S-1 1 esph_s1.htm REGISTRATION STATEMENT Registration Statement

 


As filed with the Securities and Exchange Commission on January 17, 2014

Registration No. 333-_________

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM S-1


REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


ECOSPHERE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


Delaware

 

3530

 

20-3502861

(State or other jurisdiction of

 

(Primary Standard Industrial

 

(I.R.S. Employer

incorporation or organization)

 

Classification Code Number)

 

Identification No.)


3515 S.E. Lionel Terrace, Stuart, Florida, 34997

(772) 287-4846

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


Dennis McGuire

3515 S.E. Lionel Terrace, Stuart, Florida, 34997

(772) 287-4846

(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:


Michael D. Harris, Esq.

Brian S. Bernstein, Esq.

Nason, Yeager, Gerson, White & Lioce, P.A.

1645 Palm Beach Lakes Boulevard, Suite 1200

West Palm Beach, FL 33401

(561) 686-3307


Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.


If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: þ


If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨


If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨


If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨


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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer

¨

Accelerated filer

þ

Non-accelerated filer

¨

Smaller reporting company

¨

 

 






 


CALCULATION OF REGISTRATION FEE

 

Title of Each

Class of Securities

to be Registered

  

Amount to be

Registered(1)

  

  

Proposed

Maximum

Offering Price

Per Share(2)

  

  

Proposed

Maximum

Aggregate

Offering Price(2)

  

  

Amount of 

Registration Fee

  

 

  

  

                              

  

  

  

                              

  

  

  

                              

  

  

  

                              

  

Common stock, $0.01 par value per share

  

 

18,449,987

  

  

$

0.28

  

  

$

5,138,321.38

  

  

$

661.82

  

———————

(1)  Under Rule 416 of the Securities Act of 1933, the shares being registered include such indeterminate number of shares of common stock as may be issuable with respect to the shares being registered in this registration statement as a result of any stock splits, stock dividends.

 

(2)  The proposed maximum offering price per share and the proposed maximum aggregate offering price have been estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rules 457(h) under the Securities Act of 1933 on the basis of the average of the bid and asked price of our common stock on the Over-the-Counter Bulletin Board on January 13, 2014, a date within five days prior to the date of the filing of this registration statement.


The registrant hereby amends this registration statement on such date or date(s) as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.











 


The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission of which this prospectus is a part becomes effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.


Subject to Completion, Dated January 17, 2014


ECOSPHERE TECHNOLOGIES, INC.


PROSPECTUS


18,449,987 Shares of Common Stock


This prospectus relates to the sale of up to 18,449,987 shares of Ecosphere Technologies, Inc. common stock which may be offered by the selling shareholders identified in this prospectus.


We will not receive any proceeds from the sales of shares of our common stock by the selling shareholders named on page 60.


Our common stock trades on the Over-the-Counter Bulletin Board under the symbol “ESPH”. As of the last trading day before the date of this prospectus, the closing price of our common stock was $0.28 per share.


The common stock offered in this prospectus involves a high degree of risk. See “Risk Factors” beginning on page 5 of this prospectus to read about factors you should consider before buying shares of our common stock.


The selling shareholders are offering these shares of common stock. The selling shareholders may sell all or a portion of these shares from time to time in market transactions through any market on which our common stock is then traded, in negotiated transactions or otherwise, and at prices and on terms that will be determined by the then prevailing market price or at negotiated prices directly or through a broker or brokers, who may act as agent or as principal or by a combination of such methods of sale. The selling shareholders will receive all proceeds from the sale of the common stock. For additional information on the methods of sale, you should refer to the section entitled “Plan of Distribution.”


Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.


The date of this prospectus is ________, 2014







 


TABLE OF CONTENTS


 

 

Page

 

PROSPECTUS SUMMARY

 

1

 

RISK FACTORS

 

5

 

FORWARD-LOOKING STATEMENTS

 

11

 

DILUTION

 

11

 

PRIVATE PLACEMENTS

 

12

 

USE OF PROCEEDS

 

12

 

CAPITALIZATION

 

12

 

MARKET FOR COMMON STOCK

 

13

 

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

 

14

 

BUSINESS

 

32

 

MANAGEMENT

 

42

 

EXECUTIVE COMPENSATION

 

46

 

RELATED PERSON TRANSACTIONS

 

58

 

SELLING SHAREHOLDERS

 

60

 

DESCRIPTION OF SECURITIES

 

62

 

PLAN OF DISTRIBUTION

 

63

 

LEGAL MATTERS

 

65

 

EXPERTS

 

65

 

ADDITIONAL INFORMATION

 

65

 

INDEX TO FINANCIAL STATEMENTS

 

F-1

 


You should rely only on information contained in this prospectus. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. The selling shareholders are not offering to sell or seeking offers to buy shares of common stock in jurisdictions where offers and sales are not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.











 


PROSPECTUS SUMMARY


This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully including the section entitled “Risk Factors” before making an investment decision. All references to “Ecosphere,” “we,” the “Company”, “our” and “us” refer to Ecosphere Technologies, Inc.


Our Company


Ecosphere is an innovative U.S. technology licensing and manufacturing company that develops environmental solutions for global markets. We help industry increase production, reduce costs, and protect the environment through a portfolio of more than 35 patented and patent-pending technologies, including Ozonix® and Ecos PowerCube®, which are licensable across a wide range of industries and applications throughout the world.


Ecosphere has an extensive portfolio of intellectual property on its patented Ozonix® water treatment technology that includes five issued United States patents, plus one recently approved Notice of Allowance in January 2014, as well as numerous foreign patents, trademarks and pending patent applications. The Ecosphere Ozonix® process is a revolutionary advanced oxidation process that is currently being used by Fidelity National Environmental Solutions or FNES, a company in which Ecosphere owns approximately 31%, to enable oil and gas customers to reduce costs, increase treatment efficiencies and eliminate harmful chemicals from oil and gas operations around the United States and will be used in part of Canada in the near future.


Ozonix® can be used to replace traditional chemicals in a wide variety of industries and applications, including but not limited to agriculture, energy, food and beverage, industrial, mining, marine and municipal wastewater treatment. We are devoting substantial effort to expand our business beyond the energy field in 2014 in order to further leverage our Ozonix® technology via widespread partnering and licensing. In addition to FNES, we plan to replicate the success of our “subsidiary strategy” by granting global Ozonix® field-of-use licenses to numerous industry-specific subsidiaries to achieve substantial technology deployment and the corresponding revenue and profit growth. We have recently formed six new subsidiaries, which includes; Ecosphere Agriculture, LLC, Ecosphere Food & Beverage, LLC, Ecosphere Industrial, LLC, Ecosphere Marine, LLC, Ecosphere Mining, LLC and Ecosphere Municipal, LLC.


The Ecos PowerCube® is the world’s most powerful, mobile, solar-powered generator. It is a patented, self-contained, self-sustaining, solar-powered generator that uses the power of the sun to provide energy, communications and clean water to the world’s most remote, off-grid locations.


Ecosphere’s business model is based upon the sale and licensing of intellectual property. In addition to its 31% interest in FNES, Ecosphere owns 100% of the patent rights to all of the potential industries and applications for its Ozonix® technology outside of energy. All of the various industries and applications are available for sale including our 31% interest in FNES. Ecosphere is also actively marketing the Ecos PowerCube® intellectual property to potential buyers.


Corporate Information


Our corporate headquarters are located at 3515 S.E. Lionel Terrace, Stuart, Florida, 34997 and our phone number is (772) 287-4846. Our corporate website can be found at www.ecospheretech.com. The information on our website is not incorporated in this prospectus. Presently, Ecosphere owns 31% of Fidelity National Environmental Services, LLC, or FNES, a company that has an exclusive global license from Ecosphere for energy related applications, including oil and gas exploration.


Risks Affecting Us


Our business is subject to numerous risks as discussed more fully in the section entitled “Risk Factors” immediately following this Prospectus Summary. In particular, our business would be adversely affected if:


 

our management and sales team fail to monetize the intellectual property we have created that includes but is not limited to the sale of part or all of our 31% interest in FNES,

 

the sale of part or all of our 100% interest in the six new Ozonix® subsidiaries,

 

and the sale of part or all of our 100% interest in the Ecos Power Cube®;


For a more detailed discussion of these and other risks you should consider before making an investment in our common stock, see the section entitled “Risk Factors” beginning on page 5 of this prospectus.




1



 


Private Placement


From December 18 through January 10, 2014, Ecosphere sold $1,845,000 of convertible notes, or the Notes, to four institutional investors and seven individual investors, including a director of Ecosphere. The Notes: (i) are convertible at $0.30 per share, (ii) are due two years from the investment date, and (iii) pay 10% interest per annum on the earlier of (x) the maturity date or (y) conversion. Additionally, Ecosphere issued the investors a total of 12,299,992 five-year warrants exercisable at $0.35 per share. In connection with the investment, Ecosphere agreed to register the shares of common stock underlying the Notes and warrants. The registration statement containing this prospectus is registering the shares of common stock underlying the Notes and warrants.






2



 


The Offering


Common stock outstanding prior to the offering:

164,138,402 shares

 

 

Common stock offered by the selling shareholder upon conversion of notes:

6,149,995 shares (1)

 

 

Common stock offered by the selling shareholder upon exercise of warrants:

12,299,992 shares (1)

 

 

Common stock outstanding immediately following the offering:

182,588,389 shares

 

 

Use of proceeds:

Except for the proceeds we receive upon the exercise of warrants (if the selling shareholders do not use the optional cashless exercise method), we will not receive any proceeds from the sale of shares by the selling shareholders. See “Use of Proceeds” on page 12.

 

 

Stock symbol:

OTCBB: ESPH

———————

(1)

Assumes all convertible notes are converted and all warrants are exercised for cash rather than on a cashless basis.  


The number of shares of common stock to be outstanding prior to and after this offering excludes:


 

a total of 56,131,883 shares of common stock issuable upon the exercise of outstanding stock options;

 

a total of 5,019,270 shares of common stock issuable upon the exercise of warrants, which does not include the warrants referred to above;

 

a total of 2,607,813 shares of common stock issuable upon the conversion of notes, which does not include the shares underlying the notes referred to above; and

 

a total of 362,497 shares of common stock underlying preferred stock.




3



 


SUMMARY FINANCIAL DATA


The following summary of our financial data should be read in conjunction with, and is qualified in its entirety by reference to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements appearing elsewhere in this prospectus.


The historical consolidated statements of operations data presented below for the years ended December 31, 2012, 2011 and 2010 as well as the consolidated balance sheet data as of December 31, 2012 and 2011, are derived from our audited consolidated financial statements included elsewhere in this prospectus. The historical consolidated statements of operations data presented below for the years ended December 31, 2009 and 2008 as well as the consolidated balance sheet data as of December 31, 2010, 2009 and 2008 are derived from our audited consolidated financial statements not included in this prospectus. Our historical condensed consolidated statements of operations data for the three and nine months ended September 30, 2013 and 2012 and the historical condensed consolidated balance sheet data as of September 30, 2013 are derived from our unaudited condensed consolidated financial statements appearing elsewhere in this prospectus. Our unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited financial statements and include, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim results are not necessarily indicative of the results that may be expected for the full year or any other period.


The financial information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the audited and unaudited consolidated historical financial statements and the notes thereto included elsewhere in this prospectus.


 

 

Nine Months Ended

September 30,

 

 

Year Ended

December 31,

 

 

 

2013

 

 

2012

 

 

2012

 

 

2011

 

 

2010

 

 

2009

 

 

2008

 

 

  

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Revenues

 

$

4,226,326

 

 

$

24,312,282

  

 

$

31,132,298

 

 

$

21,088,159

 

 

$

8,964,484

 

 

$

1,760,129

 

 

$

247,202

 

Operating income (loss)

 

 

(6,231,856

)

 

 

2,354,422

 

 

 

1,165,210

 

 

 

(5,340,242

)

 

 

(8,611,028

)

 

 

(9,704,186

)

 

 

(6,005,224

)

Gain (loss) from change in fair value of derivative instruments

 

 

89,894

 

 

 

1,729

 

 

 

41,374

 

 

 

152,888

 

 

 

(12,787,666

)

 

 

(3,446,612

)

 

 

 

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

 

 

22,123,084

 

 

 

1,186,631

 

 

 

136,200

 

 

 

(7,654,674

)

 

 

(22,237,207

)

 

 

(18,425,903

)

 

 

(11,831,906

)

Income (loss) applicable to Ecosphere Technologies, Inc. per share - basic and diluted

 

 

0.13

 

 

 

0.01

 

 

 

0.00

 

 

 

(0.05

)

 

 

(0.17

)

 

 

(0.19

)

 

 

(0.16

)

Working capital (deficit)

 

 

3,087,901

 

 

 

2,906,938

 

 

 

970,048

 

 

 

91,209

 

 

 

(5,459,051

)

 

 

(11,758,337

)

 

 

(9,229,775

)

Weighted average shares outstanding - basic

 

 

163,237,401

 

 

 

156,012,479

 

 

 

148,989,308

 

 

 

143,989,520

 

 

 

131,502,601

 

 

 

99,627,077

 

 

 

73,158,831

 

Weighted average shares outstanding - diluted

 

 

164,929,678

 

 

 

168,746,364

 

 

 

154,568,010

 

 

 

143,989,520

 

 

 

131,502,601

 

 

 

99,627,077

 

 

 

73,158,831

 



Consolidated Balance Sheet Data


 

 

As of

September 30,

2013

 

 

As of December 31,

 

 

 

 

 

2012

 

 

2011

 

 

2010

 

 

2009

 

 

2008

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Cash

 

$

1,436

 

 

$

2,465

 

 

$

2,044

 

 

$

46

 

 

$

1,089

 

 

$

462

 

Working capital (1)

 

 

3,088

 

 

 

970

 

 

 

91

 

 

 

(5,459

)

 

 

(11,758

)

 

 

(9,230

)

Total assets

 

 

21,954

 

 

 

8,908

 

 

 

9,614

 

 

 

8,984

 

 

 

10,246

 

 

 

3,259

 

Long-term debt

 

 

727

 

 

 

300

 

 

 

1,739

 

 

 

450

 

 

 

2,000

 

 

 

155

 

Total redeemable convertible cumulative preferred stock

 

 

3,700

 

 

 

3,638

 

 

 

3,981

 

 

 

3,878

 

 

 

3,880

 

 

 

3,934

 

Ecosphere Technologies, Inc. Stockholders’ (deficit) equity

 

 

15,903

 

 

 

(8,029

)

 

 

(11,309

)

 

 

(11,859

)

 

 

(20,369

)

 

 

(10,753

)

Noncontrolling interest in consolidated subsidiary

 

 

 

 

 

9,423

 

 

 

11,768

 

 

 

10,078

 

 

 

10,607

 

 

 

 

Total (deficit) equity

 

 

15,903

 

 

 

1,395

 

 

 

459

 

 

 

(1,781

)

 

 

(9,762

)

 

 

(10,753

)

———————

(1)

Working capital is defined as current assets less current liabilities.



4



 


RISK FACTORS


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

 

Risk Factors Relating to Our Company


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

 

We will continue to be dependent upon our ability to monetize our intellectual property or a future financing. Recently we raised approximately $1.85 million from the sale of the Notes and warrants. We are seeking to raise an additional $3.15 million from the sale of Notes and warrants. However, we cannot assure you that we will be successful in raising sufficient capital to run our operations. We also are currently conducting an offering of ownership interests in one of our subsidiaries, Ecosphere Mining, LLC. If this offering is not successful, we might be required to raise funds through Ecosphere in order to enter into new industries and applications which may dilute our existing shareholders.


Our business model focuses on inventing and patenting solutions to environmental problems, proving our patented solution works, and then monetizing our intellectual property through sales and licensing. Thus, there will be times in the future as it has been in the past where we may need to raise capital to continue operations or expand our operations to deal with increased business.


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


Although we believe we have the most proven and commercialized non chemical solution for treating industrial wastewaters including recycling frac flowback water and produced water stemming from the production of oil and natural gas wells, we face severe competition from a number of sources including service companies and various chemical companies which may adversely affect our future results of operations and financial condition.


In its providing services to oil and gas drilling companies, FNES competes with oil and gas service companies and the various chemical companies.  Service companies actually use the chemicals supplied by chemical companies in the drilling process.  Oil and gas exploration companies rely heavily on the service companies for many aspects of the drilling and fracking process, and FNES has limited market share.  These competitors are substantially larger than FNES and have substantially more resources.  If FNES is not able to expand its service business, it may adversely affect our future results of operations and financial condition.


If the current price of natural gas or oil decreases, energy companies may reduce their drilling operations in shale deposits, which could adversely affect the attractiveness of our Ecosphere Ozonix® business in the oil and gas industry. 


The development of new horizontal drilling techniques and the discovery of unconventional oil and gas in new shale areas throughout the U.S. and world market has opened up an enormous opportunity for our Ozonix technology to replace traditional chemicals used to kill bacteria in waters used for hydraulic fracturing. These fracturing operations rely on enormous supplies of clean water to be pumped downhole to break the rock that holds the oil and gas. Much of the water used in drilling oil and natural gas wells and the resulting water that flows back needs to be treated and creates an opportunity for our Ecosphere Ozonix® technology. Horizontal drilling in shale areas is very expensive; however, if prices for natural gas and oil are sufficiently high this expense can be justified. If current prices decline, horizontal drilling may not be cost-effective and the lack thereof may adversely affect our Ecosphere Ozonix® technology.

 



5



 


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


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


If chemical companies engage in predatory pricing, our licensee may lose customers, which could materially and adversely affect us.


In the oil and gas business, energy companies traditionally have used liquid chemicals to treat the water used to fracture wells. The chemical companies represent a significant competitive factor. The chemical companies which supply chemicals to the service companies that offer their services to the oil and gas exploration companies may, in order to maintain their business relationship with their customers, drastically reduce their price and seek to undercut the pricing at which we can realistically charge for our products or services. While predatory pricing that is designed to drive us or any sub-licensee out of business may be illegal under the United States anti-trust and other laws, we may lose customers as a result of any future predatory pricing and be required to file lawsuits against any companies who engage in such improper tactics. Any such litigation may be very expensive which will further impact us and affect their financial condition. As a result, predatory pricing by chemical companies could materially and adversely affect us.


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


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


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


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

 

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

 

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

 

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


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


·

Our receipt of orders;

·

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

·

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



6



 


·

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

·

Our continuing to develop new technologies;

·

Pricing pressures;

·

General economic and political conditions;

·

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

·

Our sales or licensing of our technologies.


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


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


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


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


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


If federal and state legislation and regulatory initiatives relating to horizontal drilling are passed, it could materially and adversely affect our results of operations.


FNES’ business relies upon supplying chemical-free solutions for cleaning the large amounts of water used in hydraulic fracturing applications. Objections have been raised by environmentalists, some land owners and some government officials including environmental authorities that there have been adverse side effects affecting the purity of the water supply as a result of the injection of chemicals and water in connection with horizontal drilling. Although we believe that FNES has a chemical-free solution which should result in increased business, we cannot assure you that legislation or rules will not be passed or action taken by environmental authorities that will preclude the use of horizontal drilling. At the state level, certain states and localities have implemented moratoriums and certain obligations on oil gas companies using horizontal drilling. The adoption of any future federal, state or local laws or implementing regulations imposing reporting or permitting obligations on, or otherwise limiting, the horizontal drilling process could make it more difficult to perform, or even prohibit oil and gas companies from using horizontal drilling, to complete gas and oil wells. These additional costs to drillers could result in reduced oil and gas drilling. This would reduce our potential service revenue and adversely affect our ability to sell Ozonix® Units. If this were to occur more widely in the United States, the demand for FNES’ services may be eliminated or substantially reduced. If any such federal or state legislation on horizontal fracturing were passed, our revenues and results of operations could be adversely affected.


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


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


·

Pending and future patent applications will result in issued patents;

·

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

·

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



7



 


·

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


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


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


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

 

Risks Related to Our Common Stock

 

Because our common stock does not trade on a securities exchange, a number of investors can not purchase our common stock, which has a depressive effect on our stock price.


Our common stock trades on the Bulletin Board which is not a national securities exchange. As a result of that and our stock price being under $5.00 most institutions can not buy our stock and brokers generally can not recommend to investors that they buy our stock. If an active market for our common stock is not sustained, the price may decline in the future.


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

 

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


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




8



 


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


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

 

·

Our announcements about completing any financings;

·

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

·

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

·

Short selling activities;

·

The loss of key personnel;

·

Our failure to achieve and maintain profitability;

·

Actual or anticipated variations in our quarterly results of operations;

·

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

·

The loss of major customers or product or component suppliers;

·

The loss of significant business relationships;

·

Our failure to meet financial analysts performance expectations;

·

Changes in earnings estimates and recommendations by financial analysts; or

·

Changes in market valuations of similar companies.


