been part of its fixed assets since 2013. The net book value of such unit was written off and the Company recognized a loss of $99,985 on the transaction. The Company also sold a previously fully depreciated piece of equipment for a de minimis gain which is also included in loss on sale/disposal of fixed assets, net in the accompanying consolidated statement of operations.


Depreciation expense for the years ended December 31, 2015 and 2014 amounted to $355,739 and $419,709, respectively.


9.

ACCRUED LIABILITIES

 

The major components of accrued liabilities are summarized as follows:

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

Accrued payroll and related benefits

 

$

339,793

 

 

$

256,807

 

Accrued interest

 

 

1,058,043

 

 

 

534,475

 

Accrued professional fees

 

 

20,000

 

 

 

6,000

 

Other accrued liabilities (See Note 17)

 

 

214,474

 

 

 

183,730

 

Total accrued liabilities

 

$

1,632,310

 

 

$

981,012

 




F-20



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



10.

CONVERTIBLE NOTES PAYABLE, NOTES PAYABLE AND OTHER DEBT

Convertible Notes Payable

 

 

December 31,

 2015

 

 

December 31,

 2014

 

In December 2015, the Company issued a convertible note in the aggregate principal amount of $125,000. The note has fixed interest of $12,500 and matures in April 2016 and is convertible into common stock at a conversion rate of $0.115 per share. If the Company does not pay the principal and fixed interest by April 2016 the convertible note will be extended to September 2016. In addition if such non-payment occurs, the Company is required to pay additional interest in the fixed amount of $12,500 due in September 2016 and the Company is required to deliver to the note holder warrants to purchase 2,173,913 shares of common stock or if the Company lacks authorized common stock, shares of Series C Convertible Preferred Stock (which amended articles and designations have not yet been filed with the state as of the date of this filing) on terms reasonably acceptable to the holder including conversion into up to 2,173,913. The Company did not record a discount related to the issuance of this convertible note. As of December 31, 2015, there was no unamortized discount and there was no accrued interest. See Note 20 as this note was amended.

 

$

125,000

 

 

$

 

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 Series C convertible 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 December 31, 2015, the unamortized amount of the discount was $66,965 and accrued interest was $5,938. *

 

 

58,035

 

 

 

 

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 December, 2015, there was no unamortized discount and accrued interest was $13,264. *

 

 

250,000

 

 

 

 




F-21



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014




 

 

December 31,

 2015

 

 

December 31,

 2014

 

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 owned by ETI). As of December 31, 2015, there was no unamortized discount and accrued interest was $16,181. *

 

 

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%, matured in October 2015 and is convertible into parent company common stock at a conversion rate of $0.115 per share if the Company does not merge with a public company. In connection with the issuance of the note, the parent 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 that were later cancelled in exchange for the issuance of 500,000 shares of common stock of the parent company (see Note 13). 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. The discount of $100,000 was expensed in 2015. In November 2015, the note holder agreed to extend the maturity date to April 2016 for the principal amount of $106,250, accrued interest was added to the original principal amount (see Note 20 as subsequently extended). The Company recorded a debt discount of $5,220 in connection with the extension and issuance of 500,000 shares for the cancellation of the above mentioned 1,000,000 warrants due to the incremental increase in value. As of December 31, 2015, the unamortized discount was $3,847 and accrued interest was $8,887 and is included in accrued expenses.

 

 

96,153

 

 

 

 

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 December 31, 2015, there was no unamortized discount and accrued interest was $19,583. *

 

 

250,000

 

 

 

 




F-22



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014




 

 

December 31,

 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 December 31, 2015, there was no unamortized discount and accrued interest was $54,722. **

 

 

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 as another $250,000 was received on February 10, 2015. 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 December 31, 2015, there was no unamortized discount and accrued interest was $151,250. *

 

 

1,250,000

 

 

 

300,000

 




F-23



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014




 

 

December 31,

 2015

 

 

December 31,

 2014

 

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 (see Note 20 as subsequently extended) 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 December 31, 2015, the unamortized amount of the discount was $1,288 and accrued interest was $48,111.

 

 

243,712

 

 

 

123,526

 

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%, and $200,000 matured in December 2015 (see Note 20 as subsequently extended) 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 owned by ETI). As of December 31, 2015, there was no unamortized discount and accrued interest was $345,625. **

 

 

1,700,000

 

 

 

793,406

 




F-24



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014




 

 

December 31,

 2015

 

 

December 31,

 2014

 

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 (which is currently in default, but the Company’s counsel is currently in discussions regarding extension terms). As of December 31, 2015, there was no unamortized discount and accrued interest was $69,325.

 

 

645,000

 

 

 

602,538

 





F-25



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014




 

 

December 31,

 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 (which is currently in default). As of December 31, 2015, there was no unamortized amount of the discounts. Accrued interest at December 31, 2015 was $148,214.

 

 

295,000

 

 

 

295,000

 

 

 

  

 

 

 

 

 

 

Total

 

$

5,662,900

 

 

$

2,161,642

 

Less Current Portion, net of discounts

 

 

(5,662,900

)

 

 

(2,038,116

)

Convertible notes payable, long term, net of discounts

 

$

 

 

$

123,526

 


Amortization of debt discounts is included in interest expense on the accompanying statement of operations.


*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 inventory, 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 initial share holding 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.




F-26



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



A summary of convertible notes payable and the related discounts as of December 31:


 

 

2015

 

 

2014

 

Principal amount of convertible notes payable

 

$

5,735,000

 

 

$

4,385,000

 

Unamortized discount

 

 

(72,100

)

 

 

(2,223,358

)

Convertible notes payable, net of discount

 

 

5,662,900

 

 

 

2,161,642

 

Less: current portion

 

 

(5,662,900

)

 

 

(2,038,116

)

Convertible notes payable, net of discount, less current portion

 

$

 

 

$

123,526

 


Notes 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 December 31, 2015 and 2014, respectively, from related party debt due to lack of on-going affiliation with the lender. Due to lack of payment the note was in default beginning in April 2015, the note began accruing interest at a rate of 7% per annum through December 2015 when the note the note holder agreed to extend the maturity date to October 2018 and agreed to suspend payments until July 2016 without the note bearing any additional default interest. Accordingly, $102,149 is included in notes payable and allocated between a current and long term liability in the accompanying consolidated financial statements. Accrued interest at December 31, 2015 was $5,363.


