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


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

 

FORM 10-Q

____________

 

þ

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

 

 

For the quarterly period ended September 30, 2016

  

 

OR

  

 

o

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

  

 

For the transition period from ________________ to ________________


Commission file number: 000-25663

 

Ecosphere Technologies, Inc.

 (Exact name of registrant as specified in its charter)

 

Delaware

 

20-3502861

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

3515 S.E. Lionel Terrace,
Stuart, Florida

 

34997

(Address of principal executive offices)

 

(Zip Code)


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


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


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


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

 

Large accelerated filer

o

Accelerated filer 

o

 

 

 

 

Non-accelerated filer

o (Do not check if a smaller reporting company)

Smaller reporting company 

þ

 

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


Class

 

Outstanding at November 18, 2016

Common Stock, $0.01 par value per share

 

173,713,046 shares

 

 




TABLE OF CONTENTS

 

 

 

Page

                      

                                                                                                                                                                     

                      

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

1

  

 

 

  

Condensed Consolidated Balance Sheets

1

  

 

 

 

Condensed Consolidated Statements of Operations (unaudited)

2

  

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

3

  

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

5

  

 

Item 2.

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

31

  

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

38

  

 

 

Item 4.

Controls and Procedures

39

  

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

40

  

 

 

Item 1A.

Risk Factors

40

  

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

  

 

 

Item 3.

Defaults Upon Senior Securities

40

  

 

 

Item 4.

Mine Safety Disclosures

40

  

 

 

Item 5.

Other Information

40

  

 

 

Item 6.

Exhibits

40


SIGNATURES

41







 




PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

 

Assets

  

                         

  

  

                         

  

Current assets

 

 

 

 

 

 

Cash

 

$

9,896

 

 

$

94

 

Restricted cash

 

 

10,000

 

 

 

 

Accounts receivable, net

 

 

31,949

 

 

 

50,806

 

Inventory

 

 

1,168,004

 

 

 

799,323

 

Prepaid expenses and other current assets

 

 

119,383

 

 

 

21,295

 

Total current assets

 

 

1,339,232

 

 

 

871,518

 

Property and equipment, net

 

 

694,938

 

 

 

846,974

 

Slow moving inventory

 

 

200,000

 

 

 

215,786

 

Patents, net

 

 

176,510

 

 

 

179,610

 

Deposits

 

 

58,483

 

 

 

21,340

 

Total assets

 

$

2,469,163

 

 

$

2,135,228

 

 

 

 

 

 

 

 

 

 

Liabilities, Redeemable Convertible Cumulative Preferred Stock and Deficit

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,542,803

 

 

$

1,323,127

 

Bank overdraft

 

 

 

 

 

37,319

 

Accrued liabilities

 

 

2,375,216

 

 

 

1,632,310

 

Customer deposits

 

 

1,563,400

 

 

 

1,301,400

 

Current portion of deferred revenue

 

 

25,000

 

 

 

25,000

 

Convertible notes payable, net of discounts

 

 

140,000

 

 

 

5,662,900

 

Current portion of notes payable, net of discounts

 

 

218,816

 

 

 

70,429

 

Related party notes payable

 

 

159,733

 

 

 

54,000

 

Current portion of financing obligations

 

 

27,114

 

 

 

70,337

 

Current portion of capital lease obligation

 

 

16,120

 

 

 

16,762

 

Fair value of liability of derivative instruments

 

 

190,543

 

 

 

 

Total current liabilities

 

 

6,258,745

 

 

 

10,193,584

 

Deferred revenue, net of current portion

 

 

432,292

 

 

 

451,042

 

Convertible notes payable, net of current portion and net of discounts

 

 

6,314,679

 

 

 

 

Notes payable, net of current portion

 

 

923,833

 

 

 

81,720

 

Financing obligations, net of current portion

 

 

21,560

 

 

 

29,111

 

Capital lease obligations, net of current portion

 

 

4,160

 

 

 

13,852

 

Total liabilities

 

 

13,955,269

 

 

 

10,769,309

 

 

 

 

 

 

 

 

 

 

Redeemable convertible cumulative preferred stock

 

 

 

 

 

 

 

 

Series A - 11 shares authorized; 6 shares issued and outstanding at September 30, 2016 and December 31, 2015; $25,000 per share redemption amount plus dividends in arrears

 

 

1,265,369

 

 

 

1,248,494

 

Series B - 484 shares authorized; 241 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively; $2,500 per share redemption amount plus dividends in arrears

 

 

2,682,726

 

 

 

2,637,537

 

Total redeemable convertible cumulative preferred stock

 

 

3,948,095

 

 

 

3,886,031

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

Deficit

 

 

 

 

 

 

 

 

Ecosphere Technologies, Inc. stockholders' deficit

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 300,000,000 shares authorized; 173,713,046 and 165,168,894 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

1,737,129

 

 

 

1,651,689

 

Common stock issuable, $0.01 par value; 0 and 500,000 issuable at September 30, 2016 and December 31, 2015, respectively

 

 

 

 

 

5,000

 

Additional paid-in capital

 

 

122,102,540

 

 

 

118,522,429

 

Accumulated deficit

 

 

(138,530,829

)

 

 

(132,397,790

)

Total Ecosphere Technologies, Inc. stockholders' deficit

 

 

(14,691,160

)

 

 

(12,218,672

)

Noncontrolling interest in consolidated subsidiaries

 

 

(743,041

)

 

 

(301,440

)

Total deficit

 

 

(15,434,201

)

 

 

(12,520,112

)

Total liabilities, redeemable convertible cumulative preferred stock and deficit

 

$

2,469,163

 

 

$

2,135,228

 


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



1



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenues

     

 

 

 

 

 

 

 

 

     

 

 

 

Equipment sales and licensing

 

$

6,250

 

$

6,250

 

$

18,750

 

$

17,708

 

Royalties

 

 

20,968

 

 

 

 

20,968

 

 

 

Field services

 

 

 

 

 

 

33,854

 

 

 

Aftermarket part and product sales

 

 

21,414

 

 

8,990

 

 

28,489

 

 

8,990

 

Aftermarket part sales, related party

 

 

 

 

 

 

 

 

8,506

 

Total revenues

 

 

48,632

 

 

15,240

 

 

102,061

 

 

35,204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

11,102

 

 

 

 

24,055

 

 

18,772

 

Field services costs (exclusive of depreciation shown below)

 

 

 

 

 

 

27,307

 

 

 

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

 

 

25,979

 

 

9,938

 

 

29,558

 

 

19,466

 

Selling, general and administrative

 

 

979,145

 

 

1,217,852

 

 

3,782,762

 

 

3,402,471

 

Depreciation and amortization

 

 

60,977

 

 

91,337

 

 

211,016

 

 

277,435

 

Bad debt

 

 

 

 

162,240

 

 

3,643

 

 

162,240

 

Total costs and expenses

 

 

1,077,203

 

 

1,481,367

 

 

4,078,341

 

 

3,880,384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(1,028,571

)

 

(1,466,127

)

 

(3,976,280

)

 

(3,845,180

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and impairment on investment in unconsolidated investee

 

 

 

 

(12,177,415

)

 

 

 

(12,668,298

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(315,323

)

 

(1,069,448

)

 

(781,332

)

 

(3,132,067

)

Gain (loss) on debt extinguishment

 

 

17,993

 

 

(1,515,320

)

 

(1,988,742

)

 

(1,696,007

)

Change in fair value of derivative instruments

 

 

274,672

 

 

 

 

258,164

 

 

 

Loss on abandonment of lease

 

 

 

 

 

 

(87,994

)

 

 

Other, net

 

 

 

 

643

 

 

1,544

 

 

1,775

 

Total other expense, net

 

 

(22,658

)

 

(2,584,125

)

 

(2,598,360

)

 

(4,826,299

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(1,051,229

)

 

(16,227,667

)

 

(6,574,640

)

 

(21,339,777

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

(20,688

)

 

(20,688

)

 

(62,064

)

 

(62,064

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(1,071,917

)

 

(16,248,355

)

 

(6,636,704

)

 

(21,401,841

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: net (income) loss applicable to non-controlling interest in consolidated subsidiaries

 

 

(54,977

)

 

71,998

 

 

441,601

 

 

74,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to Ecosphere Technologies, Inc. common stock

 

$

(1,126,894

)

$

(16,176,357

)

$

(6,195,103

)

$

(21,326,901

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share applicable to common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

$

(0.10

)

$

(0.04

)

$

(0.13

)

Diluted

 

$

(0.01

)

$

(0.10

)

$

(0.04

)

$

(0.13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

172,840,726

 

 

165,168,894

 

 

168,825,113

 

 

165,090,568

 

Diluted

 

 

172,840,726

 

 

165,168,894

 

 

168,825,113

 

 

165,090,568

 


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



2



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

For the Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

     

                      

  

  

                      

  

Operating Activities:

 

 

 

 

 

 

Net loss applicable to Ecosphere Technologies, Inc. common stock

 

$

(6,195,103

)

 

$

(21,326,901

)

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

 

 

 

 

 

 

 

 

Preferred stock dividends

 

 

62,064

 

 

 

62,064

 

Depreciation and amortization

 

 

211,016

 

 

 

277,435

 

Non-controlling interest in loss of consolidated subsidiaries

 

 

(441,601

)

 

 

(74,940

)

Amortization of discount on notes payable

 

 

166,552

 

 

 

2,624,803

 

Stock-based compensation expense

 

 

1,054,763

 

 

 

349,948

 

Gain from change in fair value of derivative instruments

 

 

(258,164

)

 

 

 

Loss and impairment on investment in unconsolidated investee

 

 

 

 

 

12,668,298

 

Warrants granted for services

 

 

43,306

 

 

 

 

Modification of warrants and options

 

 

 

 

 

41,701

 

Shares issued for note extension

 

 

 

 

 

47,826

 

Loss on debt extinguishment

 

 

1,988,742

 

 

 

1,696,007

 

Loss on abandonment of lease

 

 

87,994

 

 

 

 

Bad debt expense

 

 

3,643

 

 

 

162,240

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Decrease (increase) in accounts receivable

 

 

15,214

 

 

 

(107,190

)

(Increase) decrease in prepaid expenses and other current assets

 

 

(101,378

)

 

 

63,955

 

Increase in inventory

 

 

(352,895

)

 

 

(998,457

)

Increase in accounts payable

 

 

236,286

 

 

 

778,153

 

Increase (decrease) in accrued liabilities

 

 

749,156

 

 

 

399,114

 

Increase in customer deposits

 

 

262,000

 

 

 

1,450,171

 

Increase in deposits

 

 

(37,143

)

 

 

 

(Decrease) increase in deferred revenue

 

 

(18,750

)

 

 

482,292

 

Net cash used in operating activities

 

 

(2,524,298

)

 

 

(1,403,481

)

Investing Activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(201,681

)

 

 

(2,396

)

Transfer to restricted cash

 

 

(10,000

)

 

 

 

Cash receipts from sale of fixed assets

 

 

50,000

 

 

 

 

Payment of patent costs

 

 

(5,525

)

 

 

(1,865

)

Net cash used in investing activities

 

 

(167,206

)

 

 

(4,261

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible notes payable and warrants

 

 

1,704,000

 

 

 

1,225,000

 

Proceeds from issuance of related party note payable

 

 

109,733

 

 

 

50,000

 

Proceeds from note payable

 

 

990,000

 

 

 

150,000

 

Proceeds from sale of stock in consolidated subsidiary

 

 

 

 

 

100,000

 

Repayments of related party notes payable

 

 

(4,000

)

 

 

 

Bank overdraft fee

 

 

(37,319

)

 

 

 

Repayments of notes payable and insurance financing

 

 

 

 

 

(88,309

)

Repayments of capital lease obligation

 

 

(10,334

)

 

 

(12,029

)

Repayments of insurance premiums, vehicle and equipment financing

 

 

(50,774

)

 

 

(43,898

)

Net cash provided by financing activities

 

 

2,701,306

 

 

 

1,380,764

 

Net increase (decrease) in cash

 

 

9,802

 

 

 

(26,978

)

Cash at beginning of period

 

 

94

 

 

 

31,800

 

Cash at end of period

 

$

9,896

 

 

$

4,822

 


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



3



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

For the Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

Supplemental disclosures of cash flow information:

     

                      

  

  

                      

  

Cash paid for interest

 

$

17,169

 

 

$

67,097

 

Cash paid for income taxes

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued preferred stock dividends

 

$

62,064

 

 

$

62,064

 

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

 

$

702,095

 

 

$

1,231,669

 

Modification of warrants and options

 

$

 

 

$

41,701

 

Conversion of convertible debt

 

$

392,422

 

 

$

 

Reclassification of embedded conversion option liability upon conversion of debt

 

$

94,876

 

 

$

 

Insurance premium finance contract recorded as a prepaid asset

 

$

24,469

 

 

$

99,588

 


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




4



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



1.

DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION


Description of the Business


Ecosphere Technologies, Inc. (“Ecosphere,” “ETI” or the “Company”) is a technology development and intellectual property licensing company that develops patented and proprietary 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 for sale and/or available for exclusive licensing opportunities across a wide range of industries and applications throughout the world.


In recent years, the Company’s patented technologies have been used to deploy more than 60+ mobile water treatment systems around the United States and throughout the world, to treat and recycle more than 6+ billion gallons of water and generate more than $70 million in equipment sales, field service and technology licensing revenue. As a result, the Company has received numerous awards and accolades including but not limited to 2010/2011/2012 Top 50 Water Companies Award by the Artemis Project, the 2012 North American Product Leadership Award by Frost & Sullivan, 2013 Energy Innovation Pioneer Award by IHS Ceraweek, 2013 New Energy Pioneer by Bloomberg New Energy Finance, 2013 American Technology Award by TechAmerica Foundation, 2013 World Technology Awards Finalist, 2013 Water Management Company of the Year by the Oil & Gas Awards, 2013 Rising Star at the Governor’s Innovators in Business Awards by Enterprise Florida and the 2014 Best of What’s New Award in the Green Category from POPULAR SCIENCE.


The Company is currently focused on licensing, selling and manufacturing its patented technologies and products across a wide variety of global industries and applications including but not limited to Agriculture, Energy, Food & Beverage, Industrial, Marine, Mining and Municipal markets. These sales and licensing efforts are made through the Company and its subsidiaries, which include wholly-owned Ecosphere Development Company, LLC (“EDC”), majority-owned Sea of Green Systems, Inc (“SOGS”) and minority-owned Fidelity National Environmental Solutions, LLC (“FNES”).


Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) in the United States of America (“U.S.”) as promulgated by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and with the rules and regulations of the U.S Securities and Exchange Commission (“SEC”) for interim financial information. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods shown. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and Results of Operations contained in this report and the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.


Going Concern


Due to the nature of its technology licensing business model, Ecosphere presently, in contrast to before the oil and gas bust, does not have any regularly recurring revenue. The Company reported a net loss of $6,574,640 and $21,339,777 for the nine months ended September 30, 2016 and 2015, and cash used in operating activities of $2,524,298 and $1,403,481 for the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016, the Company had a working capital deficiency and accumulated deficit of $4,919,513 and $138,530,829, 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.


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 and through the date of this Report, the Company received $2,904,000 from its principal lender convertible at $0.115 per share and due in December 2017. The loan is secured by a variety of security interests on intellectual property including all fields of use of its Ozonix® patents excluding agriculture and on other assets of the Company (See Note 5). 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. Following September 30, 2016, the lender advanced another $500,000 with a conventional non-convertible note due in December 2017 (see Note 16).




5



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



Due to the rapid decline in the oil and gas industry, in 2014 Ecosphere’s management began to start diversifying its Ozonix® technology into other water treatment industries and applications, resulting in limited sales in the United States, Canada, Brazil and Malaysia.


As oil and gas drilling was reduced, Ecosphere’s management, engineering and manufacturing teams have used their collective knowledge over the past 20 years to develop a comprehensive product portfolio for the fast growing, global Precision-Agriculture market that uses software, sensors and data driven analytics that can be accessed through the Internet by computers and smartphones to improve plant quality and increase crop yields.


In May 2016, Ecosphere entered into a long-term land lease to lease six acres of I-502 heavy industrial agricultural land in Washington State, zoned for legal I-502 marijuana cultivation and processing. In April 2016, Ecosphere formed a new subsidiary, EDC, of which the Company owns 100% and intends to develop the 6 acres of land and build state-of-the-art, turn-key growing facilities that it will rent to legal, licensed I-502 growers in Washington through EDC. These turnkey, high-tech growing facilities will incorporate Ecosphere’s automated growing systems, as well as Ecosphere’s patented water treatment technology purchased exclusively from SOGS, 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. Phase 1 is presently being constructed on behalf of a subtenant that is a related party to the Company. This tenant has signed a 30-year lease to pay $250,000 per month for the term of the lease.


Ecosphere has spent the past two years locating and acquiring the I-502 zoned property as well as designing and engineering the equipment and facilities it plans to build and lease in Washington State. This new business segment will require infrastructure and equipment financing of up to $4 million ($1 million per phase) to develop the entire 6 acres, which EDC will build-out in phases for each licensed grower that agrees to its long-term leases. In June 2016, Ecosphere and EDC closed its first $1 million round of financing for Phase 1 of the Cannatech Agriculture Center in Washington State and has begun constructing its first turn-key growing facility.  EDC expects to complete construction in late January 2017 and assuming the first tenant receives its license from the Washington State Liquor Control Board, it could receive rental payments commencing as early as June 2017. The Company’s is obligated to pay its principal lender a 7% royalty on Phase 1 revenues and a 10% royalty to the Company’s CEO on all EDC revenues. Upon full completion of all four Phases, management expects that the 6-acre facility will generate approximately $1 million per month (which is for all four phases) through a combination of land, equipment, technology and consulting leases from its I-502 tenants for a period of 30 years, which is the term of the land lease. SOGS will receive 10% of revenues earned by EDC in connection with the rental income received from its tenants. Additionally, SOGS will sell to EDC all plant nutrients for EDC to in turn sell to its tenants. However, no assurance can be given on the outcome of this project and/or other future opportunities.


The Company and SOGS subsequent to September 30, 2016 have begun delivery of approximately $1.5M worth of precision, automated growing equipment to its customers operating in the Marijuana industry. As part of a 17-unit production run, which is made up of a 10-unit order for a licensed medical grower in North Las Vegas, Nevada and a 5-unit order for an equipment sales and leasing company operating throughout the United States, SOGS has now delivered six of its turn-key, state of the art DWC100 growing systems to its Las Vegas customer and expects to ship the remaining four DWC100 units in the coming weeks. In addition, SOGS has completed the manufacturing of one DWC100 unit, three DWC45 units and one VEG50 unit for its equipment-leasing customer and expects to also deliver these units in the quarter ending December 31, 2016.


Ecosphere and SOGS have engineered, manufactured and delivered a proprietary nutrient and fertilizer mixing system using Ecosphere’s ultrasonic and hydrodynamic cavitation technologies to reduce nutrient and fertilizer particle sizes and increase plant growth efficiencies in the marijuana industry that will be marketed by SOGS under the Cavisonix® name. Ecosphere and SOGS have entered into an exclusive licensing agreement with its nutrient and fertilizer supplier to market and sell SOGS proprietary line of nutrients and fertilizers to the global agricultural markets. These potential customers include but are not limited to vegetable and fruit crops, turf-grass industries, vineyards, wineries, grapes, nightshades, potatoes, onions, corn, blueberries and all crops that use liquid based fertilizers. In exchange for these rights, SOGS is to receive a per gallon royalty fee on all nutrients and fertilizers sold to customers in the global agricultural markets. SOGS will be the exclusive reseller of its Cavisonix® nutrients to the global marijuana industry.


Ecosphere continues to actively market 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. Due to this expanded diversification strategy in addition to ongoing sales and licensing efforts of its patented technologies and products along with additional financing received, management believes it will have liquidity for the next 12 months and has identified the following liquidity sources that it expects to realize. The Company is presently in discussions with several potential customers to license its technologies, but no assurance can be made whether negotiations will be consummated.




6



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



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.


Ecosphere’s business model revolves upon the licensing of its intellectual property to strategic customers and partners around the world that are well positioned and capitalized to bring Ecosphere’s patented technologies to their respective industries and countries. Additionally, Ecosphere has its own in-house design, engineering and manufacturing facilities to support customers and licensees that choose to not manufacture Ecosphere’s patented technologies themselves. In addition to the various licensing opportunities that are available for its patented Ozonix® and Ecos PowerCube® technologies globally, the Company’s 30.6% interest in FNES is also available for sale 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 unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.


In addition to needing capital to support its operations, as of the date of this Report, Ecosphere has approximately $0.7 million of its convertible notes payable, notes payable and related party notes payable due within the next 12 months.


2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Principles of Consolidation


The accompanying unaudited condensed consolidated financial statements include the accounts of Ecosphere and its majority and wholly-owned subsidiaries (Sea of Green Systems, Inc., Ecosphere Mining, LLC and Ecosphere Development Company, LLC). All other subsidiaries are inactive. The Company accounted for its 30.6% investment in FNES under the equity method (See Note 14) through September 30, 2015. All intercompany account balances and transactions have been eliminated.


Noncontrolling Interest


In October 2013, the Company’s subsidiary, Ecosphere Mining, LLC, granted to its directors an aggregate of 5% ownership in Ecosphere Mining, LLC. Further in June 2015, the Company granted a note holder a 2.5% interest in Ecosphere Mining, LLC. Accordingly, the Company is presenting noncontrolling interests as a component of equity on its consolidated balance sheets and reported noncontrolling interest net income or loss under the heading “Net (income) loss applicable to noncontrolling interest in consolidated subsidiaries” in the unaudited condensed consolidated statements of operations based on its 92.5% ownership.


Through August 13, 2015, the Company owned 100% of SOGS. From 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 condensed consolidated balance sheets and reported noncontrolling interest net income or loss under the heading “Net (income) loss applicable to noncontrolling interest in consolidated subsidiaries” in the unaudited condensed consolidated statements of operations based on its ownership. As of January 7, 2016 and through the date of this Report, ETI’s ownership in SOGS has been reduced to 59.92%.


The Company’s interest in SOGS may be further diluted by the following (excludes pledged shares held by ETI):

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Convertible debt (1)

  

  

1,858,408

  

  

  

923,913

  

Options and warrants to purchase common stock

 

 

1,450,000

 

 

 

1,450,000

 

Total Anti-Dilutive Potential Common Stock

 

 

3,308,408

 

 

 

2,373,913

 

———————

(1)

Assumes conversion into SOGS stock



7



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



Use of Estimates


The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the allowance for doubtful accounts receivable, valuation of inventory, estimates of depreciable lives and valuation of property and equipment, estimates of amortization periods for intangible assets, valuation of beneficial conversion features in convertible debt, valuation of derivative instruments, 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 September 30, 2016.