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


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


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


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

 

As of January 14, 2014, we had approximately 164 million shares of our common stock outstanding, 17.3 million shares underlying warrants, 8.7 million shares underlying outstanding convertible notes and 56.1 million shares underlying stock options. If the holders of the securities described in this risk factor exercise or convert their securities, it will materially dilute the voting power of our outstanding common stock.


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

 

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


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


Our officers and directors own approximately 2.1 million shares of our common stock or approximately 1.3% of the shares actually outstanding. By including shares of common stock which are issuable upon exercise of outstanding vested options held by them, they beneficially own approximately 35.9 million shares or 18.1%. If all of our equity equivalents outstanding as of January 14, 2014 were exercised, we would have approximately 247 million shares outstanding. For that reason, a third party could obtain control of Ecosphere and change the direction of our business.




9



 


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

 

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


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


As of January 14, 2014, we had 164,138,402 shares of common stock outstanding of which our directors and executive officers own approximately 2.1 million shares which are subject to the limitations of Rule 144 under the Securities Act. Most of the remaining outstanding shares, including a substantial amount of shares issuable upon exercise of options, are and will be freely tradable.

 

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

 

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

 

(i)

we are current in our filings,

 

(ii)

certain manner of sale provisions, and

 

(iii)

filing of Form 144.

 

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

 

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

 

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






10



 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS


This prospectus includes forward-looking statements including statements regarding liquidity, expanding our business and plans for our subsidiaries. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial position, liquidity, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” elsewhere in this prospectus. Other sections of this prospectus may include additional factors which could adversely affect our business and financial performance. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this prospectus, whether as a result of new information, future events, changed circumstances or any other reason after the date of this prospectus.


DILUTION


With the exception of shares that are issued to the selling shareholders upon conversion of Notes or exercise of warrants, there will be no dilution to existing shareholders.




11



 


PRIVATE PLACEMENTS


From December 18 through January 10, 2014, Ecosphere sold $1,845,000 of Notes to four institutional investors and seven individual investors including a director of Ecosphere. The Notes: (i) are convertible at $0.30 per share, (ii) are due two years from the investment date, and (iii) pay 10% interest per annum on the earlier of (x) the maturity date or (y) conversion. Additionally, Ecosphere issued the investors a total of 12,299,992 five-year warrants exercisable at $0.35 per share. In connection with registration rights provided to the investors, the shares being registered hereunder are the shares underlying the Notes and warrants.


USE OF PROCEEDS


We will not receive any proceeds from the sale of shares of common stock offered pursuant to this prospectus. All of the proceeds will be payable solely to the selling shareholders. We will, however, receive the proceeds from the exercise of the warrants issued to the selling shareholders if and when they are exercised, unless the holders elect to exercise them on a cashless exercise basis. When a person uses a cashless exercise, the “value” or difference between the market and exercise prices is used instead of cash to pay the exercise price. This results in the person exercising warrants receiving fewer shares of common stock and Ecosphere issuing fewer shares of common stock. We anticipate that the net proceeds, if any, from the exercise of the warrants would be used for working capital. There can be no assurances that any of the outstanding warrants will be exercised or that they will be exercised for cash.


CAPITALIZATION


The following table sets forth our capitalization as of September 30, 2013. The table should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein:


 

 

As of

September 30,

2013

 

 

 

(unaudited)

 

Cash

 

$

1,435,763

 

 

 

 

 

 

Debt:

 

 

Convertible notes, net of discounts

 

$

717,601

 

Note payable

 

$

170,249

 

Preferred stock

 

$

3,699,839

 

Shareholders’ equity:

 

 

Common stock

 

$

1,635,881

 

Additional paid-in capital

 

 

109,420,155

 

Accumulated deficit

 

 

(95,152,735

)

Total shareholders’ equity

 

$

15,903,301

 


The table above does not include the Notes issued to the selling shareholders. See the description above under “Private Placements”.




12



 


MARKET FOR COMMON STOCK


Our stock trades on the Bulletin Board, under the symbol “ESPH.” The last reported sale price of our common stock as reported by the Bulletin Board on January 16, 2014 was $0.28. As of that date, we had approximately 1,323 record holders of our common stock and we believe that there are substantially more beneficial owners than record holders.


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


 

 

 

 

Prices

 

Year

 

Period Ended

 

High

 

 

Low

 

 

 

 

 

 

 

 

 

 

2013

 

December 31

 

$

0.33

 

 

$

0.22

 

 

 

September 30

 

$

0.35

 

 

$

0.21

 

 

 

June 30

 

$

0.44

 

 

$

0.12

 

 

 

March 31

 

$

0.50

 

 

$

0.34

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

December 31

 

$

0.39

 

 

$

0.30

 

 

 

September 30

 

$

0.48

 

 

$

0.36

 

 

 

June 30

 

$

0.56

 

 

$

0.52

 

 

 

March 31

 

$

0.73

 

 

$

0.39

 


Dividend Policy


In June 2013, we issued a 5% stock dividend. Our Series A preferred stock provides for annual cash dividends at the rate of $3,750 per share, and our Series B preferred stock provides for annual cash dividends at the rate of $250 per share. Dividends payable on Series A preferred stock have preference over Series B dividends and any dividends declared on our common stock. Dividends payable on Series B preferred stock have preference over any dividends declared on our common stock. The dividends on our outstanding preferred are cumulative, and we have not been in default by failing to pay these dividends.


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





13



 


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS


This discussion should be read in conjunction with the other sections contained herein, including the risk factors and the consolidated financial statements and the related exhibits contained herein. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this prospectus as well as other matters over which we have no control. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth in this prospectus. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”


Company Overview

Ecosphere Technologies, Inc. is an innovative U.S. technology licensing and manufacturing company that develops environmental solutions for global markets. We help industry increase production, reduce costs, and protect the environment through a portfolio of more than 35 patented and patent-pending technologies, including Ozonix®, Ecos PowerCube®, which are licensable across a wide range of industries and applications throughout the world.

Business Model

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

1.

Identify a major environmental and technical challenge;

2.

Invent new technologies and file patents

3.

Partner with industry leaders;

4.

Commercialize and prove the technology with industry leaders in each specific business segment;

5.

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

6.

Create and increase shareholder value.

As a result, we have designed, developed, manufactured and commercialized technologies that are currently solving some of the world’s most critical water and energy challenges. Our patented Ozonix® technology is a revolutionary, high volume, advanced oxidation process designed to treat and recycle industrial wastewater without the use of toxic chemicals and our Ecos PowerCube® is the world’s most powerful, mobile, solar-powered generator to be used in the world’s most remote, off-grid locations.


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



14



 


Ozonix® Intellectual Property Portfolio

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

Accordingly, during the three months ended September 30, 2013, Ecosphere retained a leading company in the field of intellectual property valuation, to perform an analysis of the value of our patented Ozonix® technology portfolio. The valuation company delivered the valuation in November 2013, which includes all of the potential industries and applications where Ozonix® can be used and licensed, including the global energy field-of-use, of which Ecosphere owns approximately 31% interest in FNES. While this valuation is subject to a number of assumptions, Ecosphere believes it illustrates the hidden value that is not recognized on our Balance Sheet or by the investment community.

Since May 2013, Ecosphere has received $10 million from FNF for the sale of our 20% interest in FNES, which reduced our ownership interest in FNES to 31%. Ecosphere expects to monetize the remaining balance of its 31% ownership in FNES in 2014 Ecosphere has formed six new subsidiaries which it expects will obtain exclusive sublicenses for global, industry-specific fields-of-use to its patented Ozonix® technology. See Note 1 to the September 30, 2013 unaudited condensed consolidated financial statements contained herein. Ecosphere has hired investment banker Ladenburg Thalmann to assist it with obtaining equity financing for these subsidiaries, but initially will focus on Ecosphere Mining, LLC


Recent Success


In 2009, Ecosphere formed Ecosphere Energy Services, LLC or EES, now Fidelity National Environmental Solutions, LLC or FNES, to deploy its patented Ozonix® water treatment technology across the global energy market. Ecosphere and FNES have received numerous awards and accolades for its patented and proven Ozonix® water treatment solutions for the energy sector, including:

·

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

·

2013 Bloomberg New Energy Finance - New Energy Pioneer Award;

·

2013 IHS CERAWeek - Energy Innovation Pioneer Award;

·

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

·

2013 World Technology Awards Corporate "Environment" Category Winner;

·

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

·

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

Since 2009, Ecosphere’s patented Ozonix® technology has enabled oil and gas customers to treat, recycle and reuse over 3 billion gallons of water on more than 800 oil and natural gas wells.


Growth Strategy


Ecosphere’s strategy is to further leverage the Ozonix® technology via widespread partnering and licensing to achieve substantial technology deployment and the corresponding revenue and profit growth. In addition to FNES, formerly EES, Ecosphere plans to replicate the success of its “subsidiary strategy” by granting global field-of-use licenses to numerous industry-specific Ecosphere subsidiaries. Newly formed subsidiaries include:


·

Ecosphere Agriculture, LLC;

·

Ecosphere Food & Beverage, LLC;

·

Ecosphere Industrial, LLC;

·

Ecosphere Marine, LLC;

·

Ecosphere Mining, LLC;

·

Ecosphere Municipal, LLC;



15



 


We recently launched a private placement with our investment banker, Ladenburg Thalmann, seeking to sell a 20% minority position in Ecosphere Mining, LLC for $10 million. In furtherance of our strategy, we have opened an office in Park City, Utah, near much of the mining activity in the United States and produced equipment to demonstrate how Ecosphere Mining can help mining companies deal with wastewater created by mining operations and enhance their recovery of valuable minerals.


From a technical standpoint, Ecosphere has proven the Ozonix® technology in the most challenging treatment market sector, the oil & gas segment of the energy industry; therefore, the technological risks faced when entering other target sectors and industries are significantly diminished.


From a business standpoint, Ecosphere has successfully created a subsidiary to target the Energy industry (one of numerous target market sectors for Ozonix®), and two recent equity sales to Fidelity National Financial, a Fortune 500 company, valued just this one subsidiary at $50 million. It is important for shareholders to note: that in 2009 when FNES, formerly EES, was initially established and the technology was not yet commercially or technologically proven FNF invested $7.5 million in FNES at a $37.5 million valuation to build the equipment that is in use today at Southwestern Energy.


Critical Accounting Estimates


Use of Estimates


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


Revenue Recognition


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


Equipment and Component Sales


Revenues and related costs on production type contracts are recognized using the “percentage of completion method” of accounting in accordance with ASC 605-35, Accounting for Performance of Construction-Type and Certain Production Type Contracts (“ASC 605-35”). Under this method, contract revenues and related expenses are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract. Costs include direct material, direct labor, subcontract labor and any allocable indirect costs. All unallocable indirect costs and corporate general and administrative costs are charged to the periods as incurred. However, in the event a loss on a contract is foreseen, Ecosphere 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, Ecosphere 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, Ecosphere 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".




16



 


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.


Ecosphere 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 Ecosphere are insignificant.


Field Services


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

 

Some projects Ecosphere 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.


Aftermarket Part Sales


Ecosphere 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 as the royalties are earned.


Stock-Based Compensation


Ecosphere follows the provisions of ASC Topic 718-20-10, Compensation – Stock Compensation that establishes standards surrounding the accounting for transactions with employees in which an entity exchanges its equity instruments for services. Under ASC 718-20-10, we recognize an expense for the fair value of our outstanding stock options generally over the requisite service period of the employee service. We follow the measurement and recognition provisions of ASC 505-50 Equity Based Payments to Non-Employees for non-employee stock-based transactions.


We estimate the fair value of each stock option at the grant date by using the Black-Scholes-Merton ("BSM") option pricing model based upon certain assumptions, which are contained in Note 16 to our consolidated financial statements contained herein. The BSM option pricing model requires the input of highly subjective assumptions including the expected stock price volatility.




17



 


Results of Operations

Comparison of the Three Months ended September 30, 2013 with the Three Months Ended September 30, 2012

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,

 

 

 

 

 

 

2013

 

 

2012

 

 

Change

 

 

 

(Unaudited)

 

 

 

 

Revenues

 

 

 

 

 

 

Equipment sales and licensing

 

$

 

 

$

5,664,637

 

 

$

(5,664,637

)

Equipment sales and licensing, related party

 

 

2,268,295

 

 

 

 

 

 

2,268,295

 

Field services

 

 

 

 

 

1,133,021

 

 

 

(1,133,021

)

Aftermarket part sales

 

 

 

 

 

528,725

 

 

 

(528,725

)

Aftermarket part sales, related party

 

 

120,294

 

 

 

 

 

 

120,294

 

Total revenues

 

 

2,388,589

 

 

 

7,326,383

 

 

 

(4,937,794

)

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales and licensing (exclusive of depreciation shown below)

 

 

1,923,064

 

 

 

3,917,182

 

 

 

(1,994,118

)

Field services (exclusive of depreciation shown below)

 

 

 

 

 

576,670

 

 

 

(576,670

)

Aftermarket part costs (exclusive of depreciation shown below)

 

 

95,950

 

 

 

355,061

 

 

 

(259,111

)

Salaries and employee benefits

 

 

1,388,278

 

 

 

1,123,124

 

 

 

265,153

 

Administrative and selling

 

 

280,496

 

 

 

365,565

 

 

 

(85,069

)

Professional fees

 

 

408,266

 

 

 

190,267

 

 

 

217,999

 

Depreciation and amortization

 

 

55,253

 

 

 

556,154

 

 

 

(500,901

)

Research and development

 

 

(21,578

)

 

 

15,819

 

 

 

(37,397

)

Gain on sale/disposal of fixed asset, net

 

 

 

 

 

(142,457

)

 

 

142,457

 

Restructuring charge

 

 

 

 

 

(62,000

)

 

 

62,000

 

Total costs and expenses

 

 

4,129,729

 

 

 

6,895,385

 

 

 

(2,765,657

)

(Loss) income from operations

 

 

(1,741,140

)

 

 

430,998

 

 

 

(2,172,137

)

Loss on investment in unconsolidated investee

 

 

(437,594

)

 

 

 

 

 

(437,594

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(113,478

)

 

 

(111,261

)

 

 

(2,217

)

Loss on sale of interest in unconsolidated investee

 

 

(500,000

)

 

 

 

 

 

(500,000

)

Change in fair value of derivative instruments

 

 

1,215

 

 

 

87,724

 

 

 

(86,509

)

Total other expense, net

 

 

(612,263

)

 

 

(23,537

)

 

 

(588,726

)

Net (loss) income

 

 

(2,790,997

)

 

 

407,461

 

 

 

(3,198,457

)

Preferred stock dividends

 

 

(20,688

)

 

 

(25,687

)

 

 

4,999

 

Net (loss) income applicable to common stock

 

 

(2,811,685

)

 

 

381,774

 

 

 

(3,193,458

)

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

 

 

 

 

 

(65,789

)

 

 

65,789

 

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

 

$

(2,811,685

)

 

$

315,985

 

 

$

(3,127,669

)


Ecosphere reported net loss applicable to Ecosphere Technologies, Inc. common stock of $2.8 million during the three months ended September 30, 2013, or the 2013 Quarter, as compared to a net income applicable to Ecosphere Technologies, Inc. common stock of $0.3 million for the three months ended September 30, 2012, or the 2012 Quarter. The drivers of the $3.1 million quarter-over-quarter change are discussed below.


There are two fundamental differences when comparing the three and nine months ended September 30, 2013 and the same periods for 2012. First, in 2012, Ecosphere’s revenues were consolidated, but since May 2013, Ecosphere no longer reports the field services revenue from FNES operations. Also, there were no equipment sales associated with the Hydrozonix, LLC Agreement for 2013, which had produced substantial revenue in 2012. In its annual report on Form 10-K, Ecosphere disclosed that as a result of Hydrozonix’s loss of exclusivity, it expected declining revenue and cash flow issues for one or more quarters. Until the Hydrozonix Agreement was terminated, FNES could not expand its services business. FNES recently announced a new licensee in Canada to license and market the Ozonix technology in the Alberta region of Canada. Please review and correct per the recent press release.




18



 


Revenues


Revenues for the 2013 Quarter decreased $4.9 million from the 2012 Quarter. The decrease in revenue was driven primarily by failure of Hydrozonix, our U.S. licensee in the oil and gas sector, to maintain its obligations under the license agreement. Although Hydrozonix indicated they were going to continue purchasing per the agreement and were seeking financing, they failed to pay for Units 13 and 14 that were manufactured by Ecosphere in the first quarter of 2013. Ecosphere agreed to allow until April 15th to obtain financing, pay for Units 13 and 14 and order Units 15 and 16 and Hydrozonix agreed not to contest their loss of exclusivity if they were unsuccessful. As a result of their failure to obtain financing Hydrozonix lost their exclusivity and FNES now has regained the right to sell and service into the U.S. onshore oil and gas market with the Ozonix® units and is now able to expand its sales and marketing abilities to take advantage of the new opportunities. This decrease was partially offset by the sale of one Ozonix® EF80 Unit to FNES, a related party. Additionally, Ecosphere no longer reports field services revenue or expenses on its Statements of Operations since it no longer consolidates FNES operations.


In addition, in the 2013 Quarter, Ecosphere engaged in the sale of aftermarket parts, services, upgrades and enhancements related to the Ozonix® EF80 units in use by Hydrozonix. Such activities resulted in $0.1 million in revenues in the 2013 Quarter as compared to $0.5 million in the 2012 Quarter.


Cost and Expenses

 

Equipment Sales and Licensing Costs (exclusive of depreciation)


The equipment sales and licensing costs for the 2013 Quarter were $1.9 million as compared to $3.9 million for the 2012 Quarter. Included in the equipment sales and licensing costs for the 2013 Quarter are the costs associated with the sale of the Ozonix® EF80 and the excess costs associated with the Ozonix® EF10M that is being built for FNES.


Field Services Costs (exclusive of depreciation)


Due to the deconsolidation of FNES in May 2013, there were no field services costs for the 2013 Quarter as compared to $0.6 million for the 2012 Quarter. All field services costs are related to the services business of FNES and since deconsolidation, Ecosphere has not incurred field services costs. Included in these costs for both periods are payroll related expenses for field personnel and parts and supplies used in support of the operation of Ozonix® water treatment systems and Ecos-Frac® products, which were lower due to decreased field services revenues discussed above.


Aftermarket Part Costs (exclusive of depreciation)


The costs associated with the sale of aftermarket parts amount to $0.1 million for the 2013 Quarter as compared to $0.4 million for the 2012 Quarter. During the 2012 Quarter, Ecosphere began engaging in the sale of aftermarket parts, services, upgrades and enhancements related to the Ozonix® EF80 units in service by Hydrozonix.


Salaries and Employee Benefits


The increase in salaries and employee benefits of $0.3 million was primarily the result of mid-year 2013 cash bonuses paid and unabsorbed manufacturing labor increased due to lack of manufacturing equipment during the 2013 Quarter.


Professional Fees


The $0.2 million increase in professional fees for the 2013 Quarter was driven by the increase in consulting fees relating to two consulting agreements entered into in January 2013. In addition, legal fees increased due to the Halliburton arbitration.


(Loss) Income from Operations


Loss from operations for the 2013 Quarter was $1.7 million compared to income from operations of $0.4 million for the 2012 Quarter. See discussion above under "Revenues" and "Cost and Expenses" for details.




19



 


Loss on investment in unconsolidated investee


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


Loss on sale of interest in unconsolidated investee


In July 2013, Ecosphere sold 8% interest in FNES to Fidelity National Financial. In connection with the sale of Ecosphere’s interest in FNES, Ecosphere transferred 0.50% interest and paid $250,000 in cash to an existing FNES member. This further reduced our investment in FNES and the $250,000 cash payment was recorded on the statement of operations as “Loss on sale of interest in unconsolidated investee.”


Net loss (Income) Applicable to Noncontrolling Interest in Consolidated Subsidiary


Ecosphere no longer has net loss (income) applicable to noncontrolling interest in our FNES consolidated majority-owned subsidiary due to the deconsolidation of FNES in May 2013. The net income applicable to noncontrolling interest of consolidated subsidiary was $0.1 million for the 2012 Quarter.