In October 2015, the Company issued a promissory note in the aggregate principal amount of $50,000. The note accrues interest at an annual rate of 10%, maturing in May 2016. In connection with the promissory note, the investor was granted 750,000 options to purchase shares of SOGS common stock. The options are exercisable over a three-year period at $0.046 per share. Accrued interest at December 31, 2015 was $1,195.


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 was 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 was 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 Notes 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 December 31, 2015 was $2,250 and the Company paid $2,500 of interest during the year ended December 31, 2015.


The Company received unsecured advances from a related party of $5,000 of which $4,000 was unpaid at December 31, 2015.




F-27



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Financing Obligations


 

 

December 31,

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%

 

$

23,314

 

 

$

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%.

 

 

38,368

 

 

 

46,777

 

 

 

 

 

 

 

 

 

 

Secured non-interest bearing, equipment notes payable in monthly installments of $8,333 over 12 months, maturing in December 2014 with a $15,000 deposit due January 1, 2014.

 

 

 

 

 

8,326

 

 

 

 

 

 

 

 

 

 

Secured non-interest bearing, equipment notes payable in monthly installments of $3,000 over 15 months, maturing in January 2017.

 

 

36,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured non-interest bearing, software notes payable in monthly installments totaling $176 over 33 months maturing in December 2016.

 

 

1,766

 

 

 

3,494

 

 

 

 

 

 

 

 

 

 

Total

 

 

99,448

 

 

 

119,809

 

Less Current Portion

 

 

(70,337

)

 

 

(56,215

)

Financing obligations, long-term portion

 

$

29,111

 

 

$

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. In November 2015, the Company signed a settlement agreement with the financing company agreeing to pay 24 payments of $1,397.


Future minimum lease payments under this capital lease obligation as of December 31, 2015, by fiscal year, are as follows:


For the year ended December 31,

 

Payment

 

2016

 

$

16,762

 

2017

 

 

13,853

 

Total

 

$

30,615

 


Third Party Debt


Aggregate annual maturities of third party debt are as follows as of December 31, 2015:


For the year ended December 31,

 

Amount

 

2016

 

$

5,946,529

 

2017

 

 

64,903

 

2018

 

 

52,078

 

2019

 

 

7,701

 

Total debt- face value

 

 

6,071,211

 

Less: unamortized discount

 

 

(72,100

)

Net debt

 

$

5,999,11

 




F-28



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



11.

FAIR VALUE MEASUREMENTS


We currently measure and report at fair value the liability for warrant derivative instruments. The fair value liabilities for price adjustable warrants have been recorded as determined utilizing the BSM option pricing model and Monte Carlo simulations. The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and 2014:

 

 

 

Balance at

December 31,

2015 and 2014

 

 

Quoted Prices in Active Markets for Identical Assets

 

 

Significant Other Observable Inputs

 

 

Significant

Unobservable Inputs

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of liability for warrant derivative instruments

 

$

 

 

$

 

 

$

 

 

$

 

 

The following is a roll forward through December 31, 2014 of the fair value liability of warrant derivative instruments and embedded conversion option derivative instruments:

 

 

 

Fair Value of

 

 

 

Liability for

 

 

 

Warrant

 

 

 

Derivative

 

 

 

Instruments

 

Balance at December 31, 2013

 

 

3,671

 

Fair value of warrants exercised

 

 

(1,764

)

Change in fair value included in other (income) loss

 

 

(1,907

)

Balance at December 31, 2014

 

$

 


12.

REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK

 

Series A

 

At December 31, 2015 and 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 $1,098,494 and $1,075,994 on December 31, 2015 and 2014, respectively.

 

Series B

 

At December 31, 2015 and 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 $2,035,017 and $1,974,785 on December 31, 2015 and 2014, respectively.

 



F-29



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



13.

COMMON STOCK

 

Sea of Green Systems, Inc.


Sea of Green Systems, Inc. (“SOGS”) is authorized to issue 250,000,000 shares (no par value) of its common stock.


In 2014, SOGS issued 80,000,000 shares of common stock to Ecosphere Technologies, Inc., (“ETI”) as founder’s shares in exchange for a capital contribution of $10. From November 10, 2014 through August 2015, the parent company was the sole shareholder. During 2015, ETI sold portions of its interest in SOGS for cash and issued its own shares to third parties in order to extend ETI debt. At December 31, 2015, ETI owned 69.49% of SOGS.


Stock Dividend Payable to ETI


During the year ended December 31, 2015, SOGS issued a stock dividend payable to ETI in the amount of 21,262,800 shares of common stock. Because of the size of the stock dividend, the dividend was accounted for as of stock split, with no impact on SOGS stockholders’ equity or the statement of operations in accordance with Accounting Standards Codification Topic 505-20, Stock Dividends and Stock Splits. The stock split was accounted for retrospectively in accordance with Staff Accounting Bulletin 4.C.


Ecosphere Technologies, Inc.


The Company is authorized to issue up to 300,000,000 shares of its $0.01 par value common stock as of December 31, 2015.


2015


Shares Issuable


At December 31, 2015, the Company had 500,000 issuable shares of common stock in connection with the extension of convertible debt and cancellation of 1,000,000 outstanding warrants.


Shares Issued for Extension Fee


In February 2015, note holders agreed to extend an aggregate principal amount of $645,000 for an additional six months. ETI agreed to pay the holders an extension fee equal to an aggregate of approximately $50,000 that was payable in 434,782 shares of common stock.