Restricted Cash


Restricted cash as of September 30, 2016, represents $10,000 held pursuant to certain restrictions related to 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. At December 31, 2015, the Company recorded an allowance of $285,170 or 100% of the balance in connection with related party accounts receivable and at March 31, 2016, the Company recorded an additional allowance for doubtful accounts of $3,643 in connection with two of the Company’s customers that have had uncollectable balances for 3 months or more. No additional allowances were recorded in 2016.


Inventory


Inventory is comprised of raw materials to manufacture Ozonix® and Ecos GrowCube™ equipment, one prototype 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 various equipment orders received in 2015 and 2016 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 5 for security interest in inventory.


Property, Equipment and Capitalized Leases


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


Debt Issuance Cost


The Company accounts for debt issuance cost in accordance with ASC 470, Debt. The costs associated with the issuance of debt are 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 September 30, 2016 and December 31, 2015 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 $8,625 for the nine months ended September 30, 2016.




8



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



Impairment of Long-Lived Assets


The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less, costs to sell.


Investment in Unconsolidated Investee


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


Derivative Instruments


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


Fair Value of Financial Instruments and Fair Value Measurements


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


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


Level 1:

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

Level 2:

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

Level 3:

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




9



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



Revenue Recognition

 

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


Equipment and Component Sales


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


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


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


The Company may manufacture products in anticipation of a future contract. Since there are no binding contracts relating to the purchase of these products, ASC 605-35 is not applicable. Accordingly, revenue is recognized when persuasive evidence of an arrangement exists, products are delivered to and accepted by the customer, economic risk of loss has passed to the customer, the price is fixed or determinable, collection is reasonably assured, and any future obligations of the Company are insignificant.


Field Services


Revenue from water treatment contracts is earned based upon either, the volume of water processed plus additional period based contractual charges or a flat service fee and is recognized in the period the service is provided. Payments received in advance of the performance of services or of the delivery of goods are deferred as liabilities until the services are performed or the goods are delivered.


Some projects the Company undertakes are based upon our providing water processing services for fixed periods of time. Revenue from these projects is recognized based upon the number of days the service has been provided during the reporting period.


After Market Part Sales


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


Royalties


Revenue from technology license royalties will be recorded if and as the royalties are earned. For the three months ended September 30, 2016 the Company recorded royalty revenue of $20,968 in connection with a licensing agreement.


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 6.




10



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



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.


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 September 30, 2016, tax years since 2012 remain open for IRS audit. The Company has received no notice of audit from the Internal Revenue Service for any of the open tax years.


Net Loss Per Share


The Company displays 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.


For the nine months ended September 30, 2016 and 2015, no potential common shares were included in the calculation of diluted loss per share because they were anti-dilutive.




11



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



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


Anti-Dilutive Potential Common Stock


Ecosphere Technologies, Inc.


 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

Convertible debt

 

 

69,972,503

 

 

 

48,007,246

 

Convertible preferred stock

 

 

362,497

 

 

 

362,497

 

Options and warrants to purchase common stock

 

 

125,591,208

 

 

 

108,452,437

 

Total Anti-Dilutive Potential Common Stock

 

 

195,926,208

 

 

 

156,822,180

 


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 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.


Additional Financial Accounting Standards Board, Accounting Standard Updates which are not disclosed herein or are updates not effective until after September 30, 2016, are not expected to have a significant effect on the Company’s unaudited consolidated financial position or results of operations.


3.

INVENTORY


Inventory consists of the following at September 30, 2016 and December 31, 2015:


 

 

September 30,

2016

 

 

December 31,

2015

 

Raw materials

 

$

75,217

 

 

$

79,335

 

Work in process

 

 

839,177

 

 

 

469,988

 

Finished goods

 

 

253,610

 

 

 

250,000

 

 

 

$

1,168,004

 

 

$

799,323

 


At September 30, 2016, the Company had one Ecos GrowCube™ in finished goods. The Ecos GrowCube™ unit is now in Washington State for a demonstration showcase. The Company is currently manufacturing equipment orders received in 2015 and 2016 from two customers for fifteen turn-key, hydroponic growing systems being manufactured by Ecosphere for SOGS currently represented in work-in-process. See Note 6.


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 slow moving inventory balance was $200,000 as of September 30, 2016.




12



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



4.

PROPERTY AND EQUIPMENT


Property and equipment consists of the following at September 30, 2016, and December 31, 2015:


 

 

Estimated Useful

 

 

September 30,

 

 

December 31,

 

 

 

Lives in Years

 

 

2016

 

 

2015

 

Machinery and equipment

 

5

 

 

$

1,895,976

 

 

$

1,905,603

 

Furniture and fixtures

 

5 to 7

 

 

 

303,026

 

 

 

358,974

 

Automobiles and trucks

 

3 to 5

 

 

 

142,141

 

 

 

142,141

 

Leasehold improvements

 

5

 

 

 

574,546

 

 

 

526,659

 

Office equipment

 

5

 

 

 

618,904

 

 

 

620,858

 

 

 

 

 

 

 

 

3,534,593

 

 

 

3,554,235

 

Less total accumulated depreciation

 

 

 

 

 

 

(2,839,655

)

 

 

(2,707,261

)

Property and equipment, net

 

 

 

 

 

$

694,938

 

 

$

846,974

 


The Company sold a mining related piece of equipment for $50,000 in March 2016, the Company had previously recorded an impairment on this asset at December 31, 2015 of approximately $0.2 million. Depreciation expense amounted to approximately $60,000 and $200,000 for the three and nine months ended September 30, 2016, respectively.


During the three months ended September 30, 2016, the Company and EDC began constructing its first turn-key growing facility for the first phase of a Cannatech Agriculture Center in Washington State. In connection with the construction, the Company had additions to leasehold improvements of approximately $0.2 million that consisted of buildings, engineering and development costs.


In June 2016, the Company entered into a settlement and mutual release agreement for its Park City, UT offices. In the agreement, the Company transferred all of its rights, title and interest in and to all personal property on the premises owned by the Company and was released from the lease. The Company removed approximately $0.2 million of leasehold improvements, office equipment and furniture and fixtures and approximately $70,000 of accumulated depreciation in connection with the settlement. The Company recorded a loss on abandonment of lease of $87,994.




13



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



5.

CONVERTIBLE NOTES PAYABLE, NOTES PAYABLE AND OTHER DEBT


Debt consists of the following at September 30, 2016, and December 31, 2015:

Convertible Notes Payable

 

 

September 30,

2016

 

 

December 31,

 2015

 

In September 2016, the Company issued an amended, restated and consolidated convertible note in the aggregate principal amount of $3,654,000. This note accrues interest at a rate of 10% per annum, with the exception of $350,000 of principal that has a fixed interest rate of $70,000. The note matures in December 2017 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 30,997,282 shares of common stock and 28,765,217 shares of preferred stock at an exercise price of $0.045 per share of these warrants issued, the term was extended and exercise price was reduced to $0.045 per share on all previously issued warrants. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $665,694 which included discounts associated with the old debt and the modification of previously issued warrants. The Company recorded a discount related to the new warrants of $378,476 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 80.30%, an expected term of five years, a risk-free discount rate of 1.39% and no dividends in connection with the Q2 2016 loan additions of $900,000. The Company recorded a discount related to the new warrants of $76,830 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility of 83.21%, an expected term of five years, a risk-free discount rate of 1.23% and no dividends in connection with the Q3 2016 loan additions of $250,000. As of September 30, 2016, the unamortized amount of the discount was $371,336 and accrued interest was $470,938. (1)(2)

 

 

3,282,664

 

 

 

2,183,035

 




14



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)




 

 

September 30,

2016

 

 

December 31,

 2015

 

In June 2016, the Company issued amended and restated convertible notes in the aggregate principal amount of $2,000,000. The notes accrue interest at a rate of 10% per annum, mature in December 2017 and are convertible into common stock at a conversion rate of $0.115 per share. In connection with the issuance of the notes, the Company modified prior warrants issued to the investors and re-issued five-year warrants to purchase 18,333,331 shares of common stock (all of which were previously issued) the Company reduced the exercise price and extended the term of the warrants as consideration for the note extension. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $320,030. As of September 30, 2016, there was no unamortized amount of the discount and accrued interest was $510,000. (3)

 

 

2,000,000

 

 

 

2,000,000

 

In January 2016, SOGS issued convertible notes in the aggregate principal amount of $300,000. The notes accrue interest at an annual rate of 12.50%, originally matured in July 2016 and were convertible into the Company’s 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 Company 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. These warrants are deemed derivative instruments (see Note 15). In May 2016, the holders agreed to extend their maturity date to December 2017 in exchange for the reduction in the note conversion price and warrant exercise prices to $0.045 per share along with full price protection on both instruments. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $543,583. As a result of the modification and change in conversion terms, these notes are considered derivative instruments (see Note 15). During Q3 2016, the holders elected to convert $139,174 of the convertible notes into 3,092,751 shares of common stock (see Note 8). As of September 30, 2016, there was no unamortized discount and accrued interest was $23,850.

 

 

160,826

 

 

 

 

In April 2015, SOGS issued a convertible note in the aggregate principal amount of $100,000. The note accrued interest at an annual rate of 12.50%, matured in October 2015 and was convertible into the Company’s common stock at a conversion rate of $0.115 per share if the Company did not merge with a public company. In connection with the issuance of the note, the Company issued to the investor five-year warrants to purchase 1,000,000 shares of common stock at an exercise price of $0.115 per share that were later cancelled in exchange for the issuance of 500,000 shares of common stock of the Company. 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. 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. In April 2016, the holder extended the maturity date to July 2016 for no consideration. In June 2016, the holder elected to convert $69,620 of the convertible notes into 1,547,114 shares of common stock (see Note 8). The lender has agreed to extend the note until December 2017 in exchange for a reduction in the conversion rate to $0.045 per share. As of September 30, 2016, there was no unamortized discount and accrued interest was $10,043.

 

 

36,630

 

 

 

96,153

 




15



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)




 

 

September 30,

2016

 

 

December 31,

 2015

 

In January 2014, the Company issued convertible notes in the aggregate principal amount of $245,000. The notes accrue interest at an annual rate of 10%, mature in January 2016 and are convertible into common stock at a conversion rate of $0.30 per share. In connection with the issuance of the notes, the Company issued to the investors five-year warrants to purchase 1,633,328 shares of common stock at an exercise price of $0.35 per share. The Company recorded a discount related to the warrants and beneficial conversion feature of $234,211 based upon the relative fair value of the warrants calculated using the Black Scholes valuation method and the following assumptions: volatility ranging between 78.01% and 78.26%, an expected term of five years, a risk-free discount rate ranging between 1.61% and 1.77% and no dividends. In January 2015, the Company reduced the conversion rates and warrant exercise prices to $0.12 per share of note holders of an aggregate principal amount of $245,000. As a result of the modification, the Company recorded a debt discount of $33,889. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40 and reissuance of the existing debt, resulting in a loss on debt extinguishment of $112,624 which included discounts associated with the old debt. In January 2016, the note holders agreed to extend the convertible notes to January 2017. The modifications were accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $696 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). See Note 16 as holders of an aggregate principal amount of $180,000 have agreed to extend their maturity dates to December 2017 in exchange for 1,800,000 warrants to purchase common stock at an exercise price of $0.045 per share. In connection with this issuance, the Company recorded debt discounts of $83,587 that amortize over the remaining term of the debt. As of September 30, 2016, the unamortized amount of the discount was $71,757 and accrued interest was $66,486.