Comparison of the Nine Months ended September 30, 2013 with the Nine Months Ended September 30, 2012


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,

 

 

 

 

 

 

2013

 

 

2012

 

 

Change

 

 

 

(Unaudited)

 

 

 

 

Revenues

 

 

 

 

 

 

Equipment sales and licensing

 

$

 

 

$

17,091,344

 

 

$

(17,091,344

)

Equipment sales and licensing, related party

 

 

2,268,295

 

 

 

 

 

 

2,268,295

 

Field services

 

 

1,547,786

 

 

 

6,692,213

 

 

 

(5,144,427

)

Aftermarket part sales

 

 

287,724

 

 

 

528,725

 

 

 

(241,001

)

Aftermarket part sales, related party

 

 

122,521

 

 

 

 

 

 

122,521

 

Total revenues

 

 

4,226,326

 

 

 

24,312,282

 

 

 

(20,085,956

)

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales and licensing (exclusive of depreciation shown below)

 

 

1,923,064

 

 

 

12,587,605

 

 

 

(10,664,541

)

Field services (exclusive of depreciation shown below)

 

 

721,214

 

 

 

2,092,252

 

 

 

(1,371,038

)

Aftermarket part costs (exclusive of depreciation shown below)

 

 

322,423

 

 

 

355,061

 

 

 

(32,638

)

Salaries and employee benefits

 

 

3,991,622

 

 

 

3,691,375

 

 

 

300,247

 

Administrative and selling

 

 

1,012,112

 

 

 

1,182,788

 

 

 

(170,676

)

Professional fees

 

 

1,562,786

 

 

 

567,622

 

 

 

995,164

 

Depreciation and amortization

 

 

931,504

 

 

 

1,657,324

 

 

 

(725,820

)

Research and development

 

 

(3,373

)

 

 

28,290

 

 

 

(31,663

)

Gain on sale/disposal of fixed asset, net

 

 

 

 

 

(142,457

)

 

 

142,457

 

Restructuring charge

 

 

(3,170

)

 

 

(62,000

)

 

 

58,830

 

Total costs and expenses

 

 

10,458,182

 

 

 

21,957,860

 

 

 

(11,499,678

)

Income (loss) from operations

 

 

(6,231,856

)

 

 

2,354,422

 

 

 

(8,586,278

)

Loss on investment in unconsolidated investee

 

 

(483,598

)

 

 

 

 

 

(483,598

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Gain on deconsolidation

 

 

29,474,609

 

 

 

 

 

 

29,474,609

 

Interest expense

 

 

(351,707

)

 

 

(286,602

)

 

 

(65,105

)

Loss on sale of interest in unconsolidated investee

 

 

(500,000

)

 

 

 

 

 

(500,000

)

Other income (expense)

 

 

 

 

 

4,627

 

 

 

(4,627

)

Change in fair value of derivative instruments

 

 

89,894

 

 

 

1,729

 

 

 

88,165

 

Total other income (expense), net

 

 

28,712,796

 

 

 

(280,246

)

 

 

28,993,042

 

Net income

 

 

21,997,342

 

 

 

2,074,176

 

 

 

19,923,166

 

Preferred stock dividends

 

 

(62,064

)

 

 

(77,125

)

 

 

15,061

 

Net income applicable to common stock

 

 

21,935,278

 

 

 

1,997,051

 

 

 

19,938,227

 

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

 

 

187,806

 

 

 

(810,420

)

 

 

998,226

 

Net income applicable to Ecosphere Technologies, Inc. common stock

 

$

22,123,084

 

 

$

1,186,631

 

 

$

20,936,453

 



20



 


Ecosphere reported net income applicable to Ecosphere common stock of $22.1 million during the nine months ended September 30, 2013 or the 2013 Nine Month Period as compared to a net income applicable to Ecosphere common stock of $1.2 million for the nine months ended September 30, 2012 or the 2012 Nine Month Period. The drivers of the $20.9 million change are discussed below.


Revenues


Revenues for the nine months ended September 30, 2013 decreased $20.1 million from the nine months ended September 30, 2012. The decrease in revenue was driven primarily by the absence of revenues from equipment sales due to Hydrozonix’s failure to pay for Units 13-14 on April 15, 2013, causing Hyrdozonix to lose its exclusivity to the U.S. onshore oil and gas industry. As a result, FNES regained the exclusive U.S. onshore oil and gas license for Ozonix®. After the deconsolidation of FNES in May 2013, Ecosphere no longer reports field services revenue or expenses on its Statements of Operations since it no longer consolidates FNES operations. In July 2013, FNES purchased Ozonix® EF80 Unit 13 for $2.4 million with a down payment of $0.5 million and the remaining balance to be paid over a 36 month period. Management expects that the sale of the remaining Ozonix® EF80 Unit 14 to occur prior to the year ended December 31, 2013. 


During the 2012 Period, Ecosphere engaged in the sale of aftermarket parts, services, upgrades and enhancements related to the Ozonix® EF80 units in use by Hydrozonix. There was a decrease of $0.1 million in the sale of aftermarket parts for the 2013 Period.


Cost and Expenses

 

Equipment Sales and Licensing Costs (exclusive of depreciation)


Cost of equipment sales and licensing amounted to $1.9 million for the 2013 Nine Month Period as compared to $12.6 million during the 2012 Nine Month Period. Included in the equipment sales and licensing costs for the 2013 Quarter are the costs associated with the sale of one Ozonix® EF80 to FNES and the excess costs associated with the Ozonix® EF10M that is being built for FNES.


Field Services Costs (exclusive of depreciation)


The cost of providing field services during the 2013 Nine Month Period was $0.7 million compared to $2.1 million during the 2012 Nine Month Period. Included in these costs for both periods are payroll related expenses for field personnel and parts and supplies used in support of the operation of Ozonix® water treatment systems and Ecos-Frac® products, which were lower due primarily to the deconsolidation of FNES.


Aftermarket Part Costs (exclusive of depreciation)


The costs associated with the sale of aftermarket parts amount to $0.3 million for the 2013 Period as compared to $0.4 million for the 2012 Nine Month Period. During the 2012 Nine Month Period, Ecosphere began engaging in the sale of aftermarket parts, services, upgrades and enhancements related to the Ozonix® EF80 units in service by Hydrozonix.


Salaries and Employee Benefits


The increase in salaries and employee benefits of $0.3 million was primarily the result of mid-year cash bonuses paid and unabsorbed manufacturing labor increased due to lack of manufacturing equipment during the 2013 Quarter.


Professional Fees


The $1.0 million increase in professional fees during the 2013 Nine Month Period was driven by the increase in consulting fees relating to two consulting agreements entered into in January 2013. In addition, legal fees increased due to the Halliburton arbitration.


(Loss) Income from Operations


Loss from operations during the 2013 Nine Month Period was $6.2 million compared to income of $2.4 million for 2012 Nine Month Period. See discussion above under "Revenues," "Cost and Expenses" for details.




21



 


Loss on investment in unconsolidated investee


On May 24, 2013, Ecosphere sold a 12% interest in FNES and transferred an additional 1.5% interest to a board member of FNES, reducing Ecosphere’s ownership in FNES from 52.6% to 39.1%. Since May 24, 2013, Ecosphere accounts for its investment in FNES under the equity method. Furthermore, in July 2013, Ecosphere sold an additional 8% interest in FNES and transferred an additional 0.5% interest in FNES reducing Ecosphere’s ownership in FNES from 39.1% to 30.6%. During the 2013 Nine Month Period, the loss on investment in unconsolidated investee was $0.5 million resulting from a cash payment of $250,000 and the transfer of 0.5% interest in FNES to a member of FNES.


Gain on Deconsolidation


The sale of our controlling interest in FNES resulted in the recognition of a $29.5 million gain for the 2013 Quarter. Effective May 24, 2013, Ecosphere began to account for its investment in FNES using the equity method of accounting. See “Loss on investment in unconsolidated investee” above for details. 


Loss on sale of interest in unconsolidated investee


In July 2013, Ecosphere sold 8% interest in FNES to Fidelity National Financial. In connection with the sale of Ecosphere’s interest in FNES, Ecosphere transferred 0.5% interest and paid $250,000 in cash to an existing FNES board member. This further reduced our investment in FNES and the $250,000 cash payment was recorded on the statement of operations as “Loss on sale of interest in unconsolidated investee.”


Net loss (Income) Applicable to Noncontrolling Interest in Consolidated Subsidiary


Net loss (income) applicable to the noncontrolling interest in our FNES consolidated majority-owned subsidiary decreased by approximately $1.0 million due to the deconsolidation of FNES.


Comparison of the Year ended December 31, 2012 with the Year ended December 31, 2011

 

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


 

 

For the Years Ended

December 31,

 

 

 

 

 

 

2012

 

 

2011

 

 

Change

 

Revenues

 

 

 

 

 

 

 

 

 

Equipment sales and licensing

 

$

22,602,408

 

 

$

11,460,078

 

 

$

11,142,330

 

Field services

 

 

7,405,266

 

 

 

9,628,081

 

 

 

(2,222,815

)

Aftermarket part sales

 

 

1,124,624

 

 

 

 

 

 

1,124,624

 

Total revenues

 

 

31,132,298

 

 

 

21,088,159

 

 

 

10,044,139

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

16,430,617

 

 

 

8,261,524

 

 

 

8,169,093

 

Field services costs (exclusive of depreciation shown below)

 

 

2,492,397

 

 

 

2,583,911

 

 

 

(91,514

)

Aftermarket part costs (exclusive of depreciation shown below)

 

 

773,929

 

 

 

 

 

 

773,929

 

Salaries and employee benefits

 

 

5,514,920

 

 

 

10,319,678

 

 

 

(4,804,758

)

Administrative and selling

 

 

1,619,351

 

 

 

1,590,288

 

 

 

29,063

 

Professional fees

 

 

788,979

 

 

 

1,250,910

 

 

 

(461,931

)

Depreciation and amortization

 

 

2,318,605

 

 

 

2,174,983

 

 

 

143,622

 

Research and development

 

 

28,290

 

 

 

247,107

 

 

 

(218,817

)

Total costs and expenses

 

 

29,967,088

 

 

 

26,428,401

 

 

 

3,538,687

 

Income (loss) from operations

 

 

1,165,210

 

 

 

(5,340,242

)

 

 

6,505,452

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(360,031

)

 

 

(581,392

)

 

 

221,361

 

Restructuring charge reversal

 

 

62,000

 

 

 

 

 

 

62,000

 

Gain on sale/disposal of fixed assets, net

 

 

142,457

 

 

 

 

 

 

142,457

 

Gain (loss) on conversion

 

 

 

 

 

(93,762

)

 

 

93,762

 

Other income (expense)

 

 

3,057

 

 

 

909

 

 

 

2,148

 

Change in fair value of derivative instruments

 

 

41,374

 

 

 

152,888

 

 

 

(111,514

)

Total other income (expense)

 

 

(111,143

)

 

 

(521,357

)

 

 

410,214

 

Net income (loss)

 

 

1,054,067

 

 

 

(5,861,599

)

 

 

6,915,666

 

Preferred stock dividends

 

 

(102,813

)

 

 

(103,000

)

 

 

187

 

Net income (loss) applicable to common stock

 

 

951,254

 

 

 

(5,964,599

)

 

 

6,915,853

 

Net income applicable to noncontrolling interest of consolidated subsidiary

 

 

(815,054

)

 

 

(1,690,075

)

 

 

875,021

 

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

 

$

136,200

 

 

$

(7,654,674

)

 

$

7,790,874

 



22



 


Ecosphere reported net income applicable to Ecosphere common stock of $0.1 million during the year ended December 31, 2012 or the 2012 Period as compared to a net loss applicable to Ecosphere common stock of $7.7 million for the year ended December 31, 2011 or the 2011 Period. The major driver of the variance in earnings is Ecosphere's entering into the Hydrozonix Agreement in March 2011 and delivering its initial units beginning in the third quarter of 2011.


Revenues


Revenues for the 2012 Period increased $10 million over 2011 Period. The increase in revenue is driven largely by Ecosphere selling eight Ozonix® EF80 units under the Hydrozonix Agreement in 2012 versus four units sold in 2011.


In addition, in the 2012 Period Ecosphere began engaging in the sale of aftermarket parts, services, upgrades and enhancements related to the EF80 units in use by Hydrozonix. Such activities resulted in $1.1 million in revenues in the 2012 Period.


Partially offsetting the increase in revenues discussed above was a decline in the services business as Southwestern Energy ceased using our services in November 2012, although it resumed in February 2013.


The three months ended March 31, 2013 was driven by Hydrozonix’s failure to pay for Units 13-14. Units 13-14 have passed benchmark testing overseen by Hydrozonix. This means that they have been manufactured in accordance with Hydrozonix’s specifications. Hydrozonix subsequently failed to pay for Units 13-14 and lost its exclusivity.


Costs and Expenses


Equipment Sales and Licensing Costs (exclusive of depreciation)


Equipment sales and licensing costs amounted to $16.4 million for the 2012 Period as compared to $8.3 million during the 2011 Period. These costs represent the cost of the manufacture of the EF80 water treatment units sold to Hydrozonix. The increase in costs is due to building eight units in the 2012 Period versus four EF80 units in the 2011 Period.


Field Services Costs (exclusive of depreciation)


The cost of providing field services was $2.5 million compared to $2.6 million in the 2011 Period. Included in these costs for both periods are payroll related expenses for field personnel and parts and supplies used in support of the operation of Ozonix® water treatment systems and Ecos-Frac® products, which were lower due to (i) lower sales volume in the 2012 Period, (ii) efficiencies in our processes resulting in part from additional multiple well pad processing sites, and (iii) lower gas costs in the Period. Largely offsetting the impact of these favorable factors were fixed costs incurred during downtime in the fourth quarter of the 2012 Period.


Aftermarket Part Costs (exclusive of depreciation)


The costs associated with the sale of aftermarket parts amount to $0.8 million for the 2012 Period. Ecosphere began engaging in the sale of aftermarket parts, services, upgrades and enhancements related to the Ozonix® EF80 units in service by Hydrozonix.


Salaries and Employee Benefits


The decrease in salaries and employee benefits of $4.8 million was primarily the result of a decrease in non-cash stock-based compensation expense in the 2012 Period compared to the 2011 Period.


Professional Fees


The decrease in professional fees of $0.5 million was largely driven by the 2011 Period costs being driven up by fees associated with the negotiation of the Hydrozonix Agreement.


Research and Development


Research and development expenses were de minimis in the 2012 Period given Ecosphere's focus on manufacture of developed technology versus the 2011 Period wherein the technology was in the final stages of development.

 



23



 


Restructuring Charge Reversal


Revisions to previous estimates of restructuring costs associated with the June 2009 closing of Ecosphere's New York office resulted in a reversal of $62,000 of expense in the 2012 Period.


Gain on Sale/Disposal of Fixed Assets, Net


Ecosphere sold a water treatment unit that had been part of its historical fixed assets. The net book value of such unit was written off pursuant to a September 2010 impairment charge. Ecosphere incurred costs of $33,933 to bring the unit to saleable condition. Such costs are included in capital expenditures. Ecosphere received proceeds of $206,000 for the unit and, accordingly, recognized a gain of $172,067 on the transaction. Partially offsetting this gain was a loss on the disposal of certain demo equipment amounting to $29,610.


Income (Loss) From Operations

 

Income from operations 2012 Period was $1.2 million compared to a loss of $5.3 million for the 2011 Period. See discussion above under "Revenues" and "Costs and Expenses" for further details.


Interest Expense

 

Interest expense was $0.4 million and $0.6 million for the years ended December 31, 2012 and 2011, respectively. The decline in 2012 is the result of a decrease in the weighted average debt outstanding during the 2012 Period as compared to the same period in 2011. During the 2012 Period, Ecosphere reduced outstanding net debt by $0.7 million. In addition, during the 2012 Period, Ecosphere converted $0.8 million face value in convertible notes into common stock.


Change in Fair Value of Derivative Instruments


Ecosphere recorded non-cash gains of $41,374 in the 2012 Period and $152,888 in the 2011 Period related to the change in fair value of derivative instruments. The 2012 valuation of liabilities was based on a 6% obligation when compared to total liabilities while 2011 represented 7%.


Ecosphere records a liability for the fair value of warrants with repricing provisions. Under ASC 815-40, the fair value of these liabilities is calculated at each reporting date with the change in liability recorded in other income or expense. Ecosphere estimates the fair value of these liabilities using the BSM option pricing model and Monte Carlo simulation. 

 

Noncontrolling Interest of Consolidated Subsidiary

 

The noncontrolling interest in consolidated subsidiary income was $0.8 million for the 2012 Period as compared to $1.7 million for the 2011 Period. These amounts represent the amount of the income of EES for the respective periods which has been allocated to the non-controlling equity members of EES.

 

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

 

Net income (loss) applicable to common stock of Ecosphere was $0.1 million for the 2012 Period, compared to a net loss applicable to common stock of $7.7 million for the 2011 Period. Basic and diluted net income per common share was $0.00 for the year ended December 31, 2012 as compared to a basic and diluted net loss per common share of $0.05 for the year ended December 31, 2011. The weighted average number of shares outstanding was 148,989,308 and 143,989,520 for the years ended December 31, 2012 and 2011, respectively. Fully diluted weighted average shares outstanding were 154,568,010 and 143,989,520 for the years ended December 31, 2012 and 2011, respectively.




24



 


Comparison of the Year ended December 31, 2011 with the Year ended December 31, 2010

 

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


Results Of Operations


 

 

For the Years Ended

December 31,

 

 

 

 

 

 

2011

 

 

2010

 

 

Change

 

Revenues

 

 

 

 

 

 

 

 

 

Equipment sales and licensing

 

$

11,460,078

 

 

$

 

 

$

11,460,078

 

Field services

 

 

9,628,081

 

 

 

8,964,484

 

 

 

663,597

 

Total revenues

 

 

21,088,159

 

 

 

8,964,484

 

 

 

12,123,675

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Equipment sales and licensing costs (exclusive of depreciation)

 

 

8,261,524

 

 

 

 

 

 

8,261,524

 

Field services costs (exclusive of depreciation)

 

 

2,583,911

 

 

 

3,394,688

 

 

 

(810,777

)

Salaries and employee benefits

 

 

10,319,678

 

 

 

8,999,824

 

 

 

1,319,854

 

Administrative and selling

 

 

1,590,288

 

 

 

1,696,774

 

 

 

(106,486

)

Professional fees

 

 

1,250,910

 

 

 

1,197,017

 

 

 

53,893

 

Depreciation and amortization

 

 

2,174,983

 

 

 

1,957,881

 

 

 

217,102

 

Research and development

 

 

247,107

 

 

 

163,328

 

 

 

83,779

 

Restructuring charge

 

 

 

 

 

50,000

 

 

 

(50,000

)

Asset impairment

 

 

 

 

 

116,000

 

 

 

(116,000

)

Total costs and expenses

 

 

26,428,401

 

 

 

17,575,512

 

 

 

8,852,889

 

Loss from operations

 

 

(5,340,242

)

 

 

(8,611,028

)

 

 

3,270,786

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(581,392

)

 

 

(1,176,222

)

 

 

594,830

 

Loss on conversion

 

 

(93,762

)

 

 

(19,604

)

 

 

(74,158

)

Gain (loss) on settlement

 

 

 

 

 

(65,756

)

 

 

65,756

 

Other income (expense)

 

 

909

 

 

 

292

 

 

 

617

 

Change in fair value of derivative instruments

 

 

152,888

 

 

 

(12,787,666

)

 

 

12,940,554

 

Total other income (expense)

 

 

(521,357

)

 

 

(14,048,956

)

 

 

13,527,599

 

Net loss

 

 

(5,861,599

)

 

 

(22,659,984

)

 

 

16,798,385

 

Preferred stock dividends

 

 

(103,000

)

 

 

(105,500

)

 

 

(2,500

)

Net loss applicable to common stock

 

 

(5,964,599

)

 

 

(22,765,484

)

 

 

16,800,885

 

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

 

 

(1,690,075

)

 

 

528,277

 

 

 

2,218,352

 

Net loss applicable to Ecosphere Technologies, Inc. common stock

 

$

(7,654,674

)

 

$

(22,237,207

)

 

$

14,582,533

 


Ecosphere reported a net loss applicable to Ecosphere common stock of $7.7 million during the year ended December 31, 2011 as compared to a net loss applicable to Ecosphere common stock of $22.2 million for the year ended December 31, 2010 (the "2010 Period"). The major driver of the variance in net loss is the accounting for change in fair value of derivative instruments that impacted the prior year comparative period as discussed below. Loss from operations of $5.3 million for the 2011 Period compares favorably with a prior year loss from operations of $8.6 million. It should be noted that the 2011 Period loss from operations includes certain significant non-cash components including approximately $6.7 million of stock-based compensation expense. Ecosphere actually reported over $2.6 million of cash flow from operations for the 2011 Period.


Revenues


Revenues for the year ended December 31, 2011 increased $12.1 million over year ended December 31, 2010. The increase in revenue is driven by Ecosphere selling its first four Ozonix® EF80 units under the Hydrozonix Agreement which amounted to $11.5 million. The remainder of the revenue increase was from ongoing services contracts. The increase was the result of increased volume of activities in our business of pretreating water to fracture oil and natural gas wells and the processing of flowback and produced waters.




25



 


Costs and Expenses


Equipment Sales and Licensing Costs (exclusive of depreciation)


During the 2011 period, these costs represented the cost of the manufacture of the Ozonix® EF80 water treatment units sold to Hydrozonix. We build the Ozonix® EF80 units under a “cost plus” formula whereby the buyer pays in advance for the components and labor costs to build the units. Cost of Revenues for equipment sales and licensing was $8.3 million and covered the building of four EF80 units. The first two units were “capped” at a maximum build cost to the client of $2.75 million which was subsequently increased to $2.8 million with the increase in capacity from 60 to 80 barrels per minute. From the third unit on, there is no cap on the cost of the components and labor, which will ensure that operating income will not be impacted by cost variances.