2014


Shares Issued in Cashless Option Exercises


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


Shares Issued Upon Conversion of Debt and Other Liabilities


The Company issued 586,957 shares of common stock to lenders upon conversion of secured original issue discount notes in the amount of $67,500 at a conversion rate of $0.115 per share.




F-30



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



14.

STOCK OPTIONS AND WARRANTS

 

The fair value of option and warrants granted during the periods presented is estimated on the date of grant using the BSM option pricing model. We used the following assumptions for options granted in the following periods:


Sea of Green Systems, Inc.


 

 

For the Year Ended December 31,

 

 

2015

 

2014

Expected volatility

 

220.48% to 273%

 

Expected term (simplified method)

 

3 to 5 years

 

Risk-free interest rate

 

0.92% to 1.37%

 

Expected dividend yield

 

None

 


During 2015, the Company granted 1,450,000 stock options of SOGS to consultants of the Company with exercise prices of $0.0468 per share upon exercise. Upon exercise, ETI will cancel an equal number of shares owned by ETI. The total value of the options is $65,715 with vesting over one-year and with 1,000,000 of the options expiring in 5 years and 450,000 of the options expiring in three years. At December 31, 2015 the Company recorded $16,429 of stock option expense.


Stock Options of SOGS


 

 

For the Year Ended

December 31, 2015

 

 

For the Period of Inception

November 10, 2014 through

December 31, 2014

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

Exercise

 

 

 

 

 

Exercise

 

 

 

Shares

 

 

Price

 

 

Shares

 

 

Price

 

Outstanding at beginning of year

 

 

 

 

$

 

 

 

 

 

$

 

Granted

 

 

1,450,000

 

 

$

0.05

 

 

 

 

 

$

 

Exercised

 

 

 

 

$

 

 

 

 

 

$

 

Forfeited

 

 

 

 

$

 

 

 

 

 

$

 

Expired

 

 

 

 

$

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of year

 

 

1,450,000

 

 

$

0.05

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of year

 

 

700,000

 

 

$

0.05

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining contractual term

 

 

 

 

 

 

3.96

 

 

 

 

 

 

 

 

Aggregate intrinsic value

 

 

 

 

 

$

 

 

 

 

 

 

$

 

Weighted average grant date fair value

 

 

 

 

 

$

0.05

 

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining contractual term

 

 

 

 

 

 

3.36

 

 

 

 

 

 

 

 

Aggregate intrinsic value

 

 

 

 

 

$

 

 

 

 

 

 

$

 


Ecosphere Technologies, Inc.


 

 

For the Year Ended December 31,

 

 

2015

 

2014

Expected volatility

 

63.20% - 86.54%

 

63.30% – 78.26%

Expected term (simplified method)

 

2 – 5 years

 

3.5 -5 years

Risk-free interest rate

 

0.71% - 1.73%

 

1.10% - 1.77%

Expected dividend yield

 

 

 

None


Stock-based compensation expense for the years ended December 31, 2015 and 2014 was $422,511 and $683,650, respectively net of cancellations/forfeitures. As of December 31, 2015, there was $97,829 of total unrecognized compensation cost related to unvested options granted under the Company’s option plans. This unrecognized compensation cost is expected to be recognized over the next year.



F-31



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



EMPLOYEE FIXED STOCK OPTION PLANS:


2003 Equity Incentive Plan


On November 17, 2003, the Company adopted the 2003 Equity Incentive Plan. The Plan terminated in November 2013. There were no options to purchase shares of common stock under this plan outstanding at December 31, 2015. As of December 31, 2014 options to purchase 142,275 shares of common stock at $1.05 per share are outstanding under this Plan.


2003 Stock Option Plan for Outside Directors and Advisory Board Members


On November 17, 2003, the Company adopted the 2003 Stock Option Plan for Outside Directors and Advisory Board Members, which provided for the granting of 2,000,000 stock options, and increased on August 2, 2005 to 4,500,000, stock options to members of these Boards who are not full or part time employees of the Company. There were no options to purchase shares of common stock under this plan outstanding at December 31, 2015. At December 31, 2014 options to purchase 740,250 shares of common stock at an exercise price of $1.05 per share are outstanding under this Plan, respectively. The Plan shall continue in existence for a term of ten years unless terminated by the Company.


2006 Equity Incentive Plan


In May 2006, the Board approved the 2006 Equity Incentive Plan (the “2006 Plan”), and as part of that approval, agreed to not issue any awards under the 2003 Equity Incentive Plan and 2003 Stock Option Plan for Outside Directors and Advisory Board Members. The Plan expires August 8, 2016.


This plan, as amended, provides for the Company to issue up to 30,000,000 stock options, stock appreciation rights, restricted stock or restricted stock units to our directors, employees and consultants.


Under the 2006 Plan, all of our Directors who are not employees or 10% shareholders and all Director Advisors automatically receive a grant of restricted stock and options with the number of shares and options based upon market price at the time of grant.


 

 

 

 

 

Restricted

 

 

 

Options (1)

 

 

Stock (1)(2)(3)

 

Qualifying Event

 

 

 

 

 

 

Initial appointment as Chairman of the Board

 

$

75,000

 

 

$

75,000

 

Initial election or appointment of non-employee Director

 

$

40,000

 

 

$

40,000

 

Initial appointment as an Advisory Board member

 

$

15,000

 

 

$

10,000

 

Annual grant to Chairman of the Board

 

$

40,000

 

 

$

40,000

 

Annual grant to non-employee Director

 

$

25,000

 

 

$

25,000

 

Annual grant to Advisory Board Member

 

$

10,000

 

 

$

5,000

 

Initial appointment and annual grant of and to a non-employee director as Lead Director (4) or Chairman of a member of the following:

 

 

 

 

 

 

 

 

Audit Committee, Compensation Committee and other committees at the discretion of the Compensation Committee

 

$

15,000

 

 

$

15,000

 

Initial appointment of an annual grant to a non-employee Director to the following:

 

 

 

 

 

 

 

 

Audit Committee, Compensation Committee and other committees at the discretion of the Compensation Committee

 

$

10,000

 

 

$

10,000

 

———————

(1)

In the event that the Company does not have authorized capital, these persons will receive grants of cash settled SARs.