 

 

173,243

 

 

 

243,712

 

In December 2013, the Company issued convertible notes in the aggregate principal amount of $200,000. The notes accrue interest at an annual rate of 10%, and matured in December 2015 and were 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. In 2014 and 2015, the Company reduced the note holders conversion rates and warrant exercise prices to $0.12 per share. In January 2016, the holders agreed to extend the convertible notes to December 2016.The Company charged $119,614 to loss on debt extinguishment related to consideration paid to the lender (shares of SOGS owned by ETI). In June 2016, one of the note holders of an aggregate principal amount of $25,000 agreed to extend the maturity date to December 2017 and was granted an additional five-year warrants to purchase 208,333 shares of common stock. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $17,994 which included discounts associated with the old and new warrants. The holders of an aggregate principal amount of $125,000 agreed to extend their maturity dates to December 2017 in exchange for 1,041,666 warrants to purchase common stock at an exercise price of $0.045 per share. In connection with this issuance, the Company recorded debt discounts of $58,222 that amortize over the remaining term of the debt. As of September 30, 2016, the unamortized amount of the discount was $49,431 and accrued interest was $55,347.

  

  

150,569

  

  

  

200,000

  




16



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)




 

 

September 30,

2016

 

 

December 31,

 2015

 

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%, matured in February 2015 and were convertible into common stock at a conversion rate of $0.381 per share. Additionally, the note holders could have elected 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 until February 2016. In May 2016, the holders agreed to extend their maturity date until December 2017 and as consideration for the extension, the Company reduced the note conversion rate and warrant exercise prices to $0.045 per share. The modification was accounted for as a debt extinguishment in accordance with ASC 470-50-40, resulting in a loss on debt extinguishment of $339,123. For the nine months ended September 30, 2016, the holders elected to convert $183,628 of the convertible notes into 3,404,287 shares of the Company’s common stock (see Note 8). As of September 30, 2016, there was no unamortized discount and accrued interest was $104,989.

  

  

461,372

  

  

  

645,000

  



















17



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)




 

  

September 30,

2016

 

 

December 31,

2015

  

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. The holders agreed to extend their maturity dates to December 2017 in exchange for 2,458,333 warrants to purchase common stock at an exercise price of $0.045 per share. In connection with this issuance, the Company recorded debt discounts of $122,975 that amortize over the remaining term of the debt.  As of September 30, 2016, the unamortized amount of the discounts was $105,625 and accrued interest was $170,339.

 

 

189,375

 

 

 

295,000

 

 

  

  

 

  

  

  

 

  

Total

 

$

6,454,679

 

 

$

5,662,900

 

Less Current Portion, net of discounts

 

 

(140,000

)

 

 

(5,662,900

)

Convertible notes payable, long term, net of discounts

 

$

6,314,679

 

 

$

 


Amortization of debt discounts of $204,706 in the accompanying unaudited condensed consolidated statements of operation is included in interest expense for the nine months ended September 30, 2016.


(1) As of September 30, 2016, and December 31, 2015, the Company had issued the following secured convertible notes to its principal lender, which were consolidated into an amended and restated note in September 2016. As amended and restated, the note is collateralized by a first lien on the following: (i) the Ecos PowerCube® unit located in Stuart, FL; (ii) one completed Ecos GrowCube™ unit located in Kennewick, WA; (iii) each of the Company’s patents related to the Ozonix® technology in any global field of use other than agriculture; (iv) 30.6% of the limited liability company interests in the Company’s subsidiary Fidelity National Environmental Solutions, LLC; (v) 25% of the limited liability company interests in the Company’s subsidiary Ecosphere Mining, LLC, and (vi) all proceeds received by Ecosphere from Ozonix® patents in any global field of use other than agriculture. The Company has agreed to apply 5% of revenues from certain equipment sales and licensing fees as well as certain securities offering proceeds toward repayment of the note. In addition, the Company shall pay the lender an amount equal to 7% of the gross lease revenue received by the Company on a cash basis from the Company’s first tenant at EDC’s Cannatech Agriculture Center.


(2) In 2015, the holder (the Company’s principal lender) agreed to extend its notes in exchange for 10,440,000 shares of common stock in SOGS as noted above.


(3) The Notes are secured by a security interest of the Company’s initial share-holding of common stock of SOGS. In 2015, the holders of an aggregate principal amount of $2 million agreed to extend their notes in exchange for 10,822,800 shares of common stock in SOGS as noted above.


A summary of convertible notes payable and the related discounts as of September 30, 2016, and December 31, 2015 is as follows:


 

 

September 30,

2016

 

 

December 31,

2015

 

Principal amount of convertible notes payable

 

$

7,052,828

 

 

$

5,735,000

 

Unamortized discount

 

 

(598,149

)

 

 

(72,100

)

Convertible notes payable

 

 

6,454,679

 

 

 

5,662,900

 

Less: current portion, net of discounts

 

 

(140,000

)

 

 

(5,662,900

)

Convertible notes payable, net of discount, less current portion

 

$

6,314,679

 

 

$

 



18



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



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 September 30, 2016 and December 31, 2015, respectively, from related party debt due to lack of on-going affiliation with the lender. Beginning in April 2015, due to lack of payment the note began accruing interest at a rate of 7% per annum through December 2015 when 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 interest. Accordingly, $102,149 is included in notes payable as a current liability in the accompanying unaudited condensed consolidated financial statements. Accrued interest at September 30, 2016 was $8,938.


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. The Company is in discussions with the lender to extend this note. 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 September 30, 2016 was $4,944.


In June 2016, the Company and its wholly-owned subsidiary, EDC, issued a senior secured promissory note in the aggregate principal amount of $1,000,000. The Company recorded a discount of $10,000 for legal fees that will be amortized over the 5-year term of the note. The note bears annual interest at the rate of 15% and matures 63 months after EDC’s initial tenant obtains both a certificate of occupancy and an approved I-502 cultivation license issued by the Washington State Liquor Control Board, but no later than April 15, 2022. The Note is secured by all of EDC’s precision agriculture equipment, buildings and personal property for Phase 1 of EDC’s Cannatech Agriculture Center in Washington State. See Note 11. The balance at September 30, 2016 was $990,500 of which $923,833 is in long term and $66,667 is in short term.


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. During 2016, the employee made additional loans to the Company of $69,733, respectively. The total outstanding balance of the notes was $119,733 as of September 30, 2016. The Company is currently in discussions with the employee regarding an extension. The note accrues interest an annual rate of 10% and matured in July 2016. Accrued interest at September 30, 2016 was $9,045.


The Company received unsecured advances from a related party of $4,000 as of December 31, 2015 all of which has been repaid in 2016.


During the three months ended September 30, 2016, the Company received unsecured, non-interest bearing advances from a related party of $40,000.




19



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



Financing Obligations


 

 

September 30,

2016

 

 

December 31,

2015

 

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%. The Company also has $22,348 of principal and interest in accounts payable in connection with this equipment note payable. This equipment was subsequently sold in October 2016.

 

$

 

 

$

23,314

 

 

 

 

 

 

 

 

 

 

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%. The Company also has $1,046 of principal and interest in accounts payable in connection with this vehicle note payable.

 

 

31,509

 

 

 

38,368

 

 

 

 

 

 

 

 

 

 

Secured non-interest bearing, equipment notes payable in monthly installments of $3,000 over 15 months, maturing in January 2017. The Company also has $30,000 in accounts payable in connection with this equipment note payable. This equipment was subsequently sold in October 2016.

 

 

9,000

 

 

 

36,000

 

 

 

 

 

 

 

 

 

 

Secured non-interest bearing, software notes payable in monthly installments totaling $176 over 33 months maturing in December 2016. The Company has $239 in accounts payable in connection with this software note payable.

 

 

513

 

 

 

1,766

 

 

 

 

 

 

 

 

 

 

Financing for insurance premiums payable in nine monthly installments of $1,938 accruing interest at 8.23%. The final payment is due in January 2017.

 

 

7,652

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

48,674

 

 

 

99,448

 

Less Current Portion

 

 

(27,114

)

 

 

(70,337

)

Financing obligations, long-term portion

 

$

21,560

 

 

$

29,111

 


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. The Company has $2,796 in accounts payable in connections with this capital lease.


Future minimum lease payments under this capital lease obligation as of September 30, 2016, by fiscal year, are as follows:


For the year ended December 31,

 

Payment

 

2016

 

$

4,195

 

2017

 

 

16,775

 

Total

 

 

20,970

 

Less implied interest

 

 

(690

)

Capital lease obligation

 

 

20,280

 

Less current potion

 

 

(16,120

)

Long-term portion

 

$

4,160

 




20



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



Third Party Debt


Aggregate annual maturities of third party debt are as follows as of September 30, 2016:


For the year ended December 31,

 

Amount

 

2016

 

$

474,686

 

2017

 

 

7,206,725

 

2018

 

 

211,219

 

2019

 

 

207,701

 

2020

 

 

200,000

 

2021

 

 

133,333

 

Total debt- face value

 

 

8,433,664

 

Less: unamortized discount

 

 

(607,649

)

Net debt

 

$

7,826,015

 


6.

CUSTOMER DEPOSITS AND DEFERRED REVENUE


Customer deposits are summarized as follows:


 

September 30,

2016

 

December 31,

2015

Customer A

$

1,293,900

 

$

1,261,400

Customer B

 

237,000

 

 

40,000

Customer C

 

32,500

 

 

Total customer deposits

$

1,563,400

 

$

1,301,400


As of September 30, 2016, the Company had customer deposits of approximately $1.5 million in connection with growing equipment orders received in 2015 and 2016. The Company had work-in-process inventory related to these deposits of $829,223. In accordance with the manufacturing agreement, 80% of the selling price of Customer A and Customer B, or $1,224,720, was advanced by SOGS to Ecosphere, the related party manufacturer.


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 life of the licensing agreement. For the nine months ended September 30, 2016, the Company recorded $18,750 as equipment sales and licensing revenue. The remaining $457,292 of the licensing fee is recorded as deferred revenue with $25,000 in current liabilities and $432,292 as a long term liability and will be amortized over the 20-year period.


7.

REDEEMABLE CONVERTIBLE CUMULATIVE PREFERRED STOCK


Series A


At September 30, 2016 and December 31, 2015 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 $1,115,369 and $1,098,494 on September 30, 2016 and December 31, 2015, respectively.


Series B


At September 30, 2016 and December 31, 2015 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 $2,080,206 and $2,035,017 on September 30, 2016 and December 31, 2015, respectively.




21



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



8.

COMMON STOCK


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 Company was the sole shareholder.


During 2015 and 2016, ETI sold 9,635,389 shares of SOGS common stock for cash at $0.0468 per share and issued 23,852,741(including the 2,589,941 shares issued below) of its own shares to third parties in order to extend ETI debt. In addition, in January 2016, ETI issued 3,500,000 of its own shares as a bonus to ETI employees and the Company valued its shares based on the contemporaneous cash sales price of $0.0468 per share resulting in expense of $161,644. At September 30, 2016, ETI owned 59.92% of SOGS.


In January 2016, the Company issued 2,589,941 of its own 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 was treated as a debt extinguishment. See Note 5.