Field Services Costs (exclusive of depreciation)


The cost of providing field services for the 2011 Period was $2.6 million, which was a reduction of $0.8 million from the 2010 Period. Included in these costs for both periods are the payroll related costs of field personnel and parts and supplies used in support of the operation of Ozonix® water treatment system and Ecos-Frac® products which were lower despite higher sales volume in the 2011 Period. Such favorability is the result of efficiencies in our processes resulting in part from additional multiple well pad processing sites, as well as lower gas costs in the 2011 Period.


Salaries and Employee Benefits


Salaries and employee benefits increased by $1.3 million largely as a result of higher non-cash compensation expense related to option grants in 2011.


Administrative and Selling


Administrative and selling expenses decreased by $0.1 million due to greater efficiencies being achieved.


Professional Fees


Professional fees were consistent with the prior year.


Depreciation and Amortization


The $0.2 million increase in depreciation and amortization expense is due to additional capital equipment purchased for the manufacture of EF80 units.


Research and Development


The $0.1 million increase in R&D costs was incurred in making improvements in the Ozonix® process and technologies.

 

Impairment Reserve

 

Ecosphere recorded a charge of $116,000 in the 2010 Period to reserve for the impairment in the value of Ecosphere’s non-Ozonix® water treatment system which was previously installed in the tactical water filtration truck. There was no impairment charge in 2011.


Restructuring Reserve


Ecosphere recorded a charge of $50,000 in the 2010 Period, compared to no charge in the 2011 Period. The 2010 charge was required to increase the restructuring reserve which was recorded in 2009 based upon Ecosphere’s decision to close the New York office.


Loss From Operations

 

Loss from operations for the year ended December 31, 2011 was $5.3 million compared to a loss of $8.6 million for the year ended December 31, 2010. See discussion above under "Revenues" and "Costs and Expenses" for further details.




26



 


Interest Expense

 

Interest expense was $0.6 million and $1.2 million for the years ended December 31, 2011 and 2010, respectively. The decline in 2011 is the result of a decrease in the weighted average debt outstanding during the 2011 Period as compared to the same period in 2010. During the 2011 Period, Ecosphere reduced outstanding debt by $0.8 million. This reduction in debt was almost entirely due to the retirement of two interest bearing notes that Ecosphere’s subsidiary EES had with one of its minority members. In the 2010 period, Ecosphere converted $2.1 million in convertible notes and $0.4 million in related party debt into common stock.


Change in Fair Value of Derivative Instruments


Ecosphere recorded a non-cash gain of $152,888 related to the change in fair value of derivative instruments for the year ended December 31, 2011.


Ecosphere adopted ASC 815-40 effective January 1, 2009. Under ASC 815-40 Ecosphere recorded a liability for the fair value of warrants and the embedded conversion options of certain convertible debt agreements as of January 1, 2009 in the amount of $10.2 million. Under ASC 815-40, the fair value of these liabilities is calculated at each reporting date with the change in liability recorded in other income or expense.

 

The change in fair value of derivative instruments in other expense was $12.8 million for the year ended December 31, 2010. This change in 2010 resulted primarily from a large increase in the fair value of the liability for derivative instruments in the first quarter of 2010 due to the increase in the market price of Ecosphere’s common stock from $0.48 per share as of December 31, 2009 to $1.50 per share as of March 31, 2010. As of December 31, 2010, there were no remaining convertible notes which generate a derivative liability for Ecosphere. In addition, the number of warrants requiring derivative accounting treatment has been reduced from 16.9 million warrants at December 31, 2009 to 1.7 million warrants at December 31, 2010 and further to 1.2 million at December 31, 2011 through a combination of exercises by holders and through holders agreeing to modify the warrant terms to eliminate the requirement to treat the warrants as derivative instruments, in exchange for extending the expiration date of the warrants. As such, we anticipate that future other income and expense from these financial instruments will continue to diminish.

 

Non-controlling Interest of Consolidated Subsidiary

 

The non-controlling interest of consolidated subsidiary income was $1.7 million for the year ended December 31, 2011 as compared to a loss of $0.5 million for the year ended December 31, 2010. This 2011 Period amount represents the amount of the income of EES for the year ended December 31, 2011 which has been allocated to the non-controlling equity members of the subsidiary.

 

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

 

Net loss applicable to common stock of Ecosphere was $7.7 million for the year ended December 31, 2011, compared to a net loss applicable to common stock of $22.2 million for the year ended December 31, 2010. Net loss per common share was $0.05 for the year ended December 31, 2011 as compared to a net loss per common share of $0.17 for the year ended December 31, 2010. The weighted average number of shares outstanding was 143,989,520 and 131,502,601 for the years ended December 31, 2011 and 2010, respectively. The net loss of $7.7 million contained various non-cash items including $6.7 million of stock based compensation expense.


Liquidity And Capital Resources


A summary of our cash flows is as follows:


 

 

Nine Months Ended

September 30,

 

 

Year Ended

December 31,

 

 

 

2013

 

 

2012

 

 

2012

 

 

2011

 

 

2010

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

 

(8,570,886

)

 

 

3,022,591

 

 

 

3,869,222

 

 

 

2,610,681

 

 

 

(1,267,206

)

Net cash (used in) provided by investing activities

 

 

7,775,147

 

 

 

64,513

 

 

 

(227,554

)

 

 

(622,240

)

 

 

(1,825,260

)

Net cash (used in) provided by financing activities

 

 

(233,409

)

 

 

(1,514,290

)

 

 

(3,220,350

)

 

 

8,765

 

 

 

2,049,615

 




27



 


2013 Nine Month Period


Operating Activities


Net cash used in operating activities was $8.6 million for the nine months ended September 30, 2013, compared to net cash provided by operating activities of $3.0 million for the nine months ended September 30, 2012. Cash used in operating activities for 2013 resulted primarily from the operating loss of $6.2 million, and $3.3 million for the build out of the two Ozonix® EF80’s, offset by noncash expenses of approximately $1.4 million. Ecosphere also paid down its accounts payable and accrued expenses by approximately $780,000 and financed the sale of an EF-80 to FNES in the amount of approximately $1.9 million. Exclusive of paying down our accounts payable and accrued expenses, and providing financing terms to FNES for the sale of an EF-80, we used approximately $4.3 million in operations during the nine months ended September 30, 2013.


Investing Activities


Ecosphere’s net cash provided by investing activities of $7.8 million was the result of net proceeds from the sale of a 12% interest in May 2013 and an additional 8% in July 2013 in FNES totaling approximately $9.6 million, offset by $0.2 million of property and equipment purchases, the repayment of $1.4 million advanced by FNES, and $0.25 million of cash held by EES on the date of deconsolidation.


Financing Activities


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


2012 Nine Month Period


Operating Activities


Cash provided by operating activities in the 2012 period of $3.0 million resulted from net income applicable to Ecosphere Technologies, Inc. common stock of $1.2 million, non-cash charges of $3.7 million, partially offset by a $1.9 million use of cash resulting from working capital changes.


Non-cash charges included (i) depreciation and amortization of $1.7 million, (ii) vesting of options and restricted stock of $1.2 million, (iii) $0.8 million in income allocable to noncontrolling interests, (iv) $0.1 million gain on the sale of fixed assets (proceeds are in the investing section), and (v) $0.2 million in debt accretion.

Changes in working capital amounted to a use of $1.9 million in cash and were largely due to increases in accounts receivable which are driven by timing of collections and decreases in accounts payable and accrued liabilities due to timing of payments. See the unaudited condensed consolidated statements of cash flows for additional details.


Investing Activities


Proceeds from the sale of a fixed asset amounted to $0.2 million which was partially offset by capital expenditures of $0.1 million.


Financing Activities


Ecosphere’s net cash used in financing activities consisted of a $1.6 million cash distribution to the noncontrolling partners of Ecosphere’s wholly-owned FNES subsidiary and $0.3 million in debt repayments. Partially offsetting these uses of cash was $0.4 million in cash proceeds from option and warrant exercises and warrant modifications.


Cash Flows from Operating Activities (2012, 2011, 2010):


Net cash provided by operating activities was $3.9 million for the year ended December 31, 2012, compared to net cash provided by operating activities of $2.6 million for the year ended December 31, 2011 and net cash used in operating activities of $1.3 million for the year ended December 31, 2010. This represents the second consecutive year in which we had positive cash flow from operations. Cash provided by operating activities in the 2012 Period resulted from the net income applicable to common stock of $0.1 million along with non-cash charges of $4.7 million, partially offset by a $1.0 million use of cash resulting from working capital changes.




28



 


Year Ended 2012


Non-cash charges included (i) stock based compensation expense of $1.5 million, (ii) depreciation and amortization of $2.3 million, (iii) $0.8 million in income allocable to our EES partners, (iv) $0.2 million of non-cash interest, offset by (v) $0.1 million, net in other miscellaneous non-cash charges.


Changes in working capital amounted to a use of $1.0 million in cash and were largely the result of decreases in payables and an increase in receivables and inventory driven by increased business activity pursuant to the Hydrozonix Agreement and timing.


Year Ended 2011


Cash provided in operating activities in the 2011 Period of $2.6 million resulted from the net loss applicable to common stock of $7.7 being exceeded by non-cash charges of $10.9 million, partially offset by a $0.6 million use of cash resulting from working capital changes.


Non-cash charges included (i) stock based compensation expense of $6.7 million, (ii) depreciation and amortization of $2.2 million, (iii) $1.7 million in income allocable to our EES partners, (iv) $0.3 million of non-cash interest, and (v) $0.2 million in other miscellaneous non-cash charges offset by (vi) $0.2 million in income related to fair value adjustment of warrant derivative liabilities.


Changes in working capital amounted to a use of $0.6 million in cash and were largely the result of decreases in payables and an increase in receivables which were partially offset by increases in accrued expenses all of which are driven by increased business activity in both of our operating segments and timing.


Year Ended 2010


The cash impact of the 2010 Period net loss of $22.2 million was largely offset by (i) non-cash expenses of $8.5 million (ii) an increase in the fair value of the liability for derivative instruments of $12.8 million (iii) an increase in accounts payable of $0.4 million, and (iv) an increase in accrued expenses of $0.4 million. These impacts were partially offset by a decrease in deferred revenue of $0.7 million and the $0.5 million allocation of the EES net loss to the non-controlling equity members.


Cash Flows from Investing Activities (2012, 2011, 2010):


Ecosphere’s net cash used in investing activities was $0.2 million during the 2012 Period compared to $0.6 million and $1.8 million during the 2011 Period and 2010 Period, respectively.


Year ended 2012


Ecosphere invested $0.4 million in equipment to support the manufacturing and marketing processes and sold a previously written off water filtration unit, which was part of Ecosphere's fixed assets, realizing approximately $0.2 million in proceeds.


Year ended 2011


Ecosphere invested $0.4 million in equipment and leasehold improvements related to its manufacturing facility and made approximately $0.2 million of upgrades to existing equipment in order to enhance its ability to perform under the Hydrozonix Agreement for a total of $0.6 million.


Year ended 2010


Ecosphere invested $2.0 million to build new equipment and update old equipment and invested $0.2 million in vehicles and leasehold improvements. These expenditures were partially offset by the release of restricted cash of $0.4 million that had been held in escrow for certain convertible note agreements which were converted into common stock in 2010.


Cash Flows from Financing Activities (2012, 2011, 2010):


Ecosphere used $3.2 million in financing activities in the 2012 Period largely made up of distributions to its EES subsidiary's minority members. Ecosphere’s net cash provided by financing activities was de minimis in the 2011 Period and was $2.0 million for the 2010 Period. Proceeds from financing activities including the issuance of notes and stock option and warrant exercises were largely offset by repayments of debt in the 2011 Period.




29



 


Year ended 2012


Ecosphere's net cash used in financing activities consisted primarily of $3.2 million in distributions paid to EES’ minority members. In addition, Ecosphere received (i) $0.3 million in proceeds from warrant and option exercises, and (ii) $0.1 million in proceeds from warrant modifications. Offsetting the proceeds noted above was approximately $0.4 million in net debt repayments over borrowings.


Year ended 2011


Ecosphere's net cash provided by financing activities consisted primarily of proceeds from (i) the issuance of convertible debt and warrants of $1.6 million (ii) proceeds from the exercise of warrants and options of $0.8 million, and (iii) $0.2 million in equipment financing. Cash used in financing activities included payments on related party notes of $2.4 million and repayments on vehicle, insurance and equipment financings of approximately $0.2 million.


Year ended 2010


During the 2010 Period, Ecosphere received $0.4 million from the issuance of convertible notes and warrants, $0.5 million from the sale of common stock and warrants, $1.2 million in connection with the exercise of options and warrants to purchase shares of common stock, $0.8 million for exchanging warrants and cash for new warrants and $42,000 from vehicle financing. These sources were used make payments on notes payable of $0.7 million, vehicle and insurance finance payments of $0.2 million and to make payments on capital leases of $13,080.


Liquidity


As of September 30, 2013, Ecosphere had cash on hand of approximately $1.4 million and a working capital of $3.0 million. As of January 15, 2014, Ecosphere had cash on hand of approximately $0.6 million.

In July 2013, Ecosphere sold an additional 8% interest in FNES for gross proceeds of $4 million, and sold an Ozonix® EF80 unit to FNES for $2.4 million, $500,000 of which was paid in July 2013, and the remainder payable in equal monthly installments of approximately $52,778 over 36 months. Since December 18, 2013, Ecosphere has raised approximately $1.85 million through the sale of the Notes and warrants which is described under “Private Placements” on page 12. Management believes that its current plans will provide sufficient liquidity for the next 12 months and beyond. Management’s plans and potential opportunities include the following:

Ecosphere plans to continue monetizing its intellectual property, and has identified the following liquidity sources that it expects to realize over the next three years:

·

Ecosphere launched a private placement of $5 million of Notes and warrants in mid-December 2013 and has received approximately $1.85 million to date.

·

Ecosphere has sold EF80 units 13-14 to FNES and is receiving monthly payments of approximately $53,000 and $59,000. The respective notes are due in July and December 2016.

·

Ecosphere plans to sell minority rights to the Ozonix® technology for use in industries outside of oil and gas exploration that management expects will result in similar realization of value as that realized by the development and sale of rights to the technology to FNES. Ecosphere owns 100% of the rights to the Ozonix® technology in the U.S. and globally to all applications outside of the energy industry, including but not limited to agriculture, energy, food and beverage, industrial, mining, marine and municipal wastewater treatment, and any other industry in which water is treated with traditional chemicals to clean and recycle it for human consumption and industrial consumption and industrial disposal or for re-use.

·

Ecosphere is launching an offering of a minority interest in Ecosphere Mining, LLC, a newly formed subsidiary, and has retained Ladenburg Thalmann to raise $10 million.

·

Ecospheres business model revolves upon the sale of intellectual property. In addition to its 31% interest in FNES, Ecosphere has the patent rights to all of its Ozonix® technology outside of energy. All of the various “vertical” applications are available for sale including the 31% of FNES. Ecosphere also recently received a patent for its Ecos PowerCube® and is seeking to sell all or a portion of it.


Management believes that the realization of any of the above events will provide sufficient liquidity for the foreseeable future. However, Ecosphere cannot provide any assurance that these plans will be successful.


Ecosphere’s $300 million arbitration proceeding against Halliburton is another potential source of liquidity.




30



 


Contractual Obligations


The following describes our contractual obligations as of December 31, 2012:


 

 

2013

 

 

2014

 

 

2015

 

 

2016

 

 

2017

 

 

Thereafter

 

 

Total

 

Third party debt

 

$

1,389,648

 

 

$

111,931

 

 

$

107,565

 

 

$

23,314

 

 

$

 

 

$

 

 

$

1,632,458

 

Interest on convertible debt

 

 

245,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

245,000

 

Capital lease

 

 

14,593

 

 

 

15,347

 

 

 

16,141

 

 

 

16,975

 

 

 

8,813

 

 

 

 

 

 

71,869

 

Operating leases, net of sublease

 

 

53,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53,133

 

 

 

$

1,702,374

 

 

$

127,278

 

 

$

123,706

 

 

$

40,289

 

 

$

8,813

 

 

$

 

 

$

2,002,460

 


Ecosphere paid $0.9 million in principal to convertible note holders during the second quarter of 2013.


During the three months ended September 30, 2013, Ecosphere entered into a five year lease agreement for an office located in Park City, UT to begin developing the mining application. The commencement date for this operating lease is January 1, 2014 with the lease expiring on the day immediately prior to the fifth anniversary of the commencement date, December 31, 2019.


Related Party Transactions

 

For information on related party transactions and their financial impact, see Note 14 to the September 30, 2013 unaudited condensed consolidated financial statements. See also “Related Person Transactions” beginning at page 58 of this prospectus.

 

Research And Development

 

Research and development costs were de minimis during the three months ended September 30, 2013 and during the three months ended September 30, 2012.


Recently Issues Accounting Pronouncements


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




31



 


BUSINESS


Ecosphere is an innovative U.S. technology licensing and manufacturing company that develops environmental solutions for global markets. We help industry increase production, reduce costs, and protect the environment through a portfolio of more than 35 patented and patent-pending technologies, including Ozonix® and Ecos PowerCube®, which are licensable across a wide range of industries and applications throughout the world.


Business Strategy


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


1.

Identify a major environmental water challenge,

2.

Invent new technologies and file patents,

3.

Partner with industry leaders,

4.

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

5.

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

6.

Create recurring revenues and increase shareholder value.

 

As a result, we have designed, developed, manufactured and commercialized technologies that are currently solving some of the world’s most critical water and energy challenges. Our patented Ozonix® technology is a revolutionary, high volume, advanced oxidation process designed to treat and recycle industrial wastewater without the use of toxic chemicals and our Ecos PowerCube® is the world’s most powerful, mobile, solar-powered generator to be used in the world’s most remote, off-grid locations.


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


Licensable Technologies


OZONIX®


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


In general, the Ozonix® technology, which combines various forms of advanced oxidation processes into one process, is a technology that does not require harmful chemicals to manage the quality of industrial process water and industrial wastewaters. The Ozonix® technology has been optimized to eliminate chemical biocides and scale inhibitors, thereby eliminating the problems associated with residual chemicals. In addition, the Ozonix® technology can be used to produce an oxidizing liquid that can be used, for example, as a leaching agent or as a disinfectant.


Ozonix® Description


In one use, Ozonix® combines multiple forms of advanced oxidation processes into one process to offer broad-spectrum water treatment capabilities. This includes the destruction and oxidation of organic matter, bacteria, biofilms, heavy metals, hydrocarbons and sulfides that are typically found in industrial wastewaters. In another use, the Ozonix® process produces an environmentally safe oxidizing liquid.


[esph_s1002.gif]




32



 


The patented Ozonix® process, in summary, saturates contaminated water with ozone (O3) and uses hydrodynamic cavitation, acoustical cavitation, and electrochemical oxidation to oxidize and destroy micro-organisms, while generating no harmful disinfection byproducts. As water cycles through an Ozonix® reactor, bacteria cell walls are destroyed and contaminates are oxidized, returning clean water that is ready for use, re-use and/or final treatment for discharge applications.


Ozonix® Features and Benefits:


·

Chemical free - eliminates the use of harmful chemicals, waste byproducts and residual pollutants;

·

High volume - provides rapid on-site water treatment and reclamation;

·

Self-contained - eliminates separation, transportation and disposal costs; and requires minimal mobilization and demobilization;

·

Highly effective - oxidizes contaminates and kills bacteria on-the-fly; and,

·

Environmentally safe - preserves vital natural water resources for current and future generations.


Ozonix® Treatment Systems


There are four oxidation processes embodied in the Ozonix® technology, which synergistically provides enhanced cost and process efficiencies versus alternative treatment options. The four treatment processes are discussed below:


[esph_s1004.gif]


Hydrodynamic Cavitation - results in the disruption of microorganisms and oxidation of pollutants through mechanical (i.e., conditions of high-intensity turbulence and shear generated in the flow) and chemical means by virtue of local hot spots and reactive free radicals. As the disinfection takes place by a combination of chemical and mechanical means, it is unlikely that bacteria can become resistant to the Ozonix® treatment system, as observed with conventional disinfection chemistry techniques. As water enters the Ozonix® process it passes through a series of proprietary static mixing plates creating massive volumes of micro bubbles that grow in size based on the pressure fluctuations and finally collapse, releasing a large quantum of energy.


The cavitation process is composed of two stages: (1) rapid increase in the size of a micro bubble and (2) fast bubble collapse and the formation of a “hot spot,” a high temperature residual bubble. Under these extreme conditions, vaporized water molecules are dissociated into free oxidative (and reductive) radicals. One of the most abundant radicals is the hydroxyl radical whose oxidation potential is slightly lower than that of fluorine, the strongest oxidizer known. However, unlike fluorine and chlorine, hydroxyl radicals are safe for the environment and people. Though conventional treatment processes require the addition of chemicals, cavitation is based on the creation of oxidative and reductive radicals directly from water, which either recombine to form stable byproducts or they react with the molecules causing their degradation. These cavitating conditions result in strong oxidation capacity capable of oxidizing harmful chemicals present in the water or wastewater.