(2)

The Director or Director Advisor may elect options instead of restricted stock in order to defer income taxes.

(3)

The Director or Director Advisor may at their option receive restricted stock units in lieu of restricted stock.

(4)

The Board may, when the Chairman is an employee, appoint a Director to act as Lead Director who will have all of the authority customarily associated with such a position.


The initial grants to a Chairman of the Board, Board member and Advisory Board member shall vest in annual installments over three years and all other grants shall vest annually, all subject to the person’s continued service in the same capacity on the applicable vesting date. Generally, common stock may not be sold by our directors for six months after resignation.




F-32



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Limitation on Awards

 

The exercise price of options or SARs granted under the 2006 Plan shall not be less than the fair market value of the underlying common stock at the time of grant. In the case of ISOs, the exercise price may not be less than 110% of the fair market value in the case of 10% shareholders. Options and SARs granted under the 2006 Plan shall expire no later than five years after the date of grant. The option price may be paid in United States dollars by check or wire transfer or, at the discretion of the Board or Compensation Committee, by delivery of shares of our common stock having fair market value equal as of the date of exercise to the cash exercise price, or a combination thereof.


A maximum of 30,000,000 shares are available for grant under the 2006 Plan, as amended, and all outstanding options under the Plan provide a cashless exercise feature. The identification of individuals entitled to receive awards, the terms of the awards, and the number of shares subject to individual awards, are determined by our Board of Directors or the Compensation Committee, at their sole discretion. The aggregate number of shares with respect to which options or stock awards may be granted under the 2006 Plan and the purchase price per share, if applicable, shall be adjusted for any increase or decrease in the number of issued shares resulting from a stock dividend, stock split, reverse stock split, recapitalization or similar event. As of December 31, 2015 and 2014 options to purchase 22,949,120 and 23,230,436 shares of common stock were outstanding under the 2006 Plan, respectively.

 

Expired options relate to options that have terminated because the expiration date has passed or have expired because the employee’s employment has been terminated, and the relevant expiration period has passed.


Employee Fixed Plan Options


 

 

For the Years Ended December 31,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

Exercise

 

 

 

 

 

Exercise

 

 

 

Shares

 

 

Price

 

 

Shares

 

 

Price

 

Outstanding at beginning of year

 

 

24,080,936

 

 

$

0.33

 

 

 

20,227,948

 

 

$

0.44

 

Granted

 

 

666,667

 

 

$

0.12

 

 

 

8,794,050

 

 

$

0.17

 

Exercised

 

 

 

 

$

 

 

 

(44,546

)

 

$

0.23

 

Forfeited

 

 

 

 

$

 

 

 

 

 

$

 

Expired

 

 

(1,798,483)

 

 

$

0.83

 

 

 

(4,896,516

)

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of year

 

 

22,949,120

 

 

$

0.22

 

 

 

24,080,936

 

 

$

0.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of year

 

 

17,136,006

 

 

$

0.19

 

 

 

14,284,411

 

 

$

0.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining contractual term

 

 

 

 

 

 

2.80

 

 

 

 

 

 

 

3.54

 

Aggregate intrinsic value

 

 

 

 

 

$

 

 

 

 

 

 

$

 

Weighted average grant date fair value

 

 

 

 

 

$

0.12

 

 

 

 

 

 

$

0.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining contractual term

 

 

 

 

 

 

2.65

 

 

 

 

 

 

 

2.99

 

Aggregate intrinsic value

 

 

 

 

 

$

 

 

 

 

 

 

$

 



F-33



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



2015


Related Party Option Grants


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 fair value of these options amounted to $25,491, calculated using the BSM method, and will be expensed over a one-year period. The Director previously declined an automatic grant of options and restricted stock in July 2014.


2014


Related Party Option Grants


In November 2014, the Company granted five-year options to purchase 8,794,050 shares of common stock to certain employees at an exercise price of $0.17 per share. The fair value of these options amounted to $682,986, calculated using the BSM method, and will be expensed over a two-year period, 25% vesting upon signing of employee Term Sheets and the remainder vesting semi-annually during the term of two year employment, subject to continued employment with the Company.


Annual Director Grants


In July 2015 and 2014, the only eligible Director declined an automatic grant of options and restricted stock.


Employee Fixed Non-Plan Options


 

 

For the Years Ended December 31,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

Exercise

 

 

 

 

 

Exercise

 

 

 

Shares

 

 

Price

 

 

Shares

 

 

Price

 

Outstanding at beginning of year

 

 

29,106,000

 

 

$

0.62

 

 

 

34,633,435

 

 

$

0.60

 

Granted

 

 

 

 

$

 

 

 

 

 

$

 

Exercised

 

 

 

 

$

 

 

 

 

 

$

 

Forfeited

 

 

 

 

$

 

 

 

 

 

$

 

Expired

 

 

(15,141,000

)

 

$

0.78

 

 

 

(5,527,435

)

 

$

0.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of year

 

 

13,965,000

 

 

$

0.46

 

 

 

29,106,000

 

 

$

0.62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of year

 

 

13,965,000

 

 

$

0.46

 

 

 

29,106,000

 

 

$

0.62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining contractual term

 

 

 

 

 

 

0.17

 

 

 

 

 

 

 

0.90

 

Aggregate intrinsic value

 

 

 

 

 

$

 

 

 

 

 

 

$

 

Weighted average grant date fair value

 

 

 

 

 

 

N/A

 

 

 

 

 

 

$

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining contractual term

 

 

 

 

 

 

0.17

 

 

 

 

 

 

 

0.90

 

Aggregate intrinsic value

 

 

 