In March 2016, SOGS issued 6,000,000 shares of SOGS common stock as payment for consulting fees. The shares were valued at $0.0468 per share (contemporaneous cash sales price) or $277,103 and expensed as consulting fees.


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.


Shares issued and issuable during the nine months ended September 30, 2016 are summarized below.


Shares outstanding and issuable at December 31, 2015

 

 

165,668,894

 

Shares issued and issuable for conversion of convertible debt (a)

 

 

8,044,152

 

Total common shares outstanding at September 30, 2016

 

 

173,713,046

 

———————

(a)

issued for the conversion of the aggregate principal amount of $392,422 at rates of $0.115 and $0.045 per share. See Note 5.


9.

STOCK OPTIONS AND WARRANTS


Stock 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 one of ETI’s former Board members and consultant, 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. If exercised, the shares will be issued from ETI shareholdings and will not further dilute SOGS existing shareholders. The fair value of the options amounted to $142,606, calculated using the BSM method and were expensed at the time of the grant.


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. If exercised, the shares will be issued from ETI shareholdings and will not further dilute SOGS existing shareholders. The fair value of the options amounted to $77,827, calculated using the BSM method and will be expensed over the vesting period.




22



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



In February 2016, SOGS granted ten-year options to purchase 17,500,000 shares 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. The Company has not begun expensing the BSM value of these options as the certain milestones have not been met as of the date of this Report.


In April 2016, the Company’s CEO was awarded 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 will be recognized over the vesting term. In May 2016, the exercise price of the SARs were reduced to $0.045 per share and the Company will record an additional expense for the incremental increase in value of $22,659 over the remaining term in connection with this exercise price reduction.  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 May 2016, the Company reduced the exercise price of 10,916,684 stock options from prices ranging between $0.42 and $0.17 per share to $0.045 per share. The incremental increase in value of these options is $197,111. As of September 30, 2016, the Company has expensed $170,602 of the total value and the remaining portion will be expensed over the remaining vesting terms.


Stock-based compensation expense related to options for the nine months ended September 30, 2016 was $566,718. At September 30, 2016, total unrecognized compensation cost related to unvested options granted under the Company’s and SOGS option plans totaled $86,084. This unrecognized compensation cost is expected to be recognized over the next 30 months.


Warrant Grants


In January 2016, SOGS issued a convertible note in the aggregate principal amount of $300,000. The note accrues interest at an annual rate of 12.50%, mature in July 2016 and is convertible into the Company’s 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 Company issued to the investor five-year warrants to purchase 3,000,000 shares of common stock at an exercise price of $0.115 per share. See Note 5.


In June 2016, the Company issued an amended, restated and consolidated convertible note in the aggregate principal amount of $3,404,000 to the Company’s principal lender. The note matures in December 2017 and is convertible into common stock at a conversion rate of $0.115 per share. In connection with the issuance of the note and related to the Q2 2016 loan additions of $0.9 million, the Company issued to the investor five-year warrants to purchase 15,652,174 shares of common stock at an exercise price of $0.045 per share. The exercise price on all of the lenders previously issued warrants was reduced to $0.045 per share and the warrant terms were extended. See Note 5.


In June 2016, the Company granted five-year warrants to purchase 1,000,000 shares of common stock for services rendered by a consultant at an exercise price of $0.045 per share. The fair value of the warrants amounted to $43,306, calculated using the BSM method and was expensed at the time of the grant.


In June 2016, the Company granted five-year warrants to purchase 208,333 shares of common stock in connection with the extension of an aggregate principal amount of $25,000 at an exercise price of $0.045 per share. The fair value of the warrants amounted to $11,416, calculated using the BSM method and amortizes over the reaming term of the debt. See Note 5.


In September 2016, the Company granted five-year warrants to purchase 4,347,826 shares of common stock in connection with the issuance of an amended, restated and consolidated convertible note in the aggregate principal amount of $3,654,000 to the Company’s principal lender. See Note 5.


During the three months ended September 30, 2016, the Company granted five-year warrants to purchase 4,791,666 shares of common stock in connection with the extension of an aggregate principal amount of $575,000 at an exercise price of $0.045 per share. The fair value of the warrants amounted to $253,368, calculated using the BSM method and amortizes over the reaming term of the debt. See Note 5.




23



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



The fair value of each option and warrant is estimated on the date of grant using the BSM option-pricing model. The Company used the following assumptions for options and warrants issued or valued during the nine months ended September 30, 2016:


Risk-free interest rate

0.47% to 1.47%

Expected term in years

0.61 to 6.5 years

Expected stock price volatility

73.17% to 218.59%

Expected dividend yield

None


10.

RELATED PARTY TRANSACTIONS


Related Party 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 one of ETI’s former Board members and consultant, 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 and were expensed at the time of the grant.


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 and will be expensed over the vesting period.


In February 2016, SOGS granted ten-year options to purchase 17,500,000 shares to two of SOGS executive officers (including the Company’s CEO) at an exercise price of $0.0468 per share. The options 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 a publicly reported company (“Pubco”) which acquires the SOGS 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. The Company has not begun expensing the value of the options since certain milestones have not been met as of September 30, 2016.


Related Party Employment Agreement and Stock Appreciation Rights


In April 2016, Mr. McGuire, the Company’s CEO, 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. 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 will be recognized over the vesting term. In May 2016, the exercise price of the SARs were reduced to $0.045 per share and the Company will record an additional expense for the incremental increase in value of $22,659 over the remaining term in connection with this exercise price reduction.  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.


Related Party Stock Option Repricing


In May 2016, the Company reduced the exercise price of 10,916,684 stock options from prices ranging between $0.42 and $0.17 per share to $0.045 per share. The incremental increase in value of these options is $197,111.


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. During 2016, the employee made additional loans to the Company of $69,733, respectively. The total outstanding balance of the notes was $119,733 as of September 30, 2016. The Company is currently in discussions with the employee regarding an extension. The note accrues interest an annual rate of 10% and matured in July 2016. Accrued interest at September 30, 2016 was $9,045.




24



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



During the three months ended September 30, 2016, the Company received unsecured, non-interest bearing advances from a related party of $40,000.


Related Party Service and Manufacturing Fees


The Company is accruing a monthly management fee payable by SOGS 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 for SOGS all Ecos GrowCube™ related growing technologies and products at 80% of the selling prices, subject to the Company’s approval. The monthly management fees of $25,000 and the manufacturing fee of 80% of the selling price received by the manufacturer, or Ecosphere, are eliminated in consolidation.


Related Party Contracts


In June 2016, the Company and EDC entered into various non-binding agreements with an employee and family member of the CEO to lease one of its turn-key growing facilities in Washington State, subject to successful completion of Washington State requirements.


11.

COMMITMENTS AND CONTINGENCIES


Leases


The Company makes monthly rent payments of $16,744 under a month-to-month agreement for the Company’s Stuart, Florida corporate offices, manufacturing location and machine shop buildings. For the nine months ended September 30, 2016 the Company recognized rent expense amount of $150,696 for all four buildings in Stuart, FL. As of September 30, 2016, the Company had $31,382 in past due rent payments.


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 was January 1, 2014 with the lease expiring on the day immediately prior to the fifth anniversary of the commencement date, December 31, 2018. In June 2016, the Company entered into a settlement and mutual release agreement with the landlord for the Park City, UT office. According to the terms of the agreement, the Company paid $10,000 and transferred all of its rights, title and interest in and to all personal property on the premises owned by the Company and was released from the lease. The Company recorded a loss on abandonment of lease of $87,994.


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 was required to make a security deposit in the amount of $74,175 by May 2016, but the Company received a 120-day extension from the landlord. 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.


In May 2016, the Company entered into a new three-year lease agreement for additional space for its machine shop at a location near its current offices. The term of this lease commences in May 2016 and will terminate in May 2019. The aggregate monthly rent is $2,200.


In July 2016, the Company entered into a lease agreement for an additional 1.57 acres in Washington State. The term of this lease commenced in August 2016 and will terminate on a date five years from the commencement date or July 2021. The Company will have the option to renew the lease for five additional five-year terms. The Company paid a security deposit in the amount of $25,646 in August 2016. The aggregate monthly rent will be phased in over four months. From August 2016 through November 2016 the aggregate monthly rent is $1,425, and from December 2016 going forward the aggregate monthly rent is $8,549. In addition to this land lease agreement, the Company made a deposit of $7,500 in August 2016 for the option to lease additional land at this same property in Washington State and has 180 days to execute the lease.


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.




25



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



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

 

In December 2012, the Company reached a settlement with KIA, who filed a lawsuit against the Company in 2007, amounting to $100,000 to be paid with an initial $25,000 payment and 36 monthly installments for the remainder of the settlement amount. The Company has defaulted on its required payments and the settlement amount increased to $150,000. The Company had originally accrued $197,500 in liabilities related to this settlement. As a result of the settlement, the Company reduced legal expense by $47,500 (as the original expense was charged to this account) leaving an accrued balance of $125,000 at December 31, 2012, which was comprised of the $150,000 obligation less the initial $25,000 payment. As of September 30, 2016, the Company had an accrued balance of $70,833, which is comprised of the $150,000 obligation less $79,167 in payments. Since the Company has not been current in regards to payment, the Company will no longer record a $50,000 gain upon final payment in accordance with the settlement.

 

In March 2011, a former vendor obtained a judgment against the Company for a number of disputed billings. As of September 30, 2016 the Company has accrued $70,000 which is anticipated to be the amount of payment due to the vendor plus attorney’s fees.


In February 2016, a vendor of the Company filed a lawsuit alleging non-payment with respect to materials provided on credit throughout 2015. The Company and vendor reached a settlement in July 2016 with Ecosphere making three monthly payments with the last payment due in September 2016. As of the date of this Report, the Company has paid all amounts due to this vendor.


Other Commitments


In June 2016, the Company and EDC issued a senior secured promissory note in the amount of $1.0 million to a lender. In addition, EDC entered into a long-term Business Consulting Agreement with the lender under the note agreement pursuant to which the lender will provide EDC with advice and services with respect to EDC’s business and financial management and long-range planning. In exchange for the consulting services, EDC will pay the Lender $8,333 monthly plus 15% of EDC’s monthly revenues received under agreements with EDC’s initial tenant.


In June 2016, the Company and its subsidiaries entered into a sales representative and business development agreement with a DWC Equipment Sales, LLC (“DWC”). DWC is to receive a finder’s fee related to a license agreement with the Company’s nutrient manufacturer equal to 10% of the gross revenues received by SOGS. Also, during the term of the agreement, the Company agrees to pay DWC 3% of the gross revenues received by the Company from licensing and/or transferring of intellectual property rights of the Ozonix® water treatment technology as a result of any and all direct or indirect introductions made by DWC. In addition, the Company agrees to pay DWC 10% of adjusted gross collected revenues from Ozonix® water treatment equipment sales and/or contract services as a result of any and all direct or indirect introductions made by DWC. Lastly, the Company agrees to pay DWC a monthly performance based consulting fee of 3% of rental income received from Phase 1 for years 1 thru 5 and 2% of rental income received from Phase 1 for years 6 through 30 of EDC’s Washington CannaTech Agriculture Center. As of September 30, 2016, the Company has not accrued or paid any commissions related to the above services as no rental income has been received.