Ozone - the next phase of the treatment is based on the injection of ozone gas, which is a very powerful oxidizing agent that can react with most species containing multiple bonds at high rates and also results in significant degrees of disinfection. These oxidations only require good contact of ozone with the chemical constituents. Residual bacteria that may have survived the first step of hydrodynamic cavitation are also subjected to the highly reactive oxidative power of ozone. During this second step, residual metals are also oxidized by ozone forming various oxides. It is important to note that the Ozonix® process also destroys the environment and food source for the survival of bacteria.




33



 


Acoustical Cavitation and Electrochemical Oxidation - the main stage of the Ozonix® technology consists of an oxidation zone where the combination of ozone with ultrasound-induced acoustic cavitation and electrochemical oxidation results in the oxidation of pollutants, as well as water disinfection. Ultrasound is passed using multiple transducers that give much better cavitational activity in the reactor and also better energy transfer efficiencies. The combined operation in this stage gives much higher overall oxidation capacity as the effects of the individual operations are complimentary to each other. Thus, a combination of ozone with other advanced oxidation techniques, which can give better contact and mass transfer rates, results in a significant degree of process intensification.


Similarly, electrochemical oxidation has been found to be an environmentally friendly technology able to mineralize completely non-biodegradable organic matter and to eliminate nitrogen species, and hence can be effectively applied to industrial water treatment. Historically, a major drawback of electrochemical oxidation by itself has been the mass transfer limitations and high-energy requirements of the process, which have made the application of electrochemical oxidation in the water treatment facilities uneconomical. The efficacy of electrochemical oxidation can be enhanced if it is effectively combined with ozonation or cavitation, such as in the Ozonix® process.


Based on the principle of combined oxidation, the design of the Ozonix® technology utilizes a combination of ozone, hydrodynamic/acoustic cavitation and electrochemical oxidation. The main benefits of this unique combination processes are enhanced oxidation capacity attributed to the generation of hydroxyl radicals in the reactor, enhanced contact of ozone molecules with the contaminants due to the turbulence generated in the reactor, and elimination of mass transfer resistances in the electrochemical oxidation cell that facilitates better contact of the contaminants with the electrodes. The combined operation of ozone and ultrasonic irradiation/hydrodynamic cavitation also means that in addition to direct attack by ozone, hydroxyl radicals formed in the system attack the contaminants present in the effluent, increasing the process efficiency. The combined effect of all these factors results in the enhanced oxidation capacity and the reduction in the treatment times versus the individual processes. Thus, the simultaneous operation of combined oxidation processes leads to additional oxidation mechanisms in the reactor significantly enhancing the effectiveness of the process.


Ozonix® Competitive Advantages


Historical treatment methods for the control of bacteria, biofilms, scaling, algae and fungi are by the addition of anti-microbial chemicals (biocides) and anti-scale chemicals (scale-inhibitors). Various oxidizing and non-oxidizing chemical disinfectants are commercially available and have been successfully employed; however, these chemicals must be continually added. Even with automatic addition methods, chemical treatment systems must be monitored and adjusted frequently to maintain the desired level of residual chemicals and verify control of microbial growth. In addition, some microorganisms do become resistant. Not only does the Ozonix® process avoid the use of harmful chemicals such as chlorines, biocides (e.g., glutaraldehyde), etc., but the Ozonix® process has a much larger oxidation and disinfection capacity, leading to beneficial effects.


Ozonix® Intellectual Property Protection


Ecosphere, which is the leader in emerging advanced oxidation processes technologies, has a portfolio of intellectual property that includes five issued United States patents, plus one recently approved Notice of Allowance in January 2014, as well as numerous foreign patents, trademarks and pending patent applications associated with the Ozonix® process. In addition to the patent protection, as with most process technologies, trade secrets and know-how are also important assets providing Ecosphere with a competitive advantage.


Ozonix® Awards And Accolades


Ecosphere’s numerous awards and accolades evidence the importance and quality of its Ozonix® technology and treatment process. For example:


·

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


·

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


·

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




34



 


·

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


·

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


·

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


·

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


Ozonix® Market Opportunities


The fundamental macro market driver for clean technology is intensifying resource constraints --- everything from freshwater to energy feedstocks --- due to combined urbanization, a global population now exceeding 7 billion, and resource scarcity. The global water market --- comprised on numerous activities --- is estimated at $425 billion. Its growth is being driven by macro political, financial, social and ecological considerations.


At a high level, demand for water can be broken down into major water use sectors:


·

Food & Agricultural (70 percent of freshwater use);

·

Energy & Industry (20 percent) --- the percentage of a countrys industrial sector water demand is generally proportional to its average income level; and,

·

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


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


·

Agriculture (Grain growing and processing, livestock farms and feedlots, aquaculture, fish farming, irrigation)

·

Energy (Onshore and offshore oil and gas exploration and production, power generation, refineries, coal)

·

Food and Beverage (Drinking water, breweries, dairy, livestock processing, fruits and vegetables, sugar)

·

Industrial (Automotive, biotechnology, manufacturing, metals, microelectronics, pharmaceutical, textiles)

·

Marine (Ballast water, marine process water, onboard grey water)

·

Mining (Acid mine drainage, metals, minerals, mining process water treatment, tailing, leachate and recovery)

·

Municipal (Municipal drinking water, sewage, storm and drainage water treatment)




35



 


ECOS POWERCUBE®


The Ecos PowerCube® is designed to meet the growing demand for off-grid energy, water and communication utilities.


[esph_s1006.gif]


Ecos PowerCube® Description


The Ecos PowerCube® is the world’s most powerful, mobile, solar-powered generator. It is a patented, self-contained, self-sustaining, solar-powered generator that uses the power of the sun to provide energy, communications and clean water to the world’s most remote, off-grid locations. The Ecos PowerCube® is protected by U.S. Patent No. 8,593,102.


Ecos PowerCube® Features and Benefits:


[esph_s1008.gif]


The Ecos PowerCube® represents a combination of Ecospheres patented technologies and its innovative manufacturing know-how and experience. The Ecos PowerCube® is designed to deliver:


·

Anytime, Anywhere Power: the foundation of the system is the Ecos PowerCube® and its patented array of stacked solar panels. When deployed on site, the Ecos PowerCube® provides a photovoltaic surface area approximately 3x that which is normally obtainable. The solar energy system can provide up to 15kW of electricity to power numerous utility functions, and higher power if multiple Ecos PowerCubes® are combined.


·

Critical Water Supply: a water filtration module is capable of converting arsenic-, bacteria- and waste-laden groundwater into water suitable for drinking, cleaning, and cooking. The potable water produced meets the World Health Organization standards for clean drinking water. Another option is a module that extracts water directly from the atmosphere.



36



 


·

Versatile: numerous applications, such as: remote habitation (e.g., physical islands and remote villages), industrial remote utilities, off-grid telecommunication base stations, military remote utilities, and many others.


·

Portable: capable of being transported and delivered by truck, train, boat, helicopter or plane.


·

Durable: patented drawer panel system protects solar panels during transportation and inclement weather.


·

Powerful: provides users with the maximum amount of solar power generation possible (in 10 foot, 20 foot and 40 foot ISO shipping container footprints).


·

Rapid Deployment: the solar panel array can immediately be deployed using the automated system once the unit is delivered.


·

Reliable: 24/7 energy to power the communications module, which is equipped with a satellite communications and electrical power management system to provide a full range of wireless, satellite. Voice Over Internet Protocol and wireless communications capable of handling thousands of phone calls and offering wireless connectivity.


·

Sustainable: uses the power of the sun to generate electricity for numerous off-grid needs.


·

Range: has the ability to provide wireless connectivity and communications up to a range of 30 miles.


The Ecos PowerCube® is revolutionary in the fact that it will use only the power of the sun to create and store the energy needed to run water filtration and communication components, pumps, motors, and/or a wide variety of other devices requiring power. Multiple Ecos PowerCube® systems can be combined when greater power needs are required.


Ecos PowerCube® Intellectual Property Protection


After six years in the U.S. patents office, Ecosphere has received issuance of a U.S. patent for the Ecos PowerCube® in November 2013.


The U.S. patent expires in December 2027.


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


Ecos PowerCube® Market Opportunities


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


·

Remote habitation

·

Industrial remote utilities

·

Off-grid telecommunication base stations

·

Military remote utilities

·

Humanitarian relief and emergency / disaster preparedness

·

Numerous others


Intellectual Property Portfolio


Ecosphere has an extensive portfolio of patents and trademarks that have been filed and approved in various locations around the world, including six patents related to the Ozonix® and one related to the Ecos PowerCube®. Since 1998, Ecosphere has been a water industry innovator, when company founders began developing eco-friendly technologies to solve major water remediation challenges on land and at sea. The majority of our green technologies focus on the cavitating properties of water and eliminating the wide-spread use of toxic chemicals through technologies like our patented Ozonix® technology. Ecosphere has an extensive portfolio of patented clean technologies that can be purchased and licensed for use in large-scale and sustainable applications across industries, nations and ecosystems.




37



 


During the three months ended September 30, 2013, Ecosphere retained a leading company in the field of intellectual property valuation, to perform an analysis for value of our patented Ozonix® technology portfolio. We received the valuation in November 2013, which includes all of the potential industries and applications where Ozonix® can be used and licensed, including the global energy field-of-use, of which Ecosphere owns approximately 31% interest in Fidelity National Environmental Services, LLC or FNES. While this valuation is subject to a number of assumptions, Ecosphere believes it illustrates the hidden value that is not recognized on our Balance Sheet or by the investment community.


Intellectual Property Monetization


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


In 2007, Ecosphere formed Ecosphere Energy Services, LLC, now FNES, to license its patented Ozonix® water treatment technology across the global energy sector. Since 2008, Ecosphere’s patented Ozonix® technology has enabled oil and gas customers to treat, recycle and reuse over three billion gallons of water on more than 800 oil and natural gas wells, protecting $4 billion worth of well assets, and generating over $65 million in revenue.


From a technical standpoint, Ecosphere has proven the Ozonix® process in the most technologically challenging treatment market sector, the oil and gas segment of the energy industry; therefore, Ecosphere believes that the technological risks faced when entering the other target sectors and industries are significantly diminished. From a business standpoint, Ecosphere has successfully created a subsidiary to target the energy industry (one of numerous target markets), and a recent transaction valued just this one subsidiary at $50 million.


Ecosphere’s strategy is to further leverage the Ozonix® technology via widespread partnering and licensing to achieve substantial technology deployment and the corresponding revenue and profit growth. In addition to FNES, Ecosphere plans to replicate the success of its “subsidiary strategy” by granting global field-of-use licenses to numerous industry-specific subsidiaries. Ecosphere has formed six subsidiaries, which includes; Ecosphere Agriculture, LLC, Ecosphere Food & Beverage, LLC, Ecosphere Industrial, LLC, Ecosphere Marine, LLC, Ecosphere Mining, LLC and Ecosphere Municipal, LLC.


Ecosphere’s strategy is to replicate its experience with FNES by recruiting outside investors in its subsidiaries and then exploiting Ozonix® sublicenses in each industry specific field-of-use. Ecosphere has hired investment banker Ladenburg Thalmann & Co., Inc. to assist it with obtaining equity financing for these subsidiaries, and has initially focused its efforts on Ecosphere Mining, LLC.


Similar to the actual results associated with FNES, Ecosphere’s expectations are that a subsidiary would initially be valued at, for example, $50 million (based on the anticipated completion of a financing), and built to a point where each subsidiary would be licensed and sold to a large market player for a much larger value. We cannot assure you that we will be able to complete any financing for a subsidiary or if we do it will be at this valuation.


Ecosphere is also actively marketing the Ecos PowerCube® intellectual property to potential buyers.


Active Subsidiaries And Investments


Fidelity National Environmental Solutions, LLC


FNES, a leading water treatment provider to the energy services sector, has an exclusive field-of-use license for Ecosphere's patented Ozonix® technology for global energy applications including, but not limited to, onshore and offshore oil and natural gas exploration and production, power generation, refineries and coal. FNES currently provides licensing partners and energy exploration companies with patented Ozonix® mobile wastewater treatment equipment to eliminate harmful chemicals from hydraulic fracturing operations around the United States. We recently announced its expansion to Canada.


Ecosphere currently owns 31% of FNES and is the exclusive manufacturer of all Ozonix® related products. Its exclusive manufacturing rights expire in May 2015.




38



 


Ecosphere Mining, LLC


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


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


Ecosphere Mining, LLC has hired investment banker Ladenburg Thalmann & Co., Inc. to assist it with obtaining equity financing.


Description of Business Over Five Years


Over the past five years, we have concentrated on developing and improving our Ozonix® technology and the equipment through which we deliver services to oil and gas exploration companies. Our initial Ozonix® product line was called Ecos-Frac® tank. We manufactured and began testing the prototype of the Ecos-Frac® tank in the first quarter of 2009. In July 2009, we entered into a two-year Master Service Agreement with two subsidiaries of Southwestern Energy and received a work order under this Agreement for the deployment of Ecos-Frac® tanks to pre-treat water used to fracture natural gas wells in the Fayetteville Shale. Those services, provided by what is now known as FNES, continue to date under another Agreement which FNES more recently entered into with Southwestern.


In 2009, we also entered into an agreement with Newfield Exploration Co., which used our Ecos-Brine® technology in the Woodford, Shale, and Oklahoma to treat flowback waters. Following approval by the Corporation Commission of Oklahoma in July 2009, we began providing services to Newfield. They remain a customer of FNES as of the date of this prospectus.


In 2010, FNES continued to provide services to both Southwestern and Newfield. In late 2009 and early 2010, we delivered Ecos-Frac® units to FNES for use in the Fayetteville Shale in Arkansas. During the summer of 2010, Ecosphere and FNES made a significant effort to generate business by assisting in the Gulf oil spill clean-up. Like many other companies, which believed they had chemical-free solutions for separating the oil from the ocean and marshes, our efforts were not successful in securing a contract with BP. Additionally, in 2010, we had identified the full opportunities for Ozonix® technologies outside of energy and began limited efforts to generate interest from a potential customer or partner. In late 2010, we formed a new mining subsidiary and commenced initial efforts to raise seed capital, which were not successful.


In March 2011, we and FNES entered into a 20-year definitive agreement with Hydrozonix, LLC. That agreement granted an exclusive technology license agreement with Hydrozonix to deploy the Ozonix® technology in the United States for the on-shore oil and gas industry. Hydrozonix agreed to purchase two units per quarter over a two-year period. In the third quarter, we manufactured and delivered the initial two units and followed with an additional two units late in the fourth quarter. The bulk of our efforts in 2011 were focused on the manufacture of Ozonix® EF80 units for Hydrozonix. Late in 2011, we again began working on a strategy for our mining subsidiary seeking a financial partner. Those efforts were unsuccessful. Meanwhile, 2011 was a record year. We generated $21.1 million of revenues as the delivery of the four units to Hydrozonix made a material impact.


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


In 2013, we experienced a change in a relationship with Hydrozonix. During the first quarter as required by our agreement, we manufactured units 13-14. However, Hydrozonix was unable to pay for the units and in mid-April 2013, lost its exclusive license. We ultimately sold units 13 and 14 later in the year to FNES in exchange for cash and monthly payments over a three-year period. In May and July, Fidelity National Financial, Inc. [NYSE:FNF], a Fortune 500 company, increased its investment in what was then known as Ecosphere Energy Services by paying us $10 million for 20% of that subsidiary. Ecosphere’s management team estimates that this sale represents approximately 2% of the estimated value of Ecosphere’s global Ozonix® intellectual property portfolio. Once we fell below the 50% threshold, we ceased to be the managing member and, at the request of FNF, we agreed to change the name to FNES. FNF also obtained an option to purchase an additional 12% for $6 million by December 31, 2013 and that option lapsed.




39



 


Beginning in the fall of 2013, we began focusing more of our attention on the other industries and applications for our patented Ozonix® technology, formed six new limited liability company subsidiaries and entered into an agreement with Ladenburg Thalmann to provide financing for Ecosphere Mining, LLC on a best-efforts basis. The transaction documents were completed very late in the year. We expect to complete financing for Ecosphere Mining in 2014. Late in 2013, the United States Patent Office, after six years, issued a patent for our Ecos PowerCube®. As a result, we have begun to seek a financial or strategic partner to license the Ecos PowerCube®.


In June 2013, Ecosphere announced its newest product for the oil and gas hydraulic fracturing market, the Ozonix® EF10M. The EF10M comes as an addition to Ecosphere’s highly successful line of Ecos-Frac® mobile water treatment products that have been used to treat and recycle over 3 billion gallons of water on more than 800 oil and natural gas wells around the United States.


In September 2013, Ecosphere announced that it had filed a series of environmental patent applications with the United States Patent and Trademark Office. These patent filings teach a method to use Ecosphere’s patented Ozonix® water treatment technology to increase and maintain desired oxygen levels in the C-44 Canal (St. Lucie Canal) that feeds the St. Lucie Estuary and Indian River Lagoon. The St. Lucie Estuary and Indian River Lagoon are one of the most bio diverse ecosystems in North America, with more than 4,000 plant and animal species, including 36 endangered and threatened species.


In December 2013, Ecosphere announced completion of its first Ozonix® Ore Recovery Equipment (ORE) system for Ecosphere Mining, LLC, a wholly-owned subsidiary of Ecosphere, and a new Mobile Operations Vehicle (MOV) that is designed to remain on location for extended periods of time when Ecosphere is demonstrating its Ozonix® ORE system for customers around the United States.


In January 2014, Ecosphere announced that FNES signed an exclusive technology licensing and equipment purchase agreement with Hydrosphere Energy Solutions, a Canadian Corporation, to deploy its patented Ozonix® water treatment technology in Alberta and the Northeast part of British Columbia, Canada. Under the terms of the agreement, Hydrosphere Energy Solutions is required to purchase: one Ozonix® EF10M unit for immediate delivery, eight Ozonix® EF10 units within the first 12 months, one Ozonix® EF80 unit within the first 12 months and a minimum of two Ozonix® EF80's within 24 months following the delivery of the first purchased Ozonix® units. Hydrosphere has also agreed to pay on-going royalty payments to FNES on all water processed in the licensed territory. So long as the commitments are met, Hydrosphere shall remain the exclusive sub-licensed partner of FNES in the Alberta and Northeast British Columbia, Canada for all hydraulic fracturing applications.


Sales And Marketing


We rely on our officers for the coordination of our sales and marketing efforts. Management uses our website, www.ecospheretech.com, and search engine optimization marketing programs as well as inbound marketing techniques to bring potential customers to our website to learn about our unique technologies and product offerings. We have developed a marketing and communications strategy with our creative advertising agency to place our Company information and ads on various industry websites. Current marketing opportunities include attendance at key trade shows, presentations to industry and analyst groups and one on one conferences as appropriate. Ecosphere employs a Director of Business Development who is working with management to expand our business to other industry applications, as well as assisting in expanding business for FNES and our licensing partners. In 2013 Ecosphere engaged The Blueshirt Group to serve as its integrated investor and public relations firm. As part of its corporate communication services, this firm provides Ecosphere with business and press coverage, which helps promote Ecosphere's patented technologies and innovative solutions.


Manufacturing


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




40



 


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


Research And Development


During the three years ended December 31, 2013, Ecosphere spent approximately $275,000 on research and development.


Intangible Assets


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


Employees


At December 31, 2013, we had 47 total employees. This does not include 25 FNES employees. None of our employees are covered by a collective bargaining agreement. We believe that our relationships with our employees are good.


Legal Proceedings


In February 2013, Ecosphere initiated an arbitration proceeding against Halliburton Energy Services, Inc. alleging that Halliburton took and disclosed Ecosphere’s trade secrets proprietary information. Ecosphere is seeking $300 million in damages and alleges that Halliburton’s breached a Non-Disclosure Agreement with Ecosphere and converted or misappropriated trade secrets. The trade secrets relate to Ecosphere’s green technology business model to treat and recycle wastewater used during hydraulic fracturing of oil and gas wells.




41



 


MANAGEMENT


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


Name

 

Age

 

Positions with Ecosphere

Directors:

 

 

 

 

Dennis McGuire

 

63

 

Chairman of the Board

Dean Becker

 

59

 

Director

Michael Donn, Sr.

 

65

 

Director

Jimmac Lofton

 

56

 

Director

Charles Vinick

 

66

 

Director

David Brooks

 

43

 

Director

 

 

 

 

 

 

 

 

 

 

Executive Officers:

 

 

 

 

Dennis McGuire

 

63

 

Chief Executive Officer and Chief Technology Officer

Michael Donn, Sr.