 

 

$

 

 

 

 

 

 

$

 


2014


Extension of Options in Exchange for Cash


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



F-34



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Non-Employee Fixed Non-Plan


 

 

For the Years Ended December 31,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

Exercise

 

 

 

 

 

Exercise

 

 

 

Shares

 

 

Price

 

 

Shares

 

 

Price

 

Outstanding at beginning of year

 

 

735,000

 

 

 

0.61

 

 

 

1,260,000

 

 

 

0.53

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

(525,000

)

 

 

0.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of year

 

 

735,000

 

 

 

0.61

 

 

 

735,000

 

 

 

0.61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of year

 

 

735,000

 

 

 

0.61

 

 

 

735,000

 

 

 

0.61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining contractual term

 

 

 

 

 

 

0.04

 

 

 

 

 

 

 

1.04

 

Aggregate intrinsic value

 

 

 

 

 

$

 

 

 

 

 

 

$

 

Weighted average grant date fair value

 

 

 

 

 

 

N/A

 

 

 

 

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining contractual term

 

 

 

 

 

 

0.04

 

 

 

 

 

 

 

1.04

 

Aggregate intrinsic value

 

 

 

 

 

$

 

 

 

 

 

 

$

 


Warrants


The following table summarizes warrant activities for the years ended December 31, 2015 and 2014:


 

 

For the Years Ended December 31,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

 

Exercise

 

 

 

 

 

Exercise

 

 

 

Shares

 

 

Price

 

 

Shares

 

 

Price

 

Outstanding at beginning of year

 

 

42,833,263

 

 

 

0.16

 

 

 

16,352,598

 

 

 

0.37

 

Granted

 

 

23,051,630

 

 

 

0.12

 

 

 

27,623,590

 

 

 

0.13

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Exchanged

 

 

(1,000,000)

 

 

 

0.12

 

 

 

 

 

 

 

Expired

 

 

(203,251)

 

 

 

0.67

 

 

 

(1,142,925

)

 

 

0.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of year

 

 

64,681,642

 

 

 

0.13

 

 

 

42,833,263

 

 

 

0.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Exercisable at end of year

 

 

64,681,642

 

 

 

0.13

 

 

 

42,833,263

 

 

 

0.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding and exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining contractual term

 

 

 

 

 

 

3.68

 

 

 

 

 

 

 

4.29

 

Aggregate intrinsic value

 

 

 

 

 

$

 

 

 

 

 

 

$

284

 




F-35



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



A summary of the outstanding warrants previously issued for financing and services as of December 31, 2015 is presented below:


 

 

Shares

 

 

 

 

 

Warrants issued for financing

 

 

64,681,642

 

Outstanding at December 31, 2015

 

 

64,681,642

 


2015


Issuance of Warrants with Convertible Debt


In February 2015, the Company amended previously issued convertible notes 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. The note continues to accrue 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 additional 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. See Note 10.


In March 2015, the Company issued convertible notes 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. See Note 10.


In April 2015, the Company issued convertible notes in the aggregate principal amount of $100,000. The note accrues interest at an annual rate of 12.5%, matured in October 2016 and is convertible into common stock at a conversion rate of $0.115 per share. In connection with the convertible note issuance, 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. In November 2015, the note holder agreed to extend the note until April 2016 and the warrants were cancelled in exchange for the issuance of 500,000 shares of common stock. See Note 13.


In May 2015, the Company issued convertible notes 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. See Note 10.


In June 2015, the Company issued convertible notes 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. See Note 10.


In July 2015, the Company issued a $125,000 convertible note. 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 2,173,913 shares of common stock at an exercise price of $0.115 per share. See Note 10.


In December 2015, the Company issued a $125,000 convertible note. The note bears a fixed interest of $12,500, matures in April 2016 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 2,173,913 shares of common stock at an exercise price of $0.115 per share. See Note 10.


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 $47,826 that shall be payable in either cash or 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. See Note 10.




F-36



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



2014


Issuance of Warrants with Convertible Debt


In January 2014, the Company issued 1,633,328 five-year warrants exercisable at $0.35 per share in connection with $245,000 convertible notes. The fair value of the warrants amount to $265,622, calculated using the BSM method. (See Note 10).


As a result of the modification of the February 2013 convertible notes (See Note 10), the Company reduced the exercise price of warrants to acquire 984,375 shares of common stock from $0.381 to $0.30 per share. The Company also agreed to issue additional warrants to acquire 265,625 shares of common stock at an exercise price of $0.30 per share.


In August 2014, the holders of the February 2013 convertible notes (See Note 10), 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 1,250,000 Warrants noted above to $0.115 per share.


In September 2014, the Company issued 17,391,304 five-year warrants exercisable at $0.115 per share in connection with a $1.0 million convertible note. The fair value of the warrants amount to $1,102,357, calculated using the BSM method. (See Note 10). In addition, the Company agreed to reduce the exercise price of 562,500 previously issued warrants to $0.115 and extend 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.


In November 2014, the Company issued 8,333,333 five-year warrants exercisable at $0.12 per share in connection with $500,000 convertible notes. The fair value of the warrants amount to $947,406, calculated using the BSM method. (See Note 10). In addition, the Company agreed to reduce the exercise price of 9,999,998 previously issued warrants to $0.12.


In December 2014, the Company agreed to reduce the exercise price of 333,332 previously issued warrants to $0.12.


Extension of Warrants in Exchange for Cash


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


15.

NONCONTROLLING INTEREST IN CONSOLIDATED SUBSIDIARY

 

Ecosphere Mining, LLC


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


Balance, 2013

 

 

 

$

 

Distributions to noncontrolling members

 

 

 

 

 

Noncontrolling interest in loss

 

 

 

 

(13,117

)

Balance, 2014

 

 

 

$

(13,117)

 

Distributions to noncontrolling members

 

 

 

 

 

Noncontrolling interest in loss

 

 

 

 

(16,448

)

Balance, end of year

 

 

 

$

(29,565

)




F-37



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Sea of Green Systems, Inc.