In June 2016, the Company entered into a royalty agreement with the Company’s principal lender. During the 30-year term of the agreement, the Company shall pay the lender an amount equal to 5% of the gross revenue received on a cash basis from the Company’s first facility at the CannaTech Agriculture Center when it becomes operational. In September 2016, the Company increased the royalty rate to 7% of gross revenue as consideration for additional loans. As of September 30, 2016, the Company has not accrued or paid any royalties related to this agreement. In addition, the Company has issued a secured promissory note in October 2016 that applies to certain shares in the Company’s consolidated subsidiary, Sea of Green Systems, Inc. See Note 16.




26



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



The Company has a Second Amended and Restated Royalty Agreement effective January 1, 2016, 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”). 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 an exchange offer or tender offer, as well as proceeds received by Ecosphere from outstanding debt conversions (for all new debt issued beginning January 1, 2016) and sales of Ecosphere’s equity securities. In May 2016, the Company entered in a letter agreement with Mr. McGuire where the Company agrees to pay the inventor a 10% royalty on any gross revenues received by EDC. 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. As of September 30, 2016, the Company has accrued $33,020 of royalties earned by its CEO in 2016.


In July 2015, SOGS entered into a non-exclusive sales representative agreement with 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 Precision-Agriculture 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 Precision-Agriculture products to its customers. At September 30, 2016, the Company has paid DWC $121,026 and accrued $10,104 related to the SOGS equipment order.


12.

CONCENTRATIONS OF RISK


Concentration of Accounts Receivable and Revenues


At September 30, 2016, accounts receivable of $31,949 was comprised of two customer balances amounting to 66% and 34% of the total receivable balance. In addition, 33% of the total revenue balance is related to field services revenue for a pilot completed in May 2016, 39% of the total revenue balance is related to deferred revenue from a licensing fee that was received in 2015 and corresponding royalty revenues as per the licensing contract and 15% of the total revenue balance is related to aftermarket parts and products sold.


Concentration of Credit Risk


Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. The Company has not experienced any losses in such accounts through September 30, 2016. As of September 30, 2016, the Company’s bank balances did not exceed FDIC insured amounts. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. The Company’s payment terms are generally upon receipt or 30 days from delivery of products, but may fluctuate depending on the terms of each specific contract.


For the nine months ended September 30, 2016, the Company was dependent on its principal lender as approximately 52% of our funding came from this one source.


13.

NONCONTROLLING INTEREST IN CONSOLIDATED SUBSIDIARIES


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. Further in June 2015, the Company granted a note holder a 2.5% interest in Ecosphere Mining, LLC. Accordingly, the Company is presenting noncontrolling interests as a component of equity on its consolidated balance sheets and reported noncontrolling interest net income or loss under the heading “Net (income) loss applicable to noncontrolling interest in consolidated subsidiaries” in the unaudited condensed consolidated statements of operations.


Balance, December 31, 2015

 

 

 

$

(29,565

)

Noncontrolling interest in loss

 

 

 

 

(17,142

)

Balance, September 30, 2016

 

 

 

$

(46,707

)




27



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



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 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. In 2016, ETI issued its own shares as bonuses to ETI employees and to convertible note holders as consideration for one-year debt extensions. In addition, SOGS issued shares as consultant fees in lieu of a cash payment. At September 30, 2016, ETI owned 59.92% 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 (income) loss applicable to noncontrolling interest in consolidated subsidiaries” in the unaudited condensed consolidated statements of operations.


Balance, December 31, 2015

 

 

 

$

(271,875

)

Noncontrolling interest in loss

 

 

 

 

(424,459

)

Balance, September 30, 2016

 

 

 

$

(696,334

)


14.

INVESTMENT IN UNCONSOLIDATED INVESTEE


The results for the three and nine months ended September 30, 2015 is as follows:


 

For the three

months ended

September 30, 2015

 

For the nine

months ended

September 30, 2015

 

 

(Unaudited)

 

(Unaudited)

 

STATEMENT OF OPERATIONS

 

 

 

 

 

 

Revenues

$

185,016

 

$

1,135,220

 

Cost of sales

 

307,105

 

 

1,178,915

 

Gross loss

 

(122,089

)

 

(43,695

)

Operating expenses

 

944,435

 

 

2,792,089

 

Operating loss

 

(1,066,524

)

 

(2,835,784

)

Interest expense

 

(51,213

)

 

(138,555

)

Gain on sale of fixed assets

 

250,000

 

 

500,000

 

Other income

 

 

 

2,008

 

Net loss

$

(867,737

)

$

(2,472,331

)

Ownership interest (rounded)

 

31

%

 

31

%

Share of net loss

$

(265,460

)

$

(756,343

)

Investment

$

11,911,955

 

$

11,911,955

 

Investment impairment

$

(11,911,955

)

$

(11,911,955

)

Investment value at September 30, 2015

$

 

$

 


As of September 30, 2015, the Company reduced its investment in FNES to zero. In 2015, the Company took an impairment of its investment due to market conditions, including the 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.


15.

DERIVATIVE FINANCIAL INSTRUMENTS


The Company applies the provisions of ASC Topic 815-40, Contracts in Entity’s Own Equity, under which convertible instruments and warrants, which contain terms that protect holders from declines in the stock price (reset provisions), may not be exempt from derivative accounting treatment. As a result, warrants and embedded conversion options are recorded as a liability and are revalued at fair value at each reporting date. The Company has 3,000,000 warrants with repricing options and $160,826 of convertible debt qualifying for derivative accounting at September 30, 2016 (See Note 5).



28



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



The Company calculates the estimated fair values of the liabilities for warrant and embedded conversion option derivative instruments at each quarter-end using the Monte Carlo simulations. The closing price of the Company’s common stock at September 30, 2016 was $0.04. Volatility, expected term and risk free interest rates used to estimate the fair value of derivative liabilities at September 30, 2016, are indicated in the table that follows. The volatility was based on historical volatility, the expected term is equal to the remaining term of the warrants and the risk free rate is based upon rates for treasury securities with the same term.


Warrants

 

September 30, 2016

 

Embedded Conversion Option

 

September 30, 2016

Risk-free interest rate

    

1.10%

    

Risk-free interest rate

    

1.10%

Expected term in years

 

4.2 to 5 years

 

Expected term in years

 

1.2 to 1.5 years

Expected stock price volatility

 

86.06%

 

Expected stock price volatility

 

120.05%

Expected dividend yield

 

None

 

Expected dividend yield

 

None


During the three-month period ended September 30, 2016, based upon the estimated fair value, the Company decreased its liability for the derivative instruments by $274,672 which was recorded as "Change in fair value of derivative instruments" in the other income (expense) section of the Company's unaudited condensed consolidated statement of operations.


We currently measure and report at fair value the liability for warrant and embedded conversion option derivative instruments. The fair value liabilities for price adjustable derivative instruments have been recorded as determined utilizing the Monte Carlo simulations. The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2016:


 

 

Balance at
September 30,

2016

 

 

Quoted Prices
in Active
Markets for
Identical
Assets

 

 

Significant
Other
Observable
Inputs

 

 

Significant
Unobservable
Inputs

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of liability for embedded conversion option liability

 

$

106,499

 

 

$

 

 

$

 

 

$

106,499

 

Fair value of liability for warrant derivative instruments

 

$

84,044

 

 

$

 

 

$

 

 

$

84,044

 

Total

 

$

190,543

 

 

$

 

 

$

 

 

$

190,543

 


The following is a roll forward for the nine months ended September 30, 2016 of the fair value liability of price adjustable derivative instruments:


 

 

Fair Value of

 

 

 

Liability for

 

 

 

Warrant and
Embedded

Conversion
Option

 

 

 

Derivative

 

 

 

Instruments

 

 

 

 

 

Balance at December 31, 2015

 

$

 

Initial fair value of new warrants and embedded conversion options

 

 

543,583

 

Reclassification of derivative liability to equity upon debt conversion

 

 

(94,876

)

Change in fair value included in statement of operations

 

 

(258,164

)

Balance at September 30, 2016

 

$

190,543

 




29



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016

(Unaudited)



16.

SUBSEQUENT EVENTS


Promissory Note Issuance


In October 2016, the Company issued a secured promissory note in the amount of $500,000 with its principal lender. The obligations under the note are secured by a security agreement between the parties. In addition to the collateral granted under previously disclosed security agreements between the parties, the Company extended the Lender’s security interest in the Company’s patents to all global fields of use, and granted the Lender a security interest in 57,232,278 shares of SOGS owned by the Company.


Related Party Advance


In November 2016, the Company received unsecured, non-interest bearing advances from a related party of $50,000.


Fixed Asset Sale


In October 2016, the Company sold machine shop equipment in exchange for $0.1 million.





30



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



ITEM 2:

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


The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” in our Form 10-K for the year ended December 31, 2015.


Company Overview


Ecosphere Technologies, Inc. (“Ecosphere,” “ETI” or the “Company”) is a technology development and intellectual property licensing company that develops patented and proprietary 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 for sale and/or available for exclusive licensing opportunities across a wide range of industries and applications throughout the world.


The Company is currently focused on licensing, selling and manufacturing its patented technologies and products across a wide variety of global industries and applications including but not limited to Agriculture, Energy, Food & Beverage, Industrial, Marine, Mining and Municipal markets. These sales and licensing efforts are made through the Company and its subsidiaries, which include wholly-owned Ecosphere Development Company, LLC (“EDC”), majority-owned Sea of Green Systems, Inc (“SOGS”) and minority-owned Fidelity National Environmental Solutions, LLC (“FNES”).



Recent Developments and Success


In 2014, Ecosphere’s management, engineering and manufacturing teams have used their collective knowledge over the past 20 years to develop a comprehensive product portfolio for the fast growing, global Precision-Agriculture market that uses software, sensors and data driven analytics that can be accessed through the Internet by computers and smartphones to improve plant quality and increase crop yields.


In May 2016, Ecosphere entered into a long-term land lease to lease six acres of I-502 heavy industrial agricultural land in Washington State, zoned for legal I-502 cultivation and processing. In April 2016, Ecosphere formed a new subsidiary, Ecosphere Development Company, LLC (“EDC”), of which the Company owns 100% 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 I-502 growers in Washington through EDC. These turnkey, high-tech growing facilities will incorporate Ecosphere’s automated growing systems, as well as Ecosphere’s patented water treatment technology purchased exclusively from SOGS, 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. Phase 1 is presently being constructed on behalf of a subtenant.


Ecosphere has spent the past two years locating and acquiring the I-502 zoned property as well as designing and engineering the equipment and facilities it plans to build and lease in Washington State. This new business segment will require infrastructure and equipment financing of up to $4 million ($1 million per phase) to develop the entire 6 acres, which EDC will build-out in phases for each licensed grower that agrees to its long-term leases. In June 2016, Ecosphere and EDC closed its first $1 million round of financing for Phase 1 of the Cannatech Agriculture Center in Washington State and has begun constructing its first turn-key growing facility.  EDC expects to complete construction in late January 2017 and assuming the first tenant receives its license from the Washington State Liquor Control Board, it could receive rental payments commencing as early as June 2017. The Company’s is obligated its principal lender 7% royalty and 10% royalty to the Company’s CEO. Upon full completion of all four Phases, management expects that the 6-acre facility will generate approximately $1 million per month (which is for all four phases) through a combination of land, equipment, technology and consulting leases from its I-502 tenants for a period of 30 years, which is the term of the land lease. SOGS will receive 10% of revenues earned by EDC in connection with the rental income received from its tenants. Additionally, SOGS will sell to EDC all plant nutrients for EDC to in turn sell to its tenants. However, no assurance can be given on the outcome of this project and/or other future opportunities.