 

65

 

Chief Operating Officer

David Brooks

 

43

 

Chief Financial Officer

Jacqueline McGuire

 

50

 

Senior Vice President of Administration and Secretary


Board of Directors


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


Dean Becker has served as a director since January 1, 2013. Since June 2009, Mr. Becker has been the Chief Executive Officer of ICAP Patent Brokerage and ICAP Ocean Tomo Auctions (collectively, “ICAP”), a leader in selling intellectual property. From January 2006 until June 2009, Mr. Becker was the Vice Chairman of Ocean Tomo, LLC, an industry-leading provider of an array of financial products and services related to intangible assets prior to its acquisition by ICAP. Mr. Becker is a frequent global speaker on intellectual property rights and the use of patents to include or exclude competition through licensing and enforcement of government issued rights. Mr. Becker was selected as a director because he is one of the world’s leading experts on monetizing intellectual property.


David Brooks was appointed interim Chief Financial Officer on February 5, 2013 and was elected as a director on December 13, 2013. Since June 6, 2012, Mr. Brooks has served as the part-time Chief Financial Officer of SKM Media Corp., a data and services marketing company. Since November 2009, Mr. Brooks has been the Managing Shareholder of D. Brooks and Associates CPAs, P.A., which provides Chief Financial Officer and related services to businesses on a consulting basis. From August 2008 through October 2009, Mr. Brooks was an audit director and consultant for McGladrey & Pullen, LLP (now McGladrey LLP), a large assurance, tax and consulting services company. Mr. Brooks is a Certified Public Accountant in Florida. Mr. Brooks was selected as a director due to his financial and auditing expertise.


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




42



 


Jimmac Lofton was appointed a director in March 2012. From March 2008 until December 2011, Mr. Lofton was the Director of Investor Relations and Business Development for Evergreen Energy Inc., a clean energy technology company. Since January 2012, Mr. Lofton has been a consultant with Stanhill Capital, a London-based Merchant Bank specializing in the natural resource sector. Since May 2012, Mr. Lofton has primarily provided services to New West Capital of Sedalia, Colorado focusing on the mining industry and water resources. Mr. Lofton was selected as a director for his experience in the clean energy industry and his knowledge of public company financial matters.


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


Executive Officers


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


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


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


Key Employee


Dennis McGuire, Jr. is Ecosphere’s Director of Manufacturing and has been employed by Ecosphere since 2009.


Corporate Governance


Board Responsibilities


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


Board Committees and Charters


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


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


Name

 

Independent

 

 

Audit

 

 

Compensation

 

Dennis McGuire

 

 

 

 

 

 

 

 

 

Dean Becker

 

 

 

 

 

 

 

 

 

Michael Donn, Sr.

 

 

 

 

 

 

 

 

 

Jimmac Lofton

 

ü

 

 

 

 

 

Chairman

 

Charles Vinick

 

 

 

 

ü

 

 

 

 

David Brooks

 

 

 

 

 

 

 

 

 




43



 


Independence


Our Board has determined that Mr. Lofton is independent in accordance with standards under the NYSE MKT rules.


Committees of the Board of Directors


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


Audit Committee


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


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


Compensation Committee


The function of the Compensation Committee is to review and recommend the compensation and benefits payable to our officers, review general policies relating to employee compensation and benefits and administer our various stock option plans, including the 2006 Equity Incentive Plan, which we refer to as the “Plan.” Our Chief Executive Officer recommends executive compensation to the Compensation Committee and the Compensation Committee consider his recommendation prior to recommending compensation to our Board. The member of the Compensation Committee is Jimmac Lofton, who serves as chairman. The Compensation Committee has no authority with respect to setting compensation. However, its recommendations have always been followed.


Nominating Committee


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


Compensation Committee Interlocks and Insider Participation


None of the members of the Compensation Committee are officers or employees of Ecosphere. Previously while employed as an executive officer by Ecosphere, Mr. Charles Vinick served on the Compensation Committee. Additionally, no executive officer of Ecosphere served or serves on the compensation committee or board of any company that employed or employs any member of Ecosphere’s Compensation Committee or Board.


Board Diversity


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


Board Leadership Structure


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




44



 


Role of Board in Risk Oversight


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


Code of Ethics


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


Communication with our Board of Directors


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




45



 


EXECUTIVE COMPENSATION


Compensation Discussion and Analysis


Overview


Ecosphere’s Vision


Ecosphere Technologies, Inc. is an innovative U.S. technology licensing and manufacturing company that develops environmental solutions for global markets. We help industry increase production, reduce costs, and protect the environment through a portfolio of more than 35 patented and patent-pending technologies, including Ozonix® and Ecos PowerCube®, which are licensable across a wide range of industries and applications throughout the world.


Ecosphere’s first successful intellectual property commercialization project was a patented coatings removal process that removed paint from large ships in the heavy marine industry. This important transformational environmentally friendly technology was invented, designed and commercialized by our founder, Mr. Dennis McGuire, and is presently being used by some of the world’s most prestigious ship repair facilities.


Prior to our sale of that technology to a private equity firm in 2007, our founder and Chief Executive Officer, Mr. Dennis McGuire, invented and patented our Ecosphere Ozonix® advanced oxidation process designed to recycle high volumes of water while eliminating the need for toxic chemicals used during hydraulic fracturing operations in the natural gas exploration industry. With this innovative technology, Ecosphere's Ozonix technology has now been used to treat over 3 billion gallons of water on over 800 wells substantially increasing our revenue over four years to more than $31 million in 2012. Since 2009, Ecosphere’s revenue has been primarily generated by providing our patented Ozonix® technology to natural gas exploration companies to be used during hydraulic fracturing operations. With the change in control of our former oil and gas subsidiary, FNES, and our owning less than 50% of that company, our focus has changed. That company is now being managed by a Fortune 500 company with assistance from two of our executives who serve as members of FNES' board of directors. With this change, we are focusing on expanding Ozonix® to other industries. We are seeking to raise capital for a mining subsidiary, Ecosphere Mining, LLC. Our Ozonix® technology has the potential to be applied across numerous industries that are challenged by bacteria growth corrosion and fouling caused by microbiologically induced corrosion and fouling that occurs as a result of bacteria and biofilm of growth in industrial waste waters. Potential applications including but not limited to agriculture, energy, food and beverage, industrial, mining, marine and municipal wastewater treatment.


Following our business model, we have received five U.S. patents for our Ozonix® technology, plus one recently approved Notice of Allowance in January 2014, as well as numerous foreign patents, trademarks and pending patent applications and one recently approved patent for our Ecos PowerCube® technology. Ecosphere has provided direct water treatment services to major oil and gas exploration companies to date to demonstrate proof of concept and has generated significant revenue from its commercialization efforts of the Ozonix® technology. Since 2008, Ecosphere’s patented Ozonix® technology has enabled oil and gas customers to treat, recycle and reuse over three billion gallons of water on more than 800 oil and natural gas wells, protecting $4 billion worth of well assets, and generating over $65 million in revenue.


Compensation Philosophy


We believe there are three overriding factors that must underscore the compensation that we pay our executive officers. The compensation package must be (i) fair; (ii) competitive with other small cap or microcap issuers that have similar potential and risk; and (iii) provide incentive to motivate our executive officers to produce exceptional shareholder value. In addition, Mr. McGuire, as our founder and inventor of all of our innovative technology, provides unique skills for which the Board has decided he should be compensated as a founder/inventor. His compensation package has been designed to meet the criteria stated above and to incentivize him to remain with Ecosphere well into the future.


We believe that central to our future success is our ability to attract, retain and motivate individuals with exceptional talent who are passionate about our corporate mission and achieving the profitable long-term growth of our business. We believe that our compensation programs provide the proper incentive for high performance by linking compensation to the success of Ecosphere in a transparent and easily understood manner while, at the same time, properly balancing the risk-reward ratio of the various elements of our compensation programs. The primary tools used by the Board include annual base salary, short-term (cash) incentive compensation and long-term (stock options) incentive compensation.


The following compensation philosophy is the framework upon which we have and will base all compensation decisions for our executives and other employees. Recognizing that we have treated Mr. McGuire differently, all of our growth came from Mr. McGuire’s leadership. As 2012 evolved, we saw we would reach $31 million in revenue, be profitable and generate positive cash flow from operations. In addition, we saw 2013 as another year of continued growth.



46



 



Item

Components

Comments

Base Salary

Annual base salary.

Rewards individual performance and may vary based upon Ecosphere’s performance.

Annual Bonus

Cash reward paid to executives on an annual basis where appropriate.

Should be based upon meeting pre-determined metrics based upon overall company performance as well as individual performance. However, also permits the Board to award discretionary bonuses based on unique circumstances.

Equity and Other Incentives

Generally provide for long-term incentives that may provide value over multi-year period; now 100% stock options except for unique compensation payable to Dennis McGuire.

Rewards executives for Ecosphere’s stock price appreciation. Options are viewed as the best fit for a high-growth company.

Total Direct Compensation

Base salary plus annual bonus plus long-term incentives.

 

Benefits

Health insurance and other non-cash benefits.

Except for life insurance provided to Dennis McGuire generally broad-based benefits including participation in a 401-k plan that applies to all employees.


We believe that base salary should provide a secure base of compensation that is competitive in the marketplace. We intend to design the annual bonus and long-term incentives to link the incentive compensation of our key executives, including our named executive officers, with both the annual and long-term success of Ecosphere. The annual incentives will link compensation with company-wide and individual targets to motivate our employees, including our named executive officers, to meet short-term goals. The long-term equity incentives link compensation to the long-term growth and success of Ecosphere as measured by what we hope will be appreciation in our stock price. We believe that this bifurcation of linkage properly balances short-term and long-term incentives. By providing substantial potential benefits from annual bonuses and stock appreciation, we believe we help align our executives’ interest with our shareholders’ interest and motivate our executives to drive profitable growth of our business in an appropriate manner. Although competitive compensation is a factor, we did not engage in benchmarking when we approved a new compensation package for Mr. Dennis McGuire, our founder and Chief Executive Officer. Nonetheless, our Compensation Committee was cognizant of compensation paid by similarly-sized small companies. Mr. McGuire has invented and assigned to Ecosphere 5 approved OzonixÒ patents and 10 other patents.


The OzonixÒ patents do not include the recently approved Notice of Allowance received in January 2014.


Role of Our Compensation Committee


Our Compensation Committee has taken a very active role in negotiating the compensation of our Chief Executive Officers and in negotiating Mr. McGuire’s compensation arrangements in all of the roles he has had. All of the compensation decisions made by our Board were first approved and recommended by the Compensation Committee.


Factors Used by Compensation Committee and Board of Directors in Determining McGuire Compensation Packages as well as Other Executives


In establishing executive compensation, our Compensation Committee and our Board have both relied upon the compensation philosophy expressed above in this Compensation Discussion and Analysis. However, in negotiating the new compensation package for Dennis McGuire, the Compensation Committee and the Board also relied on the other factors described below. Mr. McGuire’s compensation arrangements were in part based upon concern that he was in many respects a highly valued executive officer due in part to his unique inventor/entrepreneurial skills and his strong technical and sales skills which would have made it extraordinarily difficult to recruit a replacement capable of continuing our accelerated growth.




47



 


In late 2010, the Hydrozonix transaction was in its infancy, although we believed that we would ultimately reach an agreement with them. Both our Compensation Committee and Board believed that without Mr. McGuire’s full commitment the Hydrozonix transaction would not be consummated. While our then Chief Executive Officer, Mr. Charles Vinick, and our then Chief Financial Officer played an important role in negotiating the ultimate legal agreement with Hydrozonix, Mr. McGuire played a fundamentally important role in developing the initial business relationship, selling the value and capabilities of the technology to the principals of Hydrozonix, and negotiating the technological aspects of that agreement that led to the completion of the due diligence of the Ozonix® technology by Hydrozonix and the final signature on the agreement.


2009-2012 Growth


After we sold our ship stripping business in 2007, our operating revenues were not material. Prior to closing the sale, Mr. McGuire had invented and developed our Ozonix® technology. Following the Ecosphere business model, multiple versions of the Ozonix® technology have been developed. Patent applications and awards, proof of concept, commercialization and licensing have followed.


The summary financial information taken from our audited financial statements reflect the substantial growth in revenue, improved cash flow and reduction in indebtedness, all directly related to the development and commercialization of the patented and proprietary Ozonix® technology.


 

 

Total

($)

 

Revenue (in '000s)

 

 

 

Year Ended 2012

 

 

 

Equipment Sales/Licensing

 

22,602

 

Field Services

 

7,405

 

Aftermarket Parts (2012)

 

1,125

 

Year Ended 2011

 

 

 

Equipment Sales/Licensing

 

11,460

 

Field Services

 

9,628

 


 

 

Total

($)

 

Operating Cash Flow

 

 

 

Generated

 

 

 

Year Ended 2012

 

3,869

 

Year Ended 2011

 

2,611

 

 

 

 

 

Debt

 

 

 

December 31, 2012

 

1,682

 

December 31, 2011

 

2,363

 

 

 

 

 

Earnings (Loss) Per Share

 

 

 

Year Ended 2012

 

0.00

 

Year Ended 2011

 

(0.05

)


The above financial data individually and as a whole reflect the substantial improvement in our financial condition and prospects resulting primarily from the cutting edge technology invented and developed by Mr. McGuire and the key commercial agreements we entered into as a result of Mr. McGuire’s efforts. In addition, Mr. McGuire is directly involved in every step of the technology development and delivery process from design through component specification and manufacturing to sales, testing and delivery. Mr. McGuire’s responsibilities involve the management of the outsourcing and contracting with the major component suppliers of the Ozonix® technology. Mr. McGuire has made extremely valuable contributions overseeing the entire design, development and manufacturing process of the Ozonix® EF80 units which we were required to build to exacting technical standards mandated by our written agreement with Hydrozonix. As the result of his tireless efforts, we continue to improve the Ozonix® EF80 units each quarter and in 2012 generated $1.1 million in revenue from the sale of aftermarket parts that included these improvements.


In the context of this dynamic change in Ecosphere’s business, rapid growth and attaining net income, our Compensation Committee held continual meetings in 2012 as our then Chief Executive Officer, Charles Vinick, and our counsel sought to secure the services of Mr. McGuire to a long-term contract precluding him from leaving Ecosphere and developing new competitive technologies. The impact of such an event would threaten Ecosphere’s viability and devastate its loyal shareholder base.




48



 


Dennis McGuire’s Unique Role


Since founding Ecosphere in 1998, Mr. Dennis McGuire has invented all of our technologies. His inventions have fueled our corporate goals and visions.


In addition to being the principal inventor of all of our technologies, Mr. McGuire has been our principal salesman. It was his vision and drive as well as financial support that permitted Ecosphere to continue in operations when Ecosphere was periodically faced with substantial cash flow difficulties. In 2004, Mr. McGuire and his wife loaned $1 million that they later converted to common stock at $1.00 per share. Thereafter, from time to time, Mr. and Mrs. McGuire made interim loans to us to permit Ecosphere to sustain its operations. In 2006, Mr. McGuire together with members of the senior management team agreed to a substantial reduction in compensation and from time to time when we could not meet payroll, Mr. McGuire and other senior officers simply deferred receipt of their salaries.


Mr. McGuire invented cutting-edge technology, the innovative Ozonix® technology that has significant potential to provide economic and environmental benefits. As a result of those inventions, Ecosphere was poised for significant future growth as 2012 came to a close.


This Ozonix® technology has been validated in both the gas and oil drilling industries. Furthermore, because of its broad potential to treat wastewater across a wide spectrum of industries in a cost effective and environmentally safe manner, we are currently seeking partners to assist us to broaden the usage of our Ozonix® technology outside the gas and oil exploration industries as well as seeking to jump start the U.S. onshore oil and gas service business and expand that business offshore and internationally.


In order to be able to convince a company like Hydrozonix to invest substantially in marketing and deploying our Ozonix® technology, we had to first prove that it was commercially viable. We did so by securing two long-term contracts with two major energy exploration companies. Like every other commercial agreement we entered into over our 15-year history, the agreements with these two energy companies came about from Mr. McGuire’s efforts as our chief salesman and business development person due to his unique knowledge of the process he invented and pioneered in the oil and gas industries. Ultimately the Hydrozonix licensing agreement arose as a result of Mr. McGuire’s efforts, although our then Chief Executive Officer and other senior executive officers played an important role in negotiating and finalizing that agreement with Hydrozonix.


Dennis McGuire’s Positions with Ecosphere


Dennis McGuire and his wife Jacqueline McGuire, our Senior Vice President of Administration and Corporate Secretary, founded Ecosphere in 1998. Since September 2005, Mr. McGuire has either been our Chief Executive Officer, Co-Chief Executive Officer or Chief Technology Officer as evidenced from the chart below.


Date

Title

March 14, 2013 to Date

Chief Executive Officer

January 18, 2011 to Date

Chief Technology Officer

January 12, 2008 to August 1, 2009

Chief Technology Officer

August 1, 2009 to January 18, 2011

Chief Executive Officer

June 17, 2008 to November 12, 2008

Co-Chief Executive Officer

September 29, 2005 to June 17, 2008

Chief Executive Officer


Description of Named Executive Officer Compensation


2012 Dennis McGuire’s Compensation Arrangement


In December 2012, Ecosphere approved entering into a new three-year Employment Agreement and a Royalty Agreement for Mr. McGuire. The two agreements have been executed as of April 26, 2013 and were effective as of January 1, 2013. In negotiating these agreements Mr. McGuire recognized that if 2013 and future years reflected the growth pattern that Ecosphere was experiencing, his total compensation would significantly increase. At the same time, he contended that he bore the risk of not receiving the incentive compensation under his Royalty Agreement.




49



 


Employment Agreement


·

Base Salary. Mr. McGuire’s annual base salary is $450,000. The base salary may be increased at the discretion of Ecosphere’s Compensation Committee based upon Ecosphere’s progress in achieving its goals and objectives. In essence, the base salary is a draw against the royalties described below.

·

Stock Option Grant. We granted Mr. McGuire 6,300,000 five-year stock options, exercisable at $0.34 per share with one-third vesting immediately and the balance vest in two equal increments on January 1, 2014 and 2015, subject to continued employment on each applicable vesting date.

·

Insurance. During the term of the Employment Agreement, Ecosphere will pay, or reimburse Mr. McGuire for, the premiums payable in connection with a $3 million term life insurance policy of which the beneficiaries shall be designated by Mr. McGuire.


Royalty Agreement


Under the Royalty Agreement Mr. McGuire is entitled to receive royalties equal to 4% of Ecosphere’s revenues generated from the patents and inventions which were created by him (the “Inventions”) less any Base Salary paid to him. In addition to the royalties paid on revenues, the royalties will also be paid on any consideration Ecosphere receives or its shareholders receive from a merger or sale of our assets outside of the ordinary course of business relating to the Inventions plus consideration received by our shareholders from exchange offer or tender offer, as well as proceeds received by Ecosphere from outstanding debt conversions (for all new debt issued beginning January 1, 2013) and sales of Ecosphere’s equity securities. Royalty payments will be paid for the life of all Inventions regardless of whether Mr. McGuire remains an employee of Ecosphere. Under the Royalty Agreement, Ecosphere granted Mr. McGuire a first-priority perfected security interest 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. Prior to a change of control of Ecosphere, the Royalty Agreement requires Mr. McGuire to agree to reasonable extensions of time if Ecosphere suffers unforeseen cash flow problems.


With the sudden unanticipated default by Hydrozonix in the first quarter of 2013, Mr. McGuire experienced the effects of the risk with respect to his incentive compensation and ceased receiving the 4% of revenues he previously received from Hydrozonix. Since the Hydrozonix relationship terminated, Mr. McGuire's royalties from operating revenue have been reduced. Because his Royalty Agreement is designed to compensate him for the sale of any interest in the patents he invented, he was eligible to receive 4% of the proceeds from FNES' two 2013 purchases, subject to the limitation in the above paragraph relating to his Base Salary. Due to this limitation, Mr. McGuire has received approximately $305,000 from the $10 million of proceeds Ecosphere received from the sales of FNES units earlier in 2013.


2011 Dennis McGuire’s Compensation Arrangement


With his two-year compensation arrangement expiring in April 2011, our Compensation Committee in late 2010 again reviewed Mr. McGuire’s efforts and critical role in our operations. Because it felt that the 3% of revenues he was receiving was not necessarily tied to any operating successes, it sought to keep Mr. McGuire’s future compensation keyed to appropriate performance standards while at the same time recognizing his role as the inventor of all of our technology. As the discussions were ensuing, the Compensation Committee and the Board were both aware of the fact that negotiations were proceeding with the principals of Hydrozonix relating to a transaction that was expected to result in a significant and positive benefit to Ecosphere. This culminated in our executing the Hydrozonix agreement in March 2011.


Accordingly, on January 2, 2011 our Board awarded Mr. McGuire a new compensation package consisting of a base salary, an annual performance bonus, a special performance bonus and an additional long-term incentive in recognition of his unique role as principal inventor of Ecosphere’s technology and his role in bringing about the Hydrozonix agreement.