In 2014, the Company’s subsidiary, SOGS, issued 80,000,000 shares of common stock to ETI as founder’s shares in exchange for a capital contribution of $10. From November 10, 2014 through August 2015, the parent company was the sole shareholder. During the year ended December 31, 2015, SOGS issued a stock dividend payable to ETI in the amount of 21,262,800 shares of common stock. During 2015, ETI sold portions of its interest in SOGS for cash and issued its own shares to third parties for services benefiting ETI. At December 31, 2015, ETI owned 69.49% of SOGS. 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 loss applicable to noncontrolling interest in consolidated subsidiary” in the consolidated statements of operations.


 

 

 

 

2015

 

Balance, beginning of year

 

 

 

$

 

Change in noncontrolling interest from sales of subsidiary common stock

 

 

 

 

(154,387)

 

Noncontrolling interest in loss

 

 

 

 

(117,488

)

Balance, end of year

 

 

 

$

(271,875

)


16.

INCOME TAXES

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 2015, the Company has a Net Operating Loss (“NOL”) carryforward of approximately $79,000,000. The NOL expires during the years 2015 to 2035. In the event that a significant change in ownership of the Company occurs as a result of the Company’s issuance of common stock, the utilization of the NOL carryforward will be subject to limitation under certain provisions of the Internal Revenue Code. Management does not presently believe that such a change has occurred. Realization of any portion of the approximately $37 million of net deferred tax assets at December 31, 2015 is not considered more likely than not by management; accordingly, a valuation allowance has been established for the full amount. The valuation allowance as of December 31, 2015 was $37,364,121. The change in the valuation allowance during the year ended December 31, 2015 amounted to $8,604,699.

 

Significant components of the Company’s deferred tax assets are as follows:


 

 

Year ended

December 31,

 

 

 

2015

 

 

2014

 

Deferred tax assets:

  

 

 

 

 

  

Organizational costs, accrued liabilities and other

 

$

1,069,339

 

 

$

830,936

 

NOL carryforwards

 

 

29,788,004

 

 

 

29,330,106

 

Depreciation

 

 

228,100

 

 

 

148,870

 

Compensation related to equity instruments issued for services

 

 

6,278,678

 

 

 

6,100,701

 

Valuation allowance

 

 

(37,364,121

)

 

 

(28,759,422

)

 

 

 

 

 

 

 

 

 

Net deferred tax assets

 

$

 

 

$

7,651,191

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Investment in unconsolidated investee

 

 

 

 

 

(7,619,174

)

Other

 

 

 

 

 

(32,017

)

Total deferred tax liabilities

 

 

 

 

 

(7,651,191

)

Total net deferred taxes

 

$

 

 

$

 

 



F-38



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Reconciliation of the differences between income tax benefit computed at the federal and state statutory tax rates and the provision for income tax benefit for the years ended December 31, 2015 and 2014 is as follows:


 

 

2015

 

 

2014

 

 

  

 

 

 

 

    

Income tax expense (benefit) at federal statutory rate

 

 

(34.00

%)

 

 

(34.00

%)

State taxes, net of federal benefit

 

 

(3.62

)

 

 

(3.62

)

Nondeductible items

 

 

0.05

 

 

 

0.10

 

Change in valuation allowance

 

 

37.57

 

 

 

37.52

 

 

 

 

%

 

 

%


17.

COMMITMENTS AND CONTINGENCIES

 

Leases


The Company signed a letter of intent to enter into a lease with the payment of $7,500 during 2015 (See Note 20).


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. During the years ended December 31, 2015 and 2014 the Company recognized rent expense amount of $200,928 and $200,928 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 mining application. The commencement date for this operating lease is January 1, 2014 with an initial monthly rent of approximately $3,600 (subject to escalation) 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 $140,659 as of December 31, 2015, relating to this five-year lease agreement.


Future minimum annual rents due under operating leases are as follows:


 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Amounts due under operating leases in 2016

 

 

 

 

 

$

45,503

 

Amounts due under operating leases in 2017

 

 

 

 

 

 

46,872

 

Amounts due under operating leases in 2018

 

 

 

 

 

 

48,284

 

 

 

 

 

 

 

$

140,659

 


Legal


From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.


To our knowledge, except as described below, no legal proceedings, government actions, administrative actions, investigations or claims are currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

 

In December 2012, the Company reached a settlement with KIA, who filed a lawsuit against the Company in 2007, amounting to $100,000 to be paid with an initial $25,000 payment and 36 monthly installments for the remainder of the settlement amount. Should the Company default on any of its required payments, the settlement amount will increase to $150,000. The Company had originally accrued $197,500 in liabilities related to this settlement. As a result of the settlement, the Company reduced legal expense by $47,500 (as the original expense was charged to this account) leaving an accrued balance of $125,000 at December 31, 2012, which was comprised of the $150,000 obligation less the initial $25,000 payment. As of December 31, 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. See Note 9.

 

In March 2011, a former vendor obtained a judgment against the Company for a number of disputed billings. As of December 31, 2015 the Company has accrued $70,000 which is anticipated to be the amount of payment due to the vendor plus attorney’s fees. See Note 9.



F-39



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



In February 2016, a vendor of the Company filed a lawsuit alleging non-payment with respect to materials provided on credit throughout 2015. Through the lawsuit, the vendor Is seeking from the Company $30,133 plus interest, attorneys’ fees and court costs. The Company has filed an answer and affirmative defenses to the pending allegations and has been served with discovery requests (responses to which are due on April 22, 2016). The Company is also attempting to negotiate an out-of-court settlement in the form of a payment plan over a period of time.  


Other Commitments


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


In June 2014, the Company entered into a one year Private Licensing Engagement Agreement (the “Agreement”) with ICAP Patent Brokerage 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. 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. 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 December 31, 2015, the Company has paid DWC $88,298 and accrued $12,640 related to the SOGS equipment order.