The Company and SOGS have begun delivery of approximately $1.5M worth of precision, automated growing equipment to its customers operating in the Marijuana industry. As part of a 17-unit production run, which is made up of a 10-unit order for a licensed medical grower in North Las Vegas, Nevada and a 5-unit order for an equipment sales and leasing company operating throughout the United States, SOGS has now delivered six of its turn-key, state of the art DWC100 growing systems to its Las Vegas customer and expects to ship the remaining four DWC100 units in the coming weeks. In addition, SOGS has completed the manufacturing of one DWC100 unit, three DWC45 units and one VEG50 unit for its equipment-leasing customer and expects to also deliver these units in the quarter ending December 31, 2016.




31



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



In Q2 2016, the Company was able to successfully extend $5.4 million of its convertible debt to December 2017 in exchange for the reduction of the warrant exercise price to $0.045 per share on previously issued warrants associated with the debt. In addition, the Company was able to extend $0.9 million of its convertible debt to December 2017 in exchange for the reduction of the conversion price and warrant exercise price to $0.045 per share on previously issued convertible debt and warrants.


In Q3 2016, the Company was able to successfully extend $0.6 million of its convertible debt to December 2017 in exchange for the issuance of 4,999,999 warrants to purchase common stock at an exercise price of $0.045 per share.


CRITICAL ACCOUNTING ESTIMATES


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


Results of Operations


Comparison of the Three Months ended September 30, 2016 with the Three Months Ended September 30, 2015


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


 

 

For the Three Months Ended

September 30,

 

 

 

 

 

 

2016

 

 

2015

 

 

Change

 

 

 

(Unaudited)

 

 

 

 

Revenues

 

 

 

 

 

 

Equipment sales and licensing

 

$

6,250

 

 

$

6,250

 

 

$

 

Royalties

 

 

20,968

 

 

 

 

 

 

20,968

 

Aftermarket part and product sales

 

 

21,414

 

 

 

8,990

 

 

 

12,424

 

Total revenues

 

 

48,632

 

 

 

15,240

 

 

 

33,392

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

11,102

 

 

 

 

 

 

11,102

 

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

 

 

25,979

 

 

 

9,938

 

 

 

16,041

 

Salaries and employee benefits

 

 

514,560

 

 

 

683,368

 

 

 

(168,808

)

Administrative and selling

 

 

241,413

 

 

 

147,247

 

 

 

94,166

 

Professional fees

 

 

137,171

 

 

 

177,139

 

 

 

(39,968

)

Depreciation and amortization

 

 

60,977

 

 

 

91,337

 

 

 

(30,360

)

Research and development

 

 

86,001

 

 

 

210,098

 

 

 

(124,097

)

Bad debt

 

 

 

 

 

162,240

 

 

 

(162,240

)

Total costs and expenses

 

 

1,077,203

 

 

 

1,481,367

 

 

 

(404,164

)

Loss from operations

 

 

(1,028,571

)

 

 

(1,466,127

)

 

 

437,556

 

Loss and impairment on investment in unconsolidated investee

 

 

 

 

 

(12,177,415

)

 

 

12,177,415

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(315,323

)

 

 

(1,069,448

)

 

 

754,125

 

Gain (loss) on debt extinguishment

 

 

17,993

 

 

 

(1,515,320

)

 

 

1,533,313

 

Change in fair value of derivative instruments

 

 

274,672

 

 

 

 

 

 

274,672

 

Other, net

 

 

 

 

 

643

 

 

 

(643

)

Total other expense, net

 

 

(22,658

)

 

 

(2,584,125

)

 

 

2,561,467

 

Net loss

 

 

(1,051,229

)

 

 

(16,227,667

)

 

 

 

 

Preferred stock dividends

 

 

(20,688

)

 

 

(20,688

)

 

 

 

Net loss applicable to common stock

 

 

(1,071,917

)

 

 

(16,248,355

)

 

 

15,176,438

 

Net (income) loss applicable to noncontrolling interest of consolidated subsidiary

 

 

(54,977

)

 

 

71,998

 

 

 

(126,975

)

Net loss applicable to Ecosphere Technologies, Inc. common stock

 

$

(1,126,894

)

 

$

(16,176,357

)

 

$

15,049,463

 


The Company reported net loss applicable to Ecosphere Technologies, Inc. common stock of $1.1 million during the three months ended September 30, 2016 (the "2016 Quarter") as compared to a net loss applicable to Ecosphere Technologies, Inc. common stock of $16.2 million for the three months ended September 30, 2015 (the "2015 Quarter"). The drivers of the $15 million quarter-over-quarter change are discussed below.




32



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



Revenues


In January 2015, ETI signed an exclusive technology licensing agreement with US H2O, Inc., to deploy its patented Ozonix® water treatment technology on an exclusive basis in the United States for the Landfill Leachate and Marine Port & Terminal fields-of-use. The Company will recognize the revenues of the $500,000 licensing fees received under this agreement over its 20-year term. In addition, the licensee is required to pay minimum royalties in order to maintain its license. During the 2016 and 2015 Quarter, the Company recorded $6,250 as equipment sales and licensing revenue. In addition $20,968 of royalty revenue and $21,414 of aftermarket part sales was recorded during the three months ended September 30, 2016.


Cost and Expenses

 

Equipment Sales and Licensing Costs (exclusive of depreciation)


The equipment sales and licensing costs for the 2016 and 2015 Quarter were de minimis.


Aftermarket Part and Product Costs (exclusive of depreciation)


The costs associated with the sale of aftermarket parts for Ozonix® water treatment equipment were $21,414 for the 2016 Quarter.


Salaries and Employee Benefits


The decrease in salaries and employee benefits of $0.2 million for the 2016 Quarter was primarily driven by a reduction in salaries, wages and related payroll taxes and benefits.


Professional Fees


The decrease in professional fees for the 2016 Quarter was de minimis.


Bad Debt


During the 2015 Quarter, the Company recorded bad debt expense of $0.2 million in connection to the allowance of doubtful accounts for a related party accounts receivable balance.


Loss from Operations


Loss from operations for the 2016 Quarter was $1.0 million compared to loss from operations of $1.5 million for the 2015 Quarter. See discussion above under "Revenues," "Cost and Expenses" for details.


Loss and Impairment on Investment in Unconsolidated Investee


The Company recorded an impairment of its unconsolidated investee of approximately $12.2 million due to the recent downturn in the oil and gas industry.


Interest Expense


Interest expense for the 2016 Quarter decreased $0.8 million, which was primarily due to the decrease in amortized interest of debt discounts since previous debt discounts recorded have been fully amortized prior to the 2016 Quarter.


Net (Income) Loss Applicable to Noncontrolling Interest in Consolidated Subsidiaries


Net income applicable to noncontrolling interest in our wholly-owned subsidiary, Ecosphere Mining, LLC and majority-owned subsidiary, Sea of Green Systems, Inc. consolidated subsidiaries was $54,977 for the 2016 Quarter.




33



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



Comparison of the Nine Months ended September 30, 2016 with the Nine Months Ended September 30, 2015


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


 

 

For the Nine Months Ended

September 30,

 

 

 

 

 

 

2016

 

 

2015

 

 

Change

 

 

 

(Unaudited)

 

 

 

 

Revenues

 

 

 

 

 

 

Equipment sales and licensing

 

$

18,750

 

 

$

17,708

 

 

$

1,042

 

Royalties

 

 

20,968

 

 

 

 

 

 

20,968

 

Field services

 

 

33,854

 

 

 

 

 

 

33,854

 

Aftermarket part and product sales

 

 

28,489

 

 

 

8,990

 

 

 

19,499

 

Aftermarket part sales, related party

 

 

 

 

 

8,506

 

 

 

(8,506

)

Total revenues

 

 

102,061

 

 

 

35,204

 

 

 

66,857

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales and licensing (exclusive of depreciation shown below)

 

 

24,055

 

 

 

18,772

 

 

 

5,283

 

Field services costs (exclusive of depreciation shown below)

 

 

27,307

 

 

 

 

 

 

27,307

 

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

 

 

29,558

 

 

 

19,466

 

 

 

6,375

 

Salaries and employee benefits

 

 

2,098,940

 

 

 

1,959,115

 

 

 

139,825

 

Administrative and selling

 

 

585,348

 

 

 

591,634

 

 

 

(6,286

)

Professional fees

 

 

887,530

 

 

 

615,170

 

 

 

272,360

 

Depreciation and amortization

 

 

211,016

 

 

 

277,435

 

 

 

(66,419

)

Research and development

 

 

210,944

 

 

 

236,552

 

 

 

(25,608

)

Bad debt

 

 

3,643

 

 

 

162,240

 

 

 

(158,597

)

Total costs and expenses

 

 

4,078,341

 

 

 

3,880,384

 

 

 

197,957

 

Loss from operations

 

 

(3,976,280

)

 

 

(3,845,180

)

 

 

(131,100

)

Loss on investment in unconsolidated investee

 

 

 

 

 

(12,668,298

)

 

 

12,668,298

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(781,332

)

 

 

(3,132,067

)

 

 

2,350,735

 

Change in fair value of derivative instruments

 

 

258,164

 

 

 

 

 

 

258,164

 

Loss on abandonment of lease

 

 

(87,994

)

 

 

 

 

 

(87,994

)

Loss on debt extinguishment

 

 

(1,988,742

)

 

 

(1,696,007

)

 

 

(292,735

)

Other, net

 

 

1,544

 

 

 

1,775

 

 

 

(231

)

Total other expense, net

 

 

(2,598,360

)

 

 

(4,826,299

)

 

 

2,227,939

 

Net loss

 

 

(6,574,640

)

 

 

(21,339,777

)

 

 

14,765,137

 

Preferred stock dividends

 

 

(62,064

)

 

 

(62,064

)

 

 

 

Net loss applicable to common stock

 

 

(6,636,704

)

 

 

(21,401,841

)

 

 

14,765,137

 

Net loss applicable to noncontrolling interest of consolidated subsidiaries

 

 

441,601

 

 

 

74,940

 

 

 

366,661

 

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

 

$

(6,195,103

)

 

$

(21,326,901

)

 

$

15,131,798

 


The Company reported net loss applicable to Ecosphere Technologies, Inc. common stock of $6.2 million during the nine months ended September 30, 2016 (the "2016 Period") as compared to a net loss applicable to Ecosphere Technologies, Inc. common stock of $21.3 million for the nine months ended September 30, 2015 (the "2015 Period"). The drivers of the $15.1 million change are discussed below.


Revenues


In January 2015, ETI signed an exclusive technology licensing agreement with US H2O, Inc., to deploy its patented Ozonix® water treatment technology on an exclusive basis in the United States for the Landfill Leachate and Marine Port & Terminal fields-of-use. The Company will recognize the revenues of the $500,000 licensing fees received under this agreement over its 20-year term. In addition, the licensee is required to pay minimum royalties in order to maintain its license.


During the 2016 Period, the Company had field services revenue of $33,854 from an Ozonix® water treatment demonstration for a power utility company. In addition, the Company had $28,489 of aftermarket part and product sales and $20,968 of royalties for the 2016 Period.




34



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



Cost and Expenses

 

Equipment Sales and Licensing Costs (exclusive of depreciation)


The change in equipment sales and licensing costs for the 2016 and 2015 Period were de minimis.