·

Base Salary. Mr. McGuire’s annual base salary was set at $250,000 increasing to $450,000 when Hydrozonix commenced paying Ecosphere an overhead fee with the proviso that if the initial two Ozonix® units were not accepted by Hydrozonix, the annual salary would revert back to $250,000. The overhead fee was paid in March and the salary increased accordingly. The initial two units were manufactured and were accepted by Hydrozonix in September 2011.

·

Annual Performance Bonus. The Board agreed to set annual performance targets of three levels with the middle level, if met equal to 75% of base salary. No targets were set for 2011.

·

Special Performance Bonus. We agreed to pay Mr. McGuire 4% of the funds received by Ecosphere (including any wholly-owned subsidiary) from the sale of all or substantially all of our assets or licensing of technology invented by Mr. McGuire.



50



 


·

Long-Term Incentive Bonus. We agreed to pay Mr. McGuire 4% of the manufacturing fees (exclusive of direct manufacturing costs and labor), 4% of the license fees, and 4% of the royalties, payable upon receipt of funds by Ecosphere from Hydrozonix. This bonus was to continue as long as we receive payments notwithstanding the fact that Mr. McGuire may no longer be employed by us.

·

Stock Option Grant. We granted Mr. McGuire 9,450,000 five-year non-qualified options, exercisable at $0.46 per share with one-third of the options vesting upon execution of the Hydrozonix agreement and the balance vesting over the two-year term of the Hydrozonix agreement.


In November 2011, we modified the Long-Term Incentive Bonus to clarify that Mr. McGuire shall receive 4% of the Hydrozonix manufacturing and licensing fees and clarify that all parts of this Hydrozonix bonus are based upon payments to Ecosphere and/or EES (now FNES). The clarification arose to resolve a difference between a Term Sheet Mr. McGuire executed and the January Board Resolution. The November Resolution was recommended by our Compensation Committee and passed by our Board.


Other Named Executive Officers


The other named executive officers are the additional executives listed in the Summary Compensation Table. The details of their compensation arrangements are provided beginning on page 53.


2013 Bonuses


In December 2013, our Board of Directors reviewed Ecosphere’s 2013 performance and the valuation it received on our Ozonix® technology. In reliance upon these factors and the recommendation of our Compensation Committee, our Board of Directors awarded Dennis McGuire a $494,874 bonus. Our Board of Directors also awarded bonuses to two other executive officers – Mr. Michael Donn, Sr. ($33,000) and Mrs. Jacqueline McGuire ($27,500).


There were no performance factors set for 2013.


Report of Compensation Committee


The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section with management and based on such review and discussion has recommended to our Board that the Compensation Discussion and Analysis section be included herein.


 

Compensation Committee

 

Jimmac Lofton, Chairman



51



 


Summary Compensation Table for 2013


The following information relates to the compensation for 2013, 2012 and 2011 to each person serving as Chief Executive Officer and Chief Financial Officer during 2013, and the three most highly compensated executive officers other than the Chief Executive Officer and Chief Financial Officer who were serving as executive officers at the end of 2013 whose compensation exceeded $100,000, which we refer to as “Named Executive Officers.”


 

 

 

 

 

 

 

 

 

 

Non-Equity

 

All

 

 

Name and Principal

 

 

 

 

 

 

 

Option

 

Incentive Plan

 

Other

 

 

Position

 

Year

 

Salary

 

Bonus

 

Awards

 

Compensation

 

Compensation

 

Total

(a)

 

(b)

 

($)(c)

 

($)(d)(1)

 

($)(f)(2)(3)

 

($)(g)(4)

 

($)(i)

 

($)(j)

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

Dennis McGuire

 

2013

 

450,000

 

 

494,874

 

844,507

 

 

305,126

 

31,612

(5)

 

2,126,119

Chief Executive Officer

 

2012

 

450,000

 

 

337,000

 

 

 

324,800

 

31,275

(5)

 

1,143,075

 

2011

 

400,000

 

 

270,000

 

3,006,180

 

 

162,400

 

30,890

(5)

 

3,869,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

John Brewster (6)

 

2013

 

56,152

 

 

 

732,981

(7)

 

 

 

 

   789,133

Former Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charles Vinick (8)

 

2013

 

13,599

 

 

 

 

 

 

 

 

     13,599

Former Chief Executive

 

2012

 

275,000

 

 

150,000

 

31,883

 

 

 

43,906

(9)

 

   500,789

Officer

 

2011

 

263,542

 

 

100,000

 

314,640

 

 

 

29,108

(9)

 

   707,290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

David Brooks (10)

 

2013

 

79,650

(11)

 

 

 

 

 

 

 

     79,650

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barbara Carabetta (12)

 

2013

 

11,956

 

 

 

 

 

 

 

 

     11,956

Former Interim Chief Financial Officer

 

2012

 

136,000

 

 

  10,000

 

5,314

(13)

 

 

 

 

   151,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael Donn, Sr.

 

2013

 

175,000

 

 

  33,000

 

 

 

 

 

7,061

(14)

 

   215,061

Chief Operating Officer

 

2012

 

175,000

 

 

  30,000

 

31,883

 

 

 

6,906

(14)

 

   243,789

 

 

2011

 

146,250

 

 

    7,500

 

 

 

 

5,869

(14)

 

   159,619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jacqueline McGuire

 

2013

 

112,200

 

 

  27,500

 

 

 

 

4,763

(14)

 

   144,463

Senior VP of Administration and Corporate Secretary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

———————

(1)

The amount in the bonus column represents cash bonuses. At December 31, 2013, Ecosphere accrued $200,000 of Mr. McGuire’s bonus that was paid in January 2014.

(2)

The amounts in these column represents the fair value of the award as of the grant date as computed in accordance with FASB ASC Topic 718 and the SEC disclosure rules. These amounts represent awards that are paid in options to purchase shares of our common stock and do not reflect the actual amounts that may be realized by the Named Executive Officers. Please note that the total compensation listed for any officer or Director in a particular year does not necessarily represent what the executive may realize in cash earnings during that period. Equity compensation is variable and depends on both the stock price and the exercise price of options. In some cases the executive may receive no compensation where options are either "under water" or expire "under water". The amounts listed for options are estimates of the value based on a number of inputs to the BSM model and are purely for the basis of accounting for the expense of the equity. See Note 16 to the December 31, 2012 consolidated financial statements contained herein for valuation inputs.

(3)

See the section entitled Named Executive Officer Compensation Arrangements below for a description of these option grants.

(4)

Represents cash payments for commissions paid. Refer to “Named Executive Officer Compensation Arrangements” below for a description of these commissions.

(5)

Represents 401(K) contributions and life insurance premiums paid by Ecosphere for life insurance that is for the benefit of Mr. McGuire’s beneficiaries.



52



 


(6)

Mr. Brewster resigned on March 12, 2013.

(7)

All options were forfeited upon the resignation of Mr. Brewster on March 12, 2013.

(8)

Mr. Vinick resigned on January 7, 2013. This table does not include any compensation received by Mr. Vinick under a Consulting Agreement. See the Director Compensation Table.

(9)

Represents travel expenses related to Mr. Vinick’s travel to and from the Company’s headquarters.

(10)

Mr. Brooks began serving as interim Chief Financial Officer on February 5, 2013.

(11)

Represents consulting fees paid to a company of which Mr. Brooks is the principal.

(12)

Ms. Carabetta resigned on January 30, 2013.

(13)

A portion of the option grant was forfeited upon the resignation of Ms. Carabetta.

(14)

Represents 401(K) contributions.


Grants of Plan-Based Awards in 2013


The following table provides information about equity-awards granted to each Named Executive Officer that received awards in 2013. This information supplements the information provided in the Summary Compensation Table above.


 

 

 

 

All Other

 

All Other

 

 

 

 

 

 

 

 

Stock

 

Option

 

 

 

Grant

 

 

 

 

Awards:

 

Awards:

 

Exercise

 

Date Fair

 

 

 

 

Number of

 

Number of

 

or Base

 

Value of

 

 

 

 

Shares of

 

Securities

 

Price of

 

Stock and

 

 

Grant

 

Stock or

 

Underlying

 

Option

 

Option

Name

 

Date

 

Units

 

Options (1)

 

Awards ($)

 

Awards ($)(2)

 

 

 

 

 

 

 

 

 

 

 

 

Dennis McGuire

 

4/26/2013

 

 

6,300,000

(3)

 

0.34

 

844,507

 

 

 

 

 

 

 

 

 

 

 

 

John Brewster

 

1/8/2013

 

 

5,250,000

(4)

 

0.38

 

732,981

———————

(1)

All of these grants were stock options that were granted under the Plan.

(2)

These amounts do not reflect the actual economic value realized by the Named Executive Officer. In accordance with SEC rules, this column represents the grant date fair value of each equity award. The grant date fair value is generally the amount Ecosphere would expense in its financial statements over the award’s service period, but does not include a reduction for forfeitures.

(3)

Two-thirds of the options vested and the remaining vest on January 2015, subject to continued employment.

(4)

These options were forfeited when he resigned on March 12, 2013.


Named Executive Officer Compensation Arrangements


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


Dennis McGuire


In January 2011, our Board approved a new employment arrangement for Mr. McGuire. His salary of $250,000 per year increased to $450,000 in March 2011, upon Ecosphere receiving an overhead fee from Hydrozonix.


Mr. McGuire’s 2011 employment arrangement provided that during the term of his employment with Ecosphere, upon the sale of all or substantially all the assets not in the ordinary course of business and/or the licensing of technology in which Mr. McGuire was an inventor, Ecosphere would pay Mr. McGuire a bonus equal to 4% of the total compensation received by Ecosphere (which includes wholly-owned subsidiaries) for these transactions. The payments would continue as long as Ecosphere receives payments.


In connection with the Hydrozonix transaction, Mr. McGuire received a fee of 4% of the manufacturing fees (exclusive of direct manufacturing costs and labor), 4% of the license fee, and 4% of the royalties, payable upon receipt of funds by Ecosphere or EES from Hydrozonix. The payments would continue as long as Ecosphere receives payments.


Ecosphere granted Mr. McGuire 9,450,000 five-year non-qualified options, exercisable at $0.46 per share. Of the options, one-third vested on March 23, 2011, at the time of the execution of the agreement with Hydrozonix, and the balance vested over the two-year term of the Hydrozonix agreement. In December 2011, in recognition of his performance during 2011, the Board awarded Mr. McGuire, a cash bonus of $270,000 that was paid in 2012.




53



 


In December 2012, our Board approved a new compensation arrangement for Mr. McGuire. In April 2013, Mr. McGuire signed an Employment Agreement and a Royalty Agreement. Under the Employment Agreement, he receives a base salary of $450,000 per year. Under the Royalty Agreement, Mr. McGuire will receive royalties equal to 4% of Ecosphere’s revenues generated from the patents and inventions that were created by Mr. McGuire (the “Inventions”) less any base salary paid to Mr. McGuire. In addition to the royalties paid on revenues, the royalties will also be paid on any consideration received by Ecosphere or its shareholders from a sale of assets outside the ordinary course of business (relating to his Inventions), merger, exchange offer or tender offer. Royalty payments shall be paid for the life of all patents in which Mr. McGuire is an inventor regardless of whether he remains an employee of Ecosphere. He was also granted 6,300,000 five-year stock options, exercisable at $0.34 per share with one-third vesting upon his acceptance of the grant and the balance in equal increments on January 1, 2014 and 2015, subject to continued employment on each applicable vesting date. In December 2012, in recognition of his performance during 2012, the Board awarded Mr. McGuire, a cash bonus of $337,000. In December 2013, in recognition of his performance during 2013, the Board of Directors approved a cash bonus of $494,874 to Mr. McGuire.


David Brooks


Mr. Brooks’ compensation is paid to a company of which he is the principal. The compensation paid to this company is on an hourly basis.


Michael Donn, Sr.


Mr. Donn received an annual salary of $146,250 that increased to $175,000 in January 2012. In December 2011, the Board approved a performance bonus of $7,500 for 2011 that was paid in January 2012. In January 2012, Mr. Donn was granted 157,500 stock options exercisable at $0.42 per share. In December 2012, in recognition of his performance during 2012, the Board awarded Mr. Donn a cash bonus of $30,000. In 2013, Mr. Donn was awarded a $33,000 cash bonus.


Jacqueline McGuire


Mrs. McGuire receives an annual salary of $112,200. In 2013, Mrs. McGuire was awarded a $27,500 cash bonus.


Dennis McGuire, Jr.


Dennis McGuire, Jr. is Ecosphere's Director of Manufacturing where he supervises 29 employees, supervised the manufacturing of 40 Ozonix® units, and continually improves the manufacturing process. In 2013, Mr. McGuire, Jr. received compensation consisting of base salary and bonus of approximately $182,000. This compensation arrangement was approved by Ecosphere’s Board of Directors.


Insurance Benefits


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


Discretionary Bonuses


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


Potential Payments Upon Termination


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


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


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


 

(i)

a material breach by Ecosphere of the Employment Agreement;

 

(ii)

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

 

(iii)

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

 

(iv)

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

 

(v)

a Change of Control (as described below);

 

(vi)

a business combination; or

 

(vii)

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




54



 


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


The following table quantifies the payment Mr. McGuire will receive in the event of the termination of employment due to disability or death.


Severance Payment

 

Unvested Stock

Options as of

December 31, 2013

 

Exercise Price

($)

 

Value Based on

Closing Price as of

December 31, 2013

($)

 

Life Insurance

($)(1)

 

Total ($)(2)

                              

    

                              

    

                              

    

                              

    

                              

    

                              

$450,000

 

4,200,000

 

0.34

 

 

3,000,000

 

3,450,000

———————

(1)

This does not include life insurance premiums paid on Mr. McGuire’s behalf in the event employment is terminated as a result of disability. The $3,000,000 life insurance premium will not be paid upon termination as a result of disability.

(2)

This table assumes that Mr. McGuire’s employment was terminated as of December 31, 2013.


The following table quantifies the payment Mr. McGuire will receive in the event he terminates employment for Good Reason or Change of Control.


Severance Payment

 

Unvested Stock

Options as of

December 31, 2013

 

Exercise Price

($)

 

Value Based on

Closing Price as of

December 31, 2013

($)

 

Health and Life

Insurance

($)(1)

 

Total ($)(2)

                              

    

                              

    

                              

    

                              

    

                              

    

                              

$900,000

 

4,200,000

 

0.34

 

 

36,400

 

936,400

———————

(1)

Represents health and life insurance premiums paid on behalf of Mr. McGuire. Does not include $3,000,000 life insurance proceeds that Mr. McGuire would receive upon his death.

(2)

This table assumes that Mr. McGuire’s employment was terminated as of December 31, 2013.





55



 


Outstanding Equity Awards At 2013 Fiscal Year-End


Listed below is information with respect to unexercised options for each Named Executive Officer as of December 31, 2013:

 

 

Option Awards

 

 

Number of

 

Number of

 

 

 

 

 

 

Securities

 

Securities

 

 

 

 

 

 

Underlying

 

Underlying

 

 

 

 

 

 

Unexercised

 

Unexercised

 

Option

 

 

 

 

Options

 

Options

 

Exercise

 

Option

 

 

(#)

 

(#)

 

Price

 

Expiration

 

 

Exercisable

 

Unexercisable

 

($)

 

Date

Name (a)

 

(b)

 

(c)

 

(e)

 

(f)

 

 

 

 

 

 

 

 

 

 

Dennis McGuire

 

3,139,500

 

 

 

0.95

 

11/8/15

 

 

2,625,000

 

 

 

0.45

 

7/1/14

 

 

1,575,000

 

 

 

0.41

 

12/22/14

 

 

6,300,000

 

 

 

0.96

 

4/21/15

 

 

9,450,000

 

 

 

0.46

 

1/3/16

 

 

2,100,000

 

4,200,000

(1)

 

0.34

 

4/25/18

 

 

 

 

 

 

 

 

 

 

Charles Vinick

 

44,546

 

 

 

0.23

 

2/28/14

 

 

171,427

 

 

 

0.45

 

7/1/14

 

 

183,140

 

 

 

0.41

 

12/21/14

 

 

42,339

 

 

 

1.18

 

7/1/15

 

 

262,500

 

 

 

0.78

 

8/12/15

 

 

1,050,000

 

 

 

0.46

 

1/18/16

 

 

105,000

 

52,500

(2)

 

0.42

 

1/2/2017

 

 

1,050,000

 

 

 

0.38

 

1/7/18

 

 

 

202,899

(3)

 

0.35

 

6/30/18

 

 

 

 

 

 

 

 

 

 

Barbara Carabetta

 

35,000

 

70,000

(4)

 

0.43

 

9/26/2016

 

 

8,750

 

17,500

(4)

 

0.42

 

1/2/2017

 

 

 

 

 

 

 

 

 

 

Michael Donn, Sr.

 

210,000

 

 

 

1.05

 

12/31/14

 

 

262,500

 

 

 

0.41

 

12/22/14

 

 

525,000

 

 

 

0.46

 

12/23/15

 

 

472,500

 

 

 

0.46

 

12/23/15

 

 

105,000

 

52,500

(2)

 

0.42

 

1/2/2017

 

 

 

 

 

 

 

 

 

 

Jacqueline McGuire

 

105,000

 

 

 

0.41

 

12/22/2014

 

 

157,500

 

 

 

0.46

 

12/23/2015

 

 

157,500

 

 

 

0.46

 

12/23/2015

 

 

105,000

 

52,500

(2)

 

0.42

 

1/2/2017

———————

(1)

These unvested options vest in two equal installments on January 1, 2014 and 2015.

(2)

These unvested options vest in two equal installments on June 30, 2014 and December 31, 2014.

(3)

These unvested options vest on June 30, 2013.

(4)

These options were forfeited upon Ms. Carabetta’s resignation on January 30, 2013.

 

 

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





56



 


Option Exercises and Stock Vested in Fiscal Year 2013


The following table provides information on stock option exercises and restricted stock award vesting for each of the Named Executive Officers during 2013.


 

 

Option Awards

 

 

Stock Awards

 

 

 

Number of

 

 

 

 

 

Number of

 

 

 

 

 

 

Shares

 

 

Value

 

 

Shares

 

 

Value

 

 

 

Acquired

 

 

Realized on

 

 

Acquired

 

 

Realized on

 

Name

 

on Exercise

(#)

 

 

Exercise

($) (1)

 

 

on Vesting

(#)

 

 

Vesting

($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dennis McGuire (2)

 

1,570,435

 

 

756,000

 

 

 

 

 

———————

(1)

Value equals the difference between the market price of Ecosphere's common stock on the day of the transaction and the exercise price of the equity instrument.

 

 

(2)

Mr. McGuire cashlessly exercised 4,200,000 options with an exercise price of $0.29 per share based upon market price of o common stock ranging from $0.46 to $0.50 per share.


Director Compensation


We do not pay cash compensation to our Directors for service on our Board. Non-employee members of our Board receive automatic initial and annual grants of restricted stock and stock options. Please see “Automatic Board Grants” below for a further description. Directors are reimbursed for reasonable expenses incurred in attending meetings and carrying out duties as Board and committee members.


2013 Director Compensation


Name

(a)

 

Stock Awards

($)(c)(1)

 

 

Option

Awards

($)(d) (1)

 

 

Total

($)(j)

 

Charles Vinick (2)

 

 

 

185,853

 

 

185,853

 

 

 

 

 

 

 

 

 

 

 

Dean Becker (3)

 

 

 

482,391

 

 

482,391

 

 

 

 

 

 

 

 

 

 

 

Jimmac Lofton (4)

 

 

 

  57,100

 

 

  57,100

 

 

 

 

 

 

 

 

 

 

 

Gene Davis (5)

 

 

 

  49,963

 

 

  49,963

 

 

 

 

 

 

 

 

 

 

 

D. Stephen Keating (6)

 

40,000

 

 

  27,672

 

 

  67,672

 

———————

(1)

This represents the fair value of the award as of the grant date in accordance with FASB ASC Topic 718. These amounts represent awards that are paid in shares of common stock or options to purchase shares of our common stock and do not reflect the actual amounts that may be realized by the directors.

(2)

Represents a total of 1,259,336 five-year stock options. Mr. Vinick was granted 1,050,000 shares of common stock in connection with a one year consulting agreement, these options were fully vested at December 31, 2013. The remaining 209,336 stock options vest on June 30, 2014.

(3)

Represents 3,150,000 five-year stock options. The options are in connection with Mr. Becker’s consulting agreement and vest in equal quarterly increments over a three-year vesting period. Effective in January 2013, Mr. Dean Becker was appointed a director of Ecosphere. Mr. Becker waived his right to an automatic equity grant under the Plan.

(4)

Represents 239,240 five-year stock options. The options vest on June 30, 2014.

(5)

Represents 209,336 five-year stock options. The options vested in December 2013. Mr. Davis did not stand for re-election at the 2013 Shareholders Meeting held in December 2013.