18.

CONCENTRATION OF RISK

 

During the year ended December 31, 2015, the Company’s revenues were primarily from one foreign customer in Malaysia representing 93% of sales, respectively.  This customer was from one revenue source, equipment sales, from the sale of Ozonix® equipment and related parts. As of December 31, 2015, 70% and 30% of accounts receivable were from Customer A and B, respectively in connection with the sale of Ozonix® equipment and miscellaneous product sales.


During the year ended December 31, 2014, the Company’s revenues were 50% and 47% from customers A and B, respectively. Customer A is a related party in the oil and gas industry and Customer B is a foreign customer in Brazil in the food and beverage industry, and were from two revenue sources. Of the two revenue sources, 94% related to the sale of Ozonix® equipment and 4% related to aftermarket parts for Ozonix® equipment in the field. As of December 31, 2014, 96% of accounts receivable were from Customer A, respectively.


The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through December 31, 2015. As of December 31, 2015, the Company’s bank balances did not exceeded FDIC insured amounts. 


Foreign sales in 2015 and 2014 were 93% and 47%, respectively.




F-40



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



In 2015, the Company was dependent on a single lender as approximately 75% of our funding came from this one source.


19.

RELATED PARTY TRANSACTIONS


2015 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. 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. Mr. Dean Becker, the former Chief Executive Officer of ICAP 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.


Related Party Consulting Agreements


In January 2013, the Company entered into a three-year consulting agreement at the rate of $250,000 per year with Mr. Becker, who is a Director. As of December 31, 2015, the Company has accrued $166,624 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% commissions on revenues generated by the consultant. The Company terminated this agreement in December 2015. The Company owes Mr. Becker $20,000 and as consideration for his cancelling $146,624 in consulting fees, in January 2016 the Company issued Mr. Becker three-year options to purchase 3,132,991 shares of SOGS at $0.0468 per share.


Related Party Service and Manufacturing Fees


The Company had 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. Once this transitional phase is complete and FNES has taken over all functions listed above, FNES will no longer pay a service fee to the Company. All costs relating to the services fee are offset against various expense accounts on the statement of operations. At December 31, 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 December 31, 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 Stock Dividend


During the year ended December 31, 2015, SOGS issued a stock dividend payable to ETI in the amount of 21,262,800 shares of common stock. See Note 13.


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.



F-41



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 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. In 2016, the Company amended this note and it now matures in July 2016.


In November 2015, the Company issued a non-interest bearing note payable to an employee of the Company in the aggregate principal amount of $5,000. The Company paid $1,000 of principal during the year ended December 31, 2015. The remaining portion of this note was paid in February 2016.


Related Party Bonus


Following the $1.3 million SOGS 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 $52,000 discretionary bonus.


2014 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 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 a January 2015 licensing agreement which the Company is deferring revenue over the term of the license.


Related Party Consulting Agreements


In January 2013, the Company entered into a three-year consulting agreement at the rate of $250,000 per year that may be terminated with 30 days’ notice with one of the Company’s board members and who is also the Chief Executive Officer of ICAP Patent Brokerage. For the year ended December 31, 2014, the Company has incurred $250,000 pursuant to the consulting agreement.


Related Party Option Grants


In November 2014, the Company granted five-year options to purchase 8,794,050 shares of common stock to certain employees at an exercise price of $0.17 per share. The fair value of these options amounted to $682,986, calculated using the BSM method, and will be expensed over a two-year period, 25% vesting upon signing of employee Term Sheets and the remainder vesting semi-annually during the term of two-year employment, subject to continued employment with the Company.


Related Party Cashless Option Exercise


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


Related Party Equipment Sales


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


In October 2014, FNES sold its second Ozonix® EF10M to Hydrosphere Energy Solutions that was purchased by FNES from the Company in 2014. The sale resulted in equipment sales of approximately $0.4 million to the Company.




F-42



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Related Party Service Fee


The Company had been receiving a service fee for its continued accounting, executive, administrative and other miscellaneous services to FNES. In April 2014, the monthly service fee was reduced from $56,360 to $44,310. The Company continues to provide the services described above and will continue to do so in a transitional phase. Once this transitional phase is complete and FNES has taken over all functions listed above, FNES will no longer pay a service fee to the Company. All costs relating to the services fee are offset against various expense accounts on the statement of operations. The Company had an accounts receivable balance at December 31, 2014 of $44,310 relating to December 2014 services performed for FNES.


Related Party Accounts Receivable


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


As a result of the sale of accounts receivable the Company recognized a loss of $985,085 for the nine months ended December 31, 2014. At December 31, 2014, the Company had an accounts receivable balance of $52,740 due from FNES. The accounts receivable balance consisted of a $44,310 service fee and $8,430 in miscellaneous charges.


20.

SUBSEQUENT EVENTS


Bridge Financing


In January 2016, SOGS and ETI entered into Securities Purchase Agreements with three unaffiliated investors pursuant to which the investors purchased an aggregate of $300,000 original principal amount of convertible notes of the Company. The Notes bear interest at 12.5% annually and mature six months from the date of investment. If, prior to the maturity date of the Notes, the Company merges with a public company by reverse merger, share exchange or other business combination (a “Public Company Event”), the Note shall thereafter be automatically convertible into shares of common stock of the public company at a price per share equal to 85% of the offering price of the shares in the financing transaction conducted in connection with the Public Company Event. Upon maturity, if no Public Company Event has occurred, the Notes shall be convertible into shares of the parent company’s common stock at $0.115 per share. In addition, ETI issued to the investors five-year warrants to purchase 3,000,000 shares of common stock at an exercise price of $0.115 per share. One of the lenders previously lent SOGS $106,000 convertible under similar terms except the due date is April 14, 2016.


SOGS Option Plan


In February 2016, SOGS approved the creation of an Equity Incentive Plan covering 35,000,000 shares of common stock.