Field Service Costs (exclusive of depreciation)


As stated above, the field services costs for the 2016 Period were $27,307 in connection with the field demonstration completed in May 2016.


Aftermarket Part and Product Costs (exclusive of depreciation)


The change in costs associated with the sale of aftermarket parts for Ozonix® water treatment equipment were de minimis for the 2016 and 2015 Period.


Salaries and Employee Benefits


The increase in salaries and employee benefits of $0.1 million for the 2016 Period was primarily driven by the additional non-cash compensation expense in connection with the issuance of Stock Appreciation Rights to the Company’s CEO and the additional expense recorded for option re-pricing to three of the Company’s executive officers.


Professional Fees


The $0.3 million increase in professional fees was driven by a $0.3 million increase in consulting and legal fees for the 2016 Period.


Loss from Operations


Loss from operations for the 2016 Period was $4 million compared to loss from operations of $3.8 million for the 2015 Period. See discussion above under "Revenues," "Cost and Expenses" for details.


Interest Expense


Interest expense for the 2016 Period decreased $2.3 million due the decrease in amortized interest related to warrant and beneficial conversion discounts on previously issued debt and warrants that have been fully amortized prior to the 2016 Period.


Loss on Abandonment of Lease


During the 2016 Period, the Company had a loss on abandonment of lease of $87,994. The Company entered into a settlement and mutual release agreement with the landlord for the Park City, UT office. According to the terms of the agreement, the Company transferred all of its rights, title and interest in and to all personal property on the premises owned by the Company paid $10,000 and was released from the lease.


Loss on Debt Extinguishment


During the 2016 Period, the Company had an increase in loss on debt extinguishment of $0.3 million in connection with the amendment of previously issued notes and warrants. The modifications were accounted for as a debt extinguishment.


Net Loss Applicable to Noncontrolling Interest in Consolidated Subsidiaries


Net loss applicable to noncontrolling interest in our wholly-owned subsidiary, Ecosphere Mining, LLC and majority-owned subsidiary, Sea of Green Systems, Inc. consolidated subsidiaries was $441,601 for the 2016 Period.




35



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



LIQUIDITY AND CAPITAL RESOURCES


A summary of our cash flows is as follows:


 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

 2015

 

 

 

(Unaudited)

 

Net cash used in operating activities

 

$

(2,524,298

)

 

$

(1,403,481

)

Net cash used in investing activities

 

$

(167,206

)

 

$

(4,261

)

Net cash provided by financing activities

 

$

2,701,306

 

 

$

1,380,764

 


2016 Period


Operating Activities


Net cash used in operating activities was $2.5 million for the 2016 Period. The cash used in operating activities for the 2016 Period, resulted from the net loss applicable to Ecosphere common stock of $6.2 million and was offset by $2 million loss on debt extinguishment from note and warrant modifications, an increase in stock based compensation of $1 million, an increase in accrued expenses of $0.7 million, an increase in customer deposits of $0.3 in connection with growing equipment orders during the 2016 Period and an increase in accounts payable of $0.2 million.


Investing Activities


Net cash used in investing activities was $0.2 million for the 2016 Period. The Company had additions to property and equipment of $0.2 million in connection with the build-out of Phase 1 of EDC’s Cannatech Agriculture Center in Washington State.


Financing Activities


Net cash provided by financing activities of $2.7 million consisted of proceeds from the issuance of convertible notes payable of $1.7 million, proceeds from the issuance of notes payable of $1 million in connection with the financing for the Cannatech Agriculture Center in Washington State and proceeds from the issuance of related party notes payable of $0.1 million. These proceeds were partially offset by repayments of vehicle and equipment financing of $50,774.


2015 Period


Operating Activities


Net cash used in operating activities was $1.4 million for the 2015 Period. For the 2015 Period, cash used in operating activities of $1.4 million resulted from the net loss applicable to Ecosphere common stock of $21.3 million and was offset by the $12.7 million impairment charge and loss on investment in FNES, the accretion of discounts on notes payable of $2.6 million, the increase in customer deposits of $1.4 million in connection with an order received for one indoor Ecos GrowCube® and one Ozonix® EF10M, stock sold in SOGS, issued for debt extension of $1.0 million, the increase in accounts payable of $0.8 million, loss on debt extinguishment of $0.7 million in connection with convertible debt and warrants amended in the 2015 Period and an increase in deferred revenue of $0.5 million in connection with a licensing agreement entered into in January 2015.


Investing Activities


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


Financing Activities


The Company’s net cash provided by financing activities of $1.4 million consisted of proceeds from the issuance of convertible notes payable of $1.2 million, proceeds from issuance of a note payable of $0.2 million, proceeds from issuance of stock sold in consolidated subsidiary, or SOGS, of $0.1 million and proceeds from the issuance of a related party note payable of $50,000, which was partially offset by repayments of insurance financing, capital lease obligations and vehicle and equipment financing of approximately $0.1 million.




36



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



Liquidity


As of November 17, 2016, Ecosphere had cash on hand of approximately $25,000. 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 and through the date of this Report, the Company received $2,904,000 from its principal lender which loan is convertible at $0.115 per share and due in December 2017. The loan is secured by a variety of security interests on intellectual property including all fields of use of its Ozonix® patents excluding agriculture and on other assets of the Company. 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.


Due to the rapid decline in the oil and gas industry, in 2014 Ecosphere’s management began to start diversifying its Ozonix® technology into other water treatment industries and applications, resulting in increased customer adoption in the United States, Canada, Brazil and most recently Malaysia. 


As its primary focus over the past two years, Ecosphere’s management, engineering and manufacturing teams have used their collective knowledge over the past 20 years to develop a comprehensive product portfolio for the fast growing, global Precision-Agriculture market that uses software, sensors and data driven analytics that can be accessed through the Internet by computers and smartphones to improve plant quality and increase crop yields.


EDC expects substantial lease revenues which may begin as early as June 2017. To meet its working capital needs until then, Ecosphere is seeking to raise up to $1 million for EDC.


Ecosphere and SOGS have engineered, manufactured and delivered a proprietary nutrient and fertilizer mixing system using Ecosphere’s ultrasonic and hydrodynamic cavitation technologies to reduce nutrient and fertilizer particle sizes and increase plant growth efficiencies that will be marketed by SOGS under the Cavisonix® name. Ecosphere and SOGS have entered into an exclusive licensing agreement with its nutrient and fertilizer supplier to sell SOGS proprietary line of nutrients and fertilizers to the marijuana industry as well as the global agricultural markets. In exchange for these rights, SOGS is to receive a per gallon royalty fee on all nutrients and fertilizers sold to customers in the global agricultural markets, except marijuana. These potential customers include but are not limited to vegetable and fruit crops, turf-grass industries, vineyards, wineries, grapes, nightshades, potatoes, onions, corn, blueberries and all crops that use liquid based fertilizers.


Ecosphere continues to actively market 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. Due to this expanded diversification strategy in addition to ongoing sales and licensing efforts of its patented technologies and products along with additional financing received, management believes it will have liquidity for the next 12 months and has identified the following liquidity sources that it expects to realize. With our management focused on EDC’s business and SOGS without any sales and marketing staff or resources, our penetration of these multiple fields and territories will be necessarily constrained.


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.


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




37



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



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 unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.


In addition to needing capital to support its operations, as of the date of this Report, Ecosphere has approximately $0.7 million of its convertible notes payable, notes payable and related party notes payable due within the next 12 months.


CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS


This report contains forward-looking statements, including statements that relate to our liquidity, completion of Phase 1 by EDC and expanding our technology into other industries. Forward looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods.


Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include the condition of the credit and financial markets, our ability to raise short-term and long-term working capital, future legislation and regulations which affect the marijuana industry, Washington State Liquor Control Board review of tenant applications, the qualifications of future tenants with such regulations and the ability to find purchasers and investors for our technologies. Forward-looking statements contained in this report also include statements related to the Company’s efforts to increase liquidity and its prospective business relationships, including, but not limited to, the following: the ultimate success of our recent pilot demonstration with a U.S. power company and our ability to turn that pilot into a business relationship going forward; and our ability to finance, develop, and successfully operate EDC’s operations in the State of Washington. In addition, our expectation that certain lenders will not exercise their default rights constitutes a forward-looking statement.


Further information on our risk factors is contained in its filings with the Securities and Exchange Commission (the “SEC”) including our Form 10-K for the year ended December 31, 2015. Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

RELATED PARTY TRANSACTIONS

 

For information on related party transactions and their financial impact, see Note 10 to the unaudited condensed consolidated financial statements.


RESEARCH AND DEVELOPMENT

 

Research and development costs during the nine months ended September 30, 2016 was $210,944 and $236,552 during the nine months ended September 30, 2015. Although Generally Accepted Accounting Principles do not permit the Company to categorize a significant portion of the Company’s selling, general and administrative expenses which totaled $3.6 million for the nine months ended September 30, 2016 all of which were largely a part of the research and development of its precision agriculture technology, the Company’s management considers such expenses as being research since they were incurred developing new technology.


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS


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


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


Not applicable to smaller reporting companies.




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ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



ITEM 4.

CONTROLS AND PROCEDURES.

 

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


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





39



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS.

 

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


ITEM 1A.

RISK FACTORS.

 

Not applicable.


ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

None


ITEM 4.

MINE SAFETY DISCLOSURES.


Not applicable.


ITEM 5.

OTHER INFORMATION.

 

None


ITEM 6.

EXHIBITS.


See the Exhibit Index.


 

 



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ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



SIGNATURES

 

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


 

 

ECOSPHERE TECHNOLOGIES, INC.

 

 

 

 

 

November 21, 2016

 

/s/ Dennis McGuire

 

 

 

Dennis McGuire

 

 

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

November 21, 2016

 

/s/ David Brooks

 

 

 

David Brooks

 

 

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)

 









41



ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES



EXHIBIT INDEX



Exhibit

 

 

 

Incorporated by Reference

 

Filed or Furnished

No.

 

Exhibit Description

 

Form

 

Date

 

Number

 

Herewith

 

 

 

 

 

 

 

 

 

 

 

3.1

 

Certificate of Incorporation, as amended

 

10-Q

 

5/12/14

 

3.1

 

 

3.2

 

Bylaws, as amended

 

10-Q

 

5/12/14

 

3.2

 

 

10.1

 

Amended, Restated, and Consolidated Convertible Note - Brisben

-

8-K

 

9/16/16

 

10.1

 

 

10.2

 

Form of Amended Royalty Agreement - Brisben

 

8-K

 

9/16/16

 

10.2

 

 

31.1

 

Certification of Principal Executive Officer (Section 302)

 

 

 

 

 

 

 

Filed

31.2

 

Certification of Principal Financial Officer (Section 302)

 

 

 

 

 

 

 

Filed

32.1

 

Certification of Principal Executive Officer and Principal Financial Officer (Section 906)

 

 

 

 

 

 

 

Furnished*

101.INS

 

XBRL Instance Document

 

 

 

 

 

 

 

Filed

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

 

 

Filed

101.CAL

 

XBRL Taxonomy Extension Calculating Linkbase Document

 

 

 

 

 

 

 

Filed

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

Filed

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

 

 

Filed

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

Filed

———————

**

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



Copies of this report (including the financial statements) and any of the exhibits referred to above will be furnished at no cost to our shareholders who make a written request to Ecosphere Technologies, Inc., 3515 S.E. Lionel Terrace, Stuart, Florida 34997 Attention: Jacqueline McGuire, Corporate Secretary.