(6)

Represents 105,263 shares of common stock and 115,942 five-year stock options. The options and shares vested December 2013. Mr. Keating did not stand for re-election at the 2013 Shareholders Meeting held in December 2013.


Effective January 1, 2013, we entered into a three-year Business Consulting Services Agreement with Mr. Becker. See “Related Person Transactions.”




57



 


Automatic Board Grants


Effective 10 days from the date on which a non-employee director is first elected or appointed, whether elected by the shareholders of Ecosphere or appointed by the Board to fill a Board vacancy, he or she shall receive an automatic grant of restricted stock (or restricted stock units or RSUs if selected by the director with such delivery deferral as the director may select) and options with the number of shares, RSUs and options based upon Fair Market Value as defined in the Plan. Effective in January 2013, Mr. Dean Becker was appointed a director of Ecosphere. Mr. Becker waived his right to automatic equity grants under the Plan.


Initial Grants

 

Options

 

 

Restricted

Stock

 

 

 

 

 

 

 

 

Initial appointment as Chairman of the Board

 

$

75,000

 

 

$

75,000

 

Initial election or appointment of a non-employee director

 

$

40,000

 

 

$

40,000

 

Initial appointment as a Director Advisor

 

$

15,000

 

 

$

10,000

 


Annual Grants and Other Grants


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


 

 

Options

 

 

Restricted

Stock

 

 

 

 

 

 

 

 

Chairman of the Board

 

$

40,000

 

 

$

40,000

 

Non-employee director

 

$

25,000

 

 

$

25,000

 

Director advisor

 

$

10,000

 

 

$

5,000

 

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

 

$

15,000

 

 

$

15,000

 

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

 

$

10,000

 

 

$

10,000

 


RELATED PERSON TRANSACTIONS


On January 8, 2013, Ecosphere and Dean Becker, a director of Ecosphere, entered into a Business Consulting Services Agreement that can be terminated on 30 days’ notice. Under the Consulting Agreement, Mr. Becker’s role is to assist Ecosphere in monetizing its intellectual property through sales or licenses. In consideration for its services, Mr. Becker receives a fee of $250,000 per year. Additionally, Mr. Becker was granted 3,150,000 five-year stock options exercisable at $0.35 per share. As additional compensation, Mr. Becker will receive 2% of all revenues generated from the sale or license of Ecosphere’s intellectual property that was consummated as a result of introductions from Mr. Becker or negotiation assistance from him.


Effective January 8, 2013, Ecosphere and Charles Vinick, a director of Ecosphere and prior Chief Executive Officer, entered into a one-year Consulting Agreement. In connection with his Consulting Agreement, Mr. Vinick received fees of $275,000 and was reimbursed for health insurance costs. Additionally, Mr. Vinick was granted 1,050,000 five-year stock options exercisable at $0.38 per share. The options are now fully vested.


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


Review, Approval or Ratification of Transactions with Related Persons


Ecosphere’s Code of Ethics requires that all employees and directors avoid conflicts of interests that interfere with the performance of their duties or are not in the best interests of Ecosphere. In addition, pursuant to its written charter, the Audit Committee has the sole authority to review and approve all related party transactions, after examining each such transaction for potential conflicts of interest and other improprieties. The Audit Committee has not adopted any specific written procedures for conducting such reviews and considers each transaction in light of the specific facts and circumstances presented.



58



 


Security Ownership of Certain Beneficial Owners and Management


The following table sets forth the number of shares of Ecosphere’s common stock beneficially owned as of January 16, 2014 by (i) those persons known by Ecosphere to be owners of more than 5% of our common stock, (ii) each director, (iii) each Named Executive Officer (as described in our Summary Compensation Table on page 52) and (iv) all executive officers and directors as a group. Unless otherwise noted in the footnotes below, the address of the shareholder is c/o Ecosphere Technologies, Inc. 3515 S.E. Lionel Terrace, Stuart, FL 34997.


 

 

 

 

 

Amount

 

 

 

 

 

Name of

 

 

Beneficially

 

 

Percent of

Title of Class

 

Beneficial Owner

 

 

Owned (1)

 

 

Class (1)

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Dennis and Jacqueline McGuire (2)

 

 

 

28,666,509

 

 

 

14.9

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

David Brooks (3)

 

 

 

0

 

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

John Brewster (4)

 

 

 

0

 

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Charles Vinick (5)

 

 

 

3,338,547

 

 

 

2.0

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Michael Donn, Sr. (6)

 

 

 

2,141,845

 

 

 

1.3

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Dean Becker (7)

 

 

 

1,050,000

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Jimmac Lofton (8)

 

 

 

662,658

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

All directors and executive officers as a group (7 persons) 

 

 

 

35,859,559

 

 

 

18.1

%

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Ronald Heller (9)

 

 

 

9,999,997

 

 

 

5.7

%

———————

* Less than 1%

(1)

Applicable percentages are based on 164,138,402 shares outstanding on January 14, 2014, adjusted as required by rules of the SEC. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock underlying options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within 60 days of the date of this prospectus are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. These shares are also included in the shareholders beneficial ownership. The table does not include unvested options. Unless otherwise indicated in the footnotes to this table, Ecosphere believes that each of the shareholders named in the table has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by them.

(2)

McGuire: Includes 27,289,500 shares issuable upon the exercise of vested options owned by Mr. McGuire and 525,000 shares issuable upon the exercise of vested options owned by Mrs. McGuire. Mr. McGuire disclaims beneficial ownership of the securities held solely in Mrs. McGuire’s name and Mrs. McGuire disclaims beneficial ownership of the securities held solely in Mr. McGuire’s name, and this disclosure shall not be deemed an admission that either is the beneficial owner of the other’s securities solely held in that person’s name for any purpose. Both Mr. and Mrs. McGuire are executive officers and Mr. McGuire is a director.

(3)

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

(4)

Brewster: Mr. Brewster is a former executive officer.

(5)

Vinick: Mr. Vinick is a director and a former executive officer. Includes 2,646,454 shares of common stock issuable upon the exercise of vested options.

(6)

Donn: Mr. Donn is a director and an executive officer. Includes 1,575,000 shares of common stock issuable upon the exercise of vested options.

(7)

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

(8)

Lofton: Mr. Lofton is a director and a selling shareholder. Includes: (i) 162,660 shares of common stock issuable upon the exercise of vested options, (ii) 166,666 shares underlying a convertible note and (iii) 333,332 shares issuable upon the exercise of warrants.

(9)

Heller: Mr. Heller and entities he controls are selling shareholders. See footnotes 3-5 to the Selling Shareholders Table below. Address is: 700 East Palisades Avenue, Englewood, NJ 07632.




59



 


SELLING SHAREHOLDERS


The following table provides information about the selling shareholders including how many shares of our common stock they own on the date of this prospectus, how many shares are offered for sale by this prospectus, and the number and percentage of outstanding shares the selling shareholders will own after the offering assuming all shares covered by this prospectus are sold.


We do not know when or in what amounts the selling shareholders will offer shares for sale. The selling shareholders may not sell any or all of the shares offered by this prospectus. Because the selling shareholders may offer all or some of the shares, and because there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares, we cannot estimate the number of the shares that will be held by the selling shareholders after completion of the offering. However, for purposes of this table, we have assumed that, after completion of the offering, all of the shares covered by this prospectus will be sold by the selling shareholders.


All of the information contained in the table below is based upon information provided to us by the selling shareholder, and we have not independently verified this information. The selling shareholders may have sold, transferred or otherwise disposed of, or may sell, transfer or otherwise dispose of, at any time or from time to time since the date on which it provided the information regarding the shares beneficially owned, all or a portion of the shares beneficially owned in transactions exempt from the registration requirements of the Securities Act of 1933, or the Securities Act.


The number of shares outstanding and the percentages of beneficial ownership post-offering are based on 164,138,402 shares of our common stock issued and outstanding as of January 14, 2014, plus the shares underlying notes and warrants which are being registered hereunder. For the purposes of the following table, the number of shares common stock beneficially owned has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, or the Exchange Act, and such information is not necessarily indicative of beneficial ownership for any other purpose. Under Rule 13d-3, beneficial ownership includes any shares as to which a selling shareholder has sole or shared voting power or investment power and also any shares which that selling shareholder has the right to acquire within 60 days of the date of this prospectus through the exercise of any stock option, warrant or other rights.


Name (1)

 

Number of

securities

beneficially

owned before

offering

 

 

Number of

securities

to be

offered

 

 

Number of

securities

beneficially

owned after

offering

 

 

Percentage of

securities

beneficially

owned after

offering

 

 

 

 

 

 

 

 

 

 

 

 

 

 

David S. Nagelberg 2003 Revocable Trust Dtd. 7/2/03 (2)

 

 

4,999,999

 

 

 

4,999,999

 

 

 

0

 

 

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ronald & Joyce Heller TTEES Ronald I Heller Rev Trust FBO Ronald Heller UAD 12/23/1997 (3)

 

 

4,999,999

 

 

 

4,999,999

 

 

 

0

 

 

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Heller Capital Partners, LLC (4)

 

 

2,499,999

 

 

 

2,499,999

 

 

 

0

 

 

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Heller Family Foundation, Inc. (5)

 

 

2,499,999

 

 

 

2,499,999

 

 

 

0

 

 

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jimmac Lofton (6)

 

 

   662,658

 

 

 

   499,998

 

 

 

   162,660

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael D. Harris & Beth Harris, Tenants by the Entireties (7)

 

 

2,581,836

 

 

 

   499,998

 

 

 

2,081,838

 

 

 

1.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

William Hunter

 

 

7,169,735

 

 

 

   999,999

 

 

 

6,169,736

 

 

 

3.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arthur Vandenberghe

 

 

   499,998

 

 

 

   499,998

 

 

 

0

 

 

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lubov Vorona Griffin

 

 

   399,999

 

 

 

   399,999

 

 

 

0

 

 

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matthew Kondrath

 

 

   690,000

 

 

 

   300,000

 

 

 

   390,000

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lawrence Eng

 

 

   317,409

 

 

 

   249,999

 

 

 

     67,410

 

 

 

*

 

———————

*

Less than 1%.




60



 



(1)

For all of the selling shareholders who are not natural persons, unless noted otherwise, the investment managers, general partners, trustees or principals named in the footnotes below have the sole voting and dispositive power over the shares held by the selling shareholders.

(2)

Mr. David Nagelberg is the trustee of the selling shareholder and has the sole voting and dispositive power over the securities.

(3)

Mr. Ronald Heller is a trustee of the selling shareholder and has voting and dispositive power over the securities.

(4)

Mr. Ronald Heller is the Chief Investment Officer of the selling shareholder and has the sole voting and dispositive power over the securities.

(5)

Mr. Ronald Heller is the President of the selling shareholder and has the sole voting and dispositive power over the securities.

(6)

The selling shareholder is a director.

(7)

The selling shareholder is employed by and a director of our general counsel. Includes 1,219,263 shares held in trusts, of which the selling shareholder is the trustee.

 

 

 

 




61



 


DESCRIPTION OF SECURITIES


Common Stock


The holders of common stock are entitled to one vote per share on all matters submitted to a vote of shareholders, including the election of directors. There is no cumulative voting in the election of directors. The holders of common stock are entitled to any dividends that may be declared by the board of directors out of funds legally available for payment of dividends subject to the prior rights of holders of preferred stock and any contractual restrictions we have against the payment of dividends on common stock. In the event of our liquidation or dissolution, holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive rights and have no right to convert their common stock into any other securities.


Preferred Stock


We are authorized to issue 4,999,505 shares of preferred stock, par value $0.01 per share, with such rights, preferences and limitations as may be created from time to time by our Board of Directors. In addition, we have authority to issue 11 shares of Series A preferred stock, of which six shares are currently outstanding, and 484 shares of Series B preferred stock, of which 241 shares are currently outstanding. The Series A preferred shareholders are entitled to receive a liquidation preference in the amount of $25,000 per share. Following payment of the Series A shareholders, the Series B preferred shareholders are entitled to a liquidation preference in the amount of $2,500 per share. Shares of Series A preferred stock are redeemable by us for $27,500 per share, plus any accrued unpaid dividends, and are redeemable by the holders in the event of a change in control for $25,000 plus any accrued unpaid dividends. Shares of Series B preferred stock are redeemable by us for $3,000 per share, plus any accrued unpaid dividends, and are redeemable by the holders in the event of a change in control for $2,500. Holders of Series A and B preferred stock may convert their shares, in whole or in part, into shares of common stock at any time. Each share of Series A preferred stock converts into 6,000 shares of common stock, and each share of Series B preferred stock converts into 835 shares of common stock. Shares of Series A and Series B preferred stock do not have any voting rights.


The following discussion of our common stock is qualified in its entirety by our Certificate of Incorporation, our Bylaws and by the full text of the agreements pursuant to which the securities were issued. We urge you to review these documents, copies of which have been filed with the SEC, as well as the applicable statutes of the State of Delaware for a more complete description of the rights and liabilities of holders of our securities.


Our charter documents include provisions that may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a shareholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by our shareholders. Certain of these provisions are summarized in the following paragraphs.


Effects of authorized but unissued common stock and blank check preferred stock. One of the effects of the existence of authorized but unissued common stock and undesignated preferred stock may be to enable our to make more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of management. If, in the due exercise of its fiduciary obligations, our Board were to determine that a takeover proposal was not in our best interest, such shares could be issued by our Board without shareholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the proposed acquirer or insurgent shareholder group, by putting a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent Board, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.


In addition, our Certificate of Incorporation grants our Board broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance also may adversely affect the rights and powers, including voting rights, of those holders and may have the effect of delaying, deterring or preventing a change in control of us.


Cumulative Voting. Our Certificate of Incorporation does not provide for cumulative voting in the election of directors that would allow holders of less than a majority of the stock to elect some directors.


Vacancies. Our bylaws provide that vacancies on the Board may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.




62



 


Special Meeting of Shareholders. A special meeting of shareholders may be called by the Board or when requested in writing by the holders of not less than 20% of all the shares entitled to vote at the meeting.


Anti-takeover Effects of Delaware Law


We are subject to the “business combination” provisions of Section 203 of the Delaware General Corporation Law. In general, such provisions prohibit a publicly-held Delaware corporation from engaging in various “business combination” transactions such as a merger with any interested shareholder which includes, a shareholder owning 15% of a corporation’s outstanding voting securities, for a period of three years after the date in which the person became an interested shareholder, unless:


The transaction is approved by the corporations Board prior to the date the shareholder became an interested shareholder;

Upon closing of the transaction which resulted in the shareholder becoming an interested shareholder, the shareholder owned at least 85% of the shares of stock entitled to vote generally in the election of directors of the corporation outstanding excluding those shares owned by persons who are both directors and officers and specified types of employee stock plans; or

On or after such date, the business combination is approved by the Board and at least 66 2/3% of outstanding voting stock not owned by the interested shareholder.


A Delaware corporation may opt out of Section 203 with either an express provision in its original Certificate of Incorporation or an amendment to its Certificate of Incorporation or Bylaws approved by its shareholders. We have not opted out of this Statute. This Statute could prohibit, discourage or delay mergers or other takeover attempts to acquire us.


PLAN OF DISTRIBUTION


The selling shareholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the Bulletin Board or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A selling shareholder may use any one or more of the following methods when selling shares:


ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

an exchange distribution in accordance with the rules of the applicable exchange;

privately negotiated transactions;

settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;

broker-dealers may agree with the selling shareholder to sell a specified number of such shares at a stipulated price per share;

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

a combination of any such methods of sale; or

any other method permitted pursuant to applicable law.


The selling shareholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.


Broker-dealers engaged by the selling shareholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholder (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA NASD Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASD IM-2440.




63



 


In connection with the sale of the common stock or interests therein, the selling shareholder may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling shareholder may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling shareholder may also enter into options or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).


The selling shareholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The selling shareholders have informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the common stock.


We are required to pay certain fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify the selling shareholder against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.


Because each of the selling shareholders may be deemed to be an “underwriter” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling shareholder.


We agreed to keep this prospectus effective until the date on which the shares may be resold by the selling shareholders under Rule 144. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.


Under applicable rules and regulations under the Securities Exchange Act of 1934 or Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling shareholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the selling shareholders or any other person. We will make copies of this prospectus available to the selling shareholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).


Registration Rights


In connection with the 2013 Private Placement, Ecosphere and the investors entered into a registration rights agreement. Pursuant to the agreement, Ecosphere agreed to file the registration statement of which this prospectus is a part with the SEC to register for resale the shares of common stock underlying the Notes and warrants issued in the 2013 Private Placement within 30 days of closing. This deadline was met. In the event that the registration statement does not become effective within 60 days of the respective selling shareholders investment date, then Ecosphere is required to pay the investors in cash an amount equal to 1.0% of the total amount invested by the investor for each 30 day period (prorated for partial periods), up to a maximum of 6%, until the registration statement is effective.


Transfer Agent


Registrar and Transfer Company is our transfer agent located at 10 Commerce Drive, Camden, NJ 07016.




64



 


LEGAL MATTERS


The validity of the securities offered hereby will be passed upon for us by Nason, Yeager, Gerson, White & Lioce, P.A., West Palm Beach, Florida. An employee of this firm beneficially owns 2,581,836 shares of our common stock and is a selling shareholder.


EXPERTS


The consolidated financial statements appearing in this prospectus and registration statement for the years ended December 31, 2012 and 2011 have been audited by Salberg & Company, P.A., an independent registered public accounting firm, as set forth in their reports appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.


ADDITIONAL INFORMATION


We have filed with the SEC a registration statement on Form S-1, including the exhibits, schedules, and amendments to this registration statement, under the Securities Act with respect to the shares of common stock to be sold in this offering. This prospectus, which is part of the registration statement, does not contain all the information set forth in the registration statement. For further information with respect to us and the shares of our common stock to be sold in this offering, we make reference to the registration statement. Although this prospectus contains all material information regarding us, statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and in each instance we make reference to the copy of such contract, agreement, or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. We also file periodic reports and other information with the SEC. You may read and copy all or any portion of the registration statement or any other information, which we file at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549, on official business days during the hours of 10:00 AM to 3:00 PM. We also file periodic reports and other information with the SEC. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings, including the registration statement, are also available to you on the SEC’s website, www.sec.gov.






65



 


INDEX TO FINANCIAL STATEMENTS

 

  

 

 

 

  

 

Page

 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 (UNAUDITED)

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

 

F-2

 

  

 

 

 

 

Condensed Consolidated Statements of Operations

 

 

F-3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

F-4

 

  

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

F-6

 

 

 

 

 

 

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

 

 

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

F-23

 

  

 

 

 

 

Consolidated Balance Sheets

 

 

F-24

 

  

 

 

 

 

Consolidated Statements of Operations

 

 

F-25

 

  

 

 

 

 

Consolidated Statements of Changes in Equity (Deficit)

 

 

F-26

 

  

 

 

 

 

Consolidated Statements of Cash Flows

 

 

F-29

 

  

 

 

 

 

Notes to Consolidated Financial Statements

 

 

F-31

 

 

 

 

 

 




F-1



 


ECOSPHERE TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

September 30,
2013

 

December 31,
2012

 

 

 

(Unaudited)

 

 

 

Assets

  

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash

 

$

1,435,763

 

$

2,464,911

 

Restricted cash

 

 

25,000

 

 

60,168

 

Accounts receivable

 

 

 

 

1,150,152

 

Current portion of accounts receivable-related party

 

 

713,794

 

 

 

Inventory

 

 

2,238,542

 

 

757,682

 

Prepaid expenses and other current assets

 

 

297,914

 

 

107,067

 

Total current assets

 

 

4,711,013

 

 

4,539,980

 

Investment in unconsolidated investee

 

 

14,813,002

 

 

 

Accounts receivable-related party, net of current portion

 

 

1,106,770

 

 

 

Property and equipment, net

 

 

1,185,601

 

 

4,264,125

 

Debt issuance costs, net

 

 

45,100

 

 

 

Patents, net

 

 

77,235

 

 

81,691

 

Deposits

 

 

14,840

 

 

22,441

 

Total assets

 

$

21,953,561

 

$

8,908,237

 

 

 

 

 

 

 

 

 

Liabilities, Redeemable Convertible Cumulative Preferred Stock and Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

398,173

 

$

845,241

 

Accrued liabilities

 

 

628,402

 

 

1,122,119

 

Customer deposits

 

 

187,500

 

 

23,196

 

Convertible notes payable, net of discounts

 

 

240,305

 

 

1,203,126

 

Current portion of note payable

 

 

85,125

 

 

68,100

 

Warrant derivatives fair value

 

 

4,308

 

 

197,009

 

Current portion of financing obligations

 

 

64,144

 

 

96,548

 

Current portion of capital lease obligation

 

 

15,155

 

 

14,593

 

Total current liabilities

 

 

1,623,112

 

 

3,569,932

 

Convertible note payable, net of discounts and current portion

 

 

477,296