SOGS Option Grants


In January 2016, the Company granted fully vested three-year options to purchase 3,132,991 fully vested shares of SOGS common stock to Dean Becker, one of ETI’s Board members, at an exercise price of $0.0468 per share in lieu of a cash payment of $146,624 that was due to the Board member for his consulting services for ETI. The fair value of the options amounted to $142,606, calculated using the BSM method.


In February 2016, the Company granted five-year options to purchase 1,709,401 shares of SOGS common stock to one of ETI’s Board members at an exercise price of $0.0468 per share in connection with his service on the Board. The options vest on June 1, 2016 subject to continued service as a director. The fair value of the options amounted to $77,827, calculated using the BSM method.




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ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



In February 2016, SOGS granted ten-year options to purchase 17,500,000 to two of the Company’s executive officers at an exercise price of $0.0468 per share. The options will vest quarterly in equal amounts over a three-year period with the first vesting date March 31, 2016, subject to performing services for the Company or publicly reported (“Pubco”) which acquires the Company by way of merger, share exchange or otherwise (“Pubco Transaction”).  The options are not exercisable until and unless the Pubco Transaction has occurred.  If the Pubco Transaction does not occur, the options will not be exercisable. The fair value of the options amounted to $802,252, calculated using the BSM method.


Convertible Note Extensions


In April 2016, convertible note holders in the aggregate principal amount of approximately $0.1 million agreed to extend the maturity date to July 2016 for no consideration.


SOGS Stock Issuance


In January 2016, ETI transferred 3,500,000 fully vested shares of SOGS common stock to ETI’s employees. The shares were valued at 0.0468 per share (contemporaneous cash sales price) or $163,800.


In January 2016, the parent Company issued 2,589,941 shares of SOGS common stock in consideration for convertible note extensions in the aggregate principal amount of $445,000 held by ETI as consideration for the extension of the convertible notes for an additional year. The shares were valued at $0.0468 per share (contemporaneous cash sales price) or $121,209 which will be treated as debt discount and amortized over the new debt term.


Convertible Note Conversion


In January 2016, a convertible note holder elected to convert $50,000 of a convertible note into 434,783 shares of the Company’s common stock.


Convertible Note Issuance


In January 2016, the Company issued a $25,000 convertible note. The note has a fixed interest rate of $2,500 and is convertible into common stock at a conversion rate of $0.115 per share maturing in April 2016. If $25,000 of this convertible note, $125,000 of a previously issued convertible note in December 2015 and the fixed interest of $15,000 are not paid by April 2016 then the maturity date will be extended until September 2016. In addition, the Company will be required to pay the investor additional interest in the fixed amount of $15,000 due in September 2016 and the Company will need to issue warrants to purchase 2,608,695 shares of common stock or if the Company lacks the authorized common stock, shares of Series C Convertible Preferred Stock. See Note 10.


In February and March 2016, Brisben made an additional loan to the Company of $200,000 convertible into common stock of the Company at $0.115 per share, maturing May 2016 and bearing fixed interest of $20,000. However, if the December 2015, January 2016 and February 2016 loans are not repaid in April 2016 and May 2016, respectively, their maturities will be extended to September 12, 2016 and the Company will issue Brisben warrants to purchase an additional 6,086,955 five-year warrants to purchase shares of the Company’s common stock at a price per share of $0.115 or if the Company lacks the authorized common stock, shares of Series C Convertible Preferred Stock.


In March 2016, Brisben made a loan to the Company of $29,000 convertible into common stock of the Company at $0.115 per share, maturing in September 2016 and bearing 10% annual interest. In April 2016, Brisben made an additional loan to the Company of $100,000 convertible into common stock of the Company at $0.115 per share, maturing in September 2016 and bearing 10% annual interest. The Company will issue Brisben five-year warrants to purchase an additional 2,243,478 of the Company common stock at an exercisable at $0.115 per share or if the Company lacks the authorized common stock, shares of Series C Convertible Preferred Stock.


Related Party Notes Payable


In February 2016, the Company amended a promissory note to an employee of the Company increasing the aggregate principal amount to $87,552 for an additional loan of $37,552. The note accrues interest at an annual rate of 10% maturing in July 2016.



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ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2015 AND 2014



Employment Agreement


In April 2016, Mr. McGuire signed a three-year Employment Agreement (the “2016 Employment Agreement”) and an Amended and Restated Royalty Agreement (the “Royalty Agreement”), each effective January 1, 2016. See the section titled “Certain Relationships and Related Transactions, and Direct Independence” below for a description of the Royalty Agreement. Under the 2016 Employment Agreement, Mr. McGuire is entitled to receive a base salary of $450,000 per year, which is identical to the 2013 Employment Agreement.  Because of the liquidity issues, Mr. McGuire often has not regularly received installments of his salary. He was also granted 6,300,000 ten-year stock appreciation rights (“SARs”), exercisable at $0.115 per share with one-third vesting upon his acceptance of the grant and the balance vesting in equal increments on December 31, 2016 and December 31, 2017, subject to continued employment as of each applicable vesting date.  The option value is $114,770 and the will be recognized over the vesting term. The SARs are settleable in cash or common stock of Ecosphere or any subsidiary. If the SARs are settled in shares of SOGS, the exercise price shall be fixed at $0.046 per share.


Lease Agreement


In March 2016, the Company entered into a lease agreement for a 6 acre property in Washington state. The term of this lease will commence in May 2016 and will terminate on a date five years from the commencement date. The Company will have the option to renew the lease for five additional five-year terms. The Company will be required to make a security deposit in the amount of $81,675 by May 2016 and the aggregate monthly rent will be phased in over one year. From May 2016 through August 2016 the aggregate monthly rent is $5,445, from September 2016 through December 2016 the aggregate monthly rent is $13,068, from January 2017 through April 2017 the aggregate monthly rent is $16,335 and from May 2017 going forward the aggregate monthly rent is $27,225.